Market Sizing and Timing in the Venture World

The month of May continued to be an exciting time for Moonfire and European tech, with our fund announcement, strong follow-on rounds and new investments. In this month’s newsletter, we explore the components of market sizing and timing in the venture world. We also have a portfolio fundraising update and are excited to announce that we are hiring!

Determining Market Size for Innovation

Understanding market potential and sizing is at the core of any founder or investor wanting to transform society. To be a great early-stage venture capital investor, a VC must identify new massive market opportunities that will produce the next wave of great startups before everyone else. And then select the foremost company out of the several startups that may be playing in a new market. Furthermore, large markets are non-obvious in the beginning. Just ask the investors who passed on Airbnb because they believed no one would want to stay in a stranger’s home, or those who passed on Snap because they thought it was just a sexting app.

There are numerous approaches to market sizing and execution - right from Peter Thiel's framework of picking a niche that can be monopolized to Keith Rabois' belief that all customers can be broadly targeted at first simultaneously. There are also multiple ways of technically sizing the market - whether it be Total Addressable Market (TAM), Serviceable Available Market (SAM), Serviceable Obtainable Market (SOM), or taking a bottoms-up or top-down approach. But interestingly, the one factor that remains a constant across these frameworks and approaches is the question 'why now?'.

Essentially, timing combined with the direction of market growth is often more important than current market size itself. Whilst large markets optically demonstrate a big opportunity, they also entail competition and major difficulties with differentiation. On the other hand, small markets that grow concentrically can expand and become a large and compelling opportunity over time. Klarna, which started by enabling online payments and now is offering broad payment solutions or an alternative to credit cards, is one company that revolutionised an industry. Ultimately, they can provide credit instantly, which is an order of magnitude improvement on credit cards.

This shows us that the ancient retort of 'market is too small' might be a fallacy as what’s more important is envisioning different market forces and how a company can actually evolve the market, or secondary markets around it. At the center of this lies the determinant of timing. As a venture capitalist you cannot be too early or too late. In order to gain a competitive advantage, the goal should be to get there early enough so that no one else can understand the underlying market dynamics. You don’t want to be so early, however, that there is a mismatch between market availability and market demand, which leads to burning cash to create a market that people do not want to purchase in. Simultaneously, you must be late enough that market forces, technological provisions and user behavior are all gradually signaling for a particular market opportunity, but not too late that the market is crowded and differentiation is tested.

One framework that demonstrates this well is Don Valentine's Sequential Identification Model. Through this approach, Valentine leverages domain expertise to identify and understand a large new market and then applies a first-principles-led logical approach to spot subsequent large markets that could evolve as a function of the first market. By looking at market needs and analyzing supply needs and demand consequences of the initial market, Valentine can map out novel market opportunities sequentially.

Lastly, history has shown us repeatedly that investing cycles (especially consumer) and market opportunities correlate with technological innovation, generational differences and historical events. Events like the Dotcom Bust, Global Financial Crisis and SARS epidemic all gave rise to new market opportunities and business models, which were further accentuated by novel technologies like the smartphone, VR and voice apps. That said, with technological innovation rates ramping up, Gen Z and now Gen alpha redefining the consumer landscape - and COVID-19 changing consumer patterns - there are compelling new market opportunities ripe from a timing perspective.

Pento raises $15.6 million in Series A financing

I invested very early in Pento, a company bringing payroll to the 21st century by delivering a cloud-based, automated solution integrated with tools like Xero to let you run payroll for any business in minutes.

The decision to invest was pretty straight forward. What they were doing fit squarely within our thesis of driving access to financial tools, creating efficiency and scale in new markets and finally creating a service that was a step change different from what users were using to date. On top of this, seeing the dynamic duo of Emil Hagbarth Rasmussen and Jonas Bøgh Larsen (who previously founded a company together) passionately tackling the error-prone methodology of spreadsheets, PDFs, emails, etc. and instead provide employers with a set of cloud-based tools, real-time calculations and overall greater transparency, made the decision easy.

General Catalyst led Pento’s $15.6 million Series A round, with Point Nine Capital and Seedcamp leading the initial seed round. Angel investors include Timothy Thairu and Diede van Lamoen, Tom Blomfield, Matt Robinson, Eric Yuan, Freddy Macnamara and Des Traynor.

While it’s still early days for Pento, we have been extremely impressed with their execution and the consistency they are delivering.

Moonfire is Hiring a Machine Learning Engineer

At Moonfire, we're a small team so it's cause for excitement when we decide to expand the family. We are looking to bring on a high-performing individual who will help us define and deliver our core technology roadmap. As Mike described in his Doubling Down on Data and Technology at Moonfire blog post, software, data, and technology are central to everything that we do at Moonfire. We are excited to bring someone onto the team who will be responsible for helping us build the internal machine learning and software solutions that automate and accelerate as much of the traditional venture capital process as possible.

Recent Insights

• In a recent episode of This Much I Know (Seedcamp's Podcast), Mattias sat down with host Carlos Espinal (Managing Partner, Seedcamp) and Giovanni Luperti (founder of Moonfire portfolio company Humaans) to discuss building for and investing in the future of work: everything about growing an organization to managing teams remotely and keeping team culture at the core of it all. Listen here
• In a recent Clubhouse seminar titled "Europe on the Move: Seeding Breakthrough Entrepreneurs" moderated by Greg Williams (Editor in Chief, Wired UK), Mattias led a panel along with Carlos Espinal, Tara Louise Reddy (founder of Moonfire portfolio company Loveshark), Sancar Sahin (founder of Moonfire portfolio company Oliva), and James Cramer (founder of Moonfire portfolio company Skunkworks), to discuss the evolving tech and VC landscape across Europe. Listen here

Thanks for reading and keep an eye out for next month's edition.

Best,
Mattias
🌓🔥