Best practices for predicting market size/opportunity/value for startups?

Steve Mullen CEO and co-founder at ChakaChat

May 11th, 2016

I've just come off an angel investment pitch for my startup ChakaChat.. i've done pitches before and the one problem slide is demonstrating market potential and it's value. All advice goes along the lines of "don't pick a big number and multiply by a % to estimate your potential market value" however for a startup there's no other way... it's impossible to accurately predict your potential market. So how do you go about doing that?

M. Dudar Chief Product Officer at FourthWall Media

May 11th, 2016

Estimate the Total Available Market (TAM) for the whole industry and then the Serviceable Available Market (SAM) which is the portion of the total that your product(s) could potentially reach. This results in the total opportunity and your opportunity; then project how much of your opportunity you can capture.

This is a detailed modeling task which requires you to make assumptions about each component. As you review the model, you'll have to document and defend your assumptions making you smarter about your business and allowing you to refine the numbers as you get push back. Look for ways to validate your bottoms-up model with top-down industry data you can reference.

Good luck!

Scott Ling CEO/Founder @InstantAPI - Investor of time and knowledge to BitAngels - Lean/Agile Mentor

May 11th, 2016

Steve, it's not as hard as it seems. The issue I see here is that you are looking at a top down evaluation (TAM based approach) which rarely works for startups with little to no idea of market/product fit or have a super vague market segment like people who use Chat. However, if you look at bottom-up methods for size of market things get easier. For example if you know 'X' type of company or user will pay 'Y' $ for your platform/technology/App/API - all you then need to figure out is how you will grow your market and what a good estimate of month by month traction is. (still a guess at early stage - but a more educated one, that you can back up with domain knowledge.) While this does not give a size of overall market it does give a quantifiable basis for revenue forecasts and helps to confirm pricing per unit vs volume of sales - all of which adds significant value when talking to investors. Most investors angel or VC want to see you know your market, how you will grow it and that your numbers can be achieved and have the potential to scale. From your side of things you may learn your pricing model or channels to grow traction may not be the best for rapid growth. - from there you can look at what real growth could look like for a more realistic TAM. When you really dig into this you will be surprised at what it will take to get to 1million in revenue, then 10million, then 100million and along the way if all goes well you should be able to articulate the road to 100million easier - but based on the process to get to the first 1million - if that makes sense? Finally, you need to tell a story whereby you can show that if traction happens that what you have as a business can scale - as you get bigger and do more business things tend to change. Not sure if this helps, just an off the cuff reply from my cell as I am travelling. So please excuse the typo's of which I am sure there are many. ps. estimates are just that - it's the thought process and understanding of market dynamics that backup the estimates that matter.

Rohit Giri Experienced Corporate Finance and M&A Professional

May 11th, 2016

Steve, Based on your the description of ChakaChat in your by-line, I'd direct you to look at Atlassian's IPO prospectus here: http://www.sec.gov/Archives/edgar/data/1650372/000104746915009143/a2226831z424b4.htm *Market Opportunity * Our products address several large and well-established categories of IT spending. Investment in these traditional categories is expected to total more than $35.0 billion in 2015. According to Gartner, Inc., a market research firm, the Application Development market is expected to be $8.8 billion and the IT Operations market is expected to be $9.1 billion in 2015 for the IT Asset and Financial Management, IT Service Support Management Tools and Automation Tools markets. International Data Corporation ("IDC"), a market research firm, expects the market for Collaborative Applications to be $13.5 billion and the Project and Portfolio Management market to be $3.8 billion in 2015. We believe that the limitations of traditional tools and distribution models, coupled with the growing demand for modern collaboration technology, present an opportunity to expand within these traditional categories. By providing affordable, versatile, adaptable and modern software built for the needs of teams, we believe that we can continue to disrupt and increase our share of these large, existing markets. Rohit

Mats Samuelsson IoT Executive > GM, VP Product Management, Business Dev, Marketing | IoT Business Definition, Creation & Growth

May 11th, 2016

Best practices for predicting market size/opportunity/value for startups?Break up the market you want to go after into meaningful and understandable sub-segments. Start by focusing on one of these segments and expand from there. This also allows you to hone you marketing as you launch.

Michael Markarian Founder at Mount Dream

May 11th, 2016

Start from the bottom up.

So, you want to understand your LTV (life time value, what you can expect to earn for your customers). Then, based on your marketing plan, begin to layout how many customers you believe you can attract and what that will cost.

I do think you should also include overall market size in your pitch -- however, I think this "bottom up" approach is what you are looking for.

Hope it helps!

Ed Nerz Venture Developer @ Nerz & Co.

May 11th, 2016

Steve, base it off of market segments you believe you can capture quickly. Everything is eventually a % of something, but it impresses investors more if they know where you plan to specilically pick up revenue. Ed NerzE.V. Nerz & Co.(609)475-5833 (c)nerzandcompany@yahoo.com

Nigel Dessau Chief Marketing Officer at Wellsmith, LLC

May 11th, 2016

I think Michael Margarin has it right. While you can do the 'top down' view (i.e. if we only get 1% of the $xB market we get rich) you should do a 'bottoms up' view as well.

The importance for a startup is the ability you have to scale. Doing 1 is hard, then 10, then 100, then 1K, then 10K, then 100K etc. ... this scaling is the hardest thing to get right. A bottom's up view allows you to put milestones against the plan. At what point in the scaling do you b/e or make a profit? How will you access these opportunities? What is the cost?

While it might look like you are limiting you market, what you are actually doing is showing the practicalities of your idea.

Rob G

May 11th, 2016

As Michael M said, bottom up. You are fooling yourself (an not investors) if you don't take the time to bid a bottom up model - to truly understand precisely who your IDEAL prospect is and how you will identify them, connect with them and close a sale with them and who will do that and how long that will take and how much that will cost. Mention the TAM for your product/service as it is currently defined simply to let everyone know that it's big enough. If the TAM is too small it's a short conversation for investors. The real meat is in HOW you generate revenue / get paying customers. So spend some time to define your IDEAL prospect and exactly how you will identify, locate and close a sale to members of that subgroup and how much time and $$ is required to make that sale. If that ideal prospect pool is not sufficiently large then define related groups of prospects, rinse and repeat. You should end up with a large spreadsheet that details out by month your costs, people, resources and revenues. After the first year or 2 of detailed monthly projections then you can extrapolate how that could grow quarter over quarter by pulling different levers, but it's the assumptions in the detailed inputs that will tell you whether you are on to something or high on something.

Steve De Long Learning Faster Than Anyone Else.

May 11th, 2016

Here are a few useful links regarding calculating TAM, SAM, and Target Markets.

http://ultralightstartups.com/how-to/calculate-market-size/

Bill Aulet, author of the Disciplined Entrepreneur, talks about a Beach Head Market in this video: https://www.youtube.com/watch?v=2KpOZ9N2QOQ

Joe Emison Chief Information Officer at Xceligent

May 11th, 2016

When I see pitch decks that talk about market opportunity, the biggest problem I see is not the "TAM is $X / Y% capture", but rather that the TAM that's being laid out is not actually the TAM for the product.

For example, I've seen a pitch for a product for electricians that used a TAM of the total amount spent by consumers on electrical work. That's not the TAM for your product for electricians.

I've seen a pitch on a commercial real estate startup that managed RFPs use a TAM of "Commercial Real Estate is a $15 Billion asset class". That's not the TAM on RFP management.

I think that if you focus on fixing your calculation of the market opportunity to something that is real and rigorous (and probably has a formula with supporting data that you are also providing), you'll find that the practice of cutting it down by a percentage capture rate is much less problematic.

I disagree with the advice of using Atlassian, because you are a start up. You are not Atlassian. Atlassian can go after crazy large markets like "Application Development" and "IT Operations" because it has a huge capture rate in segments of those markets. As a startup, you don't have anything--you have to walk before you run.

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