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This is a blog post series by Robbie Vann-Adibé, Traackr investor and Chairman.
As an investor, over time (assuming it’s something you keep doing) you start to lean towards certain types of business opportunities. There are probably as many ways to categorize these things as there are opportunities out there – ok, maybe a bit of an exaggeration - but there are a lot.
One example of a category is “new horizon” versus “incremental improvement”.
A “new horizon” type of opportunity is where the business category did not exist previously, and the product/service defines a new way of doing things. For example, the Alta Vista Search Engine – “what?” I hear some of the younger folks ask – no, not Google; Google did not do search first. Alta Vista, then Yahoo and then others did it, but then Google came along and did it better than anyone else!
An “incremental improvement” type of opportunity is where the category exists and then a company comes along and improves how it’s done. An example of this would be Salesforce. CRMs existed long before Salesforce - Siebel Systems being an obvious previous incarnation – but Salesforce came along with a very different technology and business underpinning, and the rest is history.
I’m not sure there is a difference in degree of difficulty in these two categories; in one case you are competing against incumbents, in the other you are trying to persuade people that the problem exists, and that this new way of doing things is better!
As an investor, I have most often leaned towards new horizon type opportunities. When I first started working with the Traackr team nearly four years ago now, the conversation seemed like a familiar one. Namely, the conversation goes “that’s a really neat piece of functionality, what can it be used for?” This is a strong signal that you are dealing with a “new horizon” type situation.
With Traackr we embarked on the “new horizon” journey, which required us to define a market category, and create not just the technology that it required, but also define the business processes under which it would be utilized.
When defining a new category, a substantial amount of marketing and sales efforts occur around “market education” – you keep explaining HOW to use your product in the context of the business situation, and then continually refine the product and the processes from interactions with early adopter-type customers. If you do it right, you end up working with a lot of potential partners to help you educate the market.
Often the market does not understand what you are offering as a “new horizon.” In fact, there is no “market” in traditional terms, because the market does not yet accept your proposed model of doing things. So, often this education and eventual acceptance takes a while to occur. Half the goal of being a start up in this stage is to stay alive long enough to see the market accept your ideas and have your product intercept/intersect with the market.
But there is only so much you can do to make a market mature - markets seem to have to do it in their own time. The great thing about creating a “new horizon” type business is, assuming you meet with some success, it typically requires you to build unique intellectual property, which ends up having dramatically higher value than it typically takes to build. i.e. the return on investment is very high, which translates eventually into a high value for the overall business.
If you have ever seen a business plan template or been to business plan class 101, one of the fundamental steps that you take when defining your “plan” is that you define your product and the market you are going after. This is often referred to as TAM - total addressable market - and shows that there is an existing market with big numbers associated with it. Then you go and raise VC money to do it. But guess what - it doesn’t quite work that way ;)
As many start-ups have found, many members of the Institutional Venture Investment Community have a standard playbook and one of their key questions is “how big is this market?” as many an MBA has been trained to ask. But the issue is that when a category is developing the real answer is, who knows?
Market size questions have been famously answered incorrectly by many experts and successful business people of their era: for example, the CEO of one of the largest and most successful technology companies of the time, Ken Wilson of DEC said in 1977, "There is no reason anyone would want a computer in their home.”
I like to point people at the Ali G video regarding his business idea for an ice cream glove as a great example of the investor community reacting to a business idea:
In some of Traackr’s earliest prospective investor meetings, the answer to this question was “It’s gonna be big!” For those who know me – it’s also what I used to say back in the Viant days about the internet. As we began to refine our pitch, product and overall proposition, we began to accrue enough data to be able to draw some strong evidence based conclusions on the market size. And it turns out we were right - it is big.
The assumptions underpinning the model are:
So, for the US we calculate TAM at approximately $3bn and ROW approximately $9bn.
Clearly these are some very rough assumptions, and these markets are likely to be shared by a number of providers. We believe Traackr is the market leader today in the same way that Salesforce was/is in the cloud based CRM space. A variety of folks appear to agree with us.
We were not able to give an accurate response to the question then, but here is our answer today – we hope you think it’s a big enough number.
For the entrepreneurs reading this post about to embark on a “new horizon” type venture, there is good news and bad news. Good news: your ability to answer the TAM question from prospective investors will occur once you have enough traction in the market (i.e. customers with real revenue). Bad news: it probably doesn’t matter by then anyway. In other words, you may have to bootstrap your way to this number, unless you can find the right type of investors willing to make a truly speculative investment.
At Traackr, we got so busy growing the revenue of our business that we had little time to talk to the venture community, and more importantly, found that we could get where we needed to go without institutional venture funding (at least for now).
If you have read any of my prior View From The Board Room posts: the first or the second, you will know how our VC conversations to date have played out. We ended up using Angel funding and bootstrapping the company (at least so far). I’ll discuss the joys of bootstrapping and how that changes the popular media-defined start-up playbook in my next post, and some of the start-up myths that we squashed along the way.