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Venture investors have to invest in companies in massive markets for their economics to work (exactly how big is a question I’ve answered elsewhere). However, just saying a large enough number doesn’t mean that investors will believe you. Investors need to be convinced that your market is actually as big as you say it is - they won’t just take your word for it. As an early stage VC I saw thousands of founders pitch and, when it came to market size, 90%+ of them were not convincing at all.
Across these pitches, there were patterns of mistakes that made it hard to believe the numbers being presented. This lack of belief led to the startups being rejected. The good news is that, as long as you know what these mistakes look like, it’s pretty easy to avoid them.
I wrote this post, so founders can know and avoid the most common mistakes when talking to investors about market size. Below I do three things:
Strap in!
When a founder makes one of the mistakes below, this significantly increases the likelihood of rejection for two main reasons:
Let’s briefly look at why these are so damaging.
Investors recognise that they aren't domain experts so they are willing to be educated about how big your market is. However, if they stop believing you they will need to form their own opinion on the subject to invest. This leaves you open to two destructive forces: investor bias and laziness. Here’s how it works:
Why this is bad is obvious. Assessment of your team isn’t limited to your team slide. Investors are constantly assessing your competence and knowledge of your business / industry based on how you answer questions. Even if your CV looks great, if you come across clueless it will damage your ability to get funded, early stage investors are extremely focused on the team.
Now that we know why being unconvincing is so dangerous to your fundraising prospects, let's dive into the seven mistakes that make founder’s unconvincing.
The mistakes are ordered from most to least unconvincing and each one comes with:
All of the example conversations below are written from the perspective of a fictional company called PipeCo - a Company that sells procurement software to the plumbing industry. The lessons, however, are generalisable.
If you go through a first call without describing how and why your market is large you have ceded all control to the investor (the non-expert).
Unless you are in a category which is so self-evidently large that everyone believes that billion dollar businesses can be built there, this is a terrible idea. I won’t waste my breath with examples of some of these industries - assume you aren’t in one of them.
Downsides:
Not providing a number is one of the worst things you can do if you are trying to convince a VC that your market is large. While it seems basic, you’d be surprised by how commonly founders make this mistake. Market sizes are fuzzy and hard to calculate, investors know this so they don’t expect them to be perfect (just plausible). Opting out, however, is not a viable option.
By not providing a number at all, the founder leaves themselves vulnerable. What does “a lot of money to be made” mean? Thousands? Millions? Billions?
This approach gives control of the narrative back to the investor which is terrible for the reasons outlined above. Even worse it damages your credibility as a founder. Investors will rightly think “everyone else comes up with a number so why can’t you?”.
Downsides:
While better than not providing a number at all, giving a market size estimate without anything to back it up is sub-optimal if you are looking to get a VC to believe in it. From working closely with founders, I’ve noticed that this type of market size speedrun occurs when they underestimate how important this is to investors or when they aren’t confident talking about it (a lot of people hate talking about hypothetical numbers…).
Regardless of the reasons, presenting your market size like this is a terrible idea. Throwing out an unsubstantiated number reduces the chance of anyone believing it.
VCs are aware that entrepreneurs have strong incentives to invent large market sizes to win them over - they won’t take your word at face value. Even if they believe you aren’t trying to inflate your market, there will still be a lot of questions that they need answered for them to trust your number:
It makes sense for founders to pre-emptively walk investors through this. By failing to do so, your number loses credibility. This damages your ability to guide investors to the correct answer with all of the negative consequences that entails.
Downsides:
If you’re going to present a number in your pitch, especially for something as fundamental as market size, you have to know what is in it. Investors won’t take numbers from reports on face value as it is extremely unlikely that there is a report that perfectly captures the size of the industry you are in. This scepticism is amplified for new or niche industries.
As a result, investors will ask questions about such numbers (their teams are going to ask them the same questions internally). If you can’t tell them what makes up the number you’re citing, this both damages your credibility and results in you losing the ability to guide them to the conclusion you want them to have regarding your market’s size.
Downsides:
This is a common mistake made by founders when describing their market. In the exchange above, the founder provides their sources, moreover they avoid the mistake of being unable to articulate what their source represents. There’s just one problem, the number they are using is not a perfect match for the market they're in.
While an investor would believe the $3bn number is from a real report, they would notice that it doesn’t represent the amount of revenue the startup could potentially make selling its solution. PipeCo is not selling generic software to the plumbing industry and the founder hasn't mentioned any plans to do so in the future, they are selling procurement software. The sum of all software spent by the plumbing industry includes pools of the revenue that are completely irrelevant to the company
VCs are hyper sensitive to this type of mismatch. A mistake like this will cause them to discount your market size completely. This means they will make their own conclusions without any guidance from you.
Downsides:
For this example let’s briefly imagine PipeCo has been transformed into a plumbing supplies marketplace which takes a 10% commission on sales
The above example looks good. People use PipeCo to buy plumbing supplies and the founder has found a report that perfectly represents annual spend on plumbing supplies. What’s not to like?
The problem with this exchange is that $5bn doesn’t represent the amount of revenue available to PipeCo. VCs use market size to understand whether the revenue opportunity in your industry is large enough for your business to get to a billion dollar valuation. Given that PipeCo operates on commissions, $5bn is not the revenue available to them but rather the total amount of money that could be potentially spent on their marketplace.
This difference may seem subtle but it’s huge. Given that PipeCo takes a 10% commission on purchases, the actual revenue opportunity for PipeCo is $500m. VCs will generally consider $500m markets as too small...
Mistakenly representing all financial activity as your market size is extremely common for businesses which earn revenue by taking a cut of a transaction. Typically it rears its head in marketplaces and fintech. “There are $10bn worth of transactions each year” is very different from “there is $10bn a year to be made processing transactions”. Presenting the former as your market size not only leads to loss of narrative control, but also can result in you confidently presenting a market size that is too small for venture like in the scenario above.
Downsides:
This exchange is far better than everything else we’ve seen so far. The founder starts with a number for the entire market and goes through a few logical steps to get to a market size. The calculation is clearly explained and takes into account sensible factors - industry spend on the actual business problem, target geography, and how much customers are willing to pay. Moreover, the number that we end up with reflects how PipeCo plans to make revenue. It avoids all of the mistakes above and is a textbook example of a top-down market size. So why is it in the pitching mistakes section?
The problem is that top-down market sizes provide a lot of surface area for investor scepticism. To see how, let's take a closer look at the discussion above.
While the report provides global plumbing revenue figures of $130 billion and estimates 40% of costs tied to procurement, there is a risk that these numbers may not be directly applicable to PipeCo's specific focus. Diligent investors will scrutinise the fine print behind these statistics. For instance, they might question whether the reported plumbing revenue only includes companies directly engaged in plumbing work, or if it also counts those contracting the plumbers. Similarly, they may wonder if the 40% cost figure pertains solely to the former group. This may seem paranoid, but many investors have been burnt countless times by industry metrics which are not what they seem. I’d rather know how many buyers and how much they’re paying than take a number from a report and risk double counting.
Secondly, the final part of the analysis relies heavily on a punchy assumption - that plumbing companies will allocate 10% of their procurement budget to software solutions. Absent strong evidence, investors will struggle with this type of assumption especially as it is in percentage form. Percentage based assumptions often seem less grounded in reality than concrete amounts do. Saying that small plumbing firms spend $5k on procurement software on average, based on your conversations with several of them, sounds more believable than assuming that they allocate 10% of their procurement budget.
These problems are not specific to this response but rather come with the territory when presenting market sizes calculated top-down. They generate investor scepticism for the following three reasons.
As a founder, presenting a coherent, well-researched top-down market size is definitely better than not having one at all or having one that suffers from the errors above. However, by default they will still leave you likely to face investor scepticism.
Downsides:
All of this negativity begs the question - if even a perfectly explained top-down market size isn’t persuasive, what is?
Being convincing requires a change in approach. Instead of taking a large number from a report and trimming it down, founders are better off walking investors through market sizes calculated bottoms-up.
A bottoms-up approach starts with the smallest unit - typically a single potential customer or transaction - and scales up to the total market size. Unlike the top-down approach, which begins with macro-level data and narrows it down, the bottoms-up method is more granular and relies heavily on empirical evidence. When done well and explained competently they are extremely persuasive. Which is why institutions like YC advise their founders to present their markets this way. Moreover, because they are typically grounded in empirical data - they give founders a chance to flex their domain expertise.
At its core, every bottoms-up market size can be represented with the following equation.
Number of potential customers x Revenue per customer per year = Market Size
The trick to presenting your market size convincingly is to carefully walk the investor through this equation. Thankfully, it’s pretty easy and involves just three steps:
Applying this to the PipeCo, the discussion could look something like this:
Let’s analyse this. The founder starts by showing that a customer is $7200 in revenue a year and explains the calculation clearly. Then, she shows there are 120,000 potential customers and finally she multiplies these two together to get the market size. Stylistically the founder makes sure that the inputs for the calculation are believable by providing sources for all of them and even flexes the real interactions they’ve had with customers.
The end result is a market size that is really hard to argue with. I trust in the number of plumbing companies, I trust that the average company will need three licences, and I’m inclined to trust in their pricing especially if they have some traction. If you can replicate something like this you will be in the top percentile of founders, you won’t need to worry about investors not believing in your market size any more.
Getting investors to agree that your market is big enough involves more than just pointing to a large number. I hope this post has provided you with the knowledge to avoid common mistakes in your own meetings with investors, as well as an approach that will consistently work.
Aside from writing about fundraising, I work directly with founders to take their fundraising to the next level. If you’re looking for specific feedback on your narrative, check out our offering here.
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