The real reason why investors say your market size is small

It’s super annoying when investors say your market size is small.  So, you do all this extra research – you look for Gartner’s excerpts and articles about projected market sizes, etc. – and you come back with research to argue that your market is much bigger.

Unfortunately, it’s ineffective.  The investor passes. And you walk away thinking he/she’s a dimwit.  This could be true, but it’s important to understand what is really happening here.

First, stop with the research.  It won’t help.

Here are the actual reasons why an investor passes when he/she says your market is small:

1. You are “in-between” multiple markets and are seemingly not addressing ANY market. 

Market trends change a lot, and sometimes a new market appears in between two existing ones.  However, because your company is early, investors don’t yet know if that market between markets will exist.

A good example of this is 500 Startups-backed Intercom.

When I first met them (when I was an entrepreneur), in the back of my mind, I was thinking, “Gosh, what are they actually addressing?  It’s a weird mix of customer service and marketing and sales.”

It turns out that a few years later, marketers were looking to build tighter rapport with their customers, and this tighter rapport really is a weird mix of marketing, sales, and customer service.  Now the company is doing really well! But when they first started, this was not clear at all.

In a situation like this, I commonly see entrepreneurs try to increase their market size by computing and adding the market sizes of all adjacent markets (e.g., the market size of marketing automation plus sales automation, and customer service software).

In fact, what you really need to do is the opposite.  Pick just one market – say, marketing automation – and talk about the trend towards personalized marketing.  What helps with this is to go squarely head-to-head with an existing dinosaur product and say that you are going to overthrow that incumbent because of a, b, and c reasons.  For example, Marketo sucks because you need to spend 10 days learning their software only to spam non-personalized emails at your customers; we solve this by making 2-way communication easy within products themselves, which is the way of the future.

2. Your product / business does not sound differentiated enough / the investor doesn’t know anything about the space to discern differentiation.

Companies in certain verticals tend to have this problem more (e.g., ad tech, security tech, fashion, etc.).  Just as I, as a software investor, know nothing about solar panels or pharmaceuticals, not all software investors know most verticals well enough to understand what you’re talking about.

If you don’t need specialized knowledge to be able to see your company’s differentiator, then you need to practice and test your messaging on lots of people.

However, if you do need specialized knowledge to understand your differentiator, then you need to find the right investors to talk with.

A good rule of thumb here is that if you cannot visually show your differentiator to a random person on the street, you need a specialized investor.

In the old days (i.e., 5 years ago or earlier), it was difficult to know which investors to approach because portfolios were not always online and there wasn’t a search engine for investors.  These days, AngelList can help you filter investors by category and look for investors in your space.

Now, the really hard part is if you are addressing a category that just doesn’t have that many investors.  Fashion and beauty, for example, is one that doesn’t have a lot of investors, though this is something we are actively changing at 500 Startups.  One of the best ways to navigate this is to talk to lots of entrepreneurs in your space who are further along than you.  Ask them for intros to their investors.  Ask them to meet other specific people in your space.  This may be a lot of work, but it is absolutely necessary.  Form tighter/deeper relationships in your space.

3) An investor doesn’t have conviction in you/your team.  

Lastly, a market size is “too small” is unfortunately often an explanation of what an investor thinks about you/your team.

This is especially true if you’re in a crowded market.  If you’re in a crowded market, you not only need to convey the point above well, but you also need to convince people that you’re a really solid leader.  Unfortunately, because of pattern matching, a lot of talented leaders who do not fit a typical mold really struggle with convincing investors of this.

Entrepreneurs who are introverts, of non-majority races, women, etc. tend to not fit these patterns and have to go above and beyond to convince an investor that they can win in a crowded market and that they have the right leadership abilities to win.

Keep in mind that “win” in an investor’s mind is not selling for $30M.  An investor is hoping its winners do 100x+ (obviously, this doesn’t happen most of the time, but this is what investors are looking for).  They are thinking about how you will become a $100m-$10B company, and at the seed level, the only thing they have to believe is if you and/or your team is the right person or people to get to this stage.