One questions I inevitably ask entrepreneurs is “How big is your market?”
It’s a question I rarely get a good answer to.
Some of the recent answers I’ve gotten have been “It’s a growing market!,” “It’s huge with millenials!”,” Millions are spent!” and the always reliable “It’s big!!!!”
None of those is a good answer to that question because they don’t answer the underlying question which is on every venture capitalist’s mind when they’re evaluating a startup: Is the market big enough to support my investment?
Remember: for a venture capitalist to make a successful investment, they need to get return on the order of 10-20X their investment. (For example, if a VC invests $2 million dollars into a $4 million company to make it a $6 million dollar company, the company needs to be able to grow into a $60 million company for the VC to get a 10X return).
If the market isn’t big enough to put that kind of return in the realm of possibility, it makes no sense for the venture capitalist to consider investing. And it is very, very possible for a startup to address big markets, growing markets and markets that are huge with millenials that will never be large enough to support a venture capital investment.
So if you are pitching a venture capitalist, your job is to convince him or her that your market is big enough to support the investment you are asking for. How do you do that?
Actual facts and figures. How many dollars are already spent in the market? How many people? What is the growth rate of that population? Are there ancillary markets that can be addressed, and how big are those markets in dollars, population and growth rate? Are there competitors in the market and how much of the market have they already captured?
Yes, you may have to estimate some of those figures (and you will need to explain how you have reached them), but this is one of the most important parts of our pitch deck, and it is vital that you can show a clear idea of the magnitude of your market.
It’s key to your pitching success!
How big is your market?