Be Straightforward When Qualifying Your Market | Michael Staton

Let's see. Find, qualify, or build a market, right? This is tough to say. I mean, most really big opportunities don't have a definable, measurable market when they get started. It doesn't necessarily fit into any of the boxes that people like to try to create. At the same time, you need an answer for investors, which is like, how big is your total addressable market? How big is your services addressable market? Who's in your market beachhead right now? Right? So, what I like to see is actually a bottoms-up rather than top-down market sizing exercise. And we call it a market capture exercise. So, what we want to see is at your existing price point with your existing revenue model, hopefully it's validated. How much revenue are you making at 1% of the market, 5% of the market, 10% of the market, all the way up to generally 40% of the market? So, if you're in a market with network effects, you can get 70, even 80% market share. Most markets— sorry, if you have a product with network effects. Sorry. So, if you're a business with network effects, you can get up to 70, 80% market share, maybe even more, like Microsoft. But you generally don't hold that position for long anyway. If you're kind of an ordinary product, let's say Salesforce, right, you peak generally at about 45% market share. You end up with— 40. 40, 35% market share. So, I think Salesforce is at like 42% market share right now. Right. And, you know, when Salesforce entered the kind of sales productivity CRM software space, nobody really knew what that space was or how big it was. So, they kind of had to create that space. But, I'm sure if you showed, oh, well, we make $50 per user per month. The average small and medium-sized business has X many salespeople. we can sell this many licenses, blah, blah, blah, blah, blah, blah. The numbers got really big, right. And so, in the absence of having top-down market data that says, your market is however many billion, however many, you know, billion dollars annually, do a market capture exercise instead. And if you don't have a revenue model, you don't have to fake it, right. I actually like entrepreneurs that are stage-appropriate and stage-honest. So, I'm pre-seed. I'm here to discover. I'm here to learn. I'm here to become a better founder. Here's my cool idea. Do you have any thoughts on shaping that idea? When a pre-seed entrepreneur comes in and says, I have everything figured out. Here's my revenue. Here's my chart that goes up into the right. I'm like, yo, this is— you are not being honest with the stage that you are at. So, we are more likely to fund an honest entrepreneur Than an entrepreneur that's kind of like faking it too much with their slides. You know, I mean, that doesn't mean that you shouldn't have a slide, but maybe you should put it in the appendix and be like, you know, fake revenue numbers. Ha ha ha ha ha. How many VCs do you think are actually like you? I have no idea. Because we this is definitely conflicting with some other people for sure. Yeah. Yeah, yeah. So, so, hmm. Well, so I mean the reality is it's like pre-seed companies. generally can't get investment from venture capitalists. We sit at different points in that canal. So if you get somebody from a big VC coming in that does Series B and Series Cs, they expect a lot more. If you talk to 500 Startups, if you have a good idea and seem smart, they'll be like, here's $200 grand, come to our next program. So you need to be talking to accelerators. You need to be talking to angel investors. And with angel investors, it's really friends, family. I don't really believe in fools, but I do believe in cheerleaders. So you want to find people that have conviction in your idea and conviction that you're the right person to build out that idea. And I think that you're much more likely to get an angel investor being honest about where you are. And that doesn't mean that you don't do a lot of thought experiments and you don't have good slides, because If you don't have good slides that show big revenue, it's really hard to raise money in Silicon Valley. It's, like, it's almost impossible, right? But I also know entrepreneurs that have raised 2 rounds of funding and have never made slides at all. And, like, literally I said, hey, could you follow up on our meeting with slides? And he goes, ah, I've never made a deck. You know? But he was also, he was also relatively exceptional. First of all, he was a software engineer that had already kind of built a product and already showed that people were using it. And the people that have invested in his companies have always been friends or friends of friends. Right. So I met him through investors that I'm friends with. And they invested because they know him and they're friends with him and they trust him and they like him. And he's just literally like, I never want to waste time with investors. So when I'm going to— when I need to raise money, I'm going to send out an email and say this is how much I need. And however much I get, that's however much I get, and then I keep on trucking. Most entrepreneurs aren't in that spot. Me too. Most entrepreneurs aren't in that spot. So, what I would say is, you need to come up with a lot of these faux answers that everyone knows you're gonna pivot out of, just to show that you can think through the problem at precision detail. Because the best CEOs, the reason I was a bad CEO is I have trouble going into the details. And if you read about, like, Zuck and Steve Jobs and all these folks, they are really amazing at macro leadership, but they also, in your meeting with you, will, like, go down into the details. Like, you know, I mean, they can live in the details, right? And so, I certainly think that it's appropriate to, to, Do these thought experiments. Right. But I also think that you should represent them as thought experiments rather than having everything figured out. And if people are passing on you, it's because you're pitching to investors that don't invest at your stage. If you're pitching stage-appropriate investors, I think it should be fine. That being said, not everyone raises money. I mean, that's just the— we don't even know how many entrepreneurs go out with an idea and try to raise money. and don't raise money. There's no data on that. But something like 30— I don't know the exact percentage points, so don't quote me on this. But if I remember the CB Insights data, it's something like a third of seed-funded companies are able to raise a Series A. And so, I mean, that's a steep curve. I mean, basically every round you go out to get, Half or less of the companies that raise money at the previous round make it to the next one. Right? It's very Darwinian.