You want to start a business? Don't tell me how big the market is, tell me how big the problem is.

So, a light bulb has come on over your head. You’ve had a great idea for a business. Awesome! Let’s get busy putting a dent in the universe.

Hang on a second - cool your jets. There’re a few things we need to do before you charge off and start building products and writing an investor deck.

You need to test your idea to check that it has legs. There are four simple tests you should do. I call these “The Ingredients”. The four things your business proposition must possess if it is to stand any chance of success.

The tests are four simple questions:

• Am I solving an urgent problem? (NEED)
• Do enough people have this problem to make solving it worthwhile? (MARKET SIZE)
• Why will people select my product/service to solve the problem rather than someone else’s? (DIFFERENTIATION)
• Do the unit economics make solving this problem worthwhile? (UNIT ECONOMICS)

I looked at the first ingredient in my article “You want to start a business? Show me what problem your solving”

Here I’m going to focus on the second ingredient. “Do enough people have this problem to make solving it worthwhile”.

Introduction

This is about the size of the market and it helps you and investors to understand if this is potentially a scale business, a niche or a pop up shop for Christmas.

Let’s start with what I normally see from founders. A slide on a seed-round pitch deck that has been downloaded from some business plan guru’s web site, entitled something like “Total Addressable Market”. And there planted in the middle of the slide is a number so big, it makes your head spin. In front of the number is proudly written the words. “Our market is huge”

The number may be credited to one of the big research firms or it may have come from Google. But I would predict that in most cases the effort and rigour that's gone into producing that number is close to zero.

I see this approach all the time and it grinds my gears (does it show?). Not because it’s a lazy box-ticking exercise, but because it is useless and tells you or your potential investor, absolutely nothing that is helpful to them.

A few months ago, I saw a plan for a mobile gaming start up. They proudly pronounced in their deck that the global gaming market in 2017 was worth over $109 Bn – and that was it. What is that supposed to tell us, that’s of any use about determining the size of the opportunity they’re tackling? I’ll put you out of your misery; it tells us the square root of f*ck all.

When you’re assessing the market opportunity, you’ll know in your gut if you have really found the answer. Whether you’re talking to yourself or investors, you need to come up with an answer that tells you something useful, relevant to your business and the market you are attacking. So here’s what you need to do

How big is the problem?

Initially, I’m not interested in the size of the market, I’m interested in the size of the problem. Here’s a couple of examples that illustrate what I mean.

I have worked for the last six months with a company producing environmentally friendly packaging. An answer to the scourge of single-use plastics.

We could say to ourselves and others: “The bottled water market globally is worth £145Bn” Pretty impressive big market we’re playing in. But that doesn’t tell us anything useful.

Instead we could give a better idea of the size of the opportunity by describing the scale of the problem, like this:

“Every minute 1 million plastic bottles of water are sold globally. Less than 10% of those ever get recycled. In other words, over 1 billion bottles of plastic water per day, become pollution as either litter, landfill, or waste in the sea. If things don’t change, by 2050, there’ll be more plastic in the ocean than fish”

No-one could read that and not conclude that this is a huge problem we’re talking about.

Contrast that with a business I met about nine months ago which was organising adventure games, which were accessed and run on a mobile app. Like a treasure hunt with a twist.

They used the very generic market size approach: “The fitness and wellness market in the UK is worth £21Bn a year” That says nothing useful.

Their description of the size of the problem was: “15 million people in the UK keep themselves fit. Most are not gym members and look for an alternative. One option is to take part in adventure games, meeting in parks near you with like-minded people or friends and spending an hour solving a mystery, while taking exercise”

That description is screaming “niche” at me and there’s nothing wrong with that, providing that’s what the founders intend.

But in just two examples, you can see how misleading a global market size, on its own, can be. Both business ideas had big market values, but one is a tiny opportunity and one is enormous. We flushed that out by focusing not on the size of the market, but on the size of the problem.

But understanding the size of the problem alone is not enough. Next, we need to understand how valuable the problem is.

How valuable is the problem?

There are some problems that people will pay a lot of money to solve. For example, if someone could invent a cure for cancer, that would be solving a very big problem. I don’t thinks it’s controversial to say people would get their wallets out to pay for the cure. The problem is big and valuable.

If we go back to my environmental packaging example, that’s clearly a big problem, but today, many people aren’t able or willing to pay the premium that non-plastic packaging often comes with. You may take the view that this will change as the problem becomes more acute and awareness grows. So that’s a big problem, but arguably not as valuable as its size might suggest.

A third example is a fitness app I saw recently. They were targeting the 120 million people in the UK and the USA who wanted to keep fit, but who weren’t gym members. Clearly a big problem, but a valuable one? So far it appears not. People can access so much fitness activity for free, that they aren’t willing to pay for an app. A big market but not a valuable one.

Three different businesses, that on the face of it are solving a big problem, but the problem in each case has a different value.

So now that you have understood that you are solving a big and valuable problem, you’re in the perfect position to get specific. Next, we want to look at addressable market. That’s looking not at the market, but at your market.

Your market

Fifteen years ago, a friend and I started one of the UK’s first online billing service providers. It sounds old-fashioned now, but I promise at the advent of what was called Web 2.0 (around the turn of the Millennium), the idea of big companies getting their bills off paper and online, was about exciting then as Blockchain is today.

The benefits of getting bills online were obvious, and the threat that your competitor might do it before you, made it a big problem that we were solving. People were willing to pay a lot for us to do it. So, the problem was big and valuable. But the “Your Market” test was tricky.

I can’t remember the exact number, but let’s say industry research said this market was going to be worth £3Bn in five years. That described the entire market.

Our task was to work out how much of that was our market. In other words, how much of the entire market was available to us and up for grabs. This was roughly how we went about it.

We started by assuming that some people wouldn’t change, and paper bills would persist. We guessed that would be 50% of the market.

Then we acknowledged that buried in the remaining companies, were thousands of SMEs that were too small for us. It just wasn’t economically worth our while. We estimated that this would eliminate 75% of the remainder.

Then we accepted that many companies would try and do it themselves and not outsource it. We figured that would take away about half of what remained.

That whittled the number down to £560M. Admittedly a less attractive target that £3Bn, but it was realistic and helpful, and still left us with a big market to shoot at. But, unlike the guys who pluck a big number from a Gartner report and use it regardless, we really believed our number, and it gave us the confidence that this was a worthwhile venture. And later when we sat in front of investors, it was defensible. They clearly agreed as they put £1M into our seed round.

That was one way of doing it, there are others. In many businesses, the fitness app being a good example, you could do it by figuring out how else people could spend their money. So instead of spending £20 a month to subscribe to their fitness app, people could join a gym, sign up to spin classes, join a running club. The list goes on. Work out what each of those are worth and back them out of your universal market size.

It doesn’t really matter what your method is. What matters is that you take your rose-tinted spectacles off and recognise that the great big number in the research report with an endless trail of zeroes, isn’t the size of your market or your opportunity.

It might be a starting point, but until you have sprinkled a large dose of reality over it and translated it from size of market, to size and value of problem, and then been honest about how much of that problem is yours to solve, your number remains meaningless.

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About me

I’m am an entrepreneur. Having built and sold three businesses, I now advise growth companies on scaling up and how to navigate the exponential complexity that comes with fast growth. You can contact me on pwhent@yahoo.co.uk or 07802 856000. I have never knowingly declined an opportunity to chat about early-stage business!

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