Ashmeet Sidana Founder & Chief Engineer, Engineering Capital chats with Amit Somani, Managing Partner Prime Venture Partners.

Listen to the podcast to learn about

02:00 - The High Cost of Getting The Market Size Wrong

10:00 - When Should You Use Top Down Market Size

15:30 - Calculating Market Size: Precision Vs Accuracy

23:30 - Great Products Expand Markets

28:30 - Creating a Category is a Continuum

35:00 - Disagreeing with the Market Size

Read the complete transcript below

Amit Somani 00:55

Welcome to the Prime Venture Partners podcast today. I am delighted to have with me Ashmeet Sidana. He is the founder and sole GP of a firm called engineering capital, which invests in deep tech startups. He’s based in Silicon Valley. Prior to founding engineering capital, he’s had a variety of stints and but one of the most notable ones was, he was one of the early product leads at VMware and took the company from zero to $300M in ARR. So welcome to the show. Ashmeet.

Ashmeet Sidana 01:20

Thank you, Amit. It’s a pleasure to be here.

Amit Somani 01:25

So today, we have an interesting format, for those of you listening in either on the audio or looking at this on YouTube or wherever you follow your podcast. So Ashmeet runs this amazing course, that I recently heard about called estimating market sizes for markets or products that don’t exist yet. That really caught my fancy. And he was kind enough to actually put together a few slides for our audience. So what we’re going to do today, folks, is that he’s going to run through a few slides, talking about this, you know, notion of TAM that VCs are obsessed with, and he himself has both a VC perspective. And you know, prior as an operating executive, so over to you Ashmeet. And once he’s done with the slides, I will jam with him and ask him some questions about this interesting topic.

Ashmeet Sidana 02:10

Thank you. So I’d like to start our conversation about market size in the year 1980, when there were no cell phones in the world. And AT&T was the largest phone company in the world, in fact, so large that they were being sued for antitrust as a monopoly by the US government. Being a monopoly they had been investing in cellular technology for many years. And so in 1980, they hired McKinsey to estimate the potential market size for a future cell phone product that they were considering.

And McKinsey, of course, charging them a nice fee as a high price consultant, came back with a 20 year estimate of 900,000 Cell phones. In other words, McKinsey believed that by the year 2000, there will be roughly speaking a million cell phones in the world. While McKinsey of course was wrong by a factor of 165x, the real number turned out to be 150 million. And so based on this report from McKinsey, AT&T decided to shut down their cell phone division. They thought the market was too small. It’s not an interesting business. And they actually gave up all their patents for free to the US government as part of the antitrust settlement, and AT&T shut down their wireless division.

This, of course, was a huge mistake. AT&T eventually realised that they had made a mistake. And in 1994, they bought McCaw cellular back for 12 and a half billion dollars. McCaw cellular was the first commercial cell phone provider in the US, because they decided they had to get back into the cell phone market. So an error in estimating market size cost AT&T 12 and a half billion dollars. And just in case you think this was only a AT&T, Here is a quote from Andy Grove, who was a famous futurist, famous technologist, founder and CEO of Intel, who said, a wireless personal communicator in every pocket is a pipe dream driven by greed. In other words, he also believed that it could not be built.

So my first takeaway for you on market size is that it’s really important to get it right, you can make huge consequential multibillion dollar decisions, you can get them wrong if you get your market size wrong. And to make my second point, I’d like to talk about another wireless company, which was also active in the year 1980, Motorola. Based in Chicago, Motorola had fabulous wireless technology. And the executives at Motorola also were thinking, wouldn’t it be cool if we could have a phone, which was not tethered to the wall, in other words, a cellular phone.

And so they commissioned a study internal to themselves to estimate the size for the cell phone market coincidentally also for 20 years. Now we know this with the benefit of hindsight. And their internal estimate was 100 million cell phones by the year 2000. remarkably close to the actual number. And of course vastly different from the number that McKinsey and AT&T had come up with. And because of this estimate, they got so excited that Motorola decided to bet their entire company on the nascent cell phone market. They started the largest, most expensive, privately funded R&D project ever undertaken up to that point in US history.

What was subsequently called the Iridium project. where they wanted to come up with a worldwide cell phone like solution. And they essentially bet the whole company on it to the point that eventually, even though they managed to solve some very interesting technical problems, they went with a satellite based approach, not a land based approach. Even though they solved it, and they got it working, it turned out to be a complete failure. In fact, it was listed as one of the 10 largest tech failures by Time Magazine. It created so much debt, so much expense for Motorola that the company went bankrupt.

And today, the remnants of Motorola, a fortune 500 company are sitting in Google, and Scientific Atlanta, etc, they were all sold off basically for the technology. And of course, very few people use the Iridium phone. It’s kind of a niche product right now in the market. And so my second takeaway on market size is that subtle product differences can make a huge difference. You know, at first blush, a cell phone and a satellite phone sound like almost the same thing. Remember, it was all about voice calls in the early days. But there was a very important difference between these two approaches. The minimum distribution that was required to make a viable service in the Motorola design was very different from what AT&T or originally, McCaw cellular had to do.

McCaw cellular launched just in Manhattan when they started a very dense, very small, geographically constrained area with lots of rich people. And they slowly bootstrap their way to you know, essentially nationwide, and now I would say worldwide coverage for cell phones, Motorola was forced to launch at least 66 satellites before they could even make their first phone call. And so subtle product differences can make a huge difference in how you think about market size. Market size is very important, because it is a fundamental limit on the size of a company.

There are many ways to measure market size, you know, TAM, TSM, target market, I’m not going to get into some of the differences between those. Today, that’s not really the point, I really want to emphasise why market size is important and how to think about market size, especially from the point of view of an entrepreneur or a venture capitalist. So for the rest of the talk, today, I’m going to ignore the big companies like Motorola and AT&T and say, “How should the startup think about market size?’’

And classically, there have been two ways to approach market size, you can measure it top down, or you can measure it bottoms up. Top down is a very popular way. If you were to read the Wall Street Journal or listen to CNBC on TV, or hear a discussion, most of the time, people are usually referring to a top down market size. In fact, it is so popular that there are entire companies that are dedicated to basically calculating market size. So companies like Gartner and IDC, you know, I call them essentially market size companies. I mean, they describe themselves as analysts and technologists, I described them as basically estimating the market size for a product, that’s really what they’re trying to do.

And anytime you see a report like you know, so and so predicts that the budget will be so much, that’s usually a sign of a top down market size. And it’s a very popular way to think about market size. In fact, here is an extract from a slide that an actual entrepreneur presented to me, and a typical top down market size would look like, you know, the total industrial automation market is about $75 billion of that the operation software market is about 10 billion, you can divide that further into its few segments. And usually a pitch deck will follow a slide like this by saying, and if we can get you know, 1% of this market, we can build a billion dollar company.

So that’s a typical view of how a top down market size is created. And so then the question comes up, when should you as an entrepreneur, or you as a VC, early stage VC, use top down market sizes. In my opinion, never. The only time you should use a top down market size is if somebody is paying you by the hour, and you want to waste a lot of hours, that’s a great time to do a top down market size. Top down market sizes are very hard to disagree with. They are basically surveys, they are extensions of broad macro trends. And they may or may not represent the micro value proposition that a startup has to capture in its very early stages.

And so they’re very dangerous. Another test that you can apply as an entrepreneur is that if somebody gives you a market size, and you find yourself having difficulty disagreeing with that market size, in other words, you can’t come up with a contradictory opinion, then it’s probably not interesting. It’s probably a top down market size. And you should just immediately delete any information related to that. It really is a waste of time. It can lead you astray and is not something that I recommend entrepreneurs or venture capitalists should use.

So by now, it should be obvious the right way to think about it is bottoms up as entrepreneurs, you should think about market size as a bottoms up view. And here is the very simple formula on how to think about a bottoms up market size, number of customers, times how many dollars per customer you’re going to get is your market size. It’s that simple.

In fact, it is so simple that you may think it’s trivial. There’s nothing to learn here. I mean, it’s so simple. Why is this so important? Why, how could this possibly be interesting. And to make that example, let me give you the actual market size for the iPhone, which, of course, is a famous product that we all are familiar with. And here are the numbers taken right out of their 10 Q’s, their quarterly reports published by Apple, which of course, is a public company. In Q4 of 2007. Apple launched the iPhone with an exclusive partnership with AT&T.

And they sold roughly 1.1 million phones in that very first quarter. And let’s just say it was a $500 phone.. This is very simple maths, I’m just using simple numbers. This is not exactly right. And we’ll call it half a billion dollars a quarter run rate or let’s say $2 billion a year. So the iPhone itself had a market size of $2 billion in the very first quarter that it launched. And then you know, 10 years later, they’re selling many more cell phones, of course, now they’re selling them through multiple carriers.

By now they have their own retail operation, you can walk into a store and buy a phone directly from Apple. And let’s say the price is roughly $600, a phone in Q4 of 2018. They sold 50 million phones, which are roughly approximate as $30 billion a quarter or $100 billion a year, roughly speaking is the size for the iPhone.

So now the question comes up. How many customers does Apple have? If you look at this chart in front of you, and for those of you who are listening, I’ll repeat the numbers Q4 of 2007, Apple sells exclusively through AT&T, a million cell phones for $2 billion. Q4 of 2018, Apple sells 50 million phones at $600 a phone for roughly $100 billion run rate.

And my question is, how many customers did Apple have in Q4 of 2007? And how many in Q4 of 2018? The answer for 2007 is Apple had only one customer, their only customer was a AT&T. And all phones were sold through AT&T and you as an individual consumer had to go to a AT&T to buy a phone and and get an iPhone.

Subsequently, of course, Apple was selling through many different channels. And then, you know, they had many, many customers in Q4 of 2018. Why is this so important? This is so important. Because simply by looking at this bottom up view of the market size, I can tell you what Apple’s sales force was for the iPhone in Q4 of 2007. Clearly they didn’t have a Salesforce, they didn’t need a Salesforce, I would argue Apple had only one salesperson in Q4 of 2007. And his name was Steve Jobs. That was the salesforce because he was making a deal with AT&T.

He originally offered it as an exclusive to Verizon, but we’ll skip that part of the story. In 2018, Apple had many, many customers, they were direct customers, they were multiple carriers, etc. All of this became obvious simply because we thought about the market size from a bottoms up perspective. This, of course, has huge ramifications for what is the budget? How is the force organised? What sort of gross margins can you keep etcetera? Because now we know what is the structure of the market that Apple has.

All of this becomes obvious if you think about it from a bottoms up perspective, because a bottoms up market size forces you to focus on an individual customer, it is easy to test assumptions, you can operationalize a bottoms up market size, a well thought out bottoms up market size can lead you to essentially building your entire go to market function of your company can be derived from that. And so bottoms up is the real thing. That is how you should think about market size. And it is the most valuable insight that an entrepreneur and a VC can get by thinking bottoms up.

To make my next point, I’d like to talk about precision versus accuracy. And because we’re also going to do this as a podcast, I’m going to skip some of these slides because they go into a little bit of detail describing what is the difference mathematically between precision and accuracy. And so for those of you who are watching you can read this slide, this is the actual technical definition taken right out of Wikipedia.

And to make this point, I actually have some confidential emails, emails that were previously confidential of a discussion from inside Sequoia Capital, which became public record, thanks to a lawsuit between Viacom and Google, in which these emails were subpoenaed. And I of course love to read confidential emails from other venture capitalists. And so here we have some original discussion on the potential market size for YouTube, which was a seed investment by Sequoia Capital, which was happening internally to Sequoia Capital prior to their investment in the company.

So this is rare to get an insight into how a venture capital firm was thinking about what the market size should be for a firm before they had made the investment. And here’s a key observation that Roelof who sends this email who eventually became the board member sends to Mike Moritz, who at that time used to run the firm at Sequoia, where he makes an observation saying, “…blah, blah. As a result, user generated video content will explode.”

This is the million dollar line, or I should say billion dollar line that Sequoia that Roelof figured out because in the year 2004. It was not obvious that user generated video content was going to be so large, that is what they figured out. I have the original slides from the presentation that YouTube made to Sequoia. You can go online and you can just Google for it. And you will see how simple those slides are. That YouTube presented to Sequoia. They did not have a market size discussion in them. And so the forum, the venture capital firm, in this case, Sequoia was forced to generate it themselves.

And so Roelof. And I’m going to skip this slide which discusses, you know what Google was doing at that time, and how Google believed that they would be able to buy YouTube for about $10-15M. And if they only had one more engineer, they would be quote unquote, “kicking their butt”. But that part of the story I’m going to skip here, but I’ll come back to what Sequoia has in the internal emails, where they themselves estimated the market size. And you can see the chart over here where they have a low medium high scenario, implying revenues of $6M, $20M, $55M for YouTube.

Notice, YouTube itself didn’t present any numbers. YouTube didn’t have a financial plan, they didn’t have a market size plan in it. And so they made their own internal estimate. And within that estimate itself, you see a 10x difference between the low, medium and high scenarios. The point here is, it’s not about getting some very precise number. It’s not about getting the decimals correct. It’s about being accurate. It’s about getting the direction right.

What Sequoia did beautifully is they were accurate in the potential for user generated content. Notice today, user generated content is a $20 billion business for Google. So obviously gigantic, even compared to a 50 million number that they estimated on the high end. But they were accurate, even then they were accurate, even though they were imprecise. And so if you’re an entrepreneur, you’re a VC. You don’t need to be precise, you do need to be accurate. And that’s the important thing, when you are thinking about market size.

To make my last point on market size, I am going to talk about Uber. Uber is a very interesting company, which obviously today is a public company. And we know a lot about them. But when they first emerged, it was very controversial. People didn’t know how big the market was going to be. They were taking off, it was going early. And so Professor Damodran, for those of you who are not familiar with it, is known as the dean of Wall Street, the Dean of valuation. He’s a very famous professor of finance at the Stern school in New York.

He published his own study, trying to estimate the market size for Uber as the market leader. And with a monopoly approach, you know, essentially you can derive valuation from market size. And so he’s trying to derive valuation here by estimating the market size. And again, I have a reference here to the original posting by Professor Damodran. And if you want to go read it, bottom line, he estimated that the maximum valuation that Uber should have or have is about $6 billion, because he thought that the global taxi and limo market could not exceed $100 billion. And since Uber could only take a fraction of the market, because obviously, you know, Uber doesn’t run the cars or the drivers and all of those costs have to be taken out. The maximum valuation that you could ever support would have been about $6 billion.

Well, shortly after he published his study, Uber raised money at a $70 billion valuation, 10 times greater than what the dean of Wall Street had proposed as a maximum valuation. And today, Uber is worth, you know, many 10s of billions of dollars. And so, you know, it turned out that Professor Damodran was quite wrong in his original estimate of what the market size will be.

And it was so controversial that Bill Gurley, who was an early investor in Uber, one of the co-founders of Benchmark Capital, who was on the board of Uber, at that time, posted his own study. And again, you can go online, and you can read the original study. But on this slide, what I have for you is where Bill Gurley estimates what would happen if Uber was an alternative to car ownership. In other words, if you didn’t think of Uber as a taxi replacement, but rather as an alternative to car ownership, in which case, there was a scenario where Uber could have a $1.3 trillion potential valuation.

Obviously, we never got to that larger number. But who knows, maybe in the future, one day Uber will be a trillion dollar company. Who am I to say that it can’t be that. But the important point here is what what Bill Gurley had figured out as a good venture capitalist, is what Aaron Levie captures in this beautiful tweet where he says, “sizing the market for a disruptor based on an incumbents market is like sizing the car industry based on how many horses there are in the year 1910.” Why does he pick 1910? Of course, 1910 is shortly after the launch of the Model T Ford. Henry Ford revolutionised the worldwide automobile industry by building this very cheap people’s car, the original Model T Ford.

And before that, of course, people use horses. And in fact, if you look at the horse population of the United States, the working horse population of the United States peaked in the year 1915, just five years after 1910. You know, we had 26 million horses working in the United States. And of course, that has steadily declined since then. And today, of course, horses are mostly just used for recreation, they really aren’t used for work anymore.

So it’s very important to understand that great products expand markets. What Uber was able to do is expand the market and think about the market in a different and new way. And so great products expand the market. So when you estimate your market size, if you are truly genuinely building a great product, then you may be able to expand it. So that of course begs the question, where do great products come from? That, my friends, is the topic of my next talk. Today I wanted to talk about market size. As we’ve mentioned, at the start of this talk, I am a venture capitalist, I do focus on a particular subset of the market where there are high technical risk companies. We can go into some details on that.

But at the end of the day, you know, great companies are built by great founders. I run this ad on my website, which is inspired by an ad that supposedly Shackleton ran, that’s the ad that you see on the right side here. I’m not trying to be sexist here. This is a copy of supposedly the original ad, which says men wanted from 1913. And in those days, of course, it was normal to post an ad like that. My version of the ad says “founders wanted”, of course, because today we would never want to be that sexist, but it is just as hard a journey. But it can be just as rewarding as trying to be the first person to go and stand on the south pole, which is what Sir Ernest Shackleton was trying to do.

We of course are trying to change the IT industry. That’s my discussion on market size. I welcome any questions and am happy to take this conversation in whatever direction you suggest.

Amit Somani 24:55

Fantastic, very insightful. And I have a tonne of questions as you might expect for you. But let’s start maybe we’ll turn off the slides sharing all right for the audience. So let’s start with the quote from Aaron levie which is a really nice build up to your entire talk here which is around two classes of products. So there could be that disruptive or in you know, in Prime ventures parlance, we call them a category creating a category defining products which are really disruptive like a wireless phone or whatever.

And that’s one class I’d put an iPhone in that, I’d put Airbnb in that etc. Truly products that are new, disruptive, did not have a predecessor you know the Ford Model T in 1910. And there are products which are basically taking and disrupting the technology track, right or the consumer sentiment like there is already, people using enterprise software that now becomes cloud software, somebody who’s using cloud now will become some flavour of SaaS, some niche SaaS, etc. So let’s start with the disruptors first, right, the category creating or category defining ones.

If I’m an entrepreneur listening to this podcast, and I’m thinking, of course what I have is extremely disruptive and so forth. What is the litmus test for me to both figure out? Am I really that disruptive? Right, number one? And number two? How do I guesstimate what the potential market could be? Right? And maybe maybe we’ll take an example that’s not in your slide, which is Airbnb. Right? Saying, really will people go and stay in other people’s homes, etc. So let’s start with the disruptors. And for an entrepreneur, What recommendations would you give for them to estimate that they’re in a large enough market?

Ashmeet Sidana 26:40

So it’s a very interesting distinction you make between what I would call evolutionary products versus revolutionary products. That’s another way of thinking about that segmentation. To a venture capitalist, obviously, the most exciting products are revolutionary products, products that are creating an entirely new category, because by definition, then you are the early mover, you will capture a large fraction of the market, you can be an incredibly valuable company, those are the companies that get the highest valuations, capture the highest dollars run for the longest time. People often describe them as category creators, or as I like to say, you know, long standing independent businesses, you can build those.

So those are all roughly correlated types of categorizations that you look at, when you are looking at a market like that, by definition, you don’t know the price, and you don’t know how many customers you have. So you’re going to have to make very rough estimates of both of those basic elements. And to derive those elements, you have to have some fundamental data, you have to have some belief about what you’re going to do, what you’re going to sell, what would be the value of that.

So for example, in the Airbnb case, you know, he really changed how people think about hospitality, Brian Chesky, really recreated this idea of where inventory would come from, where people would go and stay, and how people would access that, at some level, he reinvented the idea of a hotel. Hotels, of course, have existed for hundreds of years. It’s not a new concept. But where they came from, and how people access them was very different, different enough that I would say he had created a new category.

Let me also recognise that creating a category is a continuum. It’s not a black and white line, where you can say that this is evolution. And this is a revolution. No, it’s a continuum, you start with something which starts as an evolution. And if you do enough of that, and then enough changes happen, it becomes a revolution. And it becomes a category in itself. So that’s almost the self defining nature of how this comes about. And I think entrepreneurs should not necessarily focus on that distinction as much. An entrepreneur really needs to be focused on product market fit. That is the religion, the most important thing that an early stage entrepreneur needs to figure out, is the customer going to buy it? How much are they going to pay for it? And how much does it cost me to deliver it to that customer? So can I make a profit? Is there a positive gross margin in this business? And if the answer to those three things is yes, you can usually figure out a business model that makes sense.

If you pair those three things, the customer will buy it, how much will they pay for it, and I can deliver it to them profitably, if you can pair that with a very high growth rate, then in today’s market, you have a venture backed business. And if you can add on top of that a capital efficient high growth rate, then you are printing money, then you have real gold, then you have the next Google, you have the next VMware, you have, you know, the next venture backed category creation company.

So notice that there were layers of success that were required for you to get there, and they are all continuums, there is no perfect answer. You know, Google till today enjoys very high gross margins, very low customer acquisition costs, because they are such a great business, very different from the profile of a company that is similar, perhaps like Facebook, or Snapchat, or you know, you can think of them as sort of being in similar kinds of categories, very different profiles, because it was such a powerful business model and technology innovation that Google put together, that it survives the test of time, eventually, they will also be threatened, no company lasts forever. Eventually, every company gets threatened. And so you know, Google is well past the entrepreneurial stage of evolution.

Amit Somani 30:35

Fantastic. Any thoughts on evolutionary products right? For a moment, because there are a lot of people for example, trying to build global SaaS companies of India, of course they will be maybe category defining if not category creating because they’re basically saying look, something that was running on some archaic technology from 20 years ago and has seen no innovation in health or education or what have you. Are there any thoughts on that? And we can keep it brief. And because I have a lot more follow-on questions for you on the revolutionary side.

Ashmeet Sidana 31:05

Short answer there is a second mover advantage. Companies that are using the evolutionary approach, by definition, are trying to benefit from the second mover advantage. And you can build very large businesses that way, Microsoft is a great example of a company that for the first 20 years capitalised on the second mover advantage. You know, if you watch Steve Jobs, Bill Gates interviews, you know, he takes a few digs at Bill, always copying what Steve was doing.

And it’s true. That’s just fact, you know, Microsoft always played second fiddle, but built the most valuable company in the world for a while, by doing that, so it is possible to create them, you have to be a lot more capital efficient, there’s a much higher premium on execution, if you are working in an evolutionary approach, if you have truly a revolutionary approach, then you get more freedom, you get more flexibility to fail, if you’re doing that, but at the end of the day, great entrepreneurs have to accomplish both elements, they’ve got to have the idea and they’ve got to execute.

Amit Somani 32:00

Wonderful, one of the quotes that you did during the talk caught my attention, which said something to the tune of, you know, the minimal distribution required to figure out whether you have a viable service. I’d love for you to double click a little bit on that. You know, I came from a product background myself and you know, seeking product market fit, I would have probably applied to that ad that you run.

But then I came into venture capital and I realised, look, it’s not about products or not just about products. It’s about distribution. And then I realised No, no, it’s not just about distribution. It’s about, you know, the willingness of the customer to pay and gross margins. But let’s talk about distribution. Because that, you know, the minimum viable distribution, if I can loosely call it that, to validate the model, that would be good to hear about,

Ashmeet Sidana 32:50

This is a really important idea for startups to get right, which is what is the minimum unit of sale, at which the customer gets a value out of what you’re doing. Where the customer can get a benefit from the product that you have created, the smaller that unit, the easier it is to build your company. Because now if you have to only convince one person to buy your product, that’s easy, that’s an easier product to sell. Because you can find someone who is willing to try it, if they’re going to see a return on value, or for the price of the product that they’re buying.

If you have to have hundreds of people buy a product, 1000s of people buy a product before the value starts accruing to a customer, then it’s not suitable for a startup, it may be suitable for a big company to do. But it is not suitable for a startup to approach that as a product distribution strategy. And so minimum distribution to customer value, positive customer value is a very important thing that startups should think about.

And two extreme examples, opposite ends of the spectrum. You know, fax machines, selling one fax machine is an extremely difficult idea. Selling one telephone is a very difficult idea, because it’s useless. Why would the first customer in the world buy the first fax machine, the value increases as you sell more and more of them. Conversely, there are products, for example, Google advertising, they were able to create a very large distribution by taking individual customers, at VMware we were able to create a product, which a single individual customer could buy, and they could immediately consolidate their servers and see tremendous savings. So that minimum distribution became very important as a winning factor for a startup.

Amit Somani 34:30

Great moving along, you know, the other thing that you said was, let me see if I can pull out my note, this difficulty of or, you know, disagreeing with the market size that really caught my attention, particularly for my VC friends that also listen to this podcast, to say, you know, what does it mean? Because you’ll obviously have a different point of view saying, Okay, how many people, you know, would, you know, by the VMware licence, or, you know, potentially be creating YouTube videos, or, you know, stay in other people’s homes, in the hospitality industry? So can you talk a little bit about some, you know, best practices there, on what is a legitimate disagreement on the computation of the bottom up market size, versus it’s just an opinion, I don’t think user generated video is going to explode or whatever.

Ashmeet Sidana 35:20

Yeah, this is kind of a subtle point. And it’s an important point to bring about, when people talk about top down market sizes. They are usually representing some macro trend, some sort of a survey, some sort of a view about how the market works. And you know, a simple example sometimes people use is, there are 1 billion people in India so if I could sell a product for $1 to each person, I have a billion dollar market size, right? But the reality is that those 1 billion Indians are not the same, right? They’re very different. They have different needs and different incomes. different geographies, different requirements.

And so, you really cannot sell a product for $1 to 1 billion Indian, there is no such product. And so, the market size for your product cannot be 1 billion Indians, since that is not possible. And for you to claim something like, well, the Indian market, you know, the population of India is increasing at X percent, and therefore, my market size is increasing at X percent is a false statement, because you cannot disagree with the fact that the Indian population is increasing at X percent, that’s a pretty well known demographic fact, we can estimate that, what you can disprove is that that is not your market size, because I cannot disagree with the observation that you made about the market. That’s what tells me that you are looking at the market size incorrectly.

Whereas, if you had come to me and said, Well, you know, there are so many people in tier two cities in India who don’t have Wi -Fi access, and therefore, will want Internet access from their phone, that starts becoming an interesting question. Now the question becomes, well, can you reach this person? Will they buy your product? Are they interested in internet access? I don’t know. You know, obviously, we know the answer is yes, in this case, and that’s why I’m picking that as an example.

But you know, that was a question initially, there was a question mark, would people buy it? Why would people use it? You know, illiteracy rates are much higher in India than they are in the US? Would they have use of text based products? How would those products be sold? What will be the leverage point? Those are all question marks that come up, and reasonable people can disagree on them? Again, today, we know the answer, right? The Internet penetration in India is increasing very rapidly and is already very high. So we know that those products will get created. But at that time, it was not obvious.

Amit Somani 37:40

Absolutely, in fact, that reminds me of things that we normally would teach or coach salespeople for saying, unless you’re getting any kind of objections, you’re unlikely to make the sale, once you start getting some objections from the client. The they’re really thinking about, you know, the edge cases and whether this will work or not, or whether the price point will be right or not. If you’re just like, Yeah, that’s fine. And there’s not a whole lot to disagree with, they probably haven’t really thought about whether they really need your product or want your product.

Ashmeet Sidana 38:10

I had never connected it to sales, but I agree completely.

Amit Somani 38:15

Moving along to your third or fourth point, which was also interesting, you know, around the Ignore precision, focus on accuracy. And I interpret that in my own way, as you know, be in the right range, right? Don’t worry about the exact number but get the range right and the directionality right. So again, can you give some practical examples or, you know, tips for entrepreneurs in particular, not just VCs, like you and me, to get the directionality and the range right, like it’s to say, 10s of millions of dollars kind of market or hundreds of millions of dollars kind of market, obviously, customer times willingness to pay implicit in that, if there are any lessons learned, perhaps in your journey?

Ashmeet Sidana 38:55

Yes, I’ll give a personal example, since obviously, I have lots of experience with VMware. In software, especially, and I think most entrepreneurs are working with software these days. So it’s a very important way of thinking about entrepreneurship. Software has this wonderful luxury that it has zero marginal cost, all the cost is upfront in terms of developing the software that you do.

And so in software, it turns out that you can add features and change prices much more dramatically than you can in most of the products in the world. And so in the case of VMware, our first product was sold for $99. Eventually, we started selling it for $1,800, and eventually pushed the price up to above $2,000 per CPU. We were able to charge, you know, that’s a more than 10x increase in the price of the product that we were able to charge.

And that’s part of the reason why we were able to build such a big company, it was not only that there were more people buying it, those people were paying much more for the same product or product and more features that we were selling them. And so the idea here is, the direction was right, we had built a product that people found value from and then we were able to enhance it, grow it and capture more of the value out of it.

And so the direction was right, that’s really the point that I’m making. If you’re an entrepreneur, who is truly working with the new product and new idea, you should be able to guesstimate things accurately enough that you can do a ballpark. And there should be enough buffers that you believe that you can build a good company out of it and a good business out of it. In the real world. There’s going to be failures. There’ll be mistakes made. There’ll be unexpected surprises, negative surprises. And so you need a buffer, you need space to give yourself room to execute.

Amit Somani 40:45

I’ll come to your last point, which is also very, very fascinating. And I’ll add my own twist to it, which is great products, expand markets, completely 100% agree with that. I also think great entrepreneurs expand markets, because they’re constantly thinking about, you know, what are the adjacencies? What are the sister markets, you know, in what other ways is customer behaviour changing from the original point at which they started?

So, I think that is something that I’d love for you to, because you could also get a little lucky, right? You started in a particular niche, but then some other trend happened, right? Like in India and fintech, you know, Demonetization was a trend that really expanded markets. In other cases, you consciously figured out saying, hey, wait a second, we were doing this for audio, but now video is so big or vice versa.

Ashmeet Sidana 41:35

Some small element of luck is almost essential in success, let’s all be humble and recognise that as hard as we work, as smart as people are, there is always some element of luck that comes along, you know, if Microsoft had not signed a deal with IBM, for that original PC distribution, they would not have become a monopoly, they would not be the largest computer company in the world, which they were for a while.

So there’s always elements of luck that come along. Steve Jobs used to call it, you know, connecting the dots in reverse. After the fact connecting the dots not before the fact, which I think was a polite way of describing some luck and serendipity that comes along.

Do great entrepreneurs expand markets? Yes, great products, great entrepreneurs are synonymous in the way that I’m talking about over here. And that happens. And some of the best examples are, of course, you know, the cell phone itself, right? What was a business voice communication tool is today rarely used for that, the maximum use of what you think of as a cell phone, or a mobile phone is not voice calls, it is often text messaging, many forms of messaging, video, music, all of these things. And, of course, so many applications, gaming, all of these were expansionary to the market size of that initial product that was conceived as a voice communicator.

Amit Somani 43:00

Wonderful Ashmeet. Thank you so much. Lots of interesting nuances. We’ll take your top five points, even for the folks on audio, and we’ll link it to the show notes. Any parting words, as we wrap up here.

Ashmeet Sidana 43:10

I would just say thank you for inviting me. It’s always a pleasure to talk with someone who is so thoughtful about the market like yourself. I’ll end with the thought that having a large market and getting market size right is a necessary but not sufficient condition to success. You need many other things. At the end of the day, it is mostly about execution. That defines the success of a great entrepreneur. So let’s not lose sight of that. We analyse things, we look at them, but it really comes down to the hard work and the execution of entrepreneurs that builds great companies.

Amit Somani 43:50

Great, to use one of your own lines Ashmeet we should just look at the accuracy of where we are headed and not to worry too much about the precision. Thank you, Ashmeet for being on the Prime Venture Partners podcast.

Ashmeet Sidana 44:00

Thank you, Amit. It’s been a pleasure.

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