The importance of market size in fundraising
Market size can be a defining factor for many investors and can potentially be the difference between your business receiving an investment or leaving empty handed. Access to finance team leader, Ian Dixon, shares his thoughts on why knowing and understanding your market size is so important.
Why Market Size Matters
An in-depth knowledge of your business and its markets is a given for any would be successful entrepreneur, and a complete understanding of your businesses market size is a fundamental part of this. Market size is one of the most important factors potential investors will focus upon when reviewing a start-up funding proposition. It can (and will) lead to a very quick decline if you are not prepared, or the size does not sound appealing or make financial sense.
If you are trying to enter a market that is not substantial then, by definition, your start-up does not have the potential to be substantial either. This is of particular importance if you are planning to launch into a competitive market space. A small market size, especially if being shared, will not appear favourably to any investor - this is why the ‘Market Size’ slide should always feature early and prominently in an investment pitch deck. Being clear from the offset and giving the investor an immediate idea of the size of the market will help you justify your reasons for investment.
How Does Market Size Influence An Investor?
Approaching a potential investor is a typical part of the fundraising process and being prepared is key to any approach being successful. A vital piece of information any investor will expect you to know is the size of the market you are hoping to enter.
Market sizing is effectively an investor litmus test. It is the key factor upon which, if all other variables are positive, a business is either viable or not. Experience has shown repeatedly that (no matter how good the founding team and any strategic partnership within a market are) if the market size is small, there is a significant likelihood that the business will not turn a profit. You may have the best product that solves the most niche problem but if there isn’t adequate demand due to a lack of market size, there is no potential for return on investment for any investor. Gaining traction and interest is all well and good, but if the size of potential purchasers is too small, no investor will see the proposition as a financially viable option, no matter how good your forecast unit economics are.
Increase Your Chances of Investment
Founders and entrepreneurs need to think very carefully about market sizing. The concept of market size is often intuitive to founders - either it’s big or not - and is something they often struggle to articulate. However, it is very important to adopt an analytical approach and validate the market size, and most importantly your total addressable market. A robust thought process will add credibility, and third-party validation will reinforce investor confidence. Not surprisingly, information on market sizing is often readily available in the public domain, although founders need to be careful not to place over reliance on a single source and ensure where possible information is validated by reference to several sources. Typical sources of third-party independent validation include published market research, press/online web commentary, competitor information and trade organisations.
The ability to segment a market size to reflect a total addressable market is often more problematic. Again, a structured thought process is required, although this may be more focussed upon the founder's previous experience of a market and direct research undertaken by the business.
One trap founders should always seek to avoid is the ‘abundance’ statement….’if we only capture % of a market we will generate £ revenue’. These statements are red flags for investors and reflect the fact that, regardless of market size, management teams need to execute a business strategy to exploit a market opportunity. Investors can, and do, interpret such statements as evidence of weaknesses in the business strategy.
Market size is the common denominator against which all other investment criteria are judged. If all other aspects of your business are great, don’t allow a lack of knowledge and understanding of your market size come between your business, and investment.
The importance of market size to investors is typified by the notions
When a great team meets a restricted market, market wins.
When a poor team meets a significant market, market wins.
When a great team meets a significant market, something special happens.
The original version of this article first appeared on GC Business Growth Hub's website
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