How to carry out market sizing and competitor analysis when writing an investment memo
Over the past couple of months I have been navigating the highs and lows of the yellow brick road leading to breaking into the VC landscape and an upside has been all the different avenues of learning I have been exposed to.
For the most recent task I was set, I had to prepare a short written version (max 1000 words) of the market and competition sections of an investment memo for a deck I was given 3 days prior.
I was also asked to include a thesis (why this company might be a VC success) and anti-thesis (why this might fail) in bullet point format.
In hindsight this was a little more difficult than I anticipated, although I had a fair amount of experience creating mock memos for a few simulation investment committees I was a part of.
In this article I’m going to highlight the method behind the madness on how I presented my findings to the team so that you can follow the same process.
Conducting market sizing
The market sizing section of a memo is incredibly important as it lays out the potential market share the company in question is looking to acquire. This can in essence be the make or break behind a firm’s investment decision.
The methodology behind breaking down the market segments can vary dependent on the company’s stage. Normally, we are looking to see if the immediate market is large enough to support a healthy valuation and if there is a large enough industry gap they are looking to serve.
The way we go about to find this figure is corresponding publicly available information (resources such as Statista, Pitchbook, ONS) with internal fund data that has already been researched for their existing portfolio companies.
If you are using any quantitative data from the company’s Pitch Deck, make sure you have validated the figures the founders are providing, alongside any other assumptions.
Usually, the easiest way to collect your findings is by conducting a top-down approach when defining the Total Available Market (TAM), Serviceable Available Market (SAM) and Serviceable Obtainable Market (SOM):
- TAM- Total market demand for the product or service
- SAM- A segment of the TAM which can be targeted specifically
- SOM- A part of the SAM which is the realistic, immediate market opportunity the company is looking to capture
To understand the above area more, let’s use an example of the market sizing conducted in the diagram above.
This is the TAM, SAM and SOM of a UK based eyeliner brand. In this instance, the TAM is the size of the global cosmetics market ($254Bn). You can also throw in the % annual growth rate if you want to demonstrate future market potential.
If we break this down even further, we arrive at the SAM ($12Bn) which is narrowed to only include the UK’s share of the cosmetics market as this is where the company will be launching in year 1, which is at the same point in time the VC is looking to invest.
To arrive at the immediate market opportunity, the SOM ($724M), one can find the value behind the exact niche the company is looking to break into, the eye make-up market in the UK ie how much do women in the UK spend on eye make-up annually. If we wanted to be totally accurate here then we can narrow the SOM even further to only include the sole product the start-up is looking to launch, eyeliner, however these statistics can be quite difficult to obtain.
When conducting this exercise, you can also include a paragraph or two answering the following questions:
- What specific segment of the market is the company looking to address, can this potentially support a $1Bn valuation?
- Are there signs of clear YoY market growth?
- Are there any other markets the company can look to break into on its development journey?
Competitor Analysis
It’s very important to make sure you’re considering the competitive landscape in depth so that you can:
a) Highlight why the company’s additional features allow it to build a moat against other companies from acquiring their customers
b) Shed light on any potential threats to the start-up in question’s success
You can always use the tried and trusted platform Crunchbase to carry out a check on the current landscape, however I have found that this is a chance for your networking skills to really shine.
Make sure to attend industry-focused networking events and demo days in the weeks leading up to the investment committee so you can include the founders and companies you have met firsthand into your memo. This way you can even get a better insight into the competitor’s business model as a lot of information can’t be found online, especially if they are at the pre-seed stage.
You can also create some visuals to better explain the competitive landscape and how the start-up you are analysing is unique compared to the other market leaders.
For example, you can use the aid of a product feature checklist table, quadrant graph or Harvey Balls for this
It’s also important to touch on the following in your written competitive analysis section:
- The start-ups top 3 competitors
- The competitor’s traction metrics ie information on any previous funding rounds, number of existing customers, revenue indicators (MRR, ARR )
- Their product development plans
- A comparison of business models ie roll out plans, revenue streams, pricing, customer acquisition strategies
- Target market comparisons
- A SWOT analysis:
a) Strengths: what advantages do the competitor’s products have, what do they do well
b) Weaknesses: what are the key gaps in the start-up your analysing’s product features, what can be seen as a weakness
c) Opportunities: what are the potential feature opportunities that aren’t already being addressed by the existing competitors, are there any interesting trends to keep an eye out on
d) Threats: are there any potential market shocks to keep in mind, are there any technology discoveries that can push the company away from its customers
To round off your memo, it’s always important to include why investing in this company would be a VC success, an outright failure and also any additional information you require from the founding team to make a more well-rounded decision.
And there you have it! We have outlined two parts of an investment memo that you are likely to be questioned about in your interview process when partners are looking to assess your analytical skills.
The other sections which make up a complete IM include thorough analysis on: the founding team, business strategy and financials & traction.
I hope you have found the above breakdown useful and do feel free to let me know in the comments what you’d like to see next!
