How can you use market sizing data to make profitable investments in tech?

1 Define the problem

Before you dive into the numbers, you need to understand the problem that the tech startup is trying to solve and the value proposition that it offers to customers. This will help you narrow down the target market and segment it into different customer groups based on their needs, preferences, and behavior. You also need to identify the key assumptions and hypotheses that underlie the startup's solution and validate them with evidence and feedback.

2 Choose a method

Estimating the size of a market can be done in various ways, depending on the availability and reliability of data, the stage of the startup, and the level of detail needed. A top-down approach starts with a large market that includes the startup's target customers and then applies filters or percentages to narrow it down. A bottom-up approach begins with a small unit of demand, such as a single customer or transaction, and multiplies it by the number of potential customers or transactions. Lastly, value-based estimation involves calculating the value that the startup's solution creates for customers and how much of that value they are willing to pay for. For instance, if the startup is selling a software tool that helps businesses reduce costs, you can use the average cost savings per customer and the percentage of customers who are willing to switch to the startup's tool.

3 Validate and update

Market sizing data is not static. It changes over time as customer needs, preferences, and behavior evolve, as well as as competitors enter or exit the market, and as the startup itself develops its product, pricing, and distribution strategies. Therefore, you need to validate and update your market sizing data regularly, using both primary and secondary sources of information, such as surveys, interviews, experiments, industry reports, and public databases. You also need to test your assumptions and hypotheses against the actual performance and feedback of the startup and its customers.

4 Apply and communicate

Market sizing data is a powerful tool for venture capitalists who want to invest in tech startups. It can be used to determine the market share and penetration rate needed to generate a certain level of revenue and profit, compare the startup's growth rate and customer acquisition cost with its competitors and industry benchmarks, as well as identify the key drivers and risks that affect the startup's market potential and performance. Additionally, it can be used to communicate the value proposition and competitive advantage of the startup to potential customers, partners, and investors. By using market sizing data effectively, you can make more informed and profitable investment decisions and support the growth and success of the startups you back.

5 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?