Given that you now understand how venture capital works (Chapter 2), you’ll have figured out that it’s unlikely you’ll find a venture-backable business in a small market. In other words, it doesn’t matter if you have 100% of the market share for corrective eye surgery for left-handed pet ferrets. The market is not going to be big enough to build a billion-dollar business, which means it’s going to be tremendously hard to raise venture capital.
Three essential things go into your market size slide, and it’s important you think about all of them. The first element is the overall market size—that is, how valuable is the entire annual market. The next part is the market trajectory; is the market growing? If so, how quickly? Finally, you wouldn’t be able to take 100% of the market, so the question is what proportion of the market your company could reliably address?
Let’s take a closer look at all of those in order.
Market size
You can determine the market size in many different ways, and there is no objectively wrong way of looking at it. You will want to take a contextual approach; if you are fundraising to launch in the US market, it is less relevant to talk about the global market size. If you are planning to do a regional launch, it would be natural to include both national and local market sizing.
However you size your market, it’s important to illustrate that if you’re able to take a meaningful market share, it’s worth taking a bet on you. As an investor, this slide would give me pause: it looks like the market has flattened out over the last few years. That might indicate that the market is maturing and that it is harder to get a foothold. If that is the case, make sure you have a good story ready for how you’re going to gain market share from the incumbents!
A great starting point for market sizing is a simple Google search; if an extensive, established consulting firm has written a white paper or published a report about your market or industry, you’ll want to know about it. Two reasons: One, that is the number your VCs will find when they are doing their due diligence; if your figures are significantly different, you should be prepared to defend your numbers. The other reason is that market analysts have a much deeper reach and usually a pretty good grasp of the markets where they have expertise. Are they going to be exactly correct? Probably not, but then, neither will you.
If you can’t find published research about market sizing, you’ll have to make your approximations. At its simples, if there are 100,000 businesses buying widgets in the United States, and they, on average, purchase $500 worth of widgets, that means that the market size is $50m per year. You’ll have to be prepared to defend both figures: How do you know that there are that many businesses buying widgets? How do you know that the average spend is $300? A lot of the time, both these figures will represent educated guesses, and that’s okay—as long as you end up roughly in the right order of magnitude for the annual market size.
Market trajectory
Market trajectories are hugely important in deciding whether to invest in a particular market. In a past life, I ran a startup that was serving the digital photography world. The problem, of course, was that smartphones were on the rapid rise, and compact camera sales went off a cliff. In just 5 years, the number of stand-alone digital camera sales plummeted by 90%. That’s not pretty, and investors were rightly dubious about the entire market as a result.
The opposite is also true: “A rising tide raises all boats” is a saying that continues to ring true for many investors. Put differently, if you can grab a 30% market share in a small market, and then the market itself grows exponentially, the dynamic of your company is going to be interesting. You don’t have to increase your market share: you can have a rapidly growing business by just “riding the wave” as it develops. Spotify is an excellent example of this; when the founders started the company in 2006, CDs were already in sharp decline. By launching one of the first legal competitors to the Kazaas and the Napsters of the world, Spotify was able to take, and hold, a large share of the market.
In the market trajectory portion of your pitch, you have a chance to shine. Not only do you get to show off that you have a deep understanding of your market, but you can also bring in the macroeconomic trends that affect the business you are conjuring into being. Again, be prepared to defend why the market is growing. You should be able to explain both what is happening in your markets and why.
Addressable market
You may have heard of “TAM, SAM, SOM”—or total addressable market, serviceable available market, and serviceable obtainable market. A lot of founders choose to include all three numbers on the market slide because they all tell a slightly different part of the story.
Your TAM should be the same as “market size,” discussed earlier. It describes the total demand for a product in the market. If you are to launch a new type of toothpaste, for example, you’d find out what the value is of all the toothpaste sold in the United States.
One quick heads-up here. If you are in a marketplace economy, you want to capture just the value of the actual marketplace, not of the economy as a whole. In other words, if you are launching a competitor to eBay, you don’t want the value of all the transactions that happen on eBay; you’ll want the size of the commission that eBay charges.
Your SAM—serviceable available market—carves out the part of the market that you can meaningfully address. Your SAM recognizes that even though the whole market for toothpaste might be huge, you cannot compete at all fronts. Perhaps you start with just a tooth-whitening toothpaste or just a travel-size toothpaste. The SAM will be smaller than the TAM because you are excluding yourself from dentist-prescribed kinds of toothpaste or other specialty toothpastes.
Finally, your SOM is the portion of the SOM that you think you can capture. Even if you decide to focus on tooth-whitening toothpaste, you are unlikely to win 100% of the market—incumbents like Aquafresh and Colgate are never going to go away completely. The number you are looking for here is what you can achieve.
How to tell the story of your market
For your market size slide, it is often tempting to tell the story through numbers. That can work, but it’s tough to spin a compelling narrative yarn there. Use the TAM/SAM/SOM numbers to tell a story that brings the numbers to life. This is easiest if you refer back to examples you’ve used earlier in your pitch:
“Remember Lisa, the person who was struggling to remember to buy toothpaste?” you can start the callback. “It turns out that there are 40 million Lisas in the US alone, and we think we can convince a third of them to sign up for our toothpaste subscription. From there, as we launch additional product lines, the serviceable market just grows.”