As an early stage investor, I look at two elements: credible founders & a massive potential market.
You most likely have a slide in your deck that demonstrates this. Most startup founders diligently do their research and present a slide that shows that they are trying to capture a massive dollar market with their solution. Most of these slides are wrong.
I will repeat. You, smart founder, are selling yourself short.
First off, we want you to be going after a HUGE market in order to build a massive company. The majority of the market sizing slides that I see are a top down analysis of the market. Usually this means the founders are looking at large market surveys to understand how much people are spending on sales enablement tools, or HR technology, or for gluten free snacks in the country or region as their beachhead market. As an investor, this tells me that you looked at existing market data that is out on the web This is based on existing spend, from an analysis that is likely a few years old. .
Market sizing data is a fallacy for early stage founders.
Available information on markets today tells me about what you could do in today’s environment. As an early stage investor, I’m looking for the biggest companies of the future. This means that market sizing data that you got from a reputable source in the current year doesn’t apply to you. You are building something that is carving a new niche in the current market or creating an entire new category. Simply put, your company doesn’t fit into the current market sizing data.
You need to do a bottoms-up analysis of your market.
A bottoms-up analysis takes a different approach because it looks at how each incremental sale could create a huge market opportunity. A bottoms-up analysis looks at how your solution, at a specific price, serves a specific market. You start with the individual bits that make up a sale, like number of HR partners per SaaS license, total number of HR partners in a specific region, and are building up to the market size. As an investor, this shows me that you are thinking about customer acquisition more tactically. It also shows that you understand where your beachhead market is because you know how many sales it will take you to get to that massive market size. It also helps that you likely are using your current traction as a basis for future growth, which is always fantastic.
While this is definitely a more time intensive process, it is far superior to taking a number from a data analyst survey because it shows a deep understanding of who you are as a business, who your customers are, and how many of them you need to get to that $100M in revenue.
Don’t stop at one method of analysis.
You really need both in order to communicate where you sit in your market today and where you will be tomorrow.
If you’re looking for a good resource on market analysis, I like to send this link to entrepreneurs as a guide on how to do a bottoms-up analysis.
Let us know what you think in the comments – do you use one method or both in your pitch deck?
