If you are a startup looking for VC funding, the most important thing to understand is that for a VC kind of return, the expectation is to have a market large enough that can generate $1 billion or more in revenue.
Market sizing is the process of estimating the potential size of a market and the revenue that a company can generate within that market. It involves analyzing the characteristics of the target market, including the number of potential customers, their buying behavior, and the competitive landscape.
So, when you make your company pitch to a potential investor, how do you estimate your market size?
There are 3 ways that you can use -
1. Top-Down Market Sizing [ quick-and-dirty calculations divorced from reality]
2. Bottom-Up Market Sizing [detailed analysis of the potential market]
3. Comparables [ potential market size based on the success of comparable companies]
In Bottom Up Market Sizing; Market size = Total number of customers * Average Revenue per Customer
In Top Down Market Sizing; Market size = Broad Industry Market Size * % Target Share of the Market
Any given day
Bottom-Up Market Sizing > Top-Down Market Sizing
Why? A simple example
❌ The amount spent by Indians annually in ordering from food delivery apps is in Billions of Dollars ~ 25 Billion USD annually
✅ There are 185 Million Indians who currently use e-commerce platforms for ordering food, with an average order value of greater than INR 450 per month
On the other hand; Comparables, or "comps" for short, is a market sizing approach that involves estimating the potential market size based on the success of comparable companies. This method is particularly useful for startups that are operating in a new or emerging market, where there may not be established market data available.
To use this approach, startups first identify companies that are similar to their own in terms of product, target audience, and business model. They then analyze the market size and revenue generated by these comparable companies, using this data to estimate the potential market size for their own business.
Comparables can provide valuable insights into the potential market size for a startup, as they offer a benchmark for revenue generation and customer acquisition. However, it is important to note that comparables are not always an accurate representation of a startup's potential market size, as every business is unique and may face different market conditions.
While Comparables can be a useful tool for estimating market size, they should be used in combination with other market sizings methods such as Top-Down or Bottom-Up to ensure the most accurate estimate possible.