The most controversial slide in each pitch deck is usually the market dimension slide. It can set the stage for the way forward for the corporate, however too usually it’s overly exaggerated and never effectively backed up. Why is that this slide so essential? Investors care about market dimension as a result of it permits them to estimate what success might appear to be — they’re betting on the long run market potential for a services or products.
For instance, an early stage investor could search returns in extra of 20x their preliminary funding. So, if the preliminary funding is valued at $10 million, the market must be massive sufficient to assist a enterprise price $200 million sooner or later. We know that SaaS companies commerce at a median 5x income a number of, so so as to be price $200 million, the enterprise must generate $40 million in income. If the market dimension is simply $50 million, that may be onerous to realize, presuming some competitors and alternative for development. As you’ll be able to think about, the upper the valuation at funding or desired return, the higher the market dimension must be to swimsuit that investor.
Knowing this, and reviewing the 1000’s of pitch decks we see annually, I’ve gathered my high 10 tricks to contemplate when placing collectively your market dimension evaluation.
1. Don’t depend on third occasion analysis
The most frequent mistake entrepreneurs make is counting on third-party analysts to do their homework. The quantity is invariably big and subsequently probably inaccurate and never convincing. More importantly, a quantity isn’t useful to buyers if they’ll’t additionally see the inputs and calculations. Entrepreneurs undergo in depth thought processes to find out their know-how stack, pricing and gross sales fashions, and dozens of different information factors, so why do they depend on inaccurate, canned market sizing information?
2. Top down is nice
The finest place to begin a market-sizing train is with a top-down evaluation. It’s fast and straightforward however nonetheless delivers beneficial insights. Simply put, a top-down market sizing calculates the full dimension of the market after which estimates your share of that market, following this equation:
[Your Market Opportunity] = [Total Market Size] x [Your Market Share]
Just keep in mind that the worldwide enterprise software program market is $354 billion, so no matter subset you select, preserve that relative market share in thoughts.
3. Bottoms up is healthier
The flaw with top-down market sizing is you need to depend on third-party analysis (see rule primary) or tangential markets for the full market dimension estimate. So a bottoms-up method is healthier and extra thorough. At its core, a bottoms-up evaluation determines the person spend-level of a buyer or a gaggle of consumers, determines what number of of these potential clients there are, and multiplies the 2 for a market sizing. This components could sound so simple as the top-down method, however the satan is within the particulars. The finest bottoms-up analyses have a number of teams of consumers and ranging spend ranges for every group of consumers. The stage of granularity can create massive spreadsheets that incorporate varied buyer demographics, competitors, superior pricing, and present spend ranges.
4. Use the Census
The finest useful resource for market information is the U.S. Census, a improbable and customarily undisputable supply. While not the simplest to navigate, it has in depth information units on the variety of firms within the U.S. by business, subdivided by income and worker rely. Since most SaaS companies give attention to a set of verticals and clients of a sure dimension, that is an extremely highly effective useful resource with which to construct a bottoms-up evaluation. It additionally helps keep away from frequent quotation errors, reminiscent of 28 million enterprise within the United States (of which 22 million don’t have any staff, which makes promoting something to them robust).
5. Greenfield estimates have extra variance than substitute markets
It is far simpler to do market sizing analyses for substitute merchandise. You can take a look at the present spend in clients to evaluate their propensity for spend in addition to incumbents’ revenues in combination as a fast sizing of the market. Replacement markets subsequently will naturally have smaller variances in market dimension estimates. A buyer that’s spending $10,000 yearly for on-premise accounting software program immediately is unlikely to spend $50,000 yearly to change to the cloud model except it offers important moreover performance.
Estimating greenfield alternatives, then again, has extra uncertainty and subsequently extra variance. Since few or no clients have ever purchased an identical product, you need to make an estimate on the propensity to purchase. Likewise, there may be in all probability restricted information on what a purchaser is keen to pay for the brand new services or products. As information turns into extra sparse, it turns into more and more essential to know what’s being spent on tangential and complementary options.
6. Monopolies, even market majorities, are uncommon
Very few firms have greater than 90 % market share, and people are often monopolies. Microsoft Windows, which obtained prosecuted for anti-trust, solely has 85 % market share. Salesforce, whose title is synonymous with CRM, solely has about 20 % market share. You can suggest single-digit proportion market share and nonetheless achieve success.
7. Lily pads are okay
Every so usually an entrepreneur pitches a market figuring out that dominance in that market isn’t important however will permit the corporate to hop by way of “lily pad” to the following market. Peter Thiel offers immense assist for this technique in his guide, Zero to One. He cites Facebook for example, which leaped from the extra modest school market to, principally, the remainder of the world. Rather than making an attempt to cover the restricted dimension of the preliminary market, an entrepreneur ought to use the market sizing train to boost consciousness of this constraint and talk about extra markets.
8. Know your comparables
The quickest strategy to lose credibility is to magnify a market. Is your new startup reinventing the software program stack for canine shelters, which you estimate to be a $50 billion alternative? An investor is inclined to query your credibility, particularly for the reason that complete CRM market is simply $35 billion. While this instance is a bit foolish, know what tangential markets your software program will trigger an investor to consider and the scope of these alternatives relative to your estimates.
9. Match your pitch along with your market dimension
More often than one would suppose, an entrepreneur creates a bottoms-up market dimension. This evaluation could recommend that almost all of the market alternative exists in serving massive enterprises. However, the remainder of the pitch discusses the go-to-market and alternative in serving small and medium sized companies. This disconnect is perplexing to an investor and is often trigger for pausing the pursuit of a possibility.
10. Share your backup
This could also be nerve wracking, however it’s a nice trick for establishing belief and controlling the message. Investors are often overlaying many markets shortly and don’t have the in-depth data of an on a regular basis operator. A radical bottoms-up spreadsheet is a improbable software for sharing and can permit an entrepreneur to information an investor to their conclusions versus letting an investor wander to their very own conclusions.
Small moments could be pivotal in pitches. Entrepreneurs are likely to dismiss the market dimension slide when it might probably really be one of the crucial essential items of the pitch. By getting ready each tops-down and bottoms-up approaches prematurely, you may be armed with beneficial insights and credibility that may imply the distinction between getting funded or getting a well mannered go.
Alexander Niehenke is a Partner at Scale Venture Partners.