On Market Sizing
I meet with like-minded product managers or engineers about 2–3 times a month who are interested in or are working on starting something new. I get pretty excited to meet such talented individuals.
More often than not, these conversations segue to fundraising and venture capital. And the question that I typically ask is “why do you want to raise money?” While there isn’t a perfect, consistent or even correct answer, I’m always curious to hear how these entrepreneurs plan on investing the money they want to raise. However, the question I find missing in most pitches is not regarding their stellar product or service or traction or team, but regarding market size.
Often times, market size tends to be one important signal for venture capitalists to invest in a company. But more importantly, the size of the market could also help a founder discern whether their business is one that needs to be VC funded or not. Not being a VC myself, I couldn’t possibly tell you what the right market size is to identify what a VC funded business is or is not (or which firm you are a fit for, more specifically). But this exercise could help you in a multitude of ways. I cannot stress enough how important it is to identify the market (use bottom up analysis) and to be honest with yourself about what the size of the market truly is. Take your time with this exercise, do not rush it. And once you’ve got this information, you will find yourself referring back to this research several times during the course of your endeavor. At Trusted, for example, we’ve used this market sizing research to identify and target our demand (parents) and supply (providers). It serves as our north star* in guiding our marketing and expansion plans.
Here are some links that may help you:
- TAM, SAM, SOM and LAM — What’s your Launch Addressable Market? http://www.techstars.com/content/entrepreneur-resources/tam-sam-som-lam-whats-launch-addressable-market/ (via Dave Parker)
- Calculate the Total Addressable Market (TAM) Size for the Beachhead Market — http://gsl.mit.edu/media/programs/india-bms-summer-2013/materials/step_4_calculate_the_tam_---trepreneurship_101.pdf (h/t Jeff Jordan)
- Best Way to Do a Market Analysis? Top Down vs Bottom Up. https://www.inc.com/jeff-haden/bottom-up-or-top-down-market-analysis-which-should-you-use.html via Jeff Haden
- What is A Good Venture Return? http://avc.com/2009/03/what-is-a-good-venture-return/ via Fred Wilson
- Some tech startups are working on a more ‘organic’ way to grow new businesses https://www.wsj.com/articles/venture-capital-and-its-discontents-1464667261 via Christopher Mims
*- There is an argument to be made regarding “new market creation”.