Editor’s note: David Gardner is founder of Cofounders Capital in Cary and is a regular contributor to WRAL TechWire. He and other columnists are part of our regular Startup Monday package.

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CARY – I rarely ever hear an investment pitch where the entrepreneurs accurately define their market size.  Yes, healthcare is a multi-trillion-dollar industry but that’s not your market size unless your business plan includes selling every medical device, service, drug and technology there is to every single sector within the healthcare continuum.

David Gardner (Cofounders Capital photo)

Market size is important to investors because they need to know the size of your opportunity in relation to several other factors.   For example, a larger market size can absorb more competition.  Angel and early-stage investors are typically more tolerant of smaller market sizes because they don’t need as big of an exit to realize a good return.  A later-stage investor, owning only a small percentage of a venture, might need to see the potential for a half billion dollar exit to justify the ten-X return they seek.

The question for determining market size seems simple enough.   If everyone who is a potential customer for your product buys it, then how much revenue would that generate?  Like an onion, there are many questions that come in layers beneath this first question.

Let’s say you want to sell a chemical-based sleeper cab air conditioner to long distance truck drivers so they can save gas by not idling their engines at night while sleeping.  If you sell these for $10K each and there are 10,000,000 trucks with sleepers in the US then your market size must be $100,000,000, right?

Not so fast!

Some drivers prefer to sleep in hotels even if they have a sleeper cab.  Other trucks are driven by two-person teams so one is always driving while the other driver sleeps.  Some trucks operate exclusively in cool climates where air conditioning is not necessary.    You get the picture.   Real markets are almost always much smaller than initially projected and it takes a lot of research to really understand the size of any market.

Sophisticated investors may challenge you on your market sizing but they know that the bigger issue is determining how an entrepreneur thinks and processes data.  They may disagree with you but they will respect that you are analytical and that you have taken the time to think deeply about the size of your market and how best to approach it.   They know that an unsophisticated market sizing is the sign of an unsophisticated entrepreneur and that is a much bigger problem than a small market.

Once you have accurately sized your market, there is still the question of how much of that market do you think you can realistically sell.    This part of the sizing is more art than science.   There may be a million potential buyers for your product but will they buy?   How many within your market will opt for competitor offerings or be content with no-cost substitutes or manual processes?   How big of a problem are you trying to solve for your potential customer and of all the problems they are facing, how does the one you are addressing rank in their minds?  Are there other marketing dynamics at play?  For example, in our truck sleeper AC example, is the strategy of truck transportation companies to move to self-driving trucks in the future and as such be less willing to invest in the older modalities they hope to phase out?

I call these the “math market size” versus the “real market size”.  The only way startup entrepreneurs and early stage investors are going to figure out the “real market size” is by getting in the field together and talking to subject matter experts and potential customers.

Don’t just skip over market size with some generic number you pulled off the internet.  The more you understand your real market size, the more you are going to understand your business in general and the more investable both you and your venture will be.