Understanding the Terrain: Investigating Market Size and Segmenting the Market
Embarking on the journey of an agrifoodtech startup is a thrilling venture, laden with infinite possibilities. Mastering the market size, successfully segmenting the market and identifying target customers are vital steps that form the backbone of your business. As an investor, we’d like to spotlight some opportunities that agrifoodtech startups can leverage when analysing their market to unfold their full potential.
Investor’s insight 1: tapping into Market Size Analysis
Enthusiasm and optimism are inherent traits of many startups. These qualities fuel the drive to innovate and can instigate ground-breaking change in the industry. However, this unwavering optimism can sometimes paint an excessively rosy picture of market potential, leading to an overestimation of the Total Addressable Market (TAM), Serviceable Addressable Market (SAM), and Serviceable Obtainable Market (SOM). While it is indeed important for venture capital investors to believe in an outsized market potential for your solution, it is equally important to show realism in what market you can address today, compared to the potential in the future. This provides you the opportunity to show a good understanding of your market which adds credibility to the overall investment case.
Therefore, the path to realistic market estimation lies in a balanced application of both top-down and bottom-up market analysis approaches. Balancing optimism with pragmatism can help startups accurately evaluate their true market potential and create strategies that are both ambitious and rooted in reality.
Suppose your agrifoodtech startup has developed an innovative precision agriculture solution. From a top-down perspective, you might start with the total arable hectares globally, then narrow down for example to your specific region or crop. In contrast, a bottom-up approach begins in the trenches, focusing first on your startup’s existing market based on your current customers’ pipeline. This method then extrapolates outwards, assessing the possibility of expansion across specific customer segments such as types of farmer or ag input providers. We can’t stress this last point enough; showing that you’ve identified what segments to focus on and have an idea of the depth this segment can offer will place you ahead of the curve quite easily!
Recently we have seen a good example of this bottom-up approach where the entrepreneur clearly showed that she would focus on large farms above a certain hectare size and could explain how large that segment was. Moreover, she could also explain how the company projections translated into the number of individual customers required and hence market share in the target segment. The latter provided us with a higher quality indication how achievable these projections would be.
By comparing the results from the two distinct market sizing approaches, you’re establishing a comprehensive understanding of your market. It’s important to note that the figures generated from the top-down and bottom-up approaches don’t necessarily have to match exactly, but they should ideally provide a comparable estimate of the market size.
By employing this dual strategy, you’re creating a robust framework for understanding your market, a stepping stone towards unlocking the full potential of your agrifoodtech startup. Remember, knowledge of your market is not static. It grows and evolves, much like your budding enterprise. Stay tuned for our 2nd blog as we share investor’s insights in segmenting the market.