The problem is, most exciting companies seem “not big enough” to investors, especially early on. These startups are often going after markets that don’t currently exist or niche opportunities that ultimately become much bigger.

So if you’re a founder choosing to raise VC capital, how should you counter investors’ objections about your company’s market size?

Below are some different approaches. Some are left-brain approaches and others are more right-brain. Both are important and could be effective for different sorts of investors (and different sorts of founders). If you gravitate towards one, keep in mind that investors making team decisions will approach this question from multiple angles.

1. Top down, but brick by brick

Most market sizes are top-down. “The market for marketing software is $XB dollars so it’s big enough to support some really big companies.” Top-down is the simplest way to think about market size, so most investors gravitate to it, especially if you are building a company that is targeting an EXISTING market.

One way to augment the top-down approach is to adopt it, but show brick-by-brick how your market opportunity may be bigger than it seems. This means showing:

  • Geographic expansion
  • Pricing/upsell potential
  • Market growth
  • Very logical expansion into verticals or complementary products, etc

You will still need to be going after a pretty large core business for the brick-by-brick approach to resonate, but presenting a build-up like this can be effective when a prospective investor does believe that the market is somewhat big but would love to see more upside to get fully comfortable.

2. Bottoms-up market demand

The previous approach completely fails when you’re talking about markets that don’t exist yet or when an investor is not at least on the fence about market size.

Another approach is to perform a bottoms-up analysis to demonstrate the scale of market demand for a service like yours. Start with the total number of potential end-users, and use reasonable estimates around customer demand, pricing, market share, etc. The key aspects you’ll be pushed on with this sort of an analysis is a) how you are defining the reasonable scope and segmentation of the potential customers, b) how realistic your market share assumptions are, and c) the fact that this is really all conjecture.

One way to address c) is to include solid data points that lend credibility to your assumptions (like a reasonable estimate of how much customers already spend to solve a similar problem or some ROI analysis on your product/service that can be used to estimate reasonable pricing and the “no-brainer-ness” of what you are proposing). Also, keep in mind the “vitamin vs. pain-killer” analogy. Bottoms-up approaches tend to work better for “painkillers” than “vitamins,” even if the ROI of the vitamin seems to hold together.

Last thought on this approach – remember that whatever value you provide for customers, you will only end up capturing some percentage of this value. It’s tempting to say “Well, we are saving/making customers X dollars, so that’s what our market potential is. In reality, you need to make some reasonable adjustments as to how much of the value your customer will keep (usually needs to be significant) and then how much your company will end up capturing.

3. Attaching to mega-trends

Being in lock-step with a broad mega-trend is another way investors get over a seemingly small market. This means the investor (consciously or not) believes the mega-trend will either drive massive market growth or drive the new company to acquire unusually high market share.

A simple example of such a mega-trend was the shift of enterprise software to the cloud. Once investors believed this shift was happening, it became more reasonable to believe a new software product in a specific vertical might enjoy extremely rapid adoption and enough market share to quickly build to $100M+ in revenue and $1B+ in enterprise value. Without this mega-trend, it’s harder to believe in such rapid scaling because the pace of adoption may be too slow and it would be too difficult to dislodge existing players with a similar approach without being 10X better, faster, or cheaper.

Another example is the Internet of things. Historically, investors hated the idea of investing in consumer electronic products. Any early investor or operator at Ring will tell you that early on, almost nobody believed that a smart doorbell company could be “big enough.” But as a mega-trend emerged in this category, we saw more suspension of disbelief in IoT.  That lasted for a period, but then quickly died down as the realities of this market took hold. The mega-trend strategy tends to work for periods of time, but sectors eventually fall out of favor as well. Obviously, AI is the megatrend of the moment.  And at least for the time being, attaching oneself to this trend is probably allowing many companies to overcome the market-size objection, even if it’s not entirely justified. 

4. Using analogies

Using analogies can be tricky because they may not land. But if they do, investors often get so fixated on an analogy they can sufficiently build conviction to invest. When using analogies, it’s important to not just list out similar companies or big exits in the space, but internalize what those analogies communicate.

For example, if there have been some large exits in a seemingly small market, this can be a blessing or a curse. Yes, those analogies exist, but how well do investors know the comp you are citing? Was it actually a teeny business that was bought for pure strategic reasons? Are there actually only one or two buyers who would pay that kind of premium? How many investors would take that bet?

I find the best analogies are ones that tend to connect to one of two things: a mega-trend or a company with a similar ethos. 

Connecting to a mega-trend looks like this: “Just like the shift to the cloud allowed for the rise of great companies in different categories, the shift towards AI in the enterprise will do the same. So this product that company X is building is an AI-first product that mirrors what company Y did in the transition to the cloud. 

Connecting yourself to a company with a similar ethos or founders with the same super-power is a lot harder to do, and probably happens by inception more than through direct argument. You would probably not say “We are just like the Airbnb founders, so you should believe we can make this work.” But I have heard investors who have gotten to know founders over some time say something like “Wow, these founders are unbelievably obsessed with design and user experience in a way I haven’t seen since (person X). Maybe they really can pull it off!”

The power of a good analogy is that it’s very shareable. Remember that in most VC’s, there are multiple decision-makers that need to be sold, either by the founder or by their internal champion. A strong and compelling analogy provides an easy way to talk about a business, and to attach it to an already large company that is more broadly known. 

5. Scope expansion

Scope expansion is some version of “Today we are doing X, but that just puts us in a great position to do Y, which is obviously huge.” There are a couple flavors of scope expansion.

The first is the bank-shot. This is where X is actually not the foundation of a great sustainable business but could be a gateway to more. A lot of VCs have a hard time with bank-shots, unless you are already demonstrating some really remarkable traction. Usually, the right approach here is to focus on growth and scale as quickly and efficiently as possible when accomplishing X, and make most of your money doing Y down the road when you have a network effect, customer lock-in, or can provide a valuable service that no one else could provide without your scale.

The second version of scope expansion is when X is actually pretty decent. Maybe it won’t be “the next Facebook,” but it could certainly get you to a pretty attractive place. Usually, this works well when the underlying business could be profitable and decently large without being too capital-intensive, which gives you more freedom to pursue the bigger opportunity as a next step. This allows an investor to say to themselves, “I could reasonably get a 5–10X on the core business, and there is some small probability that this could actually be a 20X or more.” Usually, this means that the company is in a market that has decent prospects for future funding or M&A, such that if the business hits a double but not a home run, it still could be a good outcome.

6. Betting on the future

One additional approach I’ve seen founders use quite successfully is what I’ll call “the future bet.” The approach here is to deflect discussions about current market size and focus the discussion on a single, simple bet about the future.

The future bet is being used frequently at the moment for companies that are looking to disrupt repetitive, manual tasks in analog workflows. The argument is that generative AI will inevitably replace all of these functions, and thus, there will be significant software only (or software mostly) winners in each of these categories. In some cases, these categories are quite large when you consider the services or human labor that will be replaced, even if there are almost no current large-scale technology businesses that suggest that this market is truly venture-scale. 

Two final thoughts and reminders

First, don’t forget about what margins mean for market potential. High-margin businesses like software or marketplaces (when revenue is correctly accounted for) can support 10X+ revenue multiples. So the bar for a large-scale opportunity is the potential to generate hundreds of millions of dollars in revenue to be worth billions of dollars down the road. For low-margin businesses, the revenue bar for a larger scale opportunity is higher. Make sure to keep this in mindwhen you are talking about how your business can build using a bottoms-up analysis or comparables.

Second, the landscape of potential acquirers plays into this discussion as well. Generally, I don’t recommend founders spend too much time talking about buyers and M&A opportunities, and we don’t obsess over it much here at NextView. But when you are a company that may end up realizing that your market opportunity is not as big as you hoped, it’s comforting to be in a category with a strong set potential buyers. Most investors don’t focus on downside protection. But psychologically, this could make a difference when one is on the fence because of market size or the risk associated with a bank shot/scope expansion strategy.