Part 2 in the “Navigating Diligence: The Bling Capital Playbook” Series

Why We Start With the “Hair-on-Fire Problem + 10x Better Solution” Exercise

This is Exercise 1 in the Bling Capital Diligence Playbook.

We begin every diligence process by defining the “hair-on-fire” problem, mapping the step-by-step before and after user flows, and quantifying how the solution is 10x better. Done well, it forces precision and clarity. It tells investors:

• Who are you solving for?
• What critical pain do they face?
• What is the step-by-step user flow of current behavior?
• What is the step-by-step user flow of future behavior?
• Why is your solution delivering a transformational, not incremental, improvement?

What This Exercise Includes

You’ll answer five focused questions. Each answer should be 1-3 concrete sentences. Avoid adjectives. Treat this as a mini “product spec” for your business, one that aligns everyone involved in diligence around the user, pain, step-by-step journey, product, and value proposition.

1. What is the title of the buyer? (and if buyer is not user, repeat the same exercise for “user”)
2. What is their “hair-on-fire” problem?
3. What are they doing today? (the “instruction manual-level” user flow of the current behavior—what steps the user literally takes today to solve the problem)
4. What will they do tomorrow with your product? (the future state user flow—what the user will do [or does] in similar detail, with your product in their life or workflow)
5. Why is this 10x better?

Defining “Hair-on-Fire Problem”

A hair-on-fire problem is one that is urgent, painful, and high priority.

It can’t be ignored, deferred, or delegated. These are the problems that trigger user action, impulse purchases, budget approvals, and organizational momentum. If the problem doesn’t feel like a fire drill to the customer, you’re probably not solving the right thing.

Here’s an example, using the taxi use case for Uber:

“I need a ride right now, taxis are unpredictable, hard to hail, cash-only, and slow to arrive.”

Defining “Instruction Manual-Level” User Flow

The “Instruction Manual-Level” user flow is the step-by-step current and future state behavior.

This is where most teams go wrong. The goal is to show the messy, step-by-step reality of the user’s life today—and how your product meaningfully changes it tomorrow—in concrete user journey language. Avoid marketing terms, abstract language, and adjectives.

• What are they doing today. What is the user doing today to solve the problem without your product? What are the steps they take? What tools are involved? What’s clunky, manual, error-prone, or expensive? Where do they get stuck, hand things off, or hack together a workaround? Articulate an “instruction manual” understanding of the user’s life today and show the inefficiencies and mess the user must endure.

  Here is an example of what users do, before Uber, written as an instruction manual:

  Step 1. Call a taxi dispatcher
  Step 2. Wait on hold for ~5 minutes
  Step 3. Provide current address and destination
  Step 4. Dispatcher quotes an ETA of 30–45 minutes
  Step 5. Hope the car shows up
  Step 6. Ride may require cash; driver often doesn’t accept credit cards

  This structure makes the user’s pain obvious and makes it easy for others to follow.

• What will they do tomorrow. What is that same user doing tomorrow to solve the problem with your product? What’s automated? What’s faster, simpler, cheaper, or safer? This is your future-state user flow written with the same level of detail as the current state user flow. Articulate an “instruction manual” understanding of the user’s life tomorrow and show the delight and value the user gets with your product.

  Here is an example of what users do, with Uber, written as an instruction manual:

  Step 1. Open the Uber App
  Step 2. Location auto-detected via GPS
  Step 3. Tap “request” to order a ride
  Step 4. View real-time ETA (e.g., 4 minutes)
  Step 5. Driver arrives as shown
  Step 6. Ride is completed and paid automatically via the app with digital receipt

  Use the same step-by-step format to show how your product transforms the experience.

This isn’t positioning. It’s not using pitch language. It’s just a simple before-and-after journey of what the user does. If you can show the difference clearly, the “Hair-on-Fire Problem” and “10x Better Solution” becomes more obvious.

Defining “10x Better”

Not every “10x” leap is literal.

It can be:

• Time saved (e.g., prototyping reduced from multiple days to <1 hour)
• Cost reduced (e.g., overhead reduced from $10,000/month to $100/month)
• Risk removed (e.g., compliance error rate drops by 99.9%)
• Qualitative gains (e.g., verified reviews, UI reduced to one step).

Express the improvement with tangible metrics—not adjectives.

To sharpen the definition:

• Quantitative benchmarks: “90% fewer manual steps”, “75% reduction in error rate”, “5x faster onboarding.”
• Qualitative measures: “dramatically simpler UX”, “customer satisfaction scores jump from 6 to 9.”
• Willingness to pay: Make sure the customer has budget or spends on this pain today, and is willing to pay a meaningful premium for the improvement.

Often, 10x emerges from a combination of improvements:

• 2x cheaper + 10x faster + 2x easier to use = 14x total improvement
• 50% time saved + 50% cheaper + 7x revenue growth = ~10x value overall

Think of it as value velocity: How much more value the customer gets per unit of time, cost, or effort.

Here’s an example with Uber

ETA drops from 45 minutes to under 5 (11x faster).
Guaranteed pickup vs. uncertain availability (~99.9% reliability).
Zero cash handling; lower risk of fare dispute.
Overall ride reliability and safety score jumps by 3x with GPS and a rating system.

Five Questions in Practice

We recommend answering each question in less than 2-3 sentences each:

Question	Why We Ask
What is the title of the buyer? (and if buyer is not user, repeat the same exercise for “user”)	Clarifies who feels the pain and controls the budget, and if they’re the same person
What is their “hair on fire” problem?	Clarifies the urgency and if the problem is painful enough for someone to seek out a new solution.
What are they doing today? (format as Step 1, Step 2, etc to show clear instruction-level flow)	This is where most teams go wrong. Clarifies the step-by-step, “instruction manual” view of how the user solves the problem today, including all the messiness, inefficiency, and workarounds.
What will they be doing tomorrow with your product? (format as Step 1, Step 2, etc to show improved workflow with your product)	This is the future-state user flow. Clarifies how your product changes each painful step into something faster, simpler, cheaper, or safer—with the same level of specificity as the “today” user flow.
Why is this 10x better?	Clarifies the order-of-magnitude gain over today’s baseline. Customers usually do not switch for “minor” improvements from their existing habits.

Checking Your Work

Use these prompts to pressure-test your answers:

Prompt	What It Ensures
Have we captured every clear step in the user flow—and written it out in “Step 1, Step 2…” format?	We make the user’s pain obvious, and everyone can follow the exact sequence of what they do today and what changes with your product.
Are buyer and user roles clearly defined?	We map decision-making and budget accurately.
Do we know how people currently solve this problem?	We map the landscape of solutions, workarounds, and competitors, and where they fall short.
Have we thought through key design tradeoffs?	We’re prioritizing what matters most, not just listing features.
Is our 10x improvement quantified?	We articulate a truly transformational leap, not incremental (e.g., time saved, money saved, risk removed—expressed with numbers, not adjectives).

Common Mistakes and Fixes

We often see mistakes emerge in five patterns—here’s how they show up, in the example of a pre-seed Uber, and how to fix them:

1. Skips the user flow or too abstract
   Example: “Calling a taxi is a pain” or “Easily call a car using a mobile app”
   Mistake: No detailed picture of the real pain, no clarity around the step-by-step process the user follows today without your product, or tomorrow with your product. Reads like marketing copy.
   Fix: Skip broad claims. Write the user’s “instruction manual”—every step they take today. Then show how your product replaces or simplifies that flow, step-by-step.

2. Assumes, doesn’t show
   Example: “Taxis are dirty and unreliable”
   Mistake: Broad claim without evidence. Assumes the reader agrees with the premise without showing what the user is actually experiencing.
   Fix: Describe the actual workflow in detail—what the customer literally does, sees, and feels. Let the pain emerge from reality, not from your assertion. Investors need to feel the problem through the user’s eyes, not be told it exists.

3. Buyer / user confusion
   Example: “Taxi dispatchers and drivers are frustrated with inefficiencies”
   Mistake: Blurs who feels the pain and who pays to solve it.
   Fix: Explicitly state who feels the pain and who pays. If they’re different, run the full exercise for both.

4. Incremental gains (e.g., not “10x”)
   Example: “Faster and cleaner.”
   Mistake: Lists small perks (“better UI”) that won’t move the needle.
   Fix: Quantify the improvement—minutes saved, dollars saved, steps removed, risk avoided.

5. Missing budget context
   Example: “All SF commuters have the budget to hail a premium black car”
   Mistake: Ignoring whether user segments will pay.
   Fix: Research current spend on the problem and expected ROI.

The Bling Capital Method

We set up the “Hair-on-Fire Problem + 10x Better Solution” in a Google Doc so everyone can quickly view the answers to the five questions and collaborate.

We aim for short, direct, and focused answers.

A good response reads more like a field note than a pitch. It shows you’ve walked in the customer’s shoes—and can describe the before-and-after journey with precision. Here’s how we’d answer the five questions for a pre-seed Uber example, using our template:

1. What is the title of the buyer?
   Everyday city commuter (user = buyer).

2. What is their “hair on fire” problem?
   “I need a ride right now, taxis are unpredictable, hard to hail, cash-only, and slow to arrive.”

3. What are they doing today (the full user flow)?
   Step 1. “Call a taxi dispatcher”
   Step 2. Wait on hold for ~5 minutes
   Step 3. Provide current address and destination
   Step 4. Dispatcher quotes an ETA of 30–45 minutes
   Step 5. Hope the car shows up
   Step 6. Ride may require cash; driver often doesn’t accept credit cards

4. What will they be doing tomorrow with you (the full user flow)?
   Step 1. Open the Uber App
   Step 2. Location auto-detected via GPS
   Step 3. Tap “request” to order a ride
   Step 4. View real-time ETA (e.g., 4 minutes)
   Step 5. Driver arrives as shown
   Step 6. Ride is completed and paid automatically via the app with digital receipt

5. Why is this 10x better?
   ETA drops from 45 minutes to under 5 (11x faster).
   Guaranteed pickup vs. uncertain availability (~99.9% reliability).
   Zero cash handling; lower risk of fare dispute.
   Overall ride reliability and safety score jumps by 3x w/ GPS and rating system.

Why It Matters

Completing this exercise is useful for focusing and aligning with investors around the user, the problem, the journey, the product, and the value proposition. It helps you:

• Align with investors: Build a shared understanding of the user, buyer, and value prop.
• Build from real behavior: Use the step-by-step user flow to ground every assumption.
• Segment the market: Identify the users with the urgent pain and budget.
• Prioritize roadmap: Focus on features that drive your 10x improvement.
• Shape go-to-market: Inform messaging, pricing, and GTM with quantified gains.
• Understand business drivers: Sales cycles, marketing needs, hiring plans.

What Investors Are Really Asking

This exercise gives investors a compressed view of the business, and helps them assess:

• How well you know your user and their needs
• The buyer of the product, and whether the buyer and user are the same (or different)
• Where the user fits in the market and how you’re segmenting them
• What customers are doing today and whether you’re solving a real, valuable problem
• The product’s role in that context
• The product design tradeoffs and choices made—and why
• Whether the product delivers (or will deliver) a “10x” improvement over current solutions
• Whether you understand the messy, step-by-step reality of the user’s life today—and can show how your product meaningfully changes it

This exercise helps the founders and investors get on the same page for the rest of diligence:

Diligence Area	What It Helps Investors Understand
Market sizing	Customer segmentation (who pays, how much, and why) and if solving the hair-on-fire problem for these users would result in a venture-scale outcome (e.g., $100M gross profit at a low total market penetration).
Go-to-market (GTM)	Which customer segment(s) you are going after today, how you are finding them (if you’re live), and how you will find more of them.
Product roadmap	What features and priorities for your current customer segment(s) will deliver the 10x better value prop.
Hiring Plan	What you need, from a team perspective, to achieve product and GTM goals (and if fundraising, right-sizing the raise).
Financial Model	What assumptions you are making on revenue, costs, burn, and how it ties to the round’s goals.
Cohort Analysis	Are users in your customer segment(s) sticking around, are they actively engaged with the product, and is usage durable. Are the answers to the “Hair-on-Fire Problem + 10x Better” exercise matching reality?

And like we mentioned in our previous post, our exercises are also useful for company-building.

Final Takeaways

This is the single most important exercise in our diligence playbook. It gives investors:

• A hyper-compressed view of the business and product
• Evidence that you understand the user’s current behavior in detail—and can show exactly how your product changes it
• Understanding whether you’re solving a valuable, urgent problem for a clearly defined customer
• Clarity for all other exercises in our startup diligence playbook

Next Up: Market Sizing

In Part 3, we’ll translate your “Hair-on-Fire + 10x Better” answers into our market sizing exercise.

We’ll cover:

• Why market size is critical to venture outcomes
• Customer segmentation
• How to calculate a bottoms-up total addressable market

Stay tuned!

Thanks to Gokul Rajaram, Melody Koh, Jared Fliesler, Jason Krikorian, Nevin Raj, Andrew Bocskocsky, Tyler Maloney, and Brandon Terry for reading drafts of this.

Part 1 in the “Navigating Diligence: The Bling Capital Playbook” Series

Why We’re Writing This Diligence Guide for Startup Fundraising

Raising money is a pivotal moment for startups. It means finding investors who believe in your vision—and whom you trust enough to help you build the business.

But once talks with VCs get serious, most founders ask the same question: “What exactly do I need to prepare for diligence?”

We built this series as a practical cheat sheet to guide you through diligence, whether it’s with Bling Capital or any other investor. Each post covers a common diligence exercise, explaining clearly:

• What investors are really asking
• Why the question matters and how to address it
• How your answer sharpens your overall plan (together, all the diligence exercises)

Incidentally, these materials aren’t just useful for diligence during fundraising—they’re the same ones you’ll use for company-building too.

Why Investor Diligence Matters for Your Startup

Many founders mistakenly assume diligence begins after receiving a term sheet. Actually, diligence kicks off the moment a VC expresses serious interest.

Diligence isn’t a test to pass or boxes to check. Instead, diligence helps investors:

• Understand what collaborating with you will be like
• Align on a realistic and believable post-investment plan

And just as importantly, it helps you assess whether this investor is the right partner for you.

Good diligence creates clarity around:

• What exactly are we building?
• What’s our next major milestone, and what risks might stop us?
• Do we see the same future for the company?

What Diligence Looks Like at Different Stages

Pre-seed Stage Diligence

Diligence is light. There’s not much data to comb through, so investors mainly focus on the story, the founders, the idea, market size, and your goals for the round. Early traction helps but isn’t the main point; everyone knows the product will probably evolve significantly. At this stage, investors are mainly trying to understand “the initial shape of the company”—and what it wants to become—and whether founders see the same “shape” and are similarly aligned.

Seed Stage Diligence

Still largely about the founders and story, but now investors also check early data. Seed diligence is about proving the “base case”—i.e. the problem is real, the solution resonates, and customers are starting to stick around. Expect questions on customer engagement and usage patterns, retention, initial go-to-market, how you’ve segmented the market, and core team hiring plan. Investors are asking themselves: Given this early traction and capital, can we “build a machine” that prints new customers or revenue.

Series A Diligence

Now investors want proof points. Series A diligence is about proving the “inductive case”—i.e., not only are customers using and paying for the product, but they’re sticking around and expanding. Investors will want to see what’s working now can scale: they’ll review data to understand product-market fit, scalable growth potential, unit economics, your hiring strategy, and your repeatable growth playbook. Investors are looking to understand that what you’re doing now works, it’s generalizable, and can continue to grow over time. Think of this as: we have proven “the machine is working” and now we’re using capital to turn this into “a machine that prints out more machines”.

The Primary Goal of Investor Diligence for Startups

The primary goal is straightforward:

Both founders and investors should align on a believable plan to reach the company’s next milestone towards becoming a venture-scale business.

This alignment usually involves clear answers across several dimensions:

Product / Market

• What’s being built, and for whom, and what problem is being solved?
• Why is it significantly (ideally 10x) better than existing alternatives?

Scale / Opportunity

• How big can this company realistically get with reasonable assumptions on market penetration?
• Do we agree on the size and shape of the market opportunity?

Plan / Resources

• What milestones are critical for reaching the next inflection point?
• What resources—product roadmap, team, GTM strategy, and capital—are required?
• How does this stage prepare us for subsequent funding rounds?

Diligence, when done right, isn’t just about answers—it’s about building shared conviction before deciding to partner.

What’s Ahead in This Series

Below are the specific diligence exercises we most commonly see. Think of these posts as practical building blocks for creating clarity and alignment, both with investors and within your own team.

Diligence Exercise	What We’ll Cover
Post 1. Aligning on the Plan (this post)	Why this series exists, what diligence looks like at each stage, and how to set goals for the process.
Post 2. Hair-on-Fire Problem + Why 10× Better	How to define who you’re selling to, what “hair on fire” problem they have, what they do today, what they will do with you instead, and why this is 10x better.
Post 3. Market Sizing – “is this venture scale?” and why does it matter?	How we think about market size and why it’s critical to venture outcomes. Aligns on whether there’s a path to a $1B+ company—based on how many customers exist, what they’ll pay, and how big the market could become.
Post 4. Hiring Plan – “Who should you hire when?”	Aligning on what the team needs to achieve product and GTM goals (and if fundraising, right-sizing the raise).
Post 5. Financial Model	What we look for in a model: revenue, costs, burn, and how it ties to the round’s goals.
Post 6. Product Roadmap	What you plan to build, how it connects to the value proposition, and the customer journey.
Post 7. Cohort Analysis and sales payback (“do our unit economics work?”)	How we assess product-market fit and customer durability through cohorts.

How Founders Should Think About Investor Diligence

• Skipping diligence can be risky. For pre-seed, diligence should be light. But if you are a seed stage company with $1M in ARR, or series A company, an investor who skips diligence all together is not necessarily better—it could even be a flag. Sometimes the investors already know you, know the space very well, or they’re just moving fast because of your fundraising round’s dynamics. But sometimes they’re guessing, making incorrect assumptions on your goals and vision, or simply cannot provide helpful feedback.
• Good questions predict good partnerships. Investors asking thoughtful questions early are likely to be more supportive when challenges arise later. If a firm isn’t asking questions, how do you know you’re aligned? What happens if you have different plans?
• Effective diligence sharpens your business. Seek investors who challenge your thinking constructively and make your plans stronger. The best partners will help you see around corners and get ahead of the problems you might face as you scale.

Key Takeaways on Startup Diligence for Founders

• Alignment beats mere approval. Diligence ensures both sides truly understand and agree on how they’ll work together.
• Clarity matters more than polish. The goal isn’t “passing a test”. Investors prefer clearly articulated, evolving plans over beautifully presented yet superficial materials.
• Our templates are starting points. Use our provided templates to accelerate your diligence process—but always adapt them to fit your unique context and story.

Next Post: Hair-on-Fire Problem and Why Is Your Solution 10x Better

In the next post, we’ll dig into how we think about clearly defining who your customer is, what hair on fire problem you’re solving, and how it’s 10x better.

We’ll cover:

• The underlying question and why it matters for every subsequent diligence exercise.
• Our shared method and framework—step by step, with a template
• A simple template you can use to create your own “hair-on-fire + 10x better” story

Thanks to Gokul Rajaram, Melody Koh, Jared Fliesler, Jason Krikorian, Nevin Raj, Andrew Bocskocsky, Tyler Maloney, and Brandon Terry for reading drafts of this.

Venture investors will often ask a founder the potential size of their startup. A core part of answering this question has to do with market size, commonly known as total addressable market (or “TAM”).

The post below will outline

1. why venture investors care about TAM (VCs typically look for “fund returners”)
2. common mistakes founders make when sizing their market(s) including examples (over general top-down estimates, non-specific segmentation, unrealistic assumptions)
3. the Bling Capital approach (bottoms-up segmentation-based approach)

Why is market sizing important?

Our goal with market sizing is to understand how big your startup can get if things go well.

Here is a sample mad libs format:

• To get to $100M in gross profit per year, we need X customers paying us $Y per year, where X represents this K% of the market of prospective customers. There are a total of (X / K%) such customers in the US.
• The primary characteristics when doing a segmentation of customers are A, B, C.

Venture Capital investors often ask themselves: Is this startup’s market sufficiently large to support a “venture scale” return?

To be considered “venture scale”, a lead investor’s equity in a startup (say 10% at the seed stage) has to have the potential to return their fund. Therefore, if a seed fund is $100M, an investor generally wants to see a path for any portfolio companies to become a $1B enterprise value company if things go well.

What happens if you’re seeking to raise venture capital, yet a venture investor believes your TAM is too small?

1. If an investor believes this during your fundraising process (rightly or wrongly), they may pass with the reason being “not enough conviction on the market”.
2. If discovered after investing that the market is indeed too small, they may influence founders to strategically focus on a venture scale outcome which will naturally be more challenging in a smaller market.

As a startup founder, putting together a clear and concise “back-of-envelope” market sizing that articulates a path to $100M and $500M, respectively, in gross profit will not only help avoid scenarios above but will also be helpful to driving business strategy and go to market approach. We use $100M and $500M as benchmarks for a “venture scale” business and “venture home run” business, respectively. The reason we favor gross profit over revenue for this exercise is because different markets and business models have varying gross margins, and gross profit better accounts for these differences.

Common Mistakes

Many market-sizing approaches result in numbers that may not resemble the reality of a startup’s current or even future potential market size. Below are four common mistakes we often see founders make when talking about market sizing, and we’ll outline each with relevant examples using two of our portfolio companies: Lyft (Marketplace) and Lucidchart (SaaS). These examples build on each other.

• Lyft is one of the leading ride share companies in the U.S. and is often evaluated as a marketplace.
• Lucidchart is a growth stage SaaS company for diagramming, data visualization and collaboration.

Mistake 1: Focusing on top-down total market size alone

Why it doesn’t work: Too generic, often doesn’t display a deep understanding of the market for this specific product

Example 1a: Lyft	Example 1b: LucidChart’s market
“Lyft’s market size (“TAM”) is equal to the total spend on taxis and limos in the United States.”	“The total spend on cloud tools is $X billion and Microsoft Vizio’s revenues are $Y millions, so our TAM is $x+$y.”
Better Approach: A bottoms-up approach that includes (1) the existing market (2) how Lyft’s approach (convenience, price, customer experience) would expand the current market (3) broader market trends (in this case, gig economy, proliferation of mobile devices) that would expand the current market.	Better Approach: A bottoms up approach that includes (1) your insight into the broader market trend (in this case, the # of SMEs in 2010 will 100x over the next 10 years), (2) your buyer persona, and (3) how Lucidchart is dramatically improving a free product with a product users are willing to pay for (SaaS model).

Mistake 2: Not segmenting your bottoms-up market sizing analysis

Why it doesn’t work: Omits go to market (GTM) strategy

Example 2a: Lyft	Example 2b: LucidChart’s market
“There are XX millions of people who can use Lyft. If they spend $Y on rides per year, then our TAM is $XY millions”.	“There are XX millions of people who could use LucidChart. If they pay us $Y per year, then our total addressable market is $XY millions.”
Better Approach: Segment your markets by city size and key characteristics: Tier 1 = large + urban like LA Tier 2 = mid-size+suburban like Dallas Tier 3 = smaller + more rural like Tulsa Then show how many cities exist per segment and provide reasonable assumptions for average total GMV per tier. [1]	Better Approach: Segment your customers based on buyer persona. If the buyer is a company, you should segment the customer by company size: Enterprise: 10K+ employees like Google Midmarket: 1k-10k employees like Datadog SME: <100 employees such as a startup Then show how many companies exist per segment and provide reasonable assumptions for average ACV (annual contract value) per segment. [2]

Mistake 3: Static growth and unrealistic penetration numbers

Why it doesn’t work: Doesn’t illustrate your path toward more revenue ($10M, $100M, $500M) with reasonable market penetration (e.g., 1% vs 50%)

Example 3a: Lyft	Example 3b: LucidChart’s market
“The TAM for Tier 1, Tier 2, and Tier 3 segments is $y. At 75% market penetration we will generate $xB in revenue.”	“The TAM for Enterprise+, Enterprise, and SME segments is $y. At 75% market penetration we will generate $xB in revenue.”
Better Approach: Articulate your launch city and reasonable penetration for that launch city. Use that “launch playbook” to articulate expansion to X additional cities that look like your launch city until you reach $100M and then $500M in revenue with reasonable penetration rates (e.g., 5% per city). The idea is to “tell the story” of how your market and business model will unfold over time. [3]	Better Approach: Articulate your ideal buyer and in which segments those buyers exist. Then, articulate reasonable penetration assumptions for those segments, and how you will expand over time until you reach $100M and $500M in revenue. The idea is to “tell the story” of how your market and business model will unfold over time (e.g., # SMEs 10x in 10 years). [4] [5]

Mistake 4: Using top-line revenue or GMV instead of Gross Profit

Why it doesn’t work: Top-line revenue or GMV leaves out the cost of delivering revenue and over inflates market size

Example 4a: Lyft	Example 4b: LucidChart’s market
We need x Tier 1 cities with 2% market penetration each to hit $100M in GMV, and x Tier 1 cities and x Tier 2 cities with 1% market penetration to hit $500M in GMV.	We need x enterprise customers, and x SME customers paying us $y ACV, including one-time fees, with 10% market penetration to hit $100M in ARR. We expect ACV to 2x in 5 years and SMEs to 100x in 10 years so our market penetration in 10 years would be 0.1%.
Better Approach: Calculate Lyft’s take rate on the GMV as revenue—GMV alone doesn’t reflect the value the company is capturing. Then, subtract the cost of delivering that revenue to calculate Lyft’s gross profit.	Better Approach: Many SaaS business models do not incur a lot of COGS. However, there are some mistakes to correct such as not breaking out annual recurring revenue vs. one-time revenue in your ACV and not including costs such as payment processing, customer support, hosting, etc.

The Bling Cap Approach

At Bling Capital, we believe your market sizing and narrative are interconnected. The exercise we often go through with founders are as follows:

What do we need to believe for ‘Startup A’ to get to $100M and $500M, respectively, in gross profit?

1. How many customers (segmented) will you have and how much will they be paying you (annually)?
2. What is the margin on your revenue (ideally by customer segment )?
3. What percentage of the market does that represent? (essentially market share)*

Using the examples above, let’s go through market sizing for Lucidchart.

What do we need to believe for Lucidchart to get to $100M and $500M in gross profit?

1. We segmented buyers based on company size. We have three tiers of buyers:
   a. Tier 1 (Enterprise+) = 1000+ employee companies
   b. Tier 2 (Enterprise) = 100-1000 employee companies
   c. Tier 3 (SME) = 1-100 employee companies
2. Across all segments, there are 493K total companies in the US but we will focus on the 470K SME and Enterprise companies:
   a. Tier 2: 75K companies (15%) are between 100-1000 employees
   b. Tier 3: 395K companies (80%) are between 10-100 employees
3. We have a SaaS freemium business model with 95% gross margins across segments. Our GTM is a product-led growth, with expansion driven by a sales organization.
   a. Our goal average ACV for Tier 2 is $50K ($10K - $100K range), which is an average of 200 licenses per company per year ($250/year/license).
   b. Our goal average ACV for Tier 3 is $5K ($100-$20K range), which is an average of 50 licenses per company per year ($100/year).
4. Our immediate revenue opportunity with our current product is $5.6B and our path to $100M is clear: We need 2K Tier 2 customers paying us $50K per year (~2.6% of market), or 20K Tier 3 customers paying us $5K per year (~5% of market).
   a. Tier 2: $3.7B TAM
   b. Tier 3 $1.9B TAM
5. Over time, as we launch more features (e.g., SSO), we will roll out to Tier 1 (Enterprise +) and implement playbooks to increase ACV across all segments. With just ~14% market penetration in this $9B TAM, we can reach $500M per year.
   a. Tier 1: 23K * $150K = $3.4B (3.3K companies, or ~14%)
   b. Tier 2: 75K * $50K = $3.7B (10K companies, or ~12.5%)
   c. Tier 3: 395K * $5K = $1.9B (100K companies, or ~25%)
6. As extra credit, further segmenting their customer tiers based on actual or projected data points (e.g., engineering, product, design, marketing teams are core users for Lucidchart) shows an even deeper understanding of your market.

Apply It

When going through a market sizing exercise with entrepreneurs, we usually start with asking questions. These questions are meant to help founders segment their customers, understand and assess reasonableness of their own assumptions, and to sanity check whether the story makes sense – all of which will lead to inputs for building a venture scale business.

Let’s do this together: Create a Google Doc and answer the following questions:

• Who is the customer (or title of customer, or buyer), today AND tomorrow? These can be customers you serve today or, if you have not launched, customers you intend to serve.
• What are the segments in your market where this customer exists? Divide your market into segments and define them.
• How many of these customers exist per segment? What are the number of customers that are model customers in each segment? Does that change over time?
• What were they doing before?
• What is the hair on fire problem?
• What are they doing now?
• How is this 10x better?
• How do you get them to pay you?
• How much are they paying you / will they pay you? This should be your GMV, average order value (AOV), or average contract value (ACV) per customer per year.
• What is the cost of delivering that revenue? Does that change over time?
• What is the gross profit total for each segment? Does that change over time?
• How many customers do you need to get to $100M and $500M in gross profit, and what percentage of the market (per segment) does that represent?
• Then, show the path to do that (In one sentence, clearly summarize how big of a revenue opportunity we believe this to be for us in Year 1, 2, 3, 4, 5). How many customers in your market do you already have as customers or are currently talking to? How do you plan to get your first 10-100, 100-1000 customers (or 10x, 100x or 1000x your current customer base) at the current or future GMV, AOV, ACV?

With the answers to these questions, you should have inputs for your “business formula”, using our Market Sizing Template. The outputs are X Y K A B C in the mad libs format:

• To get to $100M in gross profit per year, we need X customers paying us $Y per year, where X represents this K% of the market of prospective customers. There are a total of (X / K%) such customers in the US.
• The primary characteristics when doing a segmentation of customers are A, B, C.

We’re excited to see what you produce!

Final Takeaway

Market sizing helps you create a holistic and compelling narrative about your business, one that will resonate with investors and help you sharpen how you talk and think about your product evolution. Taking the time to deeply evaluate your market size with a solid methodology can be a key part of crafting a strong narrative.

Footnotes

[1] Consider these questions when segmenting your markets for a location-based GTM strategy: Is it by city or metro area? What is the characteristic of cities in each segment? How many cities exist in each segment? How much market penetration do you think you can realistically achieve in every market? When do you consider a city “activated” or “unlocked”?What is the TAM per city? How many cities in each segment do we need to unlock in order to achieve $100M and $500M in gross profit?

[2] Consider these questions when segmenting your customers for a subscription product: Do you sell top-down to businesses or through a bottoms-up product-led-growth (PLG) motion? Who is your ideal customer profile? Is it different from the buyer? At what size company does your buyer differ? What is the size of the company by number of employees? Can we organize these companies by segment? How many companies exist per segment? How much will they pay us and does it differ by segment? How will sales and marketing differ per segment? How much market penetration do you think you can realistically achieve in every logo per segment to achieve $100M and $500M in gross profit?

[3] Consider these questions when thinking about location-based GTM expansion and penetration: Which tier(s) will you focus on first? What is the hypothetical cost to launch a model city in each tier? How long would it take to hypothetically payback a model city in each tier? What is the reasonable goal penetration per model city in each tier? How many cities in each tier do you need to achieve $100M and $500M in gross profit? How do you anticipate growth over the next few years? Is this a small or large percentage of the total market? Is there room for more than one winner?

[4] Consider these questions when thinking about subscription GTM expansion and penetration: Which segment(s) will you focus on first? Will you be using a sales team and if so for which segments? How will sales and marketing channels differ per segment? What is the hypothetical cost to close a model logo in each segment? How long would it take to hypothetically payback a model logo in each segment? What is the goal penetration per model logo in each segment (e.g., x employees / seats per logo)? What is the path to achieving $100M and $500M in gross profit? How do you anticipate growth over the next few years towards these revenue goals? is this a small or large percentage of the total market? Is there room for more than one winner?

[5] Consider these segmentations for subscription businesses: Segment customers into logo size segments of SME (<10 employees), Enterprise (11-1000 employees), and Enterprise + (1000+ employees). Then, each segment’s logos should be assigned an ACV based on some reasonable assumptions; calculate total ACV per segment type as $xy, with x being the number of companies in the segment.