How Big Can This Get – This Market Sizing Question Has Killed Many Startup Fundraises
Source | INC42 : By Alexander Jarvis
Market sizing. It’s something I have always struggled with, despite being analytical and knowing the theoretical fundamentals. To me it is sort of intuitive; the market is either big or not. Trying to quantify it has always been a little like either trying to put lipstick on a pig, or so obvious, do I really need to explain?
I posit that if you are in camp one, you have an issue you need to address quite quickly, and if you are in camp two, you don’t really need to explain it. Only if you are in camp one, you are highly unlikely to get funded unless it is dealt with deftly.
I know it when I see it
I shall not today attempt further to define the kinds of material I understand to be embraced within that shorthand description [“hard-core pornography”], and perhaps I could never succeed in intelligibly doing so. But I know it when I see it, and the motion picture involved in this case is not that.
In 1964 US Supreme Court Justice Potter Stewart described his threshold test for obscenity in Jacobellis v. Ohio, explaining why the alleged ‘pornographic’ material at issue in the case was not obscene under the Roth test and therefore was protected speech that could not be censored. The famous remark was “I know it when I see it.” I believe the same applies with market sizing.
Market sizing is the greatest litmus test. It is the only factor upon which if all other variables are positive, a company is either viable or not. Think of market viability as the denominator – a null value always results in a null outcome. Why?
- It doesn’t matter how good the team is and your strategic partnership with hippies inc.
- It doesn’t matter how good the product is if your market is 20 hippies.
- It doesn’t matter how good your traction is if you have 50% of the 20 hippies in a commune in a day.
- It doesn’t matter how good your unit economics are if your 20 hippies will only pay $50 a month at 99% margin and $1 CAC.
The market always wins. As Andy Rachleff, formerly of Benchmark Capital puts it:
When a great team meets a lousy market, market wins.
When a lousy team meets a great market, market wins.
When a great team meets a great market, something special happens.
VC Math Needs Big Market Sizing
VC math works different to startup math. As I blogged previously A meaningful founder exit is not the same thing for venture capital. You can’t have a strategy of shrinking a market and owning it if you don’t have a big market either. VCs need a big market to get big returns. The only thing that matters is you can be big enough and that means headroom to grow, as well as the story to tell for future growth.
So simply put you aren’t getting funded without a market that can facilitate a large exit. If you need a small market to get a big exit, the VCs would be happy with that too, but that’s not the way the world works.