As an investor, your ability to spot the next big thing can make or break your portfolio. But a key step to picking a winner is doing your research.

In this article, we'll explore both top-down and bottom-up approaches, and share some tools that may help along the way.

Ready? Let's do this.

The Top-Down Approach

First things first, let's talk about Total Addressable Market (TAM).

You'll typically hear about an industry's TAM in a pitch deck. And this is always a big juicy number.... like: "This is a $40 billion market opportunity!" And while TAM is (usually) relevant, we can never be sure how the founder came to that number. So how do you get the real scoop on market size?

For starters, you can use tools like Statista and even government databases to help you uncover:

1. How much money is actually being spent in the market
2. The number of potential customers
3. The market's growth rate

But TAM only tells part of the story. You'll also want to scope out the competitive landscape. Are there already a bunch of players in the space, or is this relatively uncharted territory? Tools like G2, Product Hunt, and even ChatGPT can help you get the lay of the land.

Let's talk a bit about competition, though. It's important to know how crowded the market is. But the existence of other companies doesn't necessarily mean game-over for all other newcomers. In fact, it could be a good sign that there's a real market need.

The key is to look for the startup's secret sauce. What's their unique angle? How will they carve out their own slice of the pie?

Consider these questions:

1. What are the barriers to entry in this market?
2. How sticky is the product?
3. How much time and energy does it take for a customer to switch products?

Remember, we're looking for companies that can build a moat around their business. The wider and deeper that moat, the better.

The Bottom-Up Approach

Once you've got a bird's eye view, time to zoom in. Let's start with a little "back-of-the-napkin" math.

Now, at Hustle Fund, we're early-stage VCs. So we're looking for 100x exits from whatever entry point we get in at, meaning we want to see a path to $100m+ in revenue from the entry point that we get in at.

Doing the bottoms-up analysis helps us think through a scenario like this: Here's a company that's currently charging $20k a year for their product. But if they de-risk X, Y, and Z things, they can get to $100k a year per customer. And if they're charging $100k a year, then they only need to acquire 1k customers to get to $100m in revenue.

From there you can go through the mental gymnastics: do I think they can acquire 10 customers this year? And 100 next year? And then 500 the year after that? Because that's what will need to happen (or some version of that) to get to $100m in revenue.

So even if you're not a fortune teller (so sorry for you), you will want to think about what the future of the company looks like:

1. Pricing evolution: Will this startup be able to charge more as they grow and add features?
2. Customer acquisition costs: How much will it cost to bring in each new customer? How will this change as they scale?
3. R&D reinvestment: Will they be able to plow money back into product development, or will all their cash go towards competing on the marketing side?

Here's a little secret: companies that crack the code on efficient customer acquisition early on are like gold dust.

Why? Because they can reinvest their revenue into R&D instead of burning it all on marketing.

Connecting the dots

Alright, so we covered top-down analysis. We covered bottoms-up analysis. Now let's connect the dots.

At this point you'll have a much clearer picture of the startup's potential. You should have some sense of:

1. market size and growth potential
2. the startup's ability to capture market share
3. potential challenges and opportunities that lie ahead

With this information, you're in a much better position to make an informed decision. You'll be able to separate the wheat from the chaff, the diamonds from the rough, the Oreos from the knock-offs.

Now go forth and analyze 🖖.