Series V

Who cares about market sizing? Part 2

“When a great team meets a lousy market, market wins. When a lousy team meets a great market, market wins. When a great team meets a great market, something special happens”- Andy Rachleff

Last week, we started a conversation about how important the current size of a market is (you can read that edition here), and why it is/might not be an important question to ask entrepreneurs.

This week, the other half of the team will make their case for market size estimates.

The argument for

Per the Pareto principle, we can assume that 80% of most VCs’ returns will come from 20% of their investments i.e. if a VC makes 10 investments, most of the financial upside will come from only 2 of them. This is popularly called the Babe Ruth effect, and as Peter Thiel notes:

“Actual [venture capital] returns are incredibly skewed. The more a VC understands this skew pattern, the better the VC. Bad VCs tend to think the dashed line is flat, i.e. that all companies are created equal, and some just fail, spin wheels, or grow. In reality, you get a power law distribution.”

How does this affect how we deploy capital? It means that we are often biased in favor of bets that have an uncapped upside; bets that could potentially return many multiples of the capital invested. The market does need to grow big(ger) at some point, to support the companies serving it, and the most straightforward way to make that assessment is the size and growth rate today.

Of course, these estimates can be flawed (and big paradigm shifts do turn the math on its head), but they are quantitative in ways the other proxies our colleagues suggested are not. That is, while we acknowledge that a market being large is not always proof that a particular entrepreneur will make meat of it, you cannot fit “Is this solution 10 times better than the alternative?” into a spreadsheet.

Secondly, market creation is often expensive and investing as our colleagues would have us, might lead us to back horseless carriages, not cars, or early approximations of what the future looks like, not the future itself. It’s okay to be early. Just don’t die.

Bonus: who wants to see what a smartwatch designed in 1983 looks like? Link.

In reality, the right approach is probably a mix of both. Venture Capital is both an art and a science, and we are as excited by the journey, as we are with the destination.

Victoria ascerta.

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Series V

Who cares about market sizing? Part 1

We often ask entrepreneurs to “talk to us about the size of this opportunity”, and we often get the same answers: “There are [x] people in [insert geographic construct], and the market for our product is [y] gazillion USD, according to [insert big name consultancy firm]. If we can capture [z]% of the market, our revenues would be [insert as many zeroes as one can get away with].”

This is useful, no doubt, but one half of our team thinks it is incomplete, and the debate has split the firm in two. (Help!) The team in charge of this newsletter is biased in one direction, so we will make our case here, and let our colleagues take two paragraphs to make theirs next week. You’ll be the judge. This is fair and just.

The argument against

Big firms like Sequoia Capital target large markets, but hear us out: market size estimates are lazy. They might be good signals that a problem exists, but the market size number (“200 billion USD per year!” “500 trillion EUR per year!”) contains little information about how *important* the problem is to paying customers; it doesn’t say much about how well any one founder’s solution addresses the problem; and it does not tell a compelling story about whether/why it will grow over time. Market size does not equal market demand. That millions of Nigerians have clothes that get dirty does not mean they will use your ‘laundry app’ instead of hiring a washerman.

The second side to this is that large estimates often signal that a market is mainstream and that its ‘huge potential’ has become common knowledge.

Andy Rachleff has a good framework for thinking about this. Consider the above 2×2 matrix. All the bets we take on founders will either turn out to be right or wrong. Obviously, we won’t make any money if we’re wrong. But if we’re right, and everybody else agrees, the returns are … meh. Competition in such crowded markets quickly becomes a bullfight; a question of who can raise the most money; a matter of mutually-assured destruction.

This view is especially important in emerging markets, where population figures are deceptively large, and little is said of purchasing power or demand intensity. Better questions to ask are: what are the offline indicators that suggest that this problem is an important one? Is this solution 10 times better than the closest alternative? Will the intensity/volume of demand grow over time? How quickly? Why? Is there a moat this founder can build around her solution to prevent better-funded competition from steamrolling her? Is the market deep enough to sustain this venture at scale? Market quality > market size.

What do you think? Reply this email to let us know, or tweet at us (@vplatformhub) to get featured in next week’s newsletter.


  • Build a product that people want. Adeyinka Adewale, Co-founder at — Link
  • Fireside chat with Benchmark’s Bill Gurley — Link
  • History of WWW and a Caution About Prematurely Judging Modern Fintech — Link
  • Swinging for the fences: How do top accelerators impact the trajectories of new ventures? — Link
  • An Often Forgotten Characteristic About Your Startup’s Ideal Customer Profile — Link

Have a great day!

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