The Billion-Dollar Question: Reframing Market Sizing for AI Startups
by Enlighten Ventures
In the world of AI startups, the pursuit of the billion-dollar market has become something of a holy grail. Founders and venture capitalists alike often fixate on these large numbers, but it’s time to take a more nuanced approach to market sizing. Let’s explore what should really go on that crucial slide and examine the realities of capturing these seemingly vast markets.
What to Put on the Slide
When crafting your market size slide, consider including:
1. TAM, SAM, and SOM figures with clear, justifiable assumptions
2. Sources for your data and methodology used
3. A brief explanation of your ideal customer profile
4. Key market trends supporting your growth projections
5. Potential barriers to market entry and your strategy to overcome them
Remember, the goal isn’t just to impress with large numbers, but to demonstrate a deep understanding of your market dynamics.
Enlighten Ventures’ Recommendation
At Enlighten Ventures, we’ve found that a more granular approach yields better insights into a startup’s potential. We recommend founders present at least five well-thought-out industry use cases and personas to validate their projections. This approach not only demonstrates a deep understanding of the market but also tests the founder’s ability to commercialize their product.
These use cases should:
1. Clearly define the problem being solved
2. Outline the specific value proposition for each persona
3. Provide realistic adoption scenarios
4. Include potential revenue models
This level of detail allows us to better assess the startup’s go-to-market (GTM) plan and its likelihood of success. Additionally, we place significant emphasis on the startup’s strategy for building a defensible moat. In the fast-paced AI landscape, the ability to create and maintain competitive advantages is crucial for long-term success.
The Reality of Billion-Dollar Markets
It’s crucial to understand that capturing a significant portion of a billion-dollar market is exceedingly rare. Let’s look at some real-life examples:
1. Uber: Despite revolutionising transportation, Uber’s market share of the global taxi market is estimated at around 37% as of 2023.
2. Salesforce: A dominant player in CRM, yet it holds approximately 23% of the global CRM market.
3. Zoom: Even after becoming a household name during the pandemic, Zoom’s share of the video conferencing market is about 48%.
These examples illustrate that even industry leaders in well-established markets often capture less than half of their TAM. For AI startups in emerging markets, the challenge is even greater.
Factors Influencing Market Capture
Several factors contribute to the difficulty of capturing large market shares:
1. Competition: The AI space is increasingly crowded, with both startups and tech giants vying for market share.
2. Market Fragmentation: Many AI applications serve niche markets or specific industry verticals.
3. Adoption Barriers: AI solutions often face hurdles in trust, integration, and change management.
4. Regulatory Landscape: Emerging AI regulations can limit addressable markets or slow adoption.
A More Realistic Approach
Instead of fixating on billion-dollar markets, founders should focus on:
1. Identifying a beachhead market: Show how you can dominate a smaller, well-defined segment.
2. Demonstrating scalability: Outline a clear path from your initial market to adjacent opportunities.
3. Highlighting unique value proposition: Explain why your AI solution is uniquely positioned to capture market share.
4. Showcasing early traction: Real customer testimonials and case studies can be more compelling than large market projections.
5. Building a defensible moat: Clearly articulate how you’ll maintain competitive advantage over time.
For VCs and investors, it’s crucial to look beyond the headline figures. Engage founders in discussions about their go-to-market strategy, customer acquisition costs, and realistic growth trajectories. A startup with a clear path to capturing a significant share of a smaller market may represent a more attractive investment than one claiming a tiny slice of a massive pie.
In conclusion, while the allure of billion-dollar markets remains strong, both founders and investors benefit from a more grounded approach to market sizing. By focusing on demonstrable value creation, realistic growth strategies, and building defensible moats, AI startups can build more compelling narratives and foster more productive conversations with potential investors.
The billion-dollar question isn’t about the size of the market, but rather about the startup’s ability to create and capture value within it, while building lasting competitive advantages.
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