Agree: Early-stage investing is rarely about accurately sizing a market. And nothing can be boiled satisfactorily down to an Excel model.
Disagree: But you still have to do it. For yourselves, if not for VCs. Presumably, VCs want to see that you've thought long and hard about the market opportunity, about the competition, and about your marketing plan and business model. And you should have. Your market sizing will never be pitch-perfect, but you can't just wave your hands in an investor meeting and declare that the entire exercise is bunk.
I would argue that, if you're being asked to "dig deeper" into market sizing, or even if you're being questioned at all about the market size in your meetings, it's really a proxy question for something else. Maybe they find the idea narrow, and they want to be convinced it can broaden to other segments. Maybe they think you're being insufficiently ambitious. Maybe it's the opposite; they think you're being wildly naive. Whatever the case, "What's the size of this market?" is a question their analysts can probably guesstimate in a few days' worth of Excel monkeying. That's not really what they're getting at. What they really want to know is how you think about the business side of your startup (or indeed, whether you do).
The result of a model is no better than a gut estimate.
But the process of developing the model, working out what the factors are that will impact market size (and your share of it), working out what things you need to monitor more closely or focus on for biggest impact is where the value is.
Exactly. I'm not sure if there is any investor consensus on this, but I'd be willing to stake a claim that a well-reasoned market analysis is superior to a putatively "accurate" market analysis. And by well-reasoned, I mean an estimate that accounts for and emphasizes the critical and necessary variables in the sizing and in the approach. Perhaps with some sensitivity analysis thrown in for good measure.
If your model is logical and flexible, you can work with investors to adjust it and play around with different scenarios. If your model depends on an inflexible degree of supposed precision, you're at high risk of deluding yourself. Savvy investors can probably sniff that out.
All things being equal, it's probably best to present a model that is simple enough to be easily grokked; flexible enough to be adjusted on the proverbial back of an envelope; and dependent on a set of factors that you've thoroughly researched and confidently believe are the factors to focus on. So you steer the conversation to the factors, and less to the outcome of the model under your presented scenario. If you've got the right factors, you can model out any number of scenarios. (And you should probably have done this already prior to the pitch, so that you're prepared to speak to a given range of hypothetical outcomes).
Yep it is basically a way of saying no without having to say why. Since no one can really defend their market analysis, anyone can shoot you down by querying it without having to think.
> Woz: Don had come to the garage and I ran the Apple II through its paces and he said, “What is the market?” I said, “A million units.” He asked me why that was and I sad, “There’s a million ham radio operators and computers are bigger than ham radio.”
No, in the highlighted section he is explicitly saying you can't figure out how big the market is by reasoning and the best you can do is guess.
In fact, it is a bit stronger than that: he states that the only knowledge that can be used is instinctual knowledge, but since instincts concerns things like what smells indicate spoiled food and legless that animals are dangerous, you don't have any relevant knowledge at all! The best you can do is baseless guessing, though after having gotten funding and done a bit of work you might have some basis for your estimate (there is a caveat that instincts dominate estimates early in the start up process).
The summary ars provides does seem to be what he strove to say, but since two people can easily disagree on what is to be considered "obvious" even that statement allows for less predictive power that seems reasonable.
I remember once sitting with the company CEO and going over my spreadsheet estimates of project timelines, sales projections, and department growth. At the end of it all I said to him that I didn't know if any of this was really worth looking at, since it was all just guesses.
His response was that in the early days of the company they had tried doing things without plans, and that bad plans were much better than no plans.
"No plans" means exactly "by chance". Bad plans can do considerably worse than chance.
What organizations need to learn how to do (and unfortunately to this day Excel isn't particularly enabling) is sensitivity analysis.
One of my corporate parlor tricks is to render valuation spreadsheets (which are typically cashflows dependent on scenario parameters) into Matlab and giving each unknown parameter a distribution from three-point estimates (min/most likely/max). The difference between good plans and bad plans is the probability that your best valuation exceeds your WACC or the turnkey price to be paid or some such method.
People are often impressed that the difference between good and bad plans even exists.
crystal ball for excel can do monte carlo simulations for what you describe but with a real probability distribution for each input. it's expensive though (as is matlab, which is what i did my master's thesis in =)
I have always loved this quote too - the thing about planning is not that you can actually workout what to do, but you cut down on the novelty you have to deal with when faced with a new situation. Your brain can only handle so much new information at once and planning lets you handle new problems better as you just have less new to handle at once.
Market sizing is a Fermi problem - that doesn't mean it's not quantitative or even that you don't need to think about it, it just means a back of a napkin calculation will do (to a first approximation). It's more important how you think through the problem of market sizing than how precise the end number is.
The thought exercise will reveal weaknesses in your strategy.
The corollary of that of course is that if a potential investor keeps asking the question it means they have a nagging feeling there is a weakness in your strategy.
To quote Robert De Niro from Ronin; "If there's doubt then there is no doubt."
To paraphrase from "Jurassic Park": this is Heidegger. I know this.
Although it doesn't ruin his short essay, "instinct" is unfortunate. Executive knowledge about the kind of nascent industry the article (and HN typically) discusses isn't "natural", or a mere knack like playing music by ear. It's tacit knowledge: it can't be codified.
In Heidegger-speak: market potential can't be reduced to a stockpile of "presence", of something that's stared at and analyzed like a tool on a shelf. Rather, it's always already operational, "ready-at-hand": what's needed is neither in the tool nor in my theory of the tool, but in the operational-skill-in-action.
Moreover: the skill to size a market doesn't live in any particular brain. "Sizing a market" can't be disentangled from the general problem of capitalism -- capital allocation in order to yield more capital. It's not like hammering a nail, it's like building a house. No single person can build a house: house-building, as nascent industry-building, lives in a community of practices. This is the crux of processes like YC "schools" and focal points like the Silicon Valley.
Instinct is indeed unfortunate, and I think it is misleading to the point of hilarity too! The notion that sizing a market (as others have mentioned: a Fermi problem) is the same kind of knowledge as that which makes babies close their mouths and wave their arms when immersed in water? Venture investing truly is child's play :D
Let "sizing a marked" mean "estimating the number of products that can be sold to a given population of persons". An very precise estimate of this number is currently very hard to provide, but giving an order of magnitude estimate is clearly a Fermi problem. Note that the difficulty is providing an accurate and tight bound, not an accurate but imprecise one and that the latter might be valuable too.
Solving a Fermi problem requires estimating a series of numbers from everyday experience. One then multiplies these number together in a mechanical fashion, which could be done in a "ready-at-hand" way by use of a tool. Evidently the process invariably requires contemplating one's every-day experience, and since ordinarily that experience is simply lived this meta-action is an act filled with "presence".
By the way, the problem of capitalism is solved, and the solution shows that it will allocate capital optimally; this is one of the main arguments in favour of capitalist systems.
The problem that the social reality in which we live only partially approximates capitalism (see: non-profit organizations) is the big problem economists, and anyone else using classical economic theory in the real world, struggle with.
The answer to this question may tell you something about how an entrepreneur thinks about their market and their place in it. Can they see the big picture? It can also serve as a sanity check. Ultimately markets just need to be big enough, but I've seen investors disengage when you can't give them a clear authoritative number.
Investors should and do make their own estimates of market opportunity.
Investors should and do demand help in making those estimates.
A common way to help is to provide a full estimate plus the inputs you used to make that estimate.
Now, I think a BETTER way to help is to provide ranges and discussions of the inputs, rather than point estimates. And it's rare that I've encountered an investor who didn't find that acceptable. But some version or other of the exercise is worthwhile.
Agree: Early-stage investing is rarely about accurately sizing a market. And nothing can be boiled satisfactorily down to an Excel model.
Disagree: But you still have to do it. For yourselves, if not for VCs. Presumably, VCs want to see that you've thought long and hard about the market opportunity, about the competition, and about your marketing plan and business model. And you should have. Your market sizing will never be pitch-perfect, but you can't just wave your hands in an investor meeting and declare that the entire exercise is bunk.
I would argue that, if you're being asked to "dig deeper" into market sizing, or even if you're being questioned at all about the market size in your meetings, it's really a proxy question for something else. Maybe they find the idea narrow, and they want to be convinced it can broaden to other segments. Maybe they think you're being insufficiently ambitious. Maybe it's the opposite; they think you're being wildly naive. Whatever the case, "What's the size of this market?" is a question their analysts can probably guesstimate in a few days' worth of Excel monkeying. That's not really what they're getting at. What they really want to know is how you think about the business side of your startup (or indeed, whether you do).