The Internet is full of IT market forecasts with highly precise predictions of product sales 5 years from now. Will citing a piece of research convince an investor? No. A $1b market forecast in 2021 does mean that the investor should open up the check book and invest in your startup with zero sales.
How to use these market forecasts? Here are some thoughts:
- Always approach market sizing from multiple angles. A top down market research estimate is one source. Trying combining it with a bottom up analysis, look at how the IT budget of one company could change and extrapolate that to the entire market.
- While forecasts by market research companies might be highly speculative, their quantification of today's market is probably reasonably accurate. Established firms have been around for many years, gathered input from many sources, including sanity checks such as adding up the turnover of all the suppliers in an industry. Your company is unlikely to be the size of IBM in 2 years.
- IT as a whole does not grow that fast anymore, single digit % growth every year. What fluctuates are sub segments inside the overall IT spend. When you are sizing your market, think about which IT spend category are you going to cannibalize?
- Market research is a useful source of "boxes" in which a VC can put you. "Where do you sit?" is probably a question you get often. While the numbers might not be 100% correct, market research gives a shared vocabulary about how to think about a market, and whether things are roughly big or small.
- Related to this, while VCs might not believe the point forecasts of market research reports, the junior analyst at the VC firms is likely going to use them as a starting point in due diligence. It is good to be prepared and go through the same process as she will.
- When selecting which market research firm to use as a source, think about not only whether they produce data that exactly matches the category you are in, but also look at the breadth of their overall coverage. A firm that covers a lot of ground will provide a nice broad, consistent definition of the world of IT.