The Deception that is Market Size
Myth: Size of Market is directly correlated to good/early results.
Good entrepreneurs know their Size of Market, Total Addressable Market and Share of Market (WTH is TAM, SAM, SOM). These metrics are important as they represent the cap on your potential Sales volume.
Size of Market has zero correlation to the probability of success of a venture. To be more precise, Size of Market has zero correlation with the true growth velocity of a Startup. Why growth velocity? Velocity, or how fast a Business can grow, is a function of its Gross Margin and Sales Volumes. Grow too slow, and there is a chance you might run out of cash too quickly leading to liquidity pressures later on.
Joel Kurtzman in “Startups that Work”, suggests that there is a correlation. In fact, he finds that “the less successful software startups focused on what they perceived (or hoped) to be very large markets. As a result of this misperception, these companies never reached sufficient customer, revenue, and business model traction. The more successful services companies focused on narrow markets early, avoiding the misperceptions about market size that plagued their less successful competitors”.
On the other hand, Size of Market does not have the same impact as Total Addressable Market size. It is crucial that you spot this one early in any Business Model. Certain Businesses are subject to artificially placed caps on TAM. For instance, airlines allocate a limit on the number of tickets that can be sold indirectly. A limited TAM in the form of regulation or policy could negatively impact your ability to make Sales happen.
Entrepreneurs, Investors, Mentors and Advisers (who’ve been entrepreneurs in previous lives), don’t should not care as much about Size of Market as much as they care about Growth velocity. To put my own thoughts in to perspective, I would never base a decision to startup (or to stop) simply on how big the size of a potential Market is.
Growth Velocity does depend on one other factor – how compelling the Business’ value proposition is. Try selling movie tickets one night before a big movie weekend. It won’t matter where you sell the tickets from, movie-goers will seek you out as the word of mouth spreads.