Defining Market Size
One of the most common reasons we reject a deal for potential investment is a belief that the company is attacking too small a market. Look not every company needs to change the world and be worth tens of billions of dollars to be a great win for you and your investors. However, if we are going to invest in the early days then we want to know there is some serious potential upside. We generally want to convince ourselves that the company can find a path to $100MM in annual revenue so that they could possibly be worth $1 Billion or more at exit.
We invest in a lot of companies around sports. We often see businesses that plan to sell to pro and college sports teams. Unfortunately, there just aren’t that many of those teams out there that have serious money to spend on a product. Even 100 customers paying $10K per year is only $1MM. And it is really hard to get 100 sports teams to pay $10K for anything, and you still need to 100X the revenue from there to hit $100MM. I am guessing this math applies to lots of B2B businesses in other sectors.
In the consumer space, a low product price can lead to a similar calculation. If you sell a product for $20, you need to sell millions to get to a seriously large business. It is hard to sell millions of any product. Similarly, if you have an app that people pay $5–10 per month for, you need a million paying customers to get to $100MM in revenue. Yes, people pay for Netflix and Disney+ each month, but there is a ton of subscription fatigue out there. Is your product going to be as important to your users as their Netflix subscription? Are there even a million potential users out there for your product?
When you are thinking about market size for early stage companies, make sure you can explain how you are going to get to serious revenue scale. It is usually a good idea to start with a small market at launch, but you need to have plans on how you will get to something big that can move the needle for your investors in the next few years. If so, you probably have the right market in your sites.
Thanks for reading today’s post, I hope this helps you think about defining your target market.