Investor Series
Diligence Series: Contextualizing the Market
Discover the essential elements of market analysis in private investing with this insightful blog post. Explore market sizing, competitive landscape assessment, and market trends and risks to gain valuable insights for evaluating investment opportunities.
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Diligence Series: Contextualizing the Market
Discover the essential elements of market analysis in private investing with this insightful blog post. Explore market sizing, competitive landscape assessment, and market trends and risks to gain valuable insights for evaluating investment opportunities.
AUTHOR(s)
Patrick Zailckas
Linkedin
Linkedin

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.

Framing The Market

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:

  • Market Sizing
  • Competitive Landscape
  • Market Trends & Risks

Taking photo of sunset

Market Sizing

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:

  • Target Available Market is the total market demand for a product or service.
  • Serviceable Addressable Market is the segment of the TAM targeted by a company’s products and services which is within reasonable geographical reach.
  • Serviceable Obtainable Market is the portion of SAM that the company believes it can capture, typically reinforced by some time-stamped projections (e.g., $xxMM by 2025)

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.

Puzzle

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:

  • Top-down market sizing takes a macro estimation of all of the potential customers and revenue (i.e., determining the total market), and then applies percentage-based factors to estimate the company’s reasonable targets for share of this market. For example, a top-down approach might take a TAM estimate of a $500MM industry and apply a percentage (i.e., 15%) to bulk-extrapolate the company’s prospective share capture of that market.
  • Bottom-up market sizing on the other hand, begins with the business model from a unit standpoint and explores how sales can be scaled. For example, x$ per unit sold multiplied by some estimated number of units at scale. Bottom-up analyses typically take more effort to complete given the number of data points to gather. For example, you will likely take a look at where geographically the proposed sales will take place, how many customers there are across these different markets, estimates of how likely those customers in different markets will contribute to sales, and how often said customers may purchase. Combining these factors with basic business model unit pricing will result in a bottom-up market size.

For more on market sizing, take a look at this helpful article.

Competitive Landscape

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.

Old man playing Chess

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:

  • Who is included in the competitive landscape of the company and how does the business differentiate? And, perhaps most importantly
  • Has the business grossly overlooked key competitive businesses, sectors, or forces?

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:

  • Performance metrics (e.g., revenue, customers, margins, NPS, etc.)
  • Team size
  • Business model structure
  • Geographic focus / footprint
  • Target customer segment(s)
  • Technology
  • Funding & notable backers
  • Age

Market Trends & Risks

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.

Sailing rapids

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:

  • Trends: can be supportive or frictionful, yet focus on underlying tailwinds that might influence the progression of the boat (the company) across the market waters. It is helpful to explore trends across different time horizons, such as immediate, near-term (1-5 years), mid-term (5-10 years), and long-term (10+ years).
  • Risks: if trends are focused on direction and intensity of the current, risks are more akin to the abrupt rapids or cliffs that might appear and create significant turbulence (or ending!) for the business along its journey. Depending upon the severity of particular findings, key market risks can singularly cause a deal to fall apart. The objective here is to be critically conservative, and to do one’s best to lay out all of the possible pitfalls that might come along the journey and assess their impact and likelihood. Comparing these risks against each investor’s unique risk tolerance will help to determine how this assessment will impact the overall impression of an investment opportunity.


Clockwork Universe Logo
About Clockwork®
Clockwork is building the digital investment office for private markets™. We offer technology and solutions for private investors of all shapes and sizes. Let's talk.
Investor Toolkit
Diligence Series: Contextualizing the Market
Discover the essential elements of market analysis in private investing with this insightful blog post. Explore market sizing, competitive landscape assessment, and market trends and risks to gain valuable insights for evaluating investment opportunities.
AUTHOR
Patrick Zailckas
Linkedin

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.

Framing The Market

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:

  • Market Sizing
  • Competitive Landscape
  • Market Trends & Risks

Taking photo of sunset

Market Sizing

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:

  • Target Available Market is the total market demand for a product or service.
  • Serviceable Addressable Market is the segment of the TAM targeted by a company’s products and services which is within reasonable geographical reach.
  • Serviceable Obtainable Market is the portion of SAM that the company believes it can capture, typically reinforced by some time-stamped projections (e.g., $xxMM by 2025)

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.

Puzzle

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:

  • Top-down market sizing takes a macro estimation of all of the potential customers and revenue (i.e., determining the total market), and then applies percentage-based factors to estimate the company’s reasonable targets for share of this market. For example, a top-down approach might take a TAM estimate of a $500MM industry and apply a percentage (i.e., 15%) to bulk-extrapolate the company’s prospective share capture of that market.
  • Bottom-up market sizing on the other hand, begins with the business model from a unit standpoint and explores how sales can be scaled. For example, x$ per unit sold multiplied by some estimated number of units at scale. Bottom-up analyses typically take more effort to complete given the number of data points to gather. For example, you will likely take a look at where geographically the proposed sales will take place, how many customers there are across these different markets, estimates of how likely those customers in different markets will contribute to sales, and how often said customers may purchase. Combining these factors with basic business model unit pricing will result in a bottom-up market size.

For more on market sizing, take a look at this helpful article.

Competitive Landscape

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.

Old man playing Chess

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:

  • Who is included in the competitive landscape of the company and how does the business differentiate? And, perhaps most importantly
  • Has the business grossly overlooked key competitive businesses, sectors, or forces?

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:

  • Performance metrics (e.g., revenue, customers, margins, NPS, etc.)
  • Team size
  • Business model structure
  • Geographic focus / footprint
  • Target customer segment(s)
  • Technology
  • Funding & notable backers
  • Age

Market Trends & Risks

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.

Sailing rapids

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:

  • Trends: can be supportive or frictionful, yet focus on underlying tailwinds that might influence the progression of the boat (the company) across the market waters. It is helpful to explore trends across different time horizons, such as immediate, near-term (1-5 years), mid-term (5-10 years), and long-term (10+ years).
  • Risks: if trends are focused on direction and intensity of the current, risks are more akin to the abrupt rapids or cliffs that might appear and create significant turbulence (or ending!) for the business along its journey. Depending upon the severity of particular findings, key market risks can singularly cause a deal to fall apart. The objective here is to be critically conservative, and to do one’s best to lay out all of the possible pitfalls that might come along the journey and assess their impact and likelihood. Comparing these risks against each investor’s unique risk tolerance will help to determine how this assessment will impact the overall impression of an investment opportunity.


Clockwork Universe Logo
About Clockwork®
Clockwork is building the digital investment office for private markets™. We offer technology and solutions for private investors of all shapes and sizes. Let's talk.
Innovator Spotlight
Diligence Series: Contextualizing the Market
Discover the essential elements of market analysis in private investing with this insightful blog post. Explore market sizing, competitive landscape assessment, and market trends and risks to gain valuable insights for evaluating investment opportunities.
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