Part 2/20 - Twenty Questions You Will Be Asked By Venture Capitalists (If You Get That Far)

By Laurence K. Hayward

This is part two of a twenty part series on this topic.

2. How did you calculate market potential? How did you determine industry sales and growth rate?

It is common for entrepreneurs to include very large market potential figures in their business plans and then indicate that they require only a miniscule fraction (e.g. ½ percent) of the market to achieve their revenue projections. These figures are typically suspect. If the company is capturing such a miniscule fraction of the market, then what is so special about what the company has to offer? Extremely small percentages beg the question of what is the company’s real value and position relative to the competition. VCs tend to prefer companies that are trying to be the leader in a particular segment, even if that segment is more narrowly defined. The reason for this will be further explained in questions 9 and 10.

On the other hand, it is important to be realistic in your projections, forecasting a large market share in just a few years may make your business plan seem amateurish. Wherever possible, support market potential estimates with independent research and use bottom-up as well as top-down calculations. Top-down calculations begin with market size estimates for the broader category (beverages) and narrow down to potential customers for the offering (soft drinks, then colas); they are important in demonstrating potential. Bottom-up calculations begin with near-term assumptions regarding what you expect to sell (units and price/unit) and scale upwards with realistic assumptions about how the business can be expanded; they are important for demonstrating what is achievable based on operational capacity and real customer data (if available). If the company is pre-revenue, then sometimes a comparable can be used to help demonstrate bottom-up potential.

Laurence K. Hayward is the Founder and CEO of TheVentureLab. To learn more about him follow the link here