This episode covers market sizing and Go-To-Market (GTM) strategy for seed-stage startups, which is frequently the weakest link in an investment pitch.
The equation that investors are looking for is: $1 of investment in, significant multiple of revenue out.
Summary:
Founders often understand their product and customer but lack a concrete plan for actually reaching and selling to them — the “it’ll sell itself” or “we’ll just go viral” mindset is flagged as a common and largely fatal mistake.
The episode explains market sizing through TAM, SAM, and SOM (Total Addressable, Serviceable Addressable, and Serviceable Obtainable Market), narrowing from the broadest possible market down to a realistic, winnable slice of it. It stresses that these figures need to be defensible with real research, not optimistic guesswork, and that businesses confined to small markets like New Zealand alone will struggle to reach the scale investors look for, whereas targeting larger international markets can change the picture considerably.
We then focus on the mechanics of Go-To-Market and customer acquisition: building a scalable, repeatable sales engine. We distinguish tactics for B2C (customer-facing) businesses from B2B (business-facing) ones. We also cover distribution through channel partners, including the need to keep those partners properly incentivised, and raise considerations for expanding overseas: local offices, pricing, regulation, and localisation.
We close by encouraging founders to validate their GTM assumptions with real-world data which significantly strengthens a pitch.
Homework: Work out your TAM, SAM, and SOM for your product as it stands, and see if you can’t work it into the many millions of dollars; and devise some GTM strategy options, and figure out how to validate them.
Transcript:
Kia ora koutou, hello and welcome to Episode 11 of nzangels.com – a guide to raising angel investment in Aotearoa New Zealand. I’m Dave Moskovitz, one of New Zealand’s most experienced angel investors.
This is Episode 11 – Go To Market
Your Go-To-Market strategy, or GTM, is one of the most important aspects of a seed stage startup. In my experience, it’s usually the weakest part of an investment pitch. Founders often have a great idea of what their product should look like, a reasonable idea of what a customer looks like, but often not a clue about how they’re going to sell the product to the customer. Often they’re unsure of which customer segment to start out with, and some will make the frequently fatal error of trying to sell the product to the entire universe.
Everyone will want to buy it! The product will sell itself, they say. We’ll just go viral! I can’t tell you how many times I’ve heard this from founders – it’s been way too many to count – but each time, a small part of me dies and I try to be polite and not look at my watch or find excuses to leave.
In my experience, no product sells itself, and going viral is tricky, risky, expensive, and very hard to pull off. I apologise for pouring cold water on your dreams here, but you’re much better off investing your time and effort in understanding exactly who you’re targeting, how to reach them, and how to close sales.
Back in Episode 8, we talked about customers and markets, so if you haven’t watched, listened to, or read that episode, I suggest having a look. We’ll assume that you have a reasonable idea of who your customers are and how to aggregate them into markets.
Investors will be very interested in the size of your target market. This is typically expressed as TAM, SAM, and SOM. That’s your Total Addressable Market, your Serviceable Addressable Market, and Serviceable Obtainable Market.
As an example, let’s say that you’ve developed a scheduling system targeting dental clinics in New Zealand, and that your product will sell for $99/month. Your total addressable market size or TAM assumes that every single potential customer, ie every dental clinic, would buy your product. Rentech Digital’s Smart Scraper estimates that there are 533 dental clinics in NZ, based on data they scraped from the NZ Dental Association’s web site. So your TAM would be 533 clinics x $99 / month x 12 months/year, or $633,204 per year.
Your product has the most value for clinics with more than one dentist that don’t already have a scheduling system they like. There are no good stats for NZ for how many of those 533 clinics have more than one dentist, but overseas it’s roughly half. Your initial market research tells you that about half of those multi-dentist clinics don’t already have a scheduling system they’re happy with – those are the ones you can realistically sell to. So, using optimistic round numbers: 300 clinics with more than one dentist, half of which are up for grabs, at $99/month, over 12 months. Our Serviceable Addressable Market, or SAM, is 300 x 0.5 x 99 x 12, or $178,200.
How many of those do you think you’ll realistically be able sell your software to in the next few years? Again, let’s be optimistic and based on various factors – the number of sales people you have, number of the dentists that are about to retire, ones who have dud listings in your data, and so on, say that you’ll be able to sell to 25% of them in that timeframe. That 25% number is a top-down guess – you’d be much better off working out this number as a bottom-up calculation based on the number of sales people you have, their documented conversion rate, etc. But assuming that the 25% guesstimate is correct, our Serviceable Obtainable Market or SOM would be $44,550 per year.
And now you can see why doing business focused on NZ is super hard. You’re hardly going to be able to do anything for $45k per year, much less build a business. And hopefully you can see why most investors aren’t interested in businesses with TAMs less than the many millions of dollars.
In a much larger market, things might be different. Let’s target the USA, with 200k dental clinics, 100k multi-dentist, again half of them already have scheduling systems they like (which you’d need to re-verify in this new market), and raise our price to $1000/month (which again you’d need to validate would be acceptable in that market). Now our TAM is $2.4B, SAM $600m, and SOM (assuming we’re still gunning for 25%) is $150m. Now we’re talking about numbers that could support a viable business.
You need to be able to defend these numbers. As an example, you’d need to ground-truth your TAM number against industry stats like total software spend by dental clinics, along with research on what your prospective customers will pay for your service. Is it closer to $99/month or $1000/month? That’s a big difference.
The trickiest bit is the final bit – how are you actually going to obtain those customers? This is where your Go To Market strategy comes in. You can’t just say, if we only had 10% of the market we’d be rolling in cash! Mind you, I’ve heard that line many times in pitches and just shake my head. 10% seems like a modest aspiration, but it says absolutely nothing about how you are going to achieve it. Investors are going to want to know these details and are certain to grill you on them.
There are many ways to acquire customers. As we discussed in episode 10, word of mouth is attractive as it’s free, but it just doesn’t scale. The equation that investors are looking for is, $1 of investment in, significant multiple of revenue out. How can you build a predictable, scalable, repeatable sales machine?
For B2C businesses, this might be social marketing or ads. Can you show a strong Lifetime Value : Customer Acquisition Cost ratio? As we said in Episode 10, investors will be looking for a ratio of at least 3:1. If you’re in a large market, can you break it down into smaller markets? This could be by geography, demographics, or some other dimension where you have an advantage. Go after the low hanging fruit first, and set up a beachhead market where you’re most likely to find success and learn the most about how to acquire customers. Can you get the product itself to do some of the sales work with product-led growth, where the product itself generates referrals for new customers?
If you’re B2B, there’s a whole science around lead generation, and closing is fairly well understood, by investors too. Hubspot have a great guide to developing a B2B GTM strategy – read it. You need to move your prospects through the AARRR funnel, and maximise your conversion rates at each stage. You also need to worry about customer success and support, and figure churn, or what percentage of customers don’t resubscribe, into your calculations.
New Zealand is so small, and our hierarchies so flat, that Kiwis don’t normally worry about distribution, or indirect ways of reaching your prospective customers. But distribution is often critical in larger markets. That might mean setting up channel partners. Going back to our dental clinic example, are there other companies that sell stuff to dental clinics for whom you could be another string to their bow? It could be the people who sell X-Ray machines or dental chairs – next time they have contact with one of *their* existing customers, they can just ask “would you like some scheduling software with that?”. That saves you the effort of establishing a direct relationship with every dental clinic, which you’ll pay for by giving the distributor some commission.
Running channel partners is a very different game from either B2C or B2B. You need to figure out how to motivate your channel, and keep them motivated. You want to make sure they ask their customers to “supersize” to include your product. If their sales team members are earning $10 a pop in commission for selling your thing and $1000 a pop for someone else’s thing, it doesn’t take much imagination to figure out where they’re going to put their energy.
If you’re selling overseas, are you planning on establishing subsidiaries and/or in-country offices? How will those sales teams operate? How does that affect your CAC? Will you use the same pricing in each jurisdiction? Are there any regulatory compliance issues you might face in your new location? Or localisation costs, eg languages, currencies, post codes, etc?
There are a lot of details to consider, but investors are likely to ask you about these things, so it’s a good idea to front-foot this.
It’s best to have some real world data to tell your prospective investors about, rather than just theorise about how things might work out. Get out of the building. Hop on a plane and investigate overseas markets firsthand, if that’s in your future plan. Try out several different ways of getting your product in front of customers before you invest in scaling. Be creative. And don’t be deterred – selling is hard, and a critical problem to solve, but once you start getting real traction, you’ll be on your way.
You could, and possibly should, spend significant time and effort on your GTM strategy. As I said, it’s typically the weakest part of a pre-seed or seed stage pitch. The last thing you want is a potential investor to think, oh God, not another entrepreneur who thinks their product will sell itself! The more relevant data you have, the more convincing your pitch will be.
Part one of your homework is to work out your TAM, SAM, and SOM for your product as it stands, and see if you can’t work it into the many millions of dollars. Part two is to devise some GTM strategy options, and figure out how to validate them.
Today’s pithy quote: The equation that investors are looking for is: $1 of investment in, significant multiple of revenue out.
If everything goes your way, what will your business look like at scale? Our next episode will focus on what great looks like.
So until then, ka kite!
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