
You Can Never Size a Market in Excel - gatsby
https://medium.com/on-startups/you-can-never-size-a-market-in-excel-786886d11f50#.6t6oxias0
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jonnathanson
Agree and disagree.

Agree: Early-stage investing is rarely about accurately sizing a market. And
nothing can be boiled satisfactorily down to an Excel model.

Disagree: But you still have to do it. For _yourselves_ , if not for VCs.
Presumably, VCs want to see that you've thought long and hard about the market
opportunity, about the competition, and about your marketing plan and business
model. And you should have. Your market sizing will never be pitch-perfect,
but you can't just wave your hands in an investor meeting and declare that the
entire exercise is bunk.

I would argue that, if you're being asked to "dig deeper" into market sizing,
or even if you're being questioned _at all_ about the market size in your
meetings, it's really a proxy question for something else. Maybe they find the
idea narrow, and they want to be convinced it can broaden to other segments.
Maybe they think you're being insufficiently ambitious. Maybe it's the
opposite; they think you're being wildly naive. Whatever the case, "What's the
size of this market?" is a question their analysts can probably guesstimate in
a few days' worth of Excel monkeying. That's not really what they're getting
at. What they really want to know is how you think about the business side of
your startup (or indeed, whether you do).

~~~
Frqy3
The result of a model is no better than a gut estimate.

But the process of developing the model, working out what the factors are that
will impact market size (and your share of it), working out what things you
need to monitor more closely or focus on for biggest impact is where the value
is.

~~~
jonnathanson
Exactly. I'm not sure if there is any investor consensus on this, but I'd be
willing to stake a claim that a _well-reasoned_ market analysis is superior to
a putatively "accurate" market analysis. And by well-reasoned, I mean an
estimate that accounts for and emphasizes the critical and necessary variables
in the sizing and in the approach. Perhaps with some sensitivity analysis
thrown in for good measure.

If your model is logical and flexible, you can work _with_ investors to adjust
it and play around with different scenarios. If your model depends on an
inflexible degree of supposed precision, you're at high risk of deluding
yourself. Savvy investors can probably sniff that out.

All things being equal, it's probably best to present a model that is simple
enough to be easily grokked; flexible enough to be adjusted on the proverbial
back of an envelope; and dependent on a set of factors that you've thoroughly
researched and confidently believe are _the_ factors to focus on. So you steer
the conversation to the _factors_ , and less to the outcome of the model under
your presented scenario. If you've got the right factors, you can model out
any number of scenarios. (And you should probably have done this already prior
to the pitch, so that you're prepared to speak to a given range of
hypothetical outcomes).

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vonnik
> _Woz: Don had come to the garage and I ran the Apple II through its paces
> and he said, “What is the market?” I said, “A million units.” He asked me
> why that was and I sad, “There’s a million ham radio operators and computers
> are bigger than ham radio.”_

[http://www.realdanlyons.com/blog/2011/10/11/a-conversation-w...](http://www.realdanlyons.com/blog/2011/10/11/a-conversation-
with-woz/)

~~~
ars
He's not saying you can't figure out a market size.

He said if the market size is not immediately obvious _then_ you can't figure
out market size.

It's not the same thing.

~~~
viola11
No, in the highlighted section he is explicitly saying you can't figure out
how big the market is by reasoning and the best you can do is guess.

In fact, it is a bit stronger than that: he states that the only knowledge
that can be used is instinctual knowledge, but since instincts concerns things
like what smells indicate spoiled food and legless that animals are dangerous,
you don't have any relevant knowledge at all! The best you can do is baseless
guessing, though after having gotten funding and done a bit of work you might
have some basis for your estimate (there is a caveat that instincts dominate
estimates early in the start up process).

The summary ars provides does seem to be what he strove to say, but since two
people can easily disagree on what is to be considered "obvious" even that
statement allows for less predictive power that seems reasonable.

------
MrTonyD
I remember once sitting with the company CEO and going over my spreadsheet
estimates of project timelines, sales projections, and department growth. At
the end of it all I said to him that I didn't know if any of this was really
worth looking at, since it was all just guesses.

His response was that in the early days of the company they had tried doing
things without plans, and that bad plans were much better than no plans.

I learned something that day.

~~~
thanatropism
No, nene, no.

"No plans" means exactly "by chance". Bad plans can do considerably worse than
chance.

What organizations need to learn how to do (and unfortunately to this day
Excel isn't particularly enabling) is sensitivity analysis.

One of my corporate parlor tricks is to render valuation spreadsheets (which
are typically cashflows dependent on scenario parameters) into Matlab and
giving each unknown parameter a distribution from three-point estimates
(min/most likely/max). The difference between good plans and bad plans is the
probability that your best valuation exceeds your WACC or the turnkey price to
be paid or some such method.

People are often impressed that the difference between good and bad plans even
exists.

~~~
clairity
crystal ball for excel can do monte carlo simulations for what you describe
but with a real probability distribution for each input. it's expensive though
(as is matlab, which is what i did my master's thesis in =)

~~~
thanatropism
Yeah. There was a long yadda yadda yadda I didn't feel like detailing on
why/how we calibrate beta distributions for three-point estimates.

What's more: Octave (free as in Stallman) is slow but runs Matlab code
transparently.

------
tryitnow
Market sizing is a Fermi problem - that doesn't mean it's not quantitative or
even that you don't need to think about it, it just means a back of a napkin
calculation will do (to a first approximation). It's more important how you
think through the problem of market sizing than how precise the end number is.

The thought exercise will reveal weaknesses in your strategy.

~~~
tankenmate
The corollary of that of course is that if a potential investor keeps asking
the question it means they have a nagging feeling there is a weakness in your
strategy.

To quote Robert De Niro from Ronin; "If there's doubt then there is no doubt."

------
thanatropism
To paraphrase from "Jurassic Park": this is Heidegger. I know this.

Although it doesn't ruin his short essay, "instinct" is unfortunate. Executive
knowledge about the kind of nascent industry the article (and HN typically)
discusses isn't "natural", or a mere knack like playing music by ear. It's
tacit knowledge: it can't be codified.

In Heidegger-speak: market potential can't be reduced to a stockpile of
"presence", of something that's stared at and analyzed like a tool on a shelf.
Rather, it's always already operational, "ready-at-hand": what's needed is
neither in the tool nor in my theory of the tool, but in the operational-
skill-in-action.

Moreover: the skill to size a market doesn't live in any particular brain.
"Sizing a market" can't be disentangled from the general problem of capitalism
-- capital allocation in order to yield more capital. It's not like hammering
a nail, it's like building a house. No single person can build a house: house-
building, as nascent industry-building, lives in a community of practices.
This is the crux of processes like YC "schools" and focal points like the
Silicon Valley.

~~~
viola11
Instinct is indeed unfortunate, and I think it is misleading to the point of
hilarity too! The notion that sizing a market (as others have mentioned: a
Fermi problem) is the same kind of knowledge as that which makes babies close
their mouths and wave their arms when immersed in water? Venture investing
truly is child's play :D

Let "sizing a marked" mean "estimating the number of products that can be sold
to a given population of persons". An very precise estimate of this number is
currently very hard to provide, but giving an order of magnitude estimate is
clearly a Fermi problem. Note that the difficulty is providing an accurate and
tight bound, not an accurate but imprecise one and that the latter might be
valuable too.

Solving a Fermi problem requires estimating a series of numbers from everyday
experience. One then multiplies these number together in a mechanical fashion,
which could be done in a "ready-at-hand" way by use of a tool. Evidently the
process invariably requires contemplating one's every-day experience, and
since ordinarily that experience is simply lived this meta-action is an act
filled with "presence".

By the way, the problem of capitalism is solved, and the solution shows that
it will allocate capital optimally; this is one of the main arguments in
favour of capitalist systems.

The problem that the social reality in which we live only partially
approximates capitalism (see: non-profit organizations) is the big problem
economists, and anyone else using classical economic theory in the real world,
struggle with.

------
rdlecler1
The answer to this question may tell you something about how an entrepreneur
thinks about their market and their place in it. Can they see the big picture?
It can also serve as a sanity check. Ultimately markets just need to be big
enough, but I've seen investors disengage when you can't give them a clear
authoritative number.

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tarr11
The link to Rand's blog is 404'ing. It appears to have been moved to the Moz
site:

[https://moz.com/rand/misadventures-venture-capital-
funding/](https://moz.com/rand/misadventures-venture-capital-funding/)

------
CurtMonash
Investors should and do make their own estimates of market opportunity.

Investors should and do demand help in making those estimates.

A common way to help is to provide a full estimate plus the inputs you used to
make that estimate.

Now, I think a BETTER way to help is to provide ranges and discussions of the
inputs, rather than point estimates. And it's rare that I've encountered an
investor who didn't find that acceptable. But some version or other of the
exercise is worthwhile.

------
swehner
I thought the article was going to be about the limitations and general
unreliabilty of Excel

