Raising Capital: Market Sizing, Part Seven

Last article, we reviewed scaling your revenues without commensurate increases in marketing costs. This week we’ll get into market sizing and basic strategy.

Market Sizing and Investment

In order to raise money from investors, they have to believe that the return on their investment (ROI) will be worth the risk of funding your business. They want to understand that your ability to capture customers is well thought out and justifiable. They will want to know that:

You understand and can explain your product in 30 seconds.
You are realistic in sizing the market.
The total market size is large enough to justify their investment.
Your projected forecast market share over time is realistic.
Their investment will give them the desired ROI if you meet your financial forecast.

Key point. VCs become masters at assessing people and business quickly or they don’t survive. You must convince them that you know your product and markets intimately in your first discussion.

Investors want to know how your forecasted annual revenues mesh with the total and serviceable market sizes. This gives them a first-round gut check of market size, product fit, and your ability to assess markets, and returns. So you don’t fail the target market test, let’s review market sizing and the three market sizes that investors will focus on, namely, TAM, SAM, and SOM.

TAM: Total Addressable/Available Market

This is the total demand for your product. Essentially it’s the theoretical annual revenue opportunity for your product assuming no competition.

Key point. For a significant investment from a VC, they typically want to see a TAM greater than $1 billion.

SAM: Serviceable Addressable/Available Market

This is a portion of the TAM comprising customers that you can reach with your sales, marketing, and distribution channels. If your business is a restaurant, your SAM may be customers within a radius of 15 miles or so of your business, plus occasional out of town visitors.

SOM: Share of Market

This is the portion of the SAM that you capture based on your planned business strategy and operations. Your financial planning model reflects revenues based on your SOM, ideally increasing significantly over time.

Target Market

Besides “sizing the market” for yourself and investors, the market definitions above help you to think about and hone your target market.

Key point. Your target market is those customers who you can reach with your sales, marketing, and distribution channels and are likely to buy your product.

Defining your target market is important as it allows you to focus your marketing and sales efforts. Targeting is a key strategy because:

It keeps your initial marketing costs down.
It helps your sales and marketing teams concentrate their efforts on the customers who are most likely to buy your product, decreasing both selling and conversion time.
Done well it increases your sales ramp rate by providing organic marketing from those who have purchased and will encourage others to purchase through direct interaction and social media.

As previously written, investors want to know that you’ll use their money wisely and provide great returns. Knowing your TAM, SAM, SOM and target market helps you understand your business more thoroughly, develop strategy, and convince investors that you may be worth the risk of an investment.

Until next week!

All the best,