Leo Polovets @lpolovets General Partner @SusaVentures (seed investor in @RobinhoodApp & @Flexport). Before: @Caltech → 2nd non-founding engineer @LinkedIn → @Google → @Factual. Oct. 08, 2019 1 min read

1/ Bottom-up market sizing is better than top-down sizing because bottom-up forces you to actually think about how much customers can spend & what fraction of them are reachable.

Top-down market estimates are quick-and-dirty calculations that are typically divorced from reality.

2/ For example, let's say you're building an accounting tool for authors. A top-down market size estimate might be "publishing is a $100b industry and a typical author spends 5% of their revenue on accounting, so our market size is $5b."

3/ But this estimate breaks down if you really think about your customers (authors). E.g. JK Rowling makes $60m/year, but probably wouldn't pay $3m/year for one tool. OTOH an author who sells $500/year might pay $25 for an accounting tool, but acquiring a user for <<$50 is hard.

4/ A good bottom-up estimate might look something like: "There are 50k authors that earn $10k-$40k/year, and they'd pay $400 for a great accounting tool. 10k authors earn $40k-$200k and they'd pay $2000. 1k authors earn $200k+, and they'd pay $8000. Total market size = $48m."

5/ The bad part about a bottom-up analysis is that the market size may be much lower than you hoped. The good part is that it's probably much closer to reality. If the number is conservative & still huge, that's great; if it's low, you can consider other ideas (if you want to).


You can follow @lpolovets.



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