I’ve had a set of conversations lately about market size estimates for startups and how to demonstrate to a potential investor that the market space you are in is attractive. A few themes emerged in those conversations:
1. Extrapolate but Don’t Invent – Emerging markets by definition don’t have perfect market size numbers associated with them. That’s OK and investors generally understand that. However, you should be able to show a range of numbers that make sense by extrapolating from the numbers that you do have. For example if your market is a subset of an existing market, you can use the size of that market as a starting point, make a set of assumptions and then reason your way to an educated logical guess at a market size. The trick is that the assumptions have to be practical. You can’t say “The global market for software is $220 Billion therefore our market must be at least a billion!” I’m joking (but only sort of).
2. Believe the Numbers – Determining the size of a startup’s addressable market isn’t an exact science and you’ll never be able to figure it out down to the penny. That’s OK but you have to believe that you are in the ballpark. It sounds silly but if you can’t really convince yourself that the numbers are close, you won’t be very persuasive when you have to convince potential investors.
3. Example Customers Count – Once you are armed with a set of numbers and an estimate of market size you need to talk to as many customers as you can to figure out if your assumptions hold up. For example, you’re selling a systems management solution to retail banks. You figure out that your addressable market is X, where X includes pretty much any retail bank in North America. Then you go out and talk to a bunch of IT managers at various retail banks and find out, oops, only the smaller ones need what you do. The more push on you assumptions with real potential customers in your market, the more comfortable you’ll be with your market sizing estimates.