Over the course of a typical month, the Emerging Companies team reviews 80 to a 100 opportunities, and we probably end up meeting around 30% of those businesses with a view to making investments and working together.

As you might imagine, this gives us an excellent insight into what companies in the UK’s startup ecosystem are good at when it comes to presenting themselves, as well as the areas where these entrepreneurs can sometimes be found wanting.

Overall, though, it is worth pointing out that the way in which the ecosystem in Britain has developed over the past few years – thanks in no small part to the accelerators and host of other startup resources that have sprung up around the country – means that the startups of today are a lot more polished and clued-up when they start looking for external funding from VCs.

One of the most significant shortcomings relates to how businesses size up their market opportunity.

But where do they go wrong? Often there are basic gaps in some propositions. One of the most significant shortcomings, in our view, relates to how businesses size up their market opportunity. 

Like many venture investors, we favour founders that want to tackle large addressable markets: but what we really want to know is, can the founders make a compelling case that connects what the business is offering to the potential opportunity and the numbers they are presenting to us?

A good litmus test is the ability to articulate the addressable market opportunity and explain how they will extract value from it.

Sadly, the majority of the time, there is no clear link between the solution and the proportion of the market a business is aiming to capture. Of course, big numbers sound impressive, but if the founders are unable make to a compelling case for how they’re going to achieve them, the whole exercise becomes counterproductive.

Unfortunately, it is too often the case where founders tend to be tunnel-visioned into engineering a big number for the investors.

There is no right and wrong way to size the market. But it’s never promising when there’s only one measurement of market size from a top-down approach. We would much rather the business takes a bottom-up approach to sizing up its market opportunity.

Imagine a business which was targeting the online remittance market: it’s not enough to simply say, OK the market is worth a certain amount and we are aiming to take 1% of it.

Equally, if a cybersecurity firm were to assess its opportunity just by working out how much businesses currently spend on protecting themselves, that would be a bit short-sighted.

The thinking needs to be more granular: for example, look at who the target customers are actually going to be and how the company is going to reach those customers. In the case of the remittance firm, are they smaller or bigger-ticket customers? And what about the competition: is the market quite concentrated, and dominated by just a handful of major players? Do these incumbents have a lot more capital?

For the cybersecurity company, we would be more interested in precisely how they were going to access customers, for example by working with partners and identifying what proportion of the market these partners would be able to give them access to.

Look at who the target customers are actually going to be and how the company is going to reach those customers.

It is in founders’ best interests to be as transparent as possible when it comes to identifying their opportunity and how they get value from it, as well as whether the source of any competitive advantage is time – in the case of first-movers – or technological barriers. Rather than leaving the investors to make conservative assumptions, founders can really influence them with a focused market-sizing picture.

Of course, the Emerging Companies team is sympathetic to the challenges many of these startups face: they are often new business models with innovative solutions that might not fit so well into existing market segments or analyses. But this makes it all the more important for founders to be able to demonstrate and explain exactly how they are going to deliver value. Use multiple approaches, differing sources, and produce conflicting results if that’s what happens. This is an imperfect science, and will help build up a picture from several outcomes.

When performed properly, market sizing can be a powerful tool to help founders better understand their business and the market on a more granular level.

Be honest with yourself on how big the market truly is…

The opinions and views expressed in the above article are for general information purposes, they should not be construed as recommendations or advice for any individual nor should any action be taken on account of the information presented.  The views and opinions have been provided by Sanchit Dhote of Investec Bank plc and are subject to change.