Sizing Markets in Supply Chain & Mobility

Specifically outlining the dollar opportunity of a particular problem

By: Santosh Sankar

Market size is something venture investors spend a lot of time trying to understand. At the seed stage, apart from a quality founding team, having a thorough market understanding is a top priority. Founders in our industry still struggle to size their market and convey associated growth in an accurate way. In part one of this three part series, let’s unbundle the “how big is this market?” ask made of founders.

Market sizing helps an investor determine if the problem a startup is focused on is large enough to yield a “big company” that can generate a venture scale return. The addressable market should specifically outline the dollars spent trying to address the problem a startup is solving and/or the money wasted because the problem persists.Growth rates are also important to point out — a small but fast growing market, a large stable market, and a shrinking market all have varying implications. Additionally, based on your business model/go-to-market, having clear statistics on the number of “accounts” or “units” in the addressable market are important — dollars tend to “attach” to this figure. This is referred to as a top-down approach to sizing.

It’s also important to size bottoms-up using “units” and “revenue per unit” figures. While this analysis usually yields a smaller value, it shows founders have a deep, first-hand understanding of their market as well as the innovators and early adopters that can help drive product/market fit. I tend to find such an analysis along with a top-down approach to be helpful. In a small but fast growth market, showing sizing across time is also helpful. In general, investors are looking for billion dollar markets where the ability for small penetration yields large revenues.

Due to this dynamic, founders in overstate their market. In supply chain and mobility, market sizing can be overstated or mis-calibrated — easy to do when everything around us has been on a truck, cleared through customs, or distributed via a warehouse. Remember that headline numbers like GMV, freight spend, and technology spend are generally not good market sizing figures (they are too broad) and imply a lazy approach to understanding the market.

Let’s use an example. If you’re building routing software for trucks, your top down market should not be TMS or technology spend. Instead, it is the industry spend on specific modules related to route planning and navigation as well as the costs associated with poorly planned routes and delayed deliveries. Also important is the number of fleets, tractors, and truck drivers along with growth rates. I point to these three figures given they have implications on the total dollar value of the market and also the startup’s business model. Bottoms-up, if my business model charges per truck, I would focus on the number of tractors, growth in new tractor purchases, mix between large fleets and owner/operators, distribution across long haul/ last mile/drayage, and pricing per tractor. If we can have an estimate of spend variations between long haul, last mile, drayage, that would help as viability of an early product and go-to-market comes to question. Bringing both together, there’s now a specific yet holistic view of the routing software market.

I understand that market sizing numbers don’t always exist in the public domain and hard to assemble — it requires research, data digging, and educated and justifiable assumptions. I would not that this can be iterative as various scenarios or analysis are conducted to get investors (or founding teams) to a point of comfort and conviction. Starting simpler and layering “reasonable complexity” is a helpful tactic — trying to build from an overly granular base can be daunting but also unhelpful (too in the weeds). The supply chain has the benefit of having process (warehousing to last mile) and layers (assets, technologies, services) — these can naturally help size a market in a thoughtful manner without too little or too much detail. Ultimately, the purpose is to convey a real understanding of the dollars attributable to a certain problem — business models are built on the back of these market figures.

Would love to hear other tactics founders have used to help navigate the constant question, “how big is this market?”

Originally from Issue 50 of the Dynamo Dispatch.