A Market Mapping is a 3-hour exercise with an entrepreneurial team to create a map of a startup’s market opportunity. There’s no pressure on entrepreneurs to “pitch”, rather it’s a collaborative process designed to help both sides better understand the company’s economic potential. It’s a key step in our diligence and the beginning of our risk/return modeling.
- Better understand the qualitative drivers of a startup’s market opportunity
- Calculate the total addressable market (TAM) with bottom-up data
- Identify the key drivers of risk and value
- Mitigate our cognitive biases by using a common framework and decision criteria
- Collect key information for our decision model
- Segment opportunity into target markets and adjacent markets
- Create a bottom-up structure for calculating the Total Addressable Market (TAM) of each segment
- Assess each element of the structure using ranges
After the meeting we use our judgment and benchmark data to assess the remaining factors needed to complete our risk/return decision model. This includes key risks at each life stage of the company, market share, dilution, exit multiples, etc.
Ulu’s Decision Criteria: 10x PWM
Many VCs say they want a 10x multiple. If they invest $1 in a startup, they want $10 back at the end of the day. We say the same thing, but probability weighted. We look for companies with the potential to deliver a 10x or better probability weighted multiple on invested capital (PWM).
In addition to calculating PWM, we use the decision model to perform sensitivity analysis on our decision model to identify the key drivers of risk and return. We ask “where if we are wrong about an assessment, will it be material to our decision.
Regardless of our decision to invest, we share our final decision model with entrepreneurs. We hope to deliver value not just while sitting on boards, but also in our diligence process. As a result of the insights that emerge from this process, about 20% of our entrepreneurs change their business model or their go-to-market strategy.
Decisions vs. Outcomes
The final returns from any investment in a startup, the outcome, is driven partially by the quality of our investment decision and partially by fortune. No amount of diligence will guarantee a good investment outcome. We make early stage investments knowing that many will never return capital much less any profit.
The only thing we can control is the quality of our decision. We strive for decisions that are free from bias, include a comprehensive picture of risk, and have returns that justify the risk per our PWMOIC metric.
For further reading, here is a Kauffman Fellows Report article by Clint Korver on decision analysis in venture and the market-mapping process. The videos below provide a deeper introduction to the market-mapping process, and we encourage founders to review them before reaching out to us for meetings.