tam-sam-som

What Do Investors Look For In A Business Plan?

When looking for investment opportunities, investors, especially when it comes to early-stage startups in the technology sectors, beyond other potential metrics, primarily look for how big the potential market might be through what’s known as the TAM, SAM, and SOM frameworks.

Understanding how venture capitalists think

A venture capitalist is an investor that provides capital to start-ups that have high growth potential. In other words, for a potentially high return, the investor endows the company with 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.

Indeed, some investors focus on a longer-term strategic approach, while others might primarily look for growth opportunities that might make a good exit.
 

In general, most investors look for interesting opportunities that would represent a good long-term investment.

How might those opportunities 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:

total-addressable-marketIn 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 the 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 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 in 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 of 3%, you will have a turnover of $300K in 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 in 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 at communicating your idea, the so-called pitch.

And suppose you’re looking for a business angel, venture capitalist, or investor. In that case, that means you might need a strategic figure able to help you scale your business as quickly as possible.

Related Market Development Frameworks

TAM, SAM, and SOM

total-addressable-market
A total addressable market or TAM is the available market for a product or service. That is a metric usually leveraged by startups to understand the business potential of an industry. Typically, a large addressable market is appealing to venture capitalists willing to back startups with extensive growth potential.

Niche Targeting

microniche
A microniche is a subset of potential customers within a niche. In the era of dominating digital super-platforms, identifying a microniche can kick off the strategy of digital businesses to prevent competition against large platforms. As the microniche becomes a niche, then a market, scale becomes an option.

Market Validation

market-validation
In simple terms, market validation is the process of showing a concept to a prospective buyer and collecting feedback to determine whether it is worth persisting with. To that end, market validation requires the business to conduct multiple customer interviews before it has made a significant investment of time or money. A transitional business model is an example of market validation that helps the company secure the needed capital while having a market reality check. It helps shape the long-term vision and a scalable business model.

Market Orientation

market-orientation
Market orientation is an approach to business where the company focuses more on the behaviors, wants, and needs of customers in its market. A company will first target a niche market to prove a commercial use case. And from there, it will create options to scale.

Market-Expansion Strategy

market-expansion-strategy
In a tech-driven business world, companies can move toward market expansion by creating options to scale via niches. Thus leveraging transitional business models to scale further and take advantage of non-linear competition, where today’s niches become tomorrow’s legacy players.

Stages of Digital Transformation

stages-of-digital-transformation
Digital and tech business models can be classified according to four levels of transformation into digitally-enabled, digitally-enhanced, tech or platform business models, and business platforms/ecosystems.

Platform Business Model Strategy

platform-business-models
A platform business model generates value by enabling interactions between people, groups, and users by leveraging network effects. Platform business models usually comprise two sides: supply and demand. Kicking off the interactions between those two sides is one of the crucial elements for a platform business model success.

Business Platform Theory

business-platform-theory

Business Scaling

business-scaling
Business scaling is the process of transformation of a business as the product is validated by wider and wider market segments. Business scaling is about creating traction for a product that fits a small market segment. As the product is validated it becomes critical to build a viable business model. And as the product is offered at wider and wider market segments, it’s important to align product, business model, and organizational design, to enable wider and wider scale.

Strategy Lever Framework

developing-a-business-strategy
Developing a successful business strategy is about finding the proper niche, where to launch an initial version of your product to create a feedback loop and improve fast while making sure not to run out of money. And from there create options to scale to adjacent niches.

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