Every pitch deck needs to have a “Market” slide. Unfortunately, most entrepreneurs get the market slide wrong.
That’s not necessarily their fault. The fault lies in the pitch coaching industry that insists that every deck include a slide with TAM, SAM and SOM. (total addressable market, serviceable addressable market, serviceable obtainable market or variations on these terms.)
You can find templates for this slide all over the internet. Almost always, the template has three bubbles. Sometimes they appear side by side, like the porridge bowls of the three bears, and sometimes they are elegantly nested within one another, like a matryoshka doll.
The mythical market size claim
It’s amazing how this three-bubble market size slide has spread. It seems that everywhere I go on the planet, from Stockholm to Shenzhen, entrepreneurs are using a similar slide.
Typically, entrepreneurs claim, “Our global TAM is $X billion, but we are going to start out in a certain part of the world, where our SAM is $Y billion. And we conservatively project that our SOM is $Z billion.”
At times, they also show a very precise compound annual growth rate (“with a CAGR of 17.65%”) to demonstrate their analytical rigor.
The typical market-size slide is obsolete.
It’s clear why entrepreneurs try to pump up their market size. They’ve been told that venture capital investors are only interested in unicorns, and so they assume that the best way to become a unicorn is to go after the largest market possible.
Presumably, the thinking is that it is easier to get 2% of a very large market than it is to get 20% of a smaller market. So, they earnestly search for market data that allow them to claim that their TAM is perhaps $56 billion, or $256 billion, or even better, $2.5 trillion.
When this slide appears, most investors chuckle (or weep). Not only are the numbers always exaggerated, they are also irrelevant.
Market size vs. market opportunity
Investors generally don’t give any credence to the market size numbers that founders present to them. We may still ask founders how big their target market is, but the point of the question is to see how founders think about market segmentation, not to rate the startup based on how big they think the market is. Savvy investors may prefer that startups go after a market that does not yet exist. Better to create the market than try to unseat established competitors.
Rather than claiming that you can disrupt a huge existing market, what’s more relevant and compelling is how you answer questions such as:
- Who are your target customers?
- How will you reach them?
- How many can you reach?
- How will you convert them?
- How many can you convert?
- How will you onboard them?
- How much will that cost?
- What is a customer worth?
- How many customers will you acquire this year? Next year? The year after?
Most investors want to see market opportunity, not market size. They need to see that you understand who you are going after at the individual customer level, why the customers will love your solution, how you are going to reach target customers and how many customers are likely to convert.
Founders should build a bottom-up model that demonstrates how you will build a big, profitable business, customer by customer. If you are truly innovating, you are creating a new market. Show investors how you are going to build an ever-expanding cadre of delighted customers. Don’t suggest that your focus is on acquiring market share in a large established market.
Show that you really know your customer
The typical market size slide is obsolete. We’ve heard several teams pitch wearable technologies for dogs to track their activity. It’s easy for startups to claim that the TAM for such a product is in the billions. They might state that there are 90 million dogs in the United States alone — at $9.95 a month subscription, that’s a $10 billion market!
In fact, for the dog wearables business, it doesn’t really matter if there are only 20 million dogs or 200 million dogs. What matters is how many dog owners the entrepreneur can convince, one by one, to sign up for this service. That requires defining and understanding the target customers in granular detail. Not “dog owners,” but “urban professionals, aged 25 to 35, earning over $80,000 per year and frequently posting on Instagram who own dogs.” Or something similarly precise, showing that you’ve really done your homework.
Entrepreneurs should stop pitching the typical market-size slide. Instead, they should show investors that they truly understand the market opportunity from the bottom up, customer by customer. Offering a compelling value proposition with their product or service and delighting customers is how they will ultimately succeed.