It always puzzled me how investors ask startups to research their own market size. It’s like asking a playful kid to write about ‘benefits of owning a PlayStation’. And the funny part is that they constantly complain about how their numbers aren’t accurate. WHAT DO YOU EXPECT?!
To clarify more in my opinion these are some of the reasons it is not the smartest move:
1 – Startups tent to overstate the numbers for obvious reasons
You tell a startup “you have to target a big market to raise money” and then ask them to estimate the market size. It is obvious what they do, they estimate every number in the highest amount possible. What most startups do is to report the whole money spent in the market as market size. The other common thing they do is to report the market size of their biggest competitor or even crazier total revenue of all of the competitors as market size.
Investors probably know that these can’t be the market size for a new startup. And probably ignore these numbers. (if they don’t know that they shouldn’t be an investor in the first place)
2 – Startups (specially in early stage) don’t have the resources to do the research
estimating even a good estimation of a market size is a lot of work. First of all, you need to know exactly who you are targeting as a customer and then have some numbers on the people with those traits (which is hard by itself) then you should estimate the amount they will probably spend on your product (which is again really hard to estimate). I don’t say that it’s impossible but it is way beyond resources of a small team. It takes months of work and a lot of money to get to some useful numbers.
3 – Market size is an abstract concept
Imagine this, I want to open a burger shop downtown and I want to estimate my market size. Do you think it is rational to assume whole town burger sales of last year as my market size? Of course not. What about assuming that my sales will be about the same as the nearest burger shop in the area? Not exactly, especially if I don’t offer everything they have on their menu and my place is different size and location.
So how am I supposed to estimate my market size? The best answer is you should open your shop. The best way to know how big my market is, is to see how much I can sell. After the first traction it will be possible to estimate a growth and see my targeted market size.
Why do they do it then?
What I assume is they inherited it from older methods of investment. In the past when there was no venture investment, companies only raised money when they already had traction and spent a few years in the market. and the reason why they assign start ups to come up with the number is simple
“They don’t want to waste their time on something that is not useful anyways”
* Image from https://unsplash.com