Market Size your Start-up using the VC Method

If you are a startup founder, why not show credibility in your pitches by triangulating your market sizing the method used by VC’s? 

Traditional Market Sizing by Startups: 

1. The Y Combinator (Large Number, Zero Context)

2. TAM, SAM, SOM (same as above but more numbers)

3. The Gartner (Largest number you can find in an analyst report, even if it is not from your market) 

Market Sizing by VC’s: 

1. Size of Largest Incumbent (What are their revenues, margins & valuations?)

2. Bottom Up Estimate (current pricing X # customers in target segment)

3. Latent Demand (future market can be much bigger than current market)

4. Adjacent Markets (Are their any larger adjacent markets to expand into?)

5 Steps for ‘Non Sales’ Founders to Sell.

A simple way for ‘non sales’ founders to think and do sales. The success rate of selling to an existing customer is 60-70% versus 5-20% for new customers. 

Segment your past 24 months (to factor in 12 mths+ of Covid) customers based on a very simple model… 

1. Save all your customer contacts centrally and in the ‘cloud’ (Your email contacts is a good starting point if you don’t have a CRM system yet).

2. List the top 10 customers from the past period with their amounts (You’ll be surprised by ‘small’ consistent customers vs inconsistent ‘big’ spending customers).

3. Assess the buying patterns of the top customers (frequency, types of products, ave amounts)

4. ‘ Label’ 4 tiers of customers:
I.e. ‘Entry Level Eddy’: Buys once, low priced product or only 1 product.

‘Repeat Purchase Rita’: Buys frequently, average priced products, average of 2 products.

‘VIP Velani’: Your biggest contributing customer segment; average 3 products. According to Signore Pareto 80% of your revenue will come from 20% customers. 

‘VVIP Piet’: Ensure that you don’t have customers in this segment, however ask yourself ‘What do I need to offer or do to increase my VIP customers to this level?”

5. Design activities to grow and maintain these customers.