If you’ve followed us this far along on our Diligence Series, by now you have a basic sense of what a company is building, and who’s behind it. The next few series of contemplations will focus upon understanding all of the elements that point toward how the business is (or is not) going to work, the field it’s playing in, and what it might achieve. While we generally consider Value Proposition and Team as the most important duo to begin with, this post and all of the following Diligence Series posts can be approached in any order. So go ahead and choose your own adventure.
Today we’re here to speak about the Market Context. Market Context is intended to analyze the relevant market conditions at play and how the company is expected to fare (i.e., advantaged or disadvantaged) given those conditions, or whether the proposed market opportunity exists at all. Perhaps you have heard of the classic SWOT (i.e., Strengths, Weaknesses, Opportunities, Threats) analysis, which can offer basic and familiar concepts for judging high level market factors. Depending upon the depth of the diligence you’re performing, a cursory assessment like this may get you 90% of the way there. For a deeper and more comprehensive exploration of the market conditions at play, we introduce the following core topics for contemplation:
The process of sizing a market can focus on one of two approaches depending upon the depth of diligence at play. A cursory assessment can be performed via researching market studies to confirm confluence with founder-stated figures. For a more advanced take, a formal quantitative assessment entails raw data aggregation and self-explored sizing calculations. The core focus question of a market sizing effort is: has the business accurately projected the Target Available, Serviceable Addressable, and Serviceable Obtainable Market sizes (TAM / SAM / SOM)? Spoken more plainly, the inquiry becomes: “is this market sizeably attractive?”
As a reference:
To keep this article brief and without journeying too technically into the details on how each of these are calculated, the purpose of the TAM is to understand total upside potential, while SAM and SOM place practically conservative lenses upon this upside to help clarify an investment. Specifically, exploring SAM and SOM projections relative to company financial traction and round valuation can provide some perspective toward the range of return multiples in play should things go well.
Should you prefer to calculate market sizes for yourself to juxtapose against company-provided estimates, we encourage a dual approach of top-down plus bottom-up sizing. These estimates will offer rough upper and lower bounds to some market size range, from which you can better stomach how reasonable (or unreasonable) a company's own projection targets are:
For more on market sizing, take a look at this helpful article.
Market assessments are all about trying to place the company under review in some position in space relative to existing markets, conditions, and players. All factors must be looked at together to understand where this position should be most reasonably situated. What is the point of recognizing an attractive market size if active competition has already fully saturated the space? Fit together, these individual pieces reveal the broader picture of the attractiveness and risks associated with the market endeavor.
When we consider competition, we’re trying to understand how saturated, competitive, and attractive the market is through a lens examining all other operators or forces. Based on what's provided by the company in addition to personal research, try to answer these two questions:
Because it is rare that two businesses are mostly identical in positioning and pursuit, it is helpful to conduct competitive landscape analyses which explore multiple factors to better understand collective strengths and weaknesses, such as:
Like everything in life, markets are never stagnant. Ever evolving, shifting, changing, markets must be respected as transitory environments. Because we are interested here in understanding whether it is the right time to hop into a particular market, it is helpful to explore the direction, nature, and intensity of the currents carrying the stream.
Trends and risks highlight exactly this, and there’s no exact format on what researching these factors must look like. Instead of pinning down exactness, here we seek to cast the net wide collecting perspectives from many different sources: industry experts, news publications (with exquisite care applied to discerning any associated bias of such sources), market research reports, social media (as applicable), field data, and more. You will take all of these perspectives and blend them together, distilling them into a series of key takeaways that are bucketed into two categories:
If you’ve followed us this far along on our Diligence Series, by now you have a basic sense of what a company is building, and who’s behind it. The next few series of contemplations will focus upon understanding all of the elements that point toward how the business is (or is not) going to work, the field it’s playing in, and what it might achieve. While we generally consider Value Proposition and Team as the most important duo to begin with, this post and all of the following Diligence Series posts can be approached in any order. So go ahead and choose your own adventure.
Today we’re here to speak about the Market Context. Market Context is intended to analyze the relevant market conditions at play and how the company is expected to fare (i.e., advantaged or disadvantaged) given those conditions, or whether the proposed market opportunity exists at all. Perhaps you have heard of the classic SWOT (i.e., Strengths, Weaknesses, Opportunities, Threats) analysis, which can offer basic and familiar concepts for judging high level market factors. Depending upon the depth of the diligence you’re performing, a cursory assessment like this may get you 90% of the way there. For a deeper and more comprehensive exploration of the market conditions at play, we introduce the following core topics for contemplation:
The process of sizing a market can focus on one of two approaches depending upon the depth of diligence at play. A cursory assessment can be performed via researching market studies to confirm confluence with founder-stated figures. For a more advanced take, a formal quantitative assessment entails raw data aggregation and self-explored sizing calculations. The core focus question of a market sizing effort is: has the business accurately projected the Target Available, Serviceable Addressable, and Serviceable Obtainable Market sizes (TAM / SAM / SOM)? Spoken more plainly, the inquiry becomes: “is this market sizeably attractive?”
As a reference:
To keep this article brief and without journeying too technically into the details on how each of these are calculated, the purpose of the TAM is to understand total upside potential, while SAM and SOM place practically conservative lenses upon this upside to help clarify an investment. Specifically, exploring SAM and SOM projections relative to company financial traction and round valuation can provide some perspective toward the range of return multiples in play should things go well.
Should you prefer to calculate market sizes for yourself to juxtapose against company-provided estimates, we encourage a dual approach of top-down plus bottom-up sizing. These estimates will offer rough upper and lower bounds to some market size range, from which you can better stomach how reasonable (or unreasonable) a company's own projection targets are:
For more on market sizing, take a look at this helpful article.
Market assessments are all about trying to place the company under review in some position in space relative to existing markets, conditions, and players. All factors must be looked at together to understand where this position should be most reasonably situated. What is the point of recognizing an attractive market size if active competition has already fully saturated the space? Fit together, these individual pieces reveal the broader picture of the attractiveness and risks associated with the market endeavor.
When we consider competition, we’re trying to understand how saturated, competitive, and attractive the market is through a lens examining all other operators or forces. Based on what's provided by the company in addition to personal research, try to answer these two questions:
Because it is rare that two businesses are mostly identical in positioning and pursuit, it is helpful to conduct competitive landscape analyses which explore multiple factors to better understand collective strengths and weaknesses, such as:
Like everything in life, markets are never stagnant. Ever evolving, shifting, changing, markets must be respected as transitory environments. Because we are interested here in understanding whether it is the right time to hop into a particular market, it is helpful to explore the direction, nature, and intensity of the currents carrying the stream.
Trends and risks highlight exactly this, and there’s no exact format on what researching these factors must look like. Instead of pinning down exactness, here we seek to cast the net wide collecting perspectives from many different sources: industry experts, news publications (with exquisite care applied to discerning any associated bias of such sources), market research reports, social media (as applicable), field data, and more. You will take all of these perspectives and blend them together, distilling them into a series of key takeaways that are bucketed into two categories: