Investor Pitch: Flaws with Top Down Market Sizing
Top down is the most common and least convincing way to size a market. The top down approach relies on analysts market research from firms like Gartner, Forrester, Frost & Sullivan, Yankee Group, Jupiter and others. Most investors will not consider a top down sizing of the market to be a sufficient if they are calling it into question.
There are two main problems with this approach. First, analyst predictions often don't windup meeting expectations and it seems that every market has been predicted to $5 billion plus within 5 years by at least one research firm. Investors just don't put much stock these research firms assessments.
The second, more problematic issue, is that even when accurate, the market research figures represent the total market, which isn't necessarily relevant to the startup. For example, Gartner estimated that the security software market was worth $5.3 billion in 2004. Yet, at Cryptine we are not creating VPN, encryption, firewall, IPS or many other sub-categories included in Gartner's $5.3 billion figure so it is a gross exaggeration of our market. The important number is not what Gartner quotes but rather the total addressable market (TAM) and the total serviceable market. TAM and total serviceable market are used somewhat interchangeable by different people, which is kind of confusing. Yet, it doesn't really matter how these terms are described, rather that the market is effectively sized, but here is what logically makes sense to me:
- Total Addressable Market = 100% of the market for type of product you sell
- Total Serviceable Market = 100% of the market you could actually sell to