I’ve been meaning to follow up on Rob’s post last month highlighting the competitor slide as the least informative in an investor pitch deck. I’d like to nominate another: the market size slide, which is usually dominated by graphics like these:
As investors, we’re considering the total addressable market for a given product or service immediately upon hearing a vision for it: How many users and/or customers are there for this? Honestly, this is often too simple and retrospective a question to suffice as a starting point for diligence, but that’s a topic for another post.
Slapping billions or tens of billions of dollars with a title and maybe an asterisk-attributed source on a slide will either be glossed over or, in some cases, actually be detrimental. Every VC has seen multi-billion dollar market size slides many times over; what a founder intends as a “wow” slide draws skepticism that a market is as big as stated. Diligent investors will do the work on their own to arrive at a market size for a startup.
In doing so, I usually consider three types of potential markets:
1. An Existing Market
A mature market that has a known and calculable size via publicly available data. A top-down, bottom-up, or blended market analysis will reveal the market’s size. I pay particular attention to the specific parameters and data inputs for any mature market analysis and personally prefer bottom-up.
2. An ‘Expand the Pie’ Market
A growing market that begins in an established market or a slice of an established market and then pulls in other customer types or tangential market(s) that to this point would not have been included. Taken all together, this makes the potential market for a given startup to address much larger. Predicting expanding markets is difficult, but I try to determine which additional markets a company could grow into and give some explanation for why I think so.
3. A Created Market
A new market that a startup will create from the latent value certain demographics gain from a profound product or service. Many of the world’s most innovative companies created new markets of their own. These types are the hardest to predict, calculate, or explain, and as a result are often passed on by investors (usually to their detriment in the long run). If there is conviction that a market can be created by a new company, I try to determine who makes up that potential market (#2) and then do an estimated version of an existing market sizing analysis on the hypothetical one I’ve created (#1).
A startup can have any combination of the three market types above.
In many cases, an investor deck deals with #1. If this is case for you, it’s helpful to show your work. How did you arrive at this big number? (Include sources and calculations.) If #2, explain the additional markets that you believe you’ll capture and what their contribution would do to overall addressable market size. If #3, outline the overlooked, dormant, or underserved group(s) that can become a new market around your company, and size it accordingly.
Right or wrong, explaining your addressable market size thought process and calculations shows that you’ve thoroughly examined who you’re trying to capture and gives investors confidence in a truly large opportunity.
For more tips on handling the market size question with investors, read The Market Size Fallacy for Seed-Stage Startups by Rob Go.