What is the canonical answer to "If we can get only x% of this y$ market" where x is a very small number and y a very big one?

One often sees business plans or pitches along the lines of "yeah we're going after a well-entrenched market, but it's a very big one and we need to get only x% of it to be profitable" where x is often ridiculously low.

Is this a valid business model? I'm pretty sure reading or hearing somewhere how bad of an idea that was, does anyone has any pointers?

Yes, it's bad, investors will rate you right away as clueless.

One way to think about it: why is your x% any more reasonable than say, 10 times less, or 10 times more? You do realize that when you say "housing is a trillion dollar market", and we only need to capture 1% to be billionaires, it doesn't make any sense. 1% seems low, which is why you assume: "anyone could get 1% of anything". It's top-down thinking. Now think bottom-up. 1% of the housing market is 10 million households. How am I going to get 10 million people to use my product? If you can answer that, then you are in good shape.

One more way to think about this: redefine your market so you become the leader in that sub-market. That's pretty much the only way that makes sense. We want to be the best at "housing for 2-income families in New York". Ok, now I can believe you know what you are trying to do.

Lindelof,

There is little value to this type of a "plan". I use quotes because it is NOT a plan at all - it is only a hope. As a wise mentor once told me Hope is not a plan. This is a TOP-DOWN view of the potential of your business.

The little value is just to give you and the investor a hypothetical view of the potential. So you can give a very large Y ($B) and a small X (<5%) say that there is a huge potential. Remember that if you show something like 20+% in 3 years, then your investor will ask you to hand over whatever you have been smoking :) and you will lose credibility. So... this X% of Y$ market is not useful and if this is all you have put in front of your investor - you will be shown the door.

To make your plan credible you need a BOTTOMS-UP PLAN - a real plan.
A real plan is not just numbers starting from zero customers/revenue growing to some realistic number over 5 years, but one that is supported by ACTIONS that your team will undertake to achieve those. These actions can be in the Development, Marketing and most importantly Sales areas.

Example: If I have an Enterprise business, and I show say 5 customers in year 1, then I need to show actions that may be something like:

1. Attend 3 conferences, collect 200 leads
2. Target and qualify 50 of them
3. Pursue and close 5 of them with 2 sales personnel

These actions will be supported by a hiring (Sales/marketing) and investment plan (for marketing, lead-gen, promotions etc). Now the 5 customers (and their revenue) becomes a believable number.

Repeat this for Years 2-5 and you have a real plan supported by actions that shows the investor that you have thought through the details. By Year 5 you may have 100 customers at ~$500K a piece which will put you at $50M revenue. If your addressable market was $1B then you have reached 5% of the addressable market.

Hope this helps.

Siva