The real reason investors don’t invest in your startup—and it’s not market size

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I once presented a company to another VC for an investment we were syndicating. This investor loved the team and thought the solution they were building was compelling.

Ultimately, the firm passed because they weren’t comfortable with the “market size,” given that they were a big fund and only targeted US$1 billion+ opportunities.

The fallacy of market size

Years ago, I was looking at a series A investment in a company called Lumos Labs. The company was the leader in online brain fitness games and had over 14 million members at that time. But these were the early days of the company.

I loved the founder but was struggling because the idea just didn’t seem “big enough” to me. I remember talking to one of their angel investors (and also one of my old mentors) about what the company could become and what it would look like if it ever became big.

I wondered if it could potentially be a platform for something else (the most meaningless and overused phrase that entrepreneurs and investors use to make companies seem more important than they are).

His answer was simple, and at the time, I dismissed it as the view of an angel investor who didn’t really “think like a VC.” After thinking for a few seconds, he said, “I just think they can get big by selling lots and lots of games.”

VCs pass because of “market size” all the time. It’s maddening feedback for entrepreneurs because no one likes to think they are not working on a big enough opportunity. Sometimes, it’s true — the market really isn’t big enough. But often, it’s either not really the case or truly impossible to tell.

How does one measure the market size of a company creating a completely new market or one that is trying to unlock non-consumption vs stealing share from existing players?

The real reason investors are hesitant

The problem with the market size feedback is that entrepreneurs end up being stuck. How do I change the size of the market I’m going after?

But the reality often is that investors don’t pass because of market size. They pass because of doubts about customer adoption.

It’s not a question of “Are there a lot of potential customers for this?” It’s more a matter of “I don’t believe that a lot of customers will buy/adopt this.” The early traction may be interesting, but investors fear that demand is driven by a small niche with idiosyncratic tastes or needs.

In other words, the investors just don’t believe in that scenario my mentor mentioned: that you can simply sell lots and lots of games.

But if this is the case, then there is actually hope!