Size markets using narratives, not numbers

Anyone who has pitched VCs knows they are obsessed with market size.  If you can’t make the case that you’re addressing a possible billion dollar market, you’ll have difficulty getting VCs to invest. (Smaller, venture-style investors like angels and seed funds also prioritize market size but are usually more flexible – they’ll often invest when the market is “only” ~$100M).  This is perfectly rational since VC returns tend to be driven by a few big hits in big markets.

For early-stage companies, you should never rely on quantitative analysis to estimate market size. Venture-style startups are bets on broad, secular trends. Good VCs understand this. Bad VCs don’t, and waste time on things like interviewing potential customers and building spreadsheets that estimate market size from the bottom-up.

The only way to understand and predict large new markets is through narratives. Some popular current narratives include: people are spending more and more time online and somehow brand advertisers will find a way to effectively influence them; social link sharing is becoming an increasingly significant source of website traffic and somehow will be monetized; mobile devices are becoming powerful enough to replace laptops for most tasks and will unleash a flood of new applications and business models.

As an entrepreneur, you shouldn’t raise VC unless you truly believe a narrative where your company is a billion dollar business. But deploying narratives is also an important tactic. VCs are financiers — quantitative analysis is their home turf. If you are arguing market size with a VC using a spreadsheet, you’ve already lost the debate.

Share:
  • Digg
  • del.icio.us
  • Facebook
  • Google Bookmarks
  • Reddit
  • Slashdot
  • Suggest to Techmeme via Twitter
  • Tumblr
  • Twitter
  • HackerNews

Related posts:

  1. VC’s care about the upside case, not the mean
  2. Options on early stage companies
  3. The importance of investor signaling in venture pricing
  4. Old VC firms: get ready to be disrupted
  5. The problem with taking seed money from big VCs

View Comments

#1 Plus size clothing | Clothing dresses skirts on 04.03.10 at 1:20 pm

[...] Size markets using narratives, not numbers cdixon.org – chris … [...]

#2 Mark Essel on 04.03.10 at 5:01 pm

My practical side says $1e9 is looney tunes. My irrational greedy genius side laughs at only 9 zeroes, I can change the world!

So at what point should a founder and startup evaluate market cap? I'm struggling (having fun) sampling the surface of social web information and network applications. Once I score the alpha of that first utility it's still a pretty far reach to sell it as a $1e9 market. Some things are inherently hard to evaluate, like what's the financial value of email? What's the social value of email?

#3 nivi on 04.03.10 at 5:26 pm

I like how your argument assumes a bet on the team and narrative and not on the current product or specific value proposition.

Reminds me of Vinod Khosla's search for a “$0 billion market (vs. a $0 million dollar market) with a credible path to grow.”

http://www.khoslaventures.com/look.html

#4 Roy Rodenstein on 04.03.10 at 7:01 pm

Nor a bet on a specific revenue model or when that revenue starts.

Of course most VCs will still require the spreadsheet, if nothing else because the partners will require it of them, but as Nivi says the Market Trends Narrative is a good way to suss out how much the investor believes in your team and vision. This will be critical down the road when the going gets tough.

#5 hdemott on 04.03.10 at 9:28 pm

AS the folks from 37Signals say in their book “Rework” these spreadsheets should be just labeled guesses. Once you accept that – then all you are left with is the narrative.

I get you completely there.

Can you reply with your narrative for Hunch?

I don't ask this to question you in any way – I'm just interested to hear how someone who has been successful at this stuff looks at their own business.

#6 chris dixon on 04.03.10 at 10:29 pm

#7 chris dixon on 04.03.10 at 10:29 pm

well first I'd say you don't have to raise VC or any outside money at all. that gives you the flexibility to go for smaller markets and still have a big success.

I would say you really need to evaluate the market size when & if you are raising outside money.

#8 chris dixon on 04.03.10 at 10:30 pm

Yeah, I'm sure what I'm saying is derivative of a lot of people include Vinod…

#9 chris dixon on 04.03.10 at 10:31 pm

Sure, the spreadsheet is fine if taken as kind of a joke / formality and not the core argument.

#10 chris dixon on 04.03.10 at 10:34 pm

Sure, the core thesis of Hunch is that by taking what companies like Firefly did and Netlix/Amazon did with recommendations but radically increasing & widening the input data we can eventually get to know users much better and make great predictions/recommendations for them. This can have a big impact on lots of billion dollar markets including search, ecommerce, social networking etc.

#11 reecepacheco on 04.04.10 at 2:23 pm

Excellent advice, Chris. Timely for me as I'm in meetings lately, sitting across the table from investors who can and cannot see the larger trends.

I think it's easy for entrepreneurs to get caught up in presenting numbers (“that's what VC's want to see, right?”), as you get caught up in sales mode and want to have all the answers.

Like you say, you're better off with a compelling story and the team to execute.

#12 andrewice on 04.04.10 at 6:33 pm

Are you saying that VC's shouldn't contact potential customers as part of their overall diligence? Or just not as part of their market sizing?

I would agree regarding market sizing – the bottoms up approach never works. However, I've found contacting potential customers is a great way to validate or contradict the qualitative narrative that both the entrepreneur and myself might share.

#13 chris dixon on 04.04.10 at 7:12 pm

I'm not saying don't contact customers as part of narrative
verification. Basically I agree with you.

#14 aarondelcohen on 04.04.10 at 9:35 pm

Terrific point. Takes great courage for entrepreneurs to speak in narratives, but is absolutely right. Lost in the explosion of Venture activity is the pursuit of enormous markets. One of the concerns I have with the new crop of entrepreneurs (and I have few concerns in general) is that they still haven't learned enough about venture economics and how important it is to have huge returns for just a few companies.

BTW, I've always understood that the movie industry was a $100bn industry and that consumption patterns were changing, piracy was a growing concern, and globalization was having a greater and greater impact. However, it has not been easy for me to always understand how I could tell a a billion dollar story. I think that's also important.

Market size is critical. So is potential revenue size. See Ken Auletta's Googled where Larry Page predicted $10bn in revenue when they had barely begun.

#15 Publishers Dispute Ad Network Sales; Big Australian Publishers Avoiding Pixels; Google To Get Shareholder Proposal On Interest-Based Ads on 04.04.10 at 11:48 pm

[...] According to Hunch chief and angel investor, Chris Dixon, you'll be better off garnering the interest of venture capital investors if you try to discuss your target market's size in a narrative format rather than quantitatively – especially if that market size is less than $1 billion. Dixon writes, "The only way to understand and predict large new markets is through narratives. Some popular current narratives include: people are spending more and more time online and somehow brand advertisers will find a way to effectively influence them…" Read more. [...]

#16 Size markets using narratives, not numbers | Igniting Startups - nPost on 04.08.10 at 12:04 pm

[...] From cdixon.org [...]

#17 Twitter and Google: Search Vs. Social | Venture Capital on 04.18.10 at 9:20 am

[...] When I’m not sure what I want to write about, I start reading blogs until I come across something that interests me or strikes me. Today the blog that did that to me was Chris Dixon’s. A few weeks ago he wrote a post about sizing markets with narratives, not numbers. [...]

#18 Narratives Over Numbers : Invest My Money on 04.18.10 at 5:02 pm

[...] When I'm not sure what I want to write about, I start reading blogs until I come across something that interests me or strikes me. Today the blog that did that to me was Chris Dixon's. A few weeks ago he wrote a post about sizing markets with narratives, not numbers. [...]

#19 What’s Your Narrative For a Billion Dollar Business Opportunity | Gauravonomics Blog For Marketers, Entrepreneurs and Activists on 04.25.10 at 12:26 pm

[...] co-founder Chris Dixon (@cdixon) says that entrepreneurs shouldn’t raise venture funding unless they truly believe a [...]

#20 Thinking More About Stories « The Digital Tiger on 05.06.10 at 1:50 pm

[...] both Fred Wilson and Chris Dixon write on the power of story telling vs. showing off your spreadsheet [...]

#21 Jeff Israely: With partners found, figuring out how best to link up » Nieman Journalism Lab on 07.13.10 at 9:02 am

[...] pride and trepidation that the interest has been quite high, though the questions are not few. One key lesson I’ve learned pitching our project is the difference between what we are currently immersed in [...]

#22 Jeff Israely: With partners found, figuring out how best to link up | This Is An Awesome Web Site on 07.13.10 at 11:06 am

[...] pride and trepidation that the interest has been quite high, though the questions are not few. One key lesson I’ve learned pitching our project is the difference between what we are currently immersed in [...]

blog comments powered by Disqus