Ask The VC: Does Addressable Market Matter?
Brad responds to a question about addressable market. Does it matter? His conclusion: "Almost every market sizing presentation is incorrect - by a lot. Enough to make it irrelevant."
He is right, of course, about the incorrect analysis. But not about the irrelevant part. Given that 90% of all new products fail and only 11% of all venture investments get to any liquidity, by definition the market sizing by entrepreneurs (and venture investors) is incorrect 90% of the time.
But the question should be: what is an addressable market? The big mistake is trying to calculate the addressable market without a rigorous definition. The mistake is defining the terms of an addressable market incorrectly. Most markets get defined by their solution: the auto market, the cell phone market, the software-as-a-service market.
But these are not markets; they are solutions. A market should be defined by the customer need and the customer population. And the need is the job that customers are trying to get done (and all the outcomes of performing that job). It is not the solution that helps them get the job done.
So yes, the concept of an addressable market matters - it is essential. Fixing the problem with addressable market analysis is the first critical step in improving the dismal success rate for new ventures.