How did Jeff Bezos buy a $500M yacht? He used the Market-First framework.

Not all investment opportunities are created equal. Investing in the right market can make the difference between a million-dollar outcome and a billion-dollar outcome. Here’s why market size matters.

Hi Guys - Did you know that Amazon founder Jeff Bezos has a $500M superyacht? Who doesn’t love an eccentric billionaire superyacht 🛥️?

The fun part? Despite the $500M price tag, this represents ~.25% of his $201.7B net-worth 🤯. 

Jeff Bezos built a company so large that he can spend $500M with virtually the same financial impact as a millionaire buying a cheap set of golf clubs 🏌️. 

Today, we’re going to dissect how to use the market-first framework to identify billion-dollar market opportunities (like Amazon!) 

 

Market Math 

Even the best startups can quickly hit a ceiling if they choose the wrong market. 

Here’s a quick example...

  • $1 Billion Market: Let’s pretend we invest in a company founded by Jeff Bezos Jr. and the company does really well and ends up with a 10% market share of a billion-dollar market (~$100M in revenue). 

We collectively invest $8M and after dilution own about 12% of the company when it gets acquired. Let’s pretend the company exits for a reasonable revenue multiple of 7X. In this scenario, the company was acquired for 7 times $100M in revenue (10% of $1B market), or a total exit valuation of $700M. Early-stage investors end up with $84M for 12% of the $700M, which is a great 10X return. 

  • $100 Million Market: Now let’s run the same model with a much smaller market and make no other adjustments:

Let’s say the company Jeff Bezos Jr. builds ends up with 10% of a $100M dollar market. As with the first scenario, investors put in a total of $8M in early rounds and end up holding about 12% of the company.

Now, assume the company gets acquired at the same revenue multiple of 7X. In this scenario, the company is worth 7 times $10M (10% of $100M market) in revenue or a total valuation of $70M. Early-stage investors end up with $8.4M for their 12% (12% of 70M), which is a break-even 1X return.

It’s a simple scenario but drives the point home. 

Because most startups will not succeed, you need the big wins to make up for your losses. To achieve a truly outsized return, the company needs to be built in a large or high-growth market.  

Total Addressable Market (TAM)

Before investing in any company, be sure to calculate the Total Addressable Market (TAM). 

TAM refers to the total market demand for the product or service the company is selling. It’s one of the most critical elements to look at because, even though it’s often a ballpark number, it willl give you a realistic forecast of how much potential revenue the company can generate. 

There are a few ways to calculate TAM; the simplest of which is the bottom-up approach, which is based on concrete customer volume and pricing. Here’s how to do a calculation:

1. Determine average contract value (ACV), or the average price a customer is willing to pay for your product. 

2. Then multiply ACV by the total number of customers.

Example: Let’s say you sell software to medical schools in the United States. The average customer pays about $1,000,000 to use this software. You determine that there are 250 medical schools in the United States. Multiply your ACV of $1,000,000, by the total number of medical schools in the United States (250) and you get a TAM of $250M. 

TAM is very important, but don’t be tricked. High-growth markets can start very small, almost hobbyist, but quickly become the next biggest trend.

Market Types: 

The end goal of a startup is to achieve a controlling market-share. There are a few ways to obtain it. Let’s discuss them below: 

  • Small, but high-growth markets: Have you ever heard the phrase “rising tides lift all boats”? It’s frequently referenced in the venture industry. The best startups often ride a new market wave that may be small initially but scales exponentially. Startups that ride this wave successfully can reach staggering success. 

Some of the best investments of the last 15 years fall into this category of company. Think WhatsApp with the mobile revolution, Amazon with eCommerce, and Coinbase with crypto. Investing in a high-growth company in a high-growth market can lead to compounding returns.

Provided by Matt Heiman is a partner at CRV.
  • TAM Expansion: In 2013, Chad Byers, the co-founder of Susa Ventures, an early-stage venture capital firm, caught wind of an up-and-coming company in Silicon Valley, now known as Robinhood (Market Cap $34B). 

Chad remembers being in the audience for the team’s demo. The concept, a completely innovative idea at the time, blew him away. Robinhood planned to capitalize on the market by making stock trading free AND entertaining via a powerful user interface. The result of this product innovation expanded the market significantly and brought in millions of new customers that previously didn’t trade stocks. 

Anticipating this TAM expansion, Susa Ventures invested $250,000 into Robinhood. Chad was nervous (it was his first investment), but it was clear that this company was about to reinvent the market and skyrocket. 

Chad was right. Today, Susa’s stake in the company is now valued at $400M. 

Stock trading was already enormous, but Robinhood was delivering an innovative way for people to invest easily and without commission on a user-friendly interface - something that had been lacking in the market up to that point. 

  • Adjacencies or Optionality: Amazon is a perfect example of a company with strong adjacencies. 

The company was founded in 1994 and launched in one very specific category...books 📚! The book category was perfectly served by Amazon’s infrastructure and they quickly came to dominate the online bookselling arena. With millions of customers already at their doorstep, it made perfect sense to begin selling other products to them and thus began Amazon’s path to becoming the “everything store” as we know it today. 

Books were just the company’s beachhead for selling everything online. 

Source: Amazon

So, that about sums it up! 

If you’re looking to invest, make sure you take the time to understand the market that the company is competing in. Really dig in and understand market segmentation and positioning. With practice, you’ll be able to quickly recognize a company’s potential, by the market it serves. 

See you next time ✌️

Callum