Recently I was talking to an entrepreneur and he was sharing his new idea. Now, the idea was sound and made sense but it immediately struck me as too small a market. There’s no perfect method to determining the size of a market opportunity but there’s plenty of information available.
Here’s how I like to think through if a market is large enough to go after:
- Do a bottom-up sales forecast
- Do a top-down opportunity evaluation (e.g. 100,000 potential customers and we’ll capture 5% of the market)
- Evaluate the likelihood of achieving $1 million in recurring gross margin by the fourth year (part of the definition of a successful business)
- Consider the market timing and risks of being too late as well as too early (ideally it’s small and fast growing)
So, it doesn’t need to be a billion dollar business but it does need to be large enough to build a sustainable, successful business in a reasonable amount of time.
What else? How big does a startup’s market need to be to make sense?