Part 6 in my VC pitch series:
If you haven’t read any previous posts in this series consider starting here at the start but it isn’t really required to get the gist of the post. If you want to go to the post immediately prior to this one it is here.
by now I know your bio and why you eat nails for breakfast. I
understand the problem you’re trying to solve and why your solution is
just the fix. You’ve shown me your killer demo and I’m excited. MAN!
Who could have thought you could do THAT with Ajax
But now comes the time for one of the biggest VC roadblocks that
many VCs will tell you they aren’t obsessed with and I guarantee you
that 98% are (and the other 2% are liars). “How big can this get?”
It is one of those vague objections that is used to kill off many
deals. The reason that many companies fail on this question is that
they don’t put enough effort into this analysis (and frankly, if more
people did do this analysis some businesses might actually not get
My own hypothesis on why more market sizing doesn’t happen is that
many entrepreneurs are in love with product features rather than
thinking through how much they could charge for their product, how many
people would actually buy it, how many competitors they will have and
therefore how big the market might be. It leads to what a friend of
mine at First Round Capital
termed FNAC (Feature, Not a Company). But even if you are a “company”
how big is your market? If you’ve never done market sizing before try
to find a friend through LinkedIn that knows someone at McKinsey, Bain
or BCG. They churn this stuff out for breakfast.
1. TAM - The starting point in market sizing is
something we call TAM or Total Addressable Market. It usually starts
by your defining the industry you’re in. For example: The US apparel
industry is worth $280 billion per year. You might even have a
stacked bar showing the breakdown by shoes, athletic wear, formal wear,
casual, etc. … if that sort of breakdown were relevant. But PLEASE
don’t for a second imply that you’re going after a $280 billion
opportunity. Many people make the mistake of alluding to this massive
market size, which sets off the VC wondering about your sense of
Next you need state that the online market for retail is between
$18-22 Billion and you might have a stacked bar to the right of the
apparel bar (you don’t have to format it this way, but I do recommend
some sort of graph / visual to walk through this exercise is possible).
If you have the breakdown by either category or major vendors (or
both) that would be helpful. I recommend that you have a very small
footnote in the bottom left of the slide in a really small font that
denotes your data source. If your VC is an ex consultant or banker
he/she will be feeling really good right now.
But wait, are you really going after the entire online apparel
industry? Or just a sub-segment? I’m guessing the latter. Better
define it. You might be going after the high-end, fashion forward
segment and that might be $1 billion of the online market and $20
billion of the total market. Now we’re talking. You’re going after
the $20 billion, high-end online apparel market of which only $1
billion is sold online today. [while you estimate that 8% of all
apparel in the US is currently bought online – only 5% of high-end is
bought online … hopefully that was part of your problem statement]
2. Bottom Up – For some industries it may by easy
to do a bottom up slide also, but even if you don’t please give it some
thought in case you’re asked. If presented with the information above
and I know a small amount about online retail I might say, OK, let’s
see … BlueFly does about $100 million in sales, Nordstrom must do at
least that much, then there’s ShopBop, RedEnvelope and all of the
“private sale” sites like HauteLook, Gilt and Ruelala. OK, $1 billion
sounds reasonable. Maybe even light? You’d be surprised how many
market sizing discussions blow up here. A partner asks, “so how big is
the largest player in this segment today” in order to try and do the
back-of-the-envelop calculation to see whether your market sizing is
right. ”I don’t know” isn’t going to earn you kudos. Credibility
starts to wane. If you don’t know how big (or at least a guestimate)
the largest player in your segment is that’s not a good sign. Maybe
you haven’t really thought through this whole go-to-market thing as
clearly as I had thought when I saw that sexy demo?
3. Market Growth – OK, so it’s only a $1 billion
market today but it IS the fastest growing segment of the eCommerce
market today. Show me the 5-year projections how this will grow to $9
billion in just 5 years and make sure you do all your math because you
know that we will. VC’s are really good on the fly at these kinds of
calculations. We watch these presentations day-in and day-out. You do
them once / year TOPS (hopefully). So … $9 billion in 5 years and it’s
a $20 billion market segment growing to $22 billion. That’s about 40%
of all high-end fashion being bought online in 5 years. Is that
reasonable? I don’t know. But you better. And you better be prepared
with the reasons why. You don’t have to lead with the percentages and
explanations – but be ready to answer it if asked.
4. Market Share – So, the market is $1 billion
growing the $9 billion. What is a reasonable share for your NewCo to
grab given entrenched competitors? Maybe year one you think you can do
$500k in sales growing to $100 million in year 5. This still
represents just 1.1% of the market share. You will address later on a
different slide how you can get to $100 million but in a category like
this I’ve seen it happen in even a shorter period of time. (in face,
showing examples of similar company growth projections adds to your
credibility). In any case, beware of the large market share problem.
Doesn’t apply in this example, but there are times where people assume
too big a share – like 50% in year 5. Even 35% share in many instances
will seem high. On the other hand if you’re only 1% after 5 years
perhaps you need to define your market more granularly.
5. Market Value (Gross/Net) – Don’t be tripped up
by gross / net. If you think that you’ll be doing $100 million of
“gross” sales through your website in year 5, how much of those sales
are attributable to you? If you’re Land’s End selling your own product
the answer is 100%. If you’re PrivateSaleCo selling OPP (Other
People’s Product, that is) then you’re true value might be just 30-50%
of the value of the goods if you, in fact, don’t take inventory. If
this is the case you’re probably better off reporting your “net”
revenue. Same applies for categories like hotel rooms, flights, etc.
6. International Expansion / Segment Expansion –
Many people add in growth plan comments at the end of their market
sizing exercise and I recommend it. In our example you could say, US
high-end apparel is $9 billion in 5 years. But don’t forget that
Europe will be $11 billion and Asia will be $5 billion. We won’t be
going after these markets in the near term but as we increase our
success we will obviously look to other markets. Also, while we’re
starting in high-end fashion we will likely extend down into the next
product category down in fashion terms, which is a $25 billion segment.
We haven’t modelled that into our numbers yet but we believe that this
market can be addressable once we’ve built the brand.
Your goal here is just to stretch my imagination and get me excited
by the future potential. You need to get over that all important VC
hurdle … this is a BIG market.
OK, so I’ve droned on for too long in this post. My next post will tell you the biggest 3 pitfalls that I often see in market sizing.
Do you have some feedback on this post? Questions? Are you an ex
McKinsey guy who can give me some tips to make this advice better?
Please leave some comments. Love to get all input and get the
(Cross-posted @ Both Sides of the Table)