Are we going after a market that’s big enough?
Any entrepreneur would need to asses if the opportunity they intend to pursue is both big and sustainable for a longer term. The market can be fragmented, old or a really fast growing area. The investors need to be convinced on the size of the opportunity to evaluate the chances of a higher returns and exit routes.
The key question – How to calculate the size of the opportunity/market? There is no defined way to address the question though. It could be performed top down, or calculated bottom-up (with few assumptions in both cases) or just a comparison to a proxy.
But the approach considered to size the market would help founders to understand/assess the total opportunity and also to design the features targeting the opportunity.
- The starting point would be the entire universe of customers who would buy the product. TAM (Total Addressable Market) includes everyone who could buy it.
- A subset of the total market would be the population which the company can serve with its current offerings (SAM Serviceable Addressable Market). But it is still a bit of wishful thinking to consider all those who are willing to buy/could be willing to buy would actually make the purchase.
- A subset of serviceable market which we could realistically expect to buy our product/service, amidst the competition and other factors, is the actual market we target for (SOM Serviceable Obtainable Market).
Most investors prefer the bottom up approach to calculate the market size. The thought process makes the founder to:
- Define his/her target customer and understand the value proposition offered.
- Articulate if the problem they intend to solve actually exists and if the solution they offer would solve the problem.
- Identify how to extract revenue from this initial focus segment.
- Calculate the potential and also define the monetisation strategy.
- Validate the entire business model and propose the methods to focus on the initial segment and explain the plan to capture future customers.
The ‘Market Size’ slide in your pitch deck is the place to convince the investors on the opportunity and not just to throw numbers obtained from secondary research/external sources. It need to provide them the confidence not just on the size but the approach to make money. We, at Growturf, work with the founders in identifying their market size (Building Pitch Deck) and help in affirming their assumptions behind their calculations.