How much is the magic market share number? It depends on how much the investment ask is: you don't need a $20 billion market share to make a profit; niche companies often succeed with much small shares–they just succeed on a smaller scale.
In this section, we'll cover some basic ways you, as the angel investor, can estimate the addressable market share. We'll also talk about how to drill down in a startup's pitch deck, what to look for when the startup talks market share, and how to protect yourself against poor investments with regard to market.
You can do some back-of-the-napkin math to estimate a startup's future share of the market. The more you know about the industry or product type in question, the more accurate your math is likely to be, which is one reason many angel investors choose to operate in fields with which they have experience.
For a solid estimate of total addressable market (TAM), you'll need five pieces of information.
1. The Total Population of Potential Users
This may be a geographical consideration: There are 100,000 people in the city where a restaurant wants to launch. More likely, this is a more abstract number, since the majority of angel investors are opting for opportunities in Internet, software, e–commerce and other virtual spaces. A total possible population for a mobile app launching in the United States, for example, might be up to 182 million people in 2015, according to Statista's numbers on smartphone users in the nation. The site also forecasts smartphone user population to grow to 220 million in 2018.
2. Definition of the Market Segment and Estimated Percent of Target Customers
Your product limits the percent of your market segment. Angel investors should ask: Who is this product for? Who is likely to want, need, and purchase this product? Are people already buying similar products, and if so, who are those people?
Consider an app that acts as a virtual storybook for babies. The obvious market for such an app would be new parents with smartphones. There are a total of 318 million people in the US; if 182 million have smartphones, then approximately 57 percent of the population has a smartphone. There are around 4 million babies born each year—applying some dirty math, we can assume that 57 percent, or around 2.28 million, of those babies have at least one parent with a smartphone. That's the target audience for our app.
This back-of-the-napkin math is rough: the population numbers used to arrive at the above percentages counted young children and older individuals, which are less likely to own smartphones. Child–bearing parents are more likely to own the devices, which means the target audience could be as high as 3 million. For ease of estimation, let's assume 2.5 million. Out of 182 million smartphone users, that's approximately 1.4 percent.
3. How Many of the Products Will Be Purchased At A Time?
If a company is selling software through licenses, businesses can purchase multiple instances of the product. Someone with a hot new cupcake recipe is going to sell in multiples as well; our baby app, however, is most likely to sell once to each user.
4. How Often Will The Product Be Purchased?
Does the product lend itself to repeat purchase? Is it a commodity or necessity that will be used up, so consumers must refill or restock? At first glance, a software product is going to be purchased once for each user, but what about new versions and upgrades? Are those free, or monetized?
5. What is the Intended Selling Price of the Product?
We'll look at two possibilities with our baby app example. First, the startup may charge for its app. Given app store prices, and depending on how much functionality the startup is going to provide in its app, price might range from 99 cents to $7.99. For the example, assume the startup charges $2.99.
The other possibility is that that startup offers the app free to users, but plans to monetize it through ads, in–app purchases, or professional relationships. In this case, the angel investor needs to see the startup's projections on how much per user the app might generate. For our example, let's assume the startup estimates $5 in revenue per user, per year.