How do you measure the market size for any venture? There is everyone’s way and there is a precise way.
According to Harvard Business Review, it’s notoriously difficult to measure markets especially new ones. The article describes how factors like customer passion are ignored in the calculation. For instance: Did you know that 11% of the population suffers insomnia whereas 26% wants to improve their sleep. So if you stumble upon a cure for insomnia, you better off marketing it as just “improving sleep”. Simply because it’s what more people are passionate about.
Another emotion our distorting market estimation is confirmation bias. The failure of the Microsoft Zune music player is a textbook example. Microsoft used the iPod as a confirmation for the projected growth of the portable music market. The reality was that Apple cannibalized its own iPod on purpose with the introduction of the iPhone.
The Zune was a minor mishap compared to Bill Gates biggest mistake: predicting Android and the opportunity of an open mobile platform. Google bought Android for a reported $50 million and went on to capture a $400 billion market. One stunning detail from that story was the fact that Google’s acquisition in 2005 was a defensive measure against Microsoft’s mobile operating system. The winner-take-all open mobile market came into existence only after the closed iPhone ecosystem launched in 2007.
So we should be aware that measuring a market based on existing products, is betting against change.
Let’s look at how we can calculate a product market size. Here are three approaches:
- Total Addressable Market (TAM);
- Jobs To Be Done (JTBD);
- Capital Allocated To (CAT).
Total Addressable Market (TAM) is calculated from the number of consumers for similar products or the revenue of those products. But here’s a dirty little secret: almost everyone copies or crowdsource a TAM number from somewhere else. Therefore, that number will be difficult to match to your product since there is no way to validate the underlying data. Worse, a TAM number may not consider evolving consumer behaviors like what happen in the Zune example.
That’s why there’s this other formula: Jobs To Be Done (JTBD). A theory derived from Clayton Christensen famous ‘job of a milkshake’, which he explains in this 4-minute video. By correctly identifying a ‘new’ need, you can deduce the number of potential customers. There is a more detailed look at this method here: Market Sizing with Jobs-to-be-Done.
The beauty of this approach is the ability to envision the change. The JTBD method for market sizing helps reveal new consumer behaviors and expose our biases towards the past. So in the case of Android, the job was to enable handset manufacturers to compete independently with the iPhone. However, JTBD would not have predicted that the size of this opportunity would be $400 Billion since the iPhone hadn’t yet changed the mobile landscape.
Numbers versus Nonsense
How do we get closer to a more precise estimate of an evolving market? By looking at venture capital. A capitalist invests their money in the opportunity to double, triple or even have a 10 times return. They are continuously looking for markets where that might happen. Once they invest in a market, we then get a total amount of capital for that market.
To test this theory, let’s stay in the legal industry and pick intellectual property law (IP law). Traditionally IP Law focus was on protecting data we generate for a commercial purpose. Data we generate and want to keep private doesn’t have such an established set of legal rules for protection. A few tech monopolies like Google and Facebook became extremely profitable because the law didn’t offer much protection on private data.
As the saying goes: we became the product.
IPTech is the use of technology in support of the enforcement of IP law and the monetization of data. We identified IPTech as one of the most lucrative segments in LegalTech. IPTech can also be deployed in defense of your brand, reputation, and privacy. We discuss ways ventures used Blockchain or Biometrics to offer these protections. In that sense, we identify IPtech as RiskTech. Now we discovered that IPTech as RiskTech is way, way bigger. How big? Over three times the size of its counterpart in LegalTech.
Legalpioneer tracked $5.84 billion of capital allocated to 473 IPTech companies. Then we noticed that $1.52 billion of venture capital was allocated in an area were just 50 RiskTech companies operate. The difference becomes apparent when we calculate and sort on the average value per area. One company that employs IPTech as RiskTech is valued at $30 million per company. One LegalTech company in the IPLaw space average value is about $10 million. To see this visualized, just follow the dotted line in the graph below.
It’s insomnia versus a sweet snooze
The above example shows how a check on Capital Allocated To (CAT) a market segment or company has the potential to uncover the real needs of consumers. The nature of private companies enables them to pivot and mirror consumers movement in near real-time. A CAT scan sheds light on where investors are taking on new bets and exactly how much is on the table.
The best way to instantly reveal new behaviors is when running continuous CAT scans across areas. That’s why we set up the Ambition dashboard to check major movements in real-time. We also discovered an interesting byproduct of CAT scans called “green pastures”. By running more granular topics and categories, scans will also reveal the areas where little or no funding is registered. Better yet, CAT scan also reveal when these green pastures are suddenly flooded with funding like in the Contract space.
We performed about 18 custom CAT scans for boot camps, startups and corporations around the world and I would like to show my gratitude to all. The insights we shared were invaluable.
So are you wondering what unique ventures are attempting to crack new markets? Where are the ‘green pastures’ in the Contract Management space or is it saturated? And is Security the new black? If one of these questions intrigues you or you have a different question, reach out to us. We have 2 scan slots still open for August so pick a topic or a company and together we’ll explore the future.