I was looking at an acquaintances business plan the other day regarding his new venture into an existing category. He was planning on raising venture capital but I saw a huge problem within a couple of turns of the digital page -- the market he was going after was extremely small. There was really nothing wrong with him going after a new product in the category but it wasn't going to be a big business. Why? There were existing competitors in the segment and the market was small. Like $100M small. Why is this small? Well an existing category that isn't growing with entrenched competition basically ensures that he's not going to have a big business. Maybe a nice cash flow business but certainly nothing large enough that would attract venture capital.
In order to assess whether your addressable market is attractive to start and grow a business consider the following:
- What customer pain are you addressing? You need to frame the market pain that you are going to address and what market is being addressed. Investors are looking for a total addressable market (aka TAM) that is large enough where a small % of the market share that your company addresses could be an interesting business. If you are presenting an opportunity where in 5 years your $20 million in revenue equates to 50% of the TAM, then this is just too small. Investors will typically want you to have a healthy revenue line in 5 years equating to single digit market share.
- Telling the story ‐ when you are telling your story to investors, be explicit and tell a very specific story. Think about showing the overall market, your TAM, and possibly other comparable competitors. You will want to clearly state the starting point Year 1 and what Year 5 looks like and how your are going to get there.
- Do your homework - in your business plan, show the overall market opportunity by building out the market segmentation (by demographic, psychographic, SIC code, etc). You will want to get as granular as possible. Layer in specific detail around segmentation growth rates, if possible.
Lastly, you should be able to articulate why today is the best time to address the market opportunity. The detail should contain as much quantifiable data as possible in order to tell the story to the investor and convince them that this moment is the right time to invest. Make the investors feel like the market conditions are ripe to exploit your addressable market, and avoid making them feel they are too early in the opportunity.