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In the week of break between leaving Google and joining Redpoint, I resolved to read all that I could about the industry, so I would be well prepared for my first few months. It turned out to be much harder than I thought.

I scoured Amazon for books on the venture industry and bought one from Josh Lerner, a professor at HBS who teaches a course on private equity and VC. Luckily, Spencer Ante had just published Creative Capital, a history of the VC world. Then, I borrowed books like Michael Porter’s Competitive Strategy and read BCG’s collection of strategy essays spanning 60 years from friends who were consultants. I even read books on how to construct arguments like The Minto Pyramid Principle.

In my first investment memo, I put in a Porter’s Five Forces diagram. That got a few laughs at the partner meeting. I quickly learned that most of the skills in venture are apprenticeship based and that Five Forces diagrams don’t belong in memos.

But market sizing proved to be a framework that stuck with me from reading all those consulting books. Market size one of the most common questions in pitch meetings and generally the focus of much of the diligence, so correctly sizing a market is essential for most entrepreneurs. Market sizing is not finding the largest number to generally describe a sector, but finding the dollar pool which is directly applicable to your business.

There’s TAM and SAM or total addressable market and serviceable addressable market.  After I meet an entrepreneur who is pursuing a business in a market, I’ll research the total size of the market, or TAM, to determine the total amount spent in that market. Let’s take a look at the radio advertising market.

Public company filings, including 10-Ks and 10-Qs, are a great place to start. They often contain market size and market share data in the first few paragraphs. Research agencies like eMarketer and Forrester, also provide market size estimates. In all of these TAM estimates, it’s important to understand the categories included. For example, estimates of the online ad market can include display, search, radio/audio ads, and so on. The radio ad market is about a $21B industry in the US.

Starting with the TAM, you can find the SAM. It’s typically a fraction of the TAM that’s relevant to the business. If we were interested in finding the SAM for online radio ads, we could look at Pandora’s S-1. Pandora generates about $120M in annual revenue, about $100M of which is ad based. Assuming they have 40% of the market (my number), then the SAM is about $400M.

So only about $0.5B of the $22B spent on audio ads is spent online. This is a great place in a pitch to describe why the shift is just about to happen in a big way and why a startup can take advantage of it.

Knowing your market well is important when pitching, but much more important as you build the company. If you know where the market is, where it’s moving and how to address it, you can position your company well to take advantage of it.

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