We’ve already talked about the market from the customer perspective, specifically their pain points being addressed. Our next investigation into the market fit has a singular focus: to size the market. How big could this thing get?
Market sizing is tricky business. A market size is an abstraction onto which we assign misleadingly specific numbers. Years ago, a founder speaking to my class said, “Market size is just some BS number you have to make up because VCs want to hear something.” He went on to raise over $25M in venture capital funding.
I believe he was expressing frustration with assigning too much meaning to something that is highly speculative. However, I think he was misunderstanding the point and context of market size, and would have benefited from thinking like a VC. True, in the abstract, the number itself has very little meaning. “We have a $1B market!” What does that mean exactly? It needs context. Most people think market size is a number. It is really a story about a number.
My favorite market size anecdote of late comes from a VC whose firm passed on Airbnb. “We didn’t see a big enough market there. We thought it was only going to be dudes crashing on friends’ couches.”
This anecdote demonstrates the importance of vision when defining a market size. One venture capitalist may envision a small niche market adopting an innovation, whereas another may have an insight for world domination. Dudes on couches vs. what we all now know Airbnb to be.
Because market size is often given as a number, founders often over-emphasize the number at the expense of the explanation of the number. The meaning of market size emerges as we weave it into the narrative that was begun in the last chapter. We began with a value proposition statement. If we did our jobs well, we identified specific pain points for specific customers. Now it is time to count those customers to determine if the startup has the potential to grow as large as our investment would require.
In theory, market size is the summation of all the conceivable future transactions in our value network.
Figure: Market size, all transactions in the value network
That’s the concept, but in practice, the data for all those transactions is unobtainable. Most of the data doesn’t even exist, and the data that does exist, like sales data for competitors, is closely guarded information. We won’t have any luck calling our competitors and asking them to share their financial statements with us!
Again, we’ll be looking for a narrative to tell a story of how big this could be. We will find all the data we can and speculate about the data we can’t find. It must all then be put in the context of our value network.
A helpful metaphor here is pond size. We are metaphorically trying to quantify the size of the pond (the market) in which our fish (the startup) will be growing.
When VCs are assessing a market, we want to make sure that the pond is big enough for the startup to grow exponentially. An old rule of thumb is that there needs to be the potential for a $1B market to warrant a VC investment.
I have found it to be particularly challenging for some business school students, immersed primarily in quantitative lessons, to reframe market size as a creative endeavor rather than a numerical calculation. At this point, I often think of the concept of the soccer mom as an example. Somebody created that phrase to identify a group of people.
Sizing a market is both creative and quantitative, and again uses data and narrative to paint a picture. Below are some of the approaches we can take as we create our story about market size.
Also covered in this chapter:
- Total Addressable Market (TAM)
- Founder Credibility
- Competitors’ Sales
- Cost Savings
- Pre-Existing Macro Market Size
- Market Trends
- Niche, Platform and Future Markets