ExitsStartup general interest

Estimating the market and opportunity size is critical at the early stages of a company

By April 25, 2012 5 Comments

Yesterday I spent an enjoyable mentoring startups at Springboard, the London chapter of the Techstars accelerator programme. Reflecting on the day I was struck by two things. Firstly the quality of the companies is improving. I mentor at Springboard and Seedcamp and at just about every session I’ve attended the companies have been stronger than the previous session, and the same was true again yesterday. On average, the businesses are a little further developed and the entrepreneurs have a clearer and more credible idea of what they want to do and how they are going to go about it.

The second thing I was struck by was the number of businesses who were working out how big their opportunity size is. Some were working through bottoms up analyses, others were iterating their plans to open up a larger opportunity, and both these are sensible and appropriate approaches. A third group were taking a different approach of beginning with the belief that their market size is huge and building up a case to support their belief.

This third group have things the wrong way round.

Getting an accurate assessment of the opportunity size is very important for startups as it informs the exit potential and financing strategy. Companies with small opportunities can be very successful for their founders and investors if they keep their financing requirements correspondingly small. Conversely, companies that over-estimate their opportunity size can struggle in a number of ways:

  • fundraising proves difficult as investors don’t believe their projections
  • if a large round is raised and expenses are ramped the chances of going bust increase significantly as revenues fall short of budget
  • if a large round is raised and an exit comes it will be below expectations, the founders will make less money than if they had raised a smaller amount, and the investors will only achieve a mediocre return

The best way to accurately assess the opportunity size is to jettison all pre-held convictions and work it out from scratch. That is a useful exercise for more established companies to do periodically as well, in light of changes in market conditions. Maybe the folk at Dropbox are having a re-think now in light of recent announcements from Google and Microsoft….