10 tips for acing your market-size slide

The most controversial slide in every pitch deck is often the market size slide. It can set the stage for the future of the company, but too often it is overly exaggerated and not efficiently backed up. Why is this slide so important? Investors care about market size because it allows them to estimate what success could look like — they’re betting on the future market potential for a product or service.

For example, an early stage investor may seek returns in excess of 20x their initial investment. So, if the initial investment is valued at $ 10 million, the market needs to be large enough to support a business worth $ 200 million in the future. We know that SaaS businesses trade at a median 5x revenue multiple, so in order to be worth $ 200 million, the business would have to generate $ 40 million in revenue. If the market size is only $ 50 million, that would be hard to achieve, presuming some competition and opportunity for growth. As you can imagine, the higher the valuation at investment or desired return, the greater the market size needs to be to suit that investor.

Knowing this, and reviewing the thousands of pitch decks we see each year, I’ve gathered my top 10 tips to consider when putting together your market size analysis.

1. Don’t rely on third party research

The most frequent mistake entrepreneurs make is relying on third-party analysts to do their homework. The number is invariably huge and therefore likely inaccurate and not convincing. More importantly, a number is not helpful to investors if they can’t also see the inputs and calculations. Entrepreneurs go through extensive thought processes to determine their technology stack, pricing and sales models, and dozens of other data points, so why do they rely on inaccurate, canned market sizing data?

2. Top down is good

The best place to start a market-sizing exercise is with a top-down analysis. It’s quick and easy but still delivers valuable insights. Simply put, a top-down market sizing calculates the total size of the market and then estimates your share of that market, following this equation:

[Your Market Opportunity] = [Total Market Size] x [Your Market Share]

Just remember that the global enterprise software market is $ 354 billion, so whatever subset you choose, keep that relative market share in mind.

3. Bottoms up is better

The flaw with top-down market sizing is you have to rely on third-party research (see rule number one) or tangential markets for the total market size estimate. So a bottoms-up approach is better and more thorough. At its core, a bottoms-up analysis determines the individual spend-level of a customer or a group of customers, determines how many of those potential customers there are, and multiplies the two for a market sizing. This formula may sound as simple as the top-down approach, but the devil is in the details. The best bottoms-up analyses have multiple groups of customers and varying spend levels for each group of customers. The level of granularity can create large spreadsheets that incorporate various customer demographics, competition, advanced pricing, and existing spend levels.

4. Use the Census

The best resource for market data is the U.S. Census, a fantastic and generally undisputable source. While not the easiest to navigate, it has extensive data sets on the number of companies in the U.S. by industry, subdivided by revenue and employee count. Since most SaaS businesses focus on a set of verticals and customers of a certain size, this is an incredibly powerful resource with which to build a bottoms-up analysis. It also helps avoid frequent citation mistakes, such as 28 million business in the United States (of which 22 million have no employees, which makes selling anything to them tough).

5. Greenfield estimates have more variance than replacement markets

It is much easier to do market sizing analyses for replacement products. You can look at the existing spend in customers to assess their propensity for spend as well as incumbents’ revenues in aggregate as a quick sizing of the market. Replacement markets therefore will naturally have smaller variances in market size estimates. A customer that is spending $ 10,000 annually for on-premise accounting software today is unlikely to spend $ 50,000 annually to switch to the cloud version unless it provides significant additionally functionality.

Estimating greenfield opportunities, on the other hand, has more uncertainty and therefore more variance. Since few or no customers have ever bought a similar product, you have to make an estimate on the propensity to buy. Likewise, there is probably limited data on what a buyer is willing to pay for the new product or service. As data becomes more sparse, it becomes increasingly important to understand what is being spent on tangential and complementary solutions.

6. Monopolies, even market majorities, are rare

Very few companies have more than 90 percent market share, and those are usually monopolies. Microsoft Windows, which got prosecuted for anti-trust, only has 85 percent market share. Salesforce, whose name is synonymous with CRM, only has about 20 percent market share. You can propose single-digit percentage market share and still be successful.

7. Lily pads are okay

Every so often an entrepreneur pitches a market knowing that dominance in that market is not significant but will allow the company to hop via “lily pad” to the next market. Peter Thiel provides immense support for this strategy in his book, Zero to One. He cites Facebook as an example, which leaped from the more modest college market to, basically, the rest of the world. Rather than trying to hide the restricted size of the initial market, an entrepreneur should use the market sizing exercise to raise awareness of this constraint and communicate about additional markets.

8. Know your comparables

The quickest way to lose credibility is to exaggerate a market. Is your new startup reinventing the software stack for dog shelters, which you estimate to be a $ 50 billion opportunity? An investor is inclined to question your credibility, especially since the total CRM market is only $ 35 billion. While this example is a bit silly, know what tangential markets your software will cause an investor to think about and the scope of those opportunities relative to your estimates.

9. Match your pitch with your market size

More frequently than one would think, an entrepreneur creates a bottoms-up market size. This analysis may suggest that the majority of the market opportunity exists in serving large enterprises. However, the rest of the pitch discusses the go-to-market and opportunity in serving small and medium sized businesses. This disconnect is perplexing to an investor and is usually cause for pausing the pursuit of an opportunity.

10. Share your backup

This may be nerve wracking, but it is a great trick for establishing trust and controlling the message. Investors are frequently covering many markets quickly and don’t have the in-depth knowledge of an everyday operator. A thorough bottoms-up spreadsheet is a fantastic tool for sharing and will allow an entrepreneur to guide an investor to their conclusions versus letting an investor wander to their own conclusions.

Small moments can be pivotal in pitches. Entrepreneurs tend to dismiss the market size slide when it can actually be one of the most crucial pieces of the pitch. By preparing both tops-down and bottoms-up approaches in advance, you will be armed with valuable insights and credibility that can mean the difference between getting funded or getting a polite pass.

Alexander Niehenke is a Partner at Scale Venture Partners.



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