Talking with an entrepreneur, I asked him about the size of some "proxy markets" for his new concept.  He came back and lectured me on how big companies always want to know the exact size of the markets - which is why they miss new market opportunities.  (see my post of a year ago at my post on market analysts, which he apparently had not read .  He then told me that he didn't know the size of any of the proxy markets that I was asking about, and that he had searched one market - but it was really a market for the raw materials his business was going to us, and therefore was useless.

I realized that this idea of proxy markets was worth articulating.  A proxy market is a market that is a substitute for, or a competitor to, the product/service you are introducing.  (Remember that a great entrepreneur never says "there is no competition" and therefore you know in detail the competitors and substitutes in your market).   A simple analogy is that before toilet paper was invented, people did SOMETHING (however much we might not like to contemplate those substitutes).  But when TP came along, there wasn't a documented market for the stuff....but a good proxy might have been the number of outhouses as well as the number of people, and the number of people adopting indoor plumbing (which didn't like the Sears Catalog  pages too well!)

For example, take facebook.com.  There are people who say "there's nothing like facebook", or they'll list the immediate web-based competitors such as MySpace....However, they entirely miss the point that many, many schools offered paper-based "facebooks" for years (Stanford GSB among them!)  The online Facebook is merely an electronic incarnation of the paper based version that has been around for years.

If you are trying to answer the question "how many customers might be interested in this product or service", proxy markets make it possible to answer the question - "are there 10 potential customers, or 10 million?"  When all is said and done, being able to place an order of magnitude on the potential number of customers (or the infamous "TAM" - Total Available Market), is very helpful, both in your own planning and when you talk to investors.  When you talk about building a customized rocket engine for spacecraft, for example, your TAM is a very small number and can probably be listed on one hand (two if you count the private efforts). 

When looking at starting a company, identify those markets that can serve as a proxy for your actual "cool new market", to get a sense of whether there are 10 potential customers, or 10 million....