A Startup’s Guide to
Market Sizing
Pen Goodale, Director of Research
OVP Venture Partners
8/23/06
2006, OVP Venture Partners, 8/23/06
The Need for Accurate Market
Sizing Never Goes Away
 All firms, start-ups to Global 2000, need to do market sizing before they invest time,
money & resources in new ventures – companies, business divisions or products.
 Market segmentation is critical before you tackle market sizing. The sharper your
focus, the better. Key variables to consider:



Which product segments in the solution stack -- initial focus & 3-5 year plan?
Which regions – initial focus & 3-5 year plan?
Type of customer:

For enterprise markets -- horizontal or vertical solution? Are there 1 or 2 “best fit” verticals?

Which distribution channel(s) will be most effective for reaching your target customers?
― Residential/consumer (Do you also need to segment by age group, or tech. adoption rates?);
― Enterprise (Global 2000, small- to medium-size firms, or small office/home office [SOHO]); or
― Service providers.
―
―
―
―
Which vertical industries have the greatest need?
Which verticals are early adopters or early majority customers?
Market size and timing for each vertical. How big & when will revenues ramp up?
How easy will it be to sell to each vertical? It may be a big vertical, but if it is going to be costly &
hard to sell to, it probably is not worth targeting.
― Direct sales vs. indirect channels , e.g., value added resellers (VARs), distributors/resellers, …
― OEM agreements also have become a key avenue for startups to gain traction.
 Before you lock in your market segmentation/targeting strategy, you need to develop
rough market sizing estimates to determine which segments have the most potential.
 Again, it’s an iterative process.
2006, OVP Venture Partners, 8/23/06
2
Market Sizing Tips
 Gather as many data “factoids” as possible while researching your industry & competitors.

Look for industry-specific & vertical-specific data that can be used to estimate your market size.
Don’t assume all of these “factoids” are right, but the more reference points the better.
Find out who are the best analysts/forecasters for your market -- important long-term contacts.

Few Global 2000 firms sell to all market segments (all layers in stack, customer types, regions …).

Developing Total Available Market (TAM) models for emerging markets takes a combination of:
research skills; luck in finding free "factoids;" creativity; basic algebra, financial analysis & Excel skills;
and being comfortable with taking "educated" guesses.
Make sure you document your sources & assumptions as much as possible.
Don't worry about getting it right on the first try. The team can refine your approach & assumptions.
Especially if your model has to be built on only a few reliable "factoids," err on the conservative side.
The team approach helps ensure that the guesses aren't too optimistic or too conservative.
Review your models with seasoned executives and industry experts.


 Even if your firm can afford detailed industry research reports, you need to take a closer look
at the market & the forecast assumptions that apply to your firm. Don’t just use analysts’ #s.
 Your firm’s Total Available Market (TAM) is a subset of an overall market, based on your
targeting strategy -- near-term & long-term.
 It is best to have a small team develop market sizing models. Leverage each other's skills &
insights to build, refine and proofread the model.



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 Market sizing forecasts don't need to be precise. Rough "ballpark" estimates -- short-term &
long-term – are usually fine.
2006, OVP Venture Partners, 8/23/06
3
Top-Down vs. Bottoms-Up Forecasts:
Complementary, Reality Checks


Top-down forecasts: Usually industry analysts’ worldwide estimates for a large market, which are then split into
segments by major product group, region or vertical industry.
Bottoms-up forecasts: Build up revenue forecasts by defining the key underlying variables and estimating how
they will change over the next 3-5 years. An illustrative example:
2006, OVP Venture Partners, 8/23/06
4
An Open Source example:
The rSmart Group
rSmart's Total Worldwide Higher Education TAM (in $Millions)
Sakai Project -- Community Source Course Management System (CMS)
Kuali Project -- Community Source Financial Information System
OSPI (Open Source Portfolio Initiative) -- ePortfolio Solutions
uPortal -- Community Source Portal Solutions
Kuali II -- Community Source HR Information Management System
Kuali III -- Community Source Student Information Management System
rSmart's Total Worldwide TAM (in $Millions)
2005
2006
2007
2008
2
0
2
13
0
0
13
0
4
11
0
0
56
4
14
20
0
0
140
33
27
28
4
0
300
105
43
40
33
4
185%
n/m
121%
54%
n/m
n/m
$17
$28
$94
$232
$525
166%
rSmart's Worldwide TAM in the Higher Education Community Source Market
$600
$500
in $Millions
$400
Kuali III
Kuali II
uPortal
$300
OSPI
Kuali I
Sakai Project
$200
$100
$0
2004
2006, OVP Venture Partners, 8/23/06
2005
2006
2007
3-Yr. CAGR
(2005-2008)
2004
2008
5
A Closer Look at 1 of rSmart's
Product Segments: Sakai in N.A.
Key Assumptions for N.A. TAM:
Total # of Higher Education Institutions in North America (1)
Universities with doctoral, master's & baccalaureate programs (DR)
4-Year Institutions with master's & baccalaureate programs (MA)
4-Year Institutions with baccalaureate & associate programs (BA)
Community Colleges (AA) & Other Specialized Institutions
Total # of Higher Education Institutions in North America
% Change
Yr.-to-Yr.
0%
2003
330
650
674
2,778
4,432
2004
330
650
674
2,778
4,432
2005
330
650
674
2,778
4,432
2006
330
650
674
2,778
4,432
2007
330
650
674
2,778
4,432
330
650
674
2,778
4,432
rSmart's N.A. TAM for Sakai -- Community Source Course Mgmt. System (CMS)
Sakai Adoption Rates by Market Segment
Universities with doctoral, master's & baccalaureate programs (DR)
0.0%
9.0% 10.0% 15.0% 20.0% 30.0%
4-Year Institutions with master's & baccalaureate programs (MA)
0.0%
0.3%
3.0% 10.0% 15.0% 25.0%
4-Year Institutions with baccalaureate & associate programs (BA)
0.0%
0.0%
1.0%
5.0% 10.0% 15.0%
Community Colleges (AA) & Other Specialized Institutions
0.0%
0.0%
5.0% 20.0% 30.0% 45.0%
(2)
Sakai Adoption Rate for N.A. Higher Educ. Institutions
0.0%
0.7%
4.5% 15.9% 24.0% 36.4%
Commercial CMS Adoption Rate for Blackboard & WebCT (3)
78.5% 78.3% 77.0% 68.6% 65.0% 55.0%
(3)
Institutions with "Home Grown" (& Other) CMS Solutions
15.2% 15.0% 13.0% 10.5%
7.0%
5.6%
Institutions with No CMS Solutions (3)
6.3%
6.0%
5.5%
5.0%
4.0%
3.0%
Total Higher Education Institutions in the N.A.
100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
# of N.A. Institutions Using Sakai -- Cumulative Installed Base #s
Universities with doctoral, master's & baccalaureate programs (DR)
0
30
33
50
66
99
4-Year Institutions with master's & baccalaureate programs (MA)
0
2
20
65
98
163
4-Year Institutions with baccalaureate & associate programs (BA)
0
0
7
34
67
101
Community Colleges (AA) & Other Specialized Institutions
0
0
139
556
833
1,250
Total # of N.A. Institutions Using Sakai
0
32
199
705
1,064
1,613
Avg. Rev. per Year for Maintenance Subscriptions (in 000s)
year-to-year increase ------->>
0%
20%
80%
20%
Universities with doctoral, master's & baccalaureate programs (DR)
$39K
$40K
$50K
$90K $110K
4-Year Institutions with master's & baccalaureate programs (MA)
$28K
$30K
$40K
$70K
$80K
4-Year Institutions with baccalaureate & associate programs (BA)
$19K
$20K
$25K
$50K
$60K
Community Colleges (AA) & Other Specialized Institutions
$18K
$20K
$25K
$50K
$60K
st
Avg. Rev. for Installation/Integration Services -- 1 year only for new customers
Universities with doctoral, master's & baccalaureate programs (DR)
$40K
$40K
$50K
$55K
$65K
4-Year Institutions with master's & baccalaureate programs (MA)
$40K
$40K
$50K
$55K
$65K
4-Year Institutions with baccalaureate & associate programs (BA)
$40K
$40K
$50K
$55K
$65K
Community Colleges (AA) & Other Specialized Institutions
$40K
$40K
$50K
$55K
$65K
Avg. Rev. per Year for On-going Professional Services -- Beginning the 2nd Year
Universities with doctoral, master's & baccalaureate programs (DR)
$25K
$25K
$25K
$25K
$30K
4-Year Institutions with master's & baccalaureate programs (MA)
$25K
$25K
$25K
$25K
$25K
4-Year Institutions with baccalaureate & associate programs (BA)
$25K
$25K
$25K
$25K
$25K
Community Colleges (AA) & Other Specialized Institutions
$25K
$25K
$25K
$25K
$30K
N.A. TAM Details for the Sakai Project (in $Millions)
Sakai Maintenance Subscriptions
$1
$5
$21
$58
$105
Sakai Installation/Integration Services
1
7
25
20
35
Sakai On-going Professional Services
0
1
5
18
30
rSmart's Total N.A. TAM for the Sakai Project (in $Millions)
$2
$13
$51
$96
$170
Sakai N.A. TAM Summarized by Market Segment
Universities with doctoral, master's & baccalaureate programs (DR)
$2
$2
$5
$8
$15
4-Year Institutions with master's & baccalaureate programs (MA)
0
2
6
11
19
4-Year Institutions with baccalaureate & associate programs (BA)
0
0
2
6
10
Community Colleges (AA) & Other Specialized Institutions
0
9
38
71
126
rSmart's Total N.A. TAM for the Sakai Project (in $Millions)
$2
$13
$51
$96
$170
2006, OVP Venture Partners, 8/23/06
3-Yr. CAGR
(2005-2008)
2008
7%
15%
15%
63%
100%
0%
44%
101%
143%
108%
101%
40%
39%
44%
44%
18%
18%
18%
18%
6%
1%
1%
6%
176%
71%
211%
96%
112%
n/m
141%
6
What Do VCs Look for in a
Startup’s Market Forecast?
 Have you done a bottoms-up TAM forecast for your targeted market segments, as well as
a top-down view at your market size?

Does the methodology reflect deep understanding of the target market segments?

Market timing & adoption rate assumptions are critical.

Do the assumptions accurately reflect pricing pressures & other key market variables?



Being the #3 player in a big market is better than 50% share in a niche, $100-$200M market.
The market needs to be large enough support a few $100M firms in 5-7 years.
General rule of thumb: minimum market size of ~$500M in 3-4 years.
― For markets with primarily indirect sales channels the hurdle is even higher.
If there is no demonstrable market yet, the bar is higher now than a few years ago.
 Are the numbers and assumptions realistic & believable?
― For an emerging market, have you studied historical adoption rates of related technologies to
develop conservative estimates? e.g., for predicting penetration rates of wireless LAN usage in the
residential market, try applying DSL & cable Internet access adoption rates.
 From a VC’s perspective, it’s better to be a smaller fish in a big pond, than a big fish in a
small pond, as long as you are a “big enough” fish.

 If your market will be <$500M in 4 years, you still have a shot at building a successful,
profitable firm, but you may need to seek funding from angel investors vs. VCs.

VCs are obligated to invest their time & their Limited Partners’ capital on startups that have
strong potential to grow to $100M companies.
2006, OVP Venture Partners, 8/23/06
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