A post from Bryce Roberts, a VC with AlphaTech O’Reilly, titled You can never size a market in Excel has been doing the rounds this morning.
His main point is that assessments of market size for early stage companies is largely instinctual. He makes three great points:
- Questions over market size are the single biggest killer of deals.
- Once doubts over market size set in they are very hard to overcome. (Bryce says that he has never seen a fundraising succeed when market size questions persist over more than two meetings. Never.)
- At the early stage markets can’t be sized in Excel. Bryce says “If they could be reduced to a formula, we’d all be working at hedge funds. The essence of early stage investing is more instinctual.”
A tempting, but wrong-headed, response to this is to think that investors will either instinctually ‘get it’ and believe the market opportunity is large, or they won’t ‘get it’ and never will. The danger in this thinking is that it can lead founders to take the lazy option of not presenting why they believe they’re onto a big thing. I’ve been in lots of pitches where the founder has a token market size slide that’s boring for them and for me, and a smaller number where the founder tries to pre-empt debate about the market size by saying ‘I’m looking for someone who believes in our market’.
That’s a mistake for these reasons:
- It incorrectly assumes that investors have an opinion on every market before they start
- It misses the chance to frame the opportunity for the investor
- Risks having the investor think the founder hasn’t thought properly about market size
- Leaves the founder in danger of unthinkingly pursuing a small market
This last point is especially dangerous. Many founders take their market as a given and regard market sizing exercises as an exercise they have to go through solely for fundraising purposes. This perspective is usually coupled with a belief that they are onto something big. Going through the exercise to thoroughly test whether that belief is correct can be scary but it is the best way to avoid spending five years or more chasing what is ultimately a small dream. I was talking recently with a friend who has just stepped down as CEO of his startup because he’s come to the conclusion that the company won’t ever get much bigger than £1-2m EBITDA and he wants to participate in something bigger. His departure is risky for the company and personally painful for him and the rest of the management team. He will be sure to go through a careful market sizing exercise before deciding on his next venture.
We wrote about How to estimate market size on The Path Forward.