Not all technology entrepreneurs should raise venture capital, as I’ve mentioned before in my post “don’t raise venture capital.” An important component into figuring out if you startup should search for those elusive VC dollars is to size your market. Venture capitalists typically like to invest in startups that have the potential to be the number one or number two in a large industry.
Startups raising VC should be in industries over $1 billion in market size
By “large” I mean an industry that can pretty easily have $1 billion plus in revenues. The rational behind this is pretty simple - in order to generate 10x returns on their investment the VC’s startups need to have a real chance to hit several hundred million in size. Larger industries also have more outcomes that can be generated by trade sales to larger companies within that industry or in adjacent industries. Note that the market can be growing to be this size in the next couple of years.
VCs will sometimes find niche industry spaces attractive, ones where a particular startup has a highly likely and defensible chance of becoming number one, but this is much more difficult - and your startup still needs to be able to potentially grow to be $200 million or more in revenues in this niche case. I’d recommend that if your industry is less than $500 million in total size you seriously consider a less capital intensive growth plan, one that can be financed with a few million in angel investments.
When you are thinking of raising venture capital, do the market sizing analysis from the top down and the bottom up. That means do more than just read some analyst reports that suggest that a market is a particular size - actually talk to a number of potential customers. Choose representative customers that are similar to the average potential customer for your startup. Get a feel for their potential desire to purchase and their willingness to pay. With that information, you can then multiply their projected price point against the number of potential customers who look like the ones you have spoken with. Viola, your market size!
Sorry for the gratuitous french - I’m actually vacationing in Paris at the moment… and now off to a brasserie for a beer and some steak frites!
