In last week’s blog, I described the three items that every company should have before initiating discussions with potential investors. Those items are: 1) a detailed business plan; 2) an executive summary (usually one page, two pages at most); and 3) a PowerPoint pitch deck. It is essential to have all three documents fully developed at the outset, whether you are raising money from corporate venture capital funds, free-standing VC firms, angel groups, or individual investors. Depending on the situation, you may also need a draft term sheet and a document containing legal disclosures as required by securities law.
Once you have the right pitch materials, you are well on your way to making a successful presentation to potential investors, but there are still challenges to overcome. I have seen presentations to investors falter for a variety of reasons. One of the more surprising reasons is that companies are often unable to provide quality answers to basic questions that should have been anticipated.
For instance, any sophisticated investor can be expected to ask, “What is your market size?” Market size is a key determinant of likely investor interest. Each investor has their individual approach to this aspect, but it is rare (nonexistent?!) to find an investor who will consider a company pursuing a market that is less than $100 mm. Many investors will have a much higher threshold such as $500 mm. You must have a good answer to the simple question, “What is your market size?”
One reason that many companies are unable to properly answer this question is that defining their market is not a simple task – in fact, it can be quite complex. Consider a software company that is developing a salesforce compensation management product. The market arguably consists of every business with a sales staff that is compensated wholly or in part based on commissions or similar incentives. However, the true target market for this hypothetical software company is likely large to mid-size organizations with complex sales compensation packages.
This means that this hypothetical company needs to take three steps, none of which are simple, to define their market. First, it needs to determine the likely size of organization that is their true addressable market – is it companies with over five million dollars in sales, or five hundred million dollars, or five billion dollars? Second, it needs to consider which large organizations with sufficiently complex sales compensation packages would be true likely adopters of a software product in this area. Finally, having made the first two decisions, it needs to research and analyze the available data, whether produced by government data, trade groups, or otherwise, to determine the size of the market that they have defined.
While many companies stumble over this question, the better-prepared companies have a ready response that is based on substantial research and analysis. One good example comes from a presentation I heard at a recent meeting of the Atlanta Technology Angels. The presenting company, ColliderTech, has developed a remarkable step forward in the world of 3D printing – eliminating the need to cut molds for production-ready parts in a variety of materials.
This company had one of the better and more thorough answers to the market size question that I have heard in some time. Their response consisted of three parts:
- They identified a total addressable market of $500B, consisting of $45B for thermoset parts; $5B for 3D printing; and $440B for thermoplastic parts.
- Within that broad total addressable market, they identified a serviceable market of low volume production of $10.7B, consisting of $10B for thermosets (silicone, polyurethane: rigid, elastomers), and $770M for 3D printing (plastics only); and
- Finally, they assumed the ability to capture fifteen percent of the serviceable market, which would result in sales of $1.6B.
This answer is impressive for multiple reasons. First, it shows that the market size is clearly substantial. Second, it shows that the company has done significant research and analysis, which enhances their overall credibility. Third, they wisely chose a conservative market share number of fifteen percent, which further enhanced their credibility.
“What is your market size?” is just one question that investors frequently ask; be sure you are prepared to answer it. Stay tuned for another example next week!