MARKET ANALYSIS for a Startup Investment
When assessing investment opportunities, one of the most frequent questions I ask entrepreneurs is about market analysis. Although it is a crucial element of the conversation we have, I have a feeling its relevance is often neglected. Given the high risk associated with running a company without a proper understanding of the market, I would like to highlight the importance of market analysis from a VC’s perspective. Firstly, I would like to cover investors’ motivations behind requesting a market analysis, as well as discuss the importance for startups to do it right.
Knowledge of your market is critical, whether you are a startup raising money, attempting to find product-market-fit, launching a new product/service or targeting a new segment. It is not always straightforward; the market can be difficult to assess, due to lack of data sources or the entrepreneur’s lack of familiarity with the market analysis process. Nevertheless, you must develop a view or make an educated guess, to progress. Failure to do so might have painful consequences in the long term, as you make key business decisions with incomplete information.
Getting to an approximate “bottom-up” analysis can be done relatively simply if you have the appropriate facts or are willing to make the appropriate assumptions.
As an example, let’s say I was trying to figure out the overall market size for an imaginary company, LearnStuff.com, which sells software to higher education institutions for use by their students. An incredibly simple (but probably not sufficiently accurate) way to do this would be to find a figure for the total number of higher education institutions in the US and multiply that number by an assumed average sale price per institution. That figure is approximately 6,700, of which approximately 4,500 are degree granting. We might assume that only degree granting institutions have a need for LearnStuff.com’s solution so we’ll stick with a market of 4,500 institutions. If I then assume that, on average, LearnStuff.Com is charging $100k per institution per year, we would arrive at a market size of $450 million. Though this clarifies the market size in a “quick and dirty” fashion, it’s probably not completely accurate.
Examples and other views, below.
TAM Methodology: An Explanation and Example of Total Addressable Market Analysis
The importance of market analysis for early stage entrepreneurs & VCs
How VCs Assess Market Size & Opportunity
12 VCs share their thoughts on enterprise startup trends and opportunities
