A venture capitalist is an investor that provides capital to start-ups which have high growth-potential. In other words, for a potentially high return, the investor endows the company of equity for a stake within it.
It is important to highlight that not all investors and venture capitalists look for the same things, or focus on the same aspects of a business.
In general, though most investors look for interesting opportunities that would represent a good long-term investment.
How those opportunities might look like? It is crucial at this stage you get acquainted with the market you’ll be operating.
This means you’ll need to understand three key concepts: TAM, SAM, and SOM:
In short, you might want to start by understanding the size of the Total Addressable Market.
From there you might want to understand the size of the Serviceable Addressable Market.
And what your Serviceable Obtainable Market will be.
Once you have defined he SOM you can make a five-year projection of the expected sales (assuming you don’t have revenues yet).
Based on that projection, you will be able to apply a 3-5X multiplier on the revenues, based on the market and business model you identified.
Quick case study
- Imagine you are evaluating how much is your marketplace idea is worth.
- You operate in a market where the TAM is $10 Billion.
- That your SOM is 0.5% of that market at the year 5th.
- This means at the year five you will have a volume of transactions on your marketplace of about $10 million.
- As a marketplace, you might make money through transactions fee.
- Assuming a transaction fee at 3%, you will have a turnover of $300K at year 5th.
- Considering that a marketplace business model is highly scalable and that the TAM is pretty big, you might want to apply a high multiple, let’s say 5X on the revenues.
- This means that at the 5th year your company will be worth $1.5 million.
Therefore, if the business angel invests:
- 10% = $150.000
- 20% = $300.000
- 30% = $450.000
- And so on…
Keep in mind the example above is just a simple case study.
The estimates will depend on what assumptions you’ll start with from evaluating your company.
So how big is the TAM? How much of that market can you service in 3-5 years? How will you make money? And so on.
Also, the ability to convince the business angel might depend on how good you will be in communicating your idea, the so-called pitch.
Resources for your business:
- What Is a Business Model? 30 Successful Types of Business Models You Need to Know
- The Complete Guide To Business Development
- Business Strategy: Definition, Examples, And Case Studies
- What Is a Business Model Canvas? Business Model Canvas Explained
- Blitzscaling Business Model Innovation Canvas In A Nutshell
- What Is a Value Proposition? Value Proposition Canvas Explained
- What Is a Lean Startup Canvas? Lean Startup Canvas Explained
- What Is Market Segmentation? the Ultimate Guide to Market Segmentation
- Marketing Strategy: Definition, Types, And Examples
- Marketing vs. Sales: How to Use Sales Processes to Grow Your Business
- How To Write A Mission Statement
- What is Growth Hacking?
- Growth Hacking Canvas: A Glance At The Tools To Generate Growth Ideas
- Distribution Channels: Types, Functions, And Examples