Our CEO at York IE, Kyle York, recently wrote a blog post on the importance of founders taking a “market in” approach in addition to a “product out” view when building a company. One of my primary responsibilities at York IE is analyzing markets for potential investment opportunities, portfolio companies, and advisory/services clients, and I wanted to elaborate on our “market in” methodology. When I begin to research and analyze a market, I ask myself four main questions. How large is the market? Who will be the customers? Who, or what, are you trying to replace? Is anyone else disrupting?
How Large is the Market?
I discussed this topic in my recent blog on Keys to Writing a Good Investment Rationale. At York IE, we look at total addressable market size (TAM) from both a top down and bottoms up point of view. This is important to us because it helps balance estimates from analysts performing market research against the projections actual industry practitioners are making.
Generally when performing top down research our team is looking at market reports and analyst opinions. Sources range from the large analyst research firms like Gartner, IDC, and Forrester to smaller, industry focused analyst firms that provide market sizing and mapping. However, these reports can be very expensive and aren’t always available for a particular sector. In that scenario it is very important to nail the bottoms up analysis.
Our bottoms up analysis takes a different approach. We look at the number of potential customers we can identify for a company, and then multiply it by the estimated deal/account size (average and max). Our team is using information provided by the startups we are working with as well as data from our own market research in this methodology. Depending on the company, product, and/or business model we may use different metrics, or come up with multiple TAMs. This exercise also forces the team to validate potential pricing models as they are the main influence on estimated deal/account size.
The final piece of analysis is determining what the serviceable addressable market (SAM) is. This is the portion of our TAM(s) that we believe a company can actually attain. We value this analysis highly because it helps us think through what a startup’s go-to-market (GTM) strategy will need to be and lead us to conviction, one way or another, on whether the company has a realistic chance of obtaining market share. This analysis won’t be the same for every investment opportunity. Some startups will be going after massive markets with a small chance of succeeding, compared to others that are going after smaller, tech-laggard markets that offer a higher probability of success. Each comes with their own risks, and our team works to evaluate what is the right balance between risk and potential return. One profile we like to invest in is a startup going after large, tech laggard markets.
Who Will Be the Customers?
During our due diligence process, we normally get an answer to this question in our first conversation with an entrepreneur. However, it is important to factor this into the market analysis when taking a market in approach. As seen above, we use an estimated number of potential customers to determine market opportunity. Any entrepreneur needs to know what customer segment they are trying to serve from a vertical (industry/sector) and horizontal (Size-enterprises, SMBs, individual users, etc) standpoint. Understanding who your customer is at a deep level will help when devising a GTM strategy and pricing plan. In both our investment and advisory/consultancy work, we drill down on this question early because it is so vital to the rest of our analysis and strategy.
Who Are You Replacing?
This may be the most loaded question of the four. A product or service can be replacing multiple things. Our team breaks it down into four areas; budget, the “old way” of doing things, incumbents, and other startups.
Understanding the customer’s budget is key to planning GTM and growth strategy. The York IE team always considers whether a startup is looking to take share of a current budget allocated to a team, or create additional budget for the buyer persona by providing substantial ROI. Sometimes it might be a two step process where in initial engagement a startup is fighting for a slice of the current budget, but over time delivers a large enough ROI that additional budget is allocated to grow an engagement. No matter what the answer to this question is, it must be understood when conceiving, or analyzing, GTM and growth strategies.
I don’t think I could count the amount of times I’ve heard an entrepreneur tell me they are competing against the “old way” of doing things. This may make sense, but as an investor I need to understand what that “old way” is. What tools are used? What is the human element required? Understanding this allows me to evaluate whether I think there is a real chance of that “old way” being replaced, and if so, is the solution I am looking at the way it will be done. In a lot of ways this is where an entrepreneur is answering the question of, What is the problem I am trying to solve?
Analyzing the current competitive status of a market is probably what most people think of when they hear the term market research or market in approach. It is fairly self explanatory, but there are a few main things we look for during this portion of diligence. First, who are the incumbents? This is similar to the “old way” of doing things, but in many markets there are large firms that offer innovative solutions. It is important to know if you are competing against a tech giant like Amazon, Google, or Salesforce, and equally important to know if there are gaps in a platform that could be filled. Once again, knowing who the competition is will help determine GTM and growth strategy.
The second thing our team investigates are the maturing startups that are, or could be, competitive. We need to be able to recognize how a potential portfolio company’s product will compare and contrast with other solutions that have received venture capital funding. York IE prides itself on helping startups fund responsibly, and part of that strategy is looking at the funding strategies of competitors. While it is not impossible to compete against a well-funded startup, it does alter strategy when taking a market in approach. It is also worth considering if the current solution or strategy is worth sticking with if the market is already highly competitive with several incumbents and startups fighting for market share.
Is Anyone Else Disrupting This Market?
This is a pretty simple question to understand. It is not uncommon for multiple people/companies to have the same great idea. And if by chance there is a great, unique idea entering the market, it is almost guaranteed that it will be copied by others. This makes it imperative for entrepreneurs and investors to know who else is trying to disrupt a market. This research can be difficult because some early stage startups operate in stealth and others are too early in their lifecycle to attract media or analyst attention. An entrepreneur or investor has to do the best they can with the tools at their disposal, but they have to ensure that they are constantly on the lookout for new competitors. This can be a laborious effort, which is why we have developed our own market data and analytics platform to help our team reduce the manual research process so we have more time to focus on our market analysis.
At the end of the day, the “market in” approach helps make you the most prepared person in the room when it comes to your company or an investment opportunity. Our team at York IE considers it a vital component to all the work we do helping startups scale and strongly believe that it has played a significant part in all of the successes we’ve had along the way.