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Market Sizing 101

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Market Sizing 101

  1. 1. Market Identification and Analysis Gautam Gupta General Catalyst Partners Entrepreneurs Investing in Entrepreneurs Follow me @gRamblings www.generalcatalyst.com
  2. 2. <ul><li>A market is the set of all actual and potential buyers of your product </li></ul><ul><li>A market need drives the definition of the market </li></ul><ul><ul><li>Consumers need to get from Point A to Point B </li></ul></ul><ul><ul><li>Horse carriage and Car both exist in the transportation market </li></ul></ul><ul><li>Market definition should be broad yet specific </li></ul><ul><li>Start with a need, pain point, or fascination then worry about the market </li></ul>Proprietary & Confidential What is “the market”?
  3. 3. How specific <ul><li>Consumer: Demographics, Geography, Spending habits </li></ul><ul><li>Enterprise: Industry, Company Size, Geography </li></ul><ul><li>TAM – target addressable market defines the size of the market if you had 100% market share of all customers served by your product </li></ul><ul><ul><li>Pet food market -> Dog food market -> Puppy food </li></ul></ul><ul><ul><li>Implies that market is sized by product price / pricing model (ex. If your product is 1/10 price of competitors or billed on a subscription basis) </li></ul></ul>Proprietary & Confidential
  4. 4. <ul><li>Top-down </li></ul><ul><ul><li>Use research reports / analyst data to start with a large market estimate </li></ul></ul><ul><ul><li>Cut the market size down to TAM by making key assumptions </li></ul></ul><ul><li>Bottom-up </li></ul><ul><ul><li>Start with the potential number of customers and work up from there </li></ul></ul><ul><ul><li>Users – frequency of usage – transaction price </li></ul></ul>Proprietary & Confidential Sizing up
  5. 5. <ul><li>Sizes the problem you are going after </li></ul><ul><li>Investment decision based on: </li></ul><ul><ul><li>Size of Market </li></ul></ul><ul><ul><li>Growth </li></ul></ul><ul><ul><li>Potential Market Penetration </li></ul></ul><ul><ul><li>Competition </li></ul></ul><ul><ul><li>Exit value </li></ul></ul>Proprietary & Confidential What it is used for
  6. 6. Proprietary & Confidential Examples – Top Down Via Lightspeed Ventures Blog
  7. 7. Proprietary & Confidential Examples – Bottom Up
  8. 8. <ul><li>Must be easy to understand and logical </li></ul><ul><li>Most VC’s look for +$1B markets </li></ul><ul><li>Assumptions are critical – don’t hesitate to use high, low, base case scenario’s </li></ul><ul><li>Market size should not be without context (growth, structure of the market, adjacencies) </li></ul>Proprietary & Confidential Rules of Thumb
  9. 9. <ul><li>Cite your source and context for data </li></ul><ul><li>Many free sources of data – don’t pay Gartner unnecessarily </li></ul><ul><li>Apply a reality check and measure the market in multiple ways </li></ul><ul><li>Market size is always optimistic but based on reality </li></ul><ul><li>Don’t assume large market means a large market share </li></ul><ul><li>Don’t over think market sizing – it is important but not a perfect science (needs to be directionally correct) </li></ul>Proprietary & Confidential Do’s and Don’ts
  10. 10. <ul><li>Explosive new categories / markets can create compelling returns (social gaming) </li></ul><ul><li>Large fragmented markets underscore challenges to building a big business (language learning) </li></ul><ul><li>Market segmentation and understanding much more important than size (data center software) </li></ul>Proprietary & Confidential Examples

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