SAI contributor Mark Davis is a venture capitalist at DFJ Gotham. He also writes Get Venture, a blog aimed at helping entrepreneurs trying to raise money from VCs. We’ve previously published Mark’s thoughts on the objective of the first meeting, the importance of knowing your competition, not looking like a bozo, and not filling the room with a cast of thousands.
Before you go bragging to VCs how big your “addressable market” is, stop and think about it. For example, if you’re hell-bent on “disrupting” an industry, the addressable market may be smaller than it was for the companies that you intend to displace. Disruptive technologies often reduce prices. If your company lowers prices, it will likely shrink the addressable market.
On the other hand, your lower prices may also enable new customers to purchase the product or service, which could increase the size of the total market opportunity. The decline in price and the increase in unit volume, in other words, each have the opposite effect on the size of the addressable market. The net effect varies by industry. So think carefully about what is likely to happen in your industry…
When presenting your analysis, justifying an increase in unit volume is more difficult than explaining the decline in price, making it difficult to get VCs to believe that the net result is a larger market. As a result, entrepreneurs who believe the smaller addressable market is sufficiently attractive (which it often is) should first present the smaller addressable market. Then, later, you can suggest that there is a potential for significant upside–and explain why. This avoids unnecessarily making flimsy claims that a VC may find faulty, which may make the VC think you’re a bozo.
If the attractiveness of your business is dependent upon presenting a larger addressable market opportunity, be sure to provide significant evidence that demonstrates the potential for increased quantities. In other words, don’t just cut and paste numbers. Think them through. Deeply.