The Entrepreneur’s Guide To Estimating Market Size For It’s Startup

Note: Before I begin, I would like to clarify the difference between market potential and revenue estimate. I have often seen entrepreneurs use the two terms interchangeably.

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Market Potential

Market Potential is about estimating the size of the overall market opportunity. It is a sum total of the potential revenues of all players who are addressing that opportunity, if all the potential customers were to buy. I.e. If you were selling ‘affordable’ golf kits for first-time golfers, then you could estimate market potential as follows (all numbers are indicative for illustration and do not represent actual market) :

  • There are about 20 millon golfers across the top 10 golfing markets in the world. Additionally, about 100,000 new people take up golf every year across the top 10 golfing markets in the world.
  • About 25% of these find the cost of golf kits expensive. If you take this as the addressable market at USD 400 a kit for 5 million buyers, we are addressing a USD 2 bn market opportunity, even if you look at only those who find the price of current golf kits too high.
  • Additionally, the ‘high-quality at lower price’ value proposition is likely to attract regular and casual golfers too i.e. 20 million golfers. This opens up a USD 8 billion market among existing golfers. And that’s a market growing at 15% pa.
  • However, given that most people who want to play golf do not take it up because the current kits cost upwards of USD 1500, we believe that a USD 400 kit will explode the market and we would be able to encourage 10 times the number of people to start playing golf. I.e. by redefining the price-point, we can create an additional market potential worth over USD 500 mn.
  • i.e. with an ‘affordable and high-quality golf kit’, we will be playing into a market that’s roughly USD 8 – 10 billion in the top 10 golfing markets of the world.

Revenue Estimate

Continue reading “The Entrepreneur’s Guide To Estimating Market Size For It’s Startup”

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Is it okay to be a leader in a niche segment?

Targeting a niche segment almost always seems like a winning strategy. There is always a temptation to carve out a niche when a category matures or seems to be growing well.

However, just because you have identified a good niche does NOT mean that it makes a good business case, no matter how sharply defined that niche is.

Often entrepreneurs make the mistake of getting excited about playing in a niche, and assuming that they can be leaders in that niche simply because they are super-focused ONLY on that segment. The truth however is that just because you focus on a niche does not mean that others who service broader segments are not at least as good as you, at servicing that niche as well.

Focusing on a niche makes sense only if that niche represents a fairly large market. Also, if servicing the niche helps you build competencies which can be leveraged across a broader segment, there is really no merit in building a ‘business case’ around that niche. Although, you could have multiple brands targeting different niche segments, with the common competencies deployed across all the segments.

How to judge whether your business idea is worth implementing?

Whether you should implement an idea should depend on whether that idea has the potential to meet what YOUR objectives are. If your goal is wealth creation, you will have to check if the business case is strong and if this is what will create wealth for you. If not, you will evaluate other opportunities.

On the other hand, if your goal is NOT wealth creation but ‘social impact’, then you will evaluate if this idea is providing the scale of impact that you wish to create.

And if your goal is to ‘enjoy what I do’, then you have to evaluate if this idea is what will give you the greatest joy.

If your goal is wealth creation, you will have to evaluate things like what is the scale of the opportunity, what is the competitive environment, why do I have an opportunity to be a dominant player, what is the scale that I can reach with this venture, what are the resources that I will need and can I gather the, what are the competencies that I will need and do I have them or do I have the ability to engage others who have those competencies, what are my exit options, etc.

 

When you have multiple business ideas that you believe in, how do you choose which one to focus on?

It is common for many aspiring entrepreneurs to be excited with a number of ideas or concepts, and they may genuinely believe in the potential for each one of these ideas to be successful.

However, eventually you will have to make a choice and decide to focus on only one of these ideas to build your startup around. Here are a few thoughts on how to make this rather tough decision. Of course, your decision will be a combination of various factors, and often will require revisiting the parameters that you used for your decision making.

 

1) Personal passion is critical

Every startup will go through challenging times. If the startup is not in an area of your personal passion, you are less likely to fight your way through these tough times and are more likely to give up.

On the other hand, if the venture is in your area of personal passion and interest, even if the commercial success seems a distant away than you had originally planned, you probably would be driven enough to keep going.

However, the commercial potential of an idea can sometimes mislead you into believing that you are deeply interested in that domain. It is important therefore to evaluate what you are really, really, deeply and passionately interested in. Here’s how you can possible identify the areas of your interest. Leave the ideas aside, and think of what you would want to do in life if you had enough money and not have to work for a living. That will give you clues on what excites you the most an what your real areas of passion are.

 

2) Evaluate the business case for each idea

Unless you are considering doing a social impact venture, the point of doing a startup is to generate wealth. Thus, it is critical to evaluate the business case around each of your ideas and then take a view on what is likely to generate maximum wealth.

Consider factors like market potential, possibility of scale, what is required to scale – e.g. does the venture require proportionate scaling of resources & capital to scale or would it be possible to scale exponentially, what areas are most likely to receive VC investments, what domains are likely to see higher valuations, etc. i.e. consider all the factors and evaluate how much you would be worth n 10 years if each of these ideas were to succeed as you plan.  You are most likely to get a different figure for each one of your ideas, based on the business case for these concepts.

 

3) Evaluate the external environment for each idea

Things like ‘how important is the problem or how real is the opportunity’ that this concept is addressing, which of these ideas have less competition, which of these concepts address an immediate need and which of these concepts will require hard-selling of the value proposition to potential customers/consumers.

Also, evaluate which of these ideas can be implemented from where you live and which of these concepts may require you to relocate. Then decide on the basis of your personal circumstances and preferences.

Also, while many of these ideas may have a large market in the country where you live, the KEY markets for some of these concept may NOT be the country of your residence. Evaluate if some concepts will require you at some stage to relocate. And then decide on the basis of your personal circumstances and preferences.

 

4) Which of these ideas have an opportunity for you to be a dominant player

What skill sets & competencies and other resources do you have that will give you a higher chance of success in the venture?

While the potential may exist in all categories, some sectors may not be ‘startup friendly’. Evaluate if the some of these concepts are likely to see competition from existing large brands. E.g. “Can Google do this?”.

 

5) Evaluate if you ‘like doing’ what the venture will require you to do

Example: You may be passionate about healthcare. However, creating and managing a chain of clinics requires you to be keen on & good in on-ground & distributed environment operations management, which is different from the operations management required for an ideas about an online medical records platform.

6) Evaluate the risks

While you play for the upside of a venture, also evaluate what the downside is. Some concepts, if they fail, will mean closure of the business. While some concepts, even if they do not become run away successes, may be sustainable as a smaller venture than you originally planned. Evaluate your risk appetite and evaluate which concepts are more aligned to your personal situation.

Finally, after you evaluate all these aspects, you probably should let your intuition lead the decision for which idea to go with.

I will be keen to know more parameters that people may have used to evaluate ideas. Will update this post as I get more responses.

 

 

 

How to Calculate Market Size

Kristina Tomaz-Young  is VC-TV’s CEO, Founder & on the go Strategic Partnerships Wrangler.  She has a passion for igniting unconventional ideas and creating new media opportunities to connect smart technology startups with idea backers. Having led strategic initiatives for large corporations as well as growth strategies for startups & mid sized technology companies alike in North America, Asia and Europe, she’s a hybrid combining big business experience with an entrepreneurial spirit. More on Kristina athttp://www.linkedin.com/in/kristinatomazyoung or connect with her atkristina@vc-tv.biz / kristina@venturecaptv.com