Too many entrepreneurs confuse their addressable market with their market size. It's rare that these two numbers are the same. And, mixing them up can be a problem.

The market size is the total revenue generated in a particular segment of the economy. For example, the internet advertising industry may be X billion dollars this year - the total amount of money spent on advertising on the web.

The addressable market is the total amount of revenue that your company could generate if it acquired every potential customer. The entire group of potential customers is often referred to as the addressable population.

The addressable market is unique to your narrow industry focus and therefore is often different from the high-level market size numbers that analysts quote about that sector of the economy. If you are an ecard company - your addressable market is not the same as the online advertising market size. Your addressable market is a sliver of that market. Getting this wrong is bad.

Since the addressable market is often much smaller than the market size, using the market size as your addressable market typically means that you are over-stating the opportunity. When VCs see this they draw one of two conclusions:

1. You don't know the difference between an addressable market and a market size, implying that you're not competent management, or
2. You're trying to dupe them into thinking the opportunity is bigger than it is and your not going to be an honest partner.

Either way you look bad.

Get the addressable market size right and impress your investors.

Comments

[JTreiber]

Great post Mark,

This is a huge distinction but one that is so important to make and one that many people (including myself initially) didn't fully grasp. It's one of those many little things that will stand out in a VC meaning which will indicate if you know what you're talking about (and the lingo).

[Mark Davis]

JT--
I agree, this is a big deal. It's better to learn it before the executive summary is sent or meeting is had.

[Michael Young]

This is definitely something important to point out, but I don't think the advertising/ecards example is the best way to highlight the distinction. It's pretty obvious that the addressable market for ecards isn't the entire advertising market. The problem comes when there is a subtler difference, which isn't always easy to pick up.

Is the educational software industry a better example? The market size would include all high schools/colleges/universities in the country. The addressable market wouldn't include all of those, though, because many cannot afford expensive software or prefer to use something proprietary.