Estimated Time

• Reading: ~6 minutes
• Video: ~41 minutes
• Activities: to be completed prior to the next week

Insights

• Most investors do not care about your lazy TAM
• A more meaningful measure of TAM is bottoms-up based on real customers

Total Addressable Market

• The Total Addressable Market (TAM) as described by CFI
• Is the overall revenue opportunity that is available to a product or service if they captured the entire market
• It helps determine the level of effort and funding that a person or company should put into a new business line
• There are 3 main ways of calculating TAM
• Bottom-Up:
• Jason prefers this method as it is the most accurate and shows that the founder understands who the customers are
• It evaluates where products can be sold
• Takes into consideration the sales of comparable products
• And estimates the market share based on current customers
• Top-Down:
• Calculated by determining the total market
• Then estimating the company's share of that market
• Value Theory:
• How much value do consumers receive from your product or service
• And how much they're willing to pay in the future for it
• Difference between TAM, SAM, and SOM

Understanding your Market

• Are you creating a new market or servicing an existing one—how to tell the difference.
• Let's use two consumer subscription companies as examples for this:
• Spotify and Calm
• The market for Spotify was clear - everyone loves music
• Consumers would love all the music in the world cataloged and instantly accessible for a small monthly fee
• The issue with Spotify was figuring out the rights issues that plagued music startups in the past
• Spotify knew their market existed
• They knew everyone loves music
• They had to figure out how to not make the same mistakes as Napster
• For Calm, their market did not exist
• They helped create their own market by launching a great product at the perfect time
• Calm did not know for sure that there was a pot of gold at the end of the rainbow
• But their product was so good it helped create the market they now exist in
• Great products can create markets
• Uber
• Airbnb
• Calm
• Understand the difference between "Lazy TAM" and "Bottom-Up TAM"
• Early-stage investors typically don't need to see a TAM slide
• "Lazy TAM" is a term Jason coined after having hundreds of founders show an uncorrelated Gartner number on their TAM slide
• Episode Date: May 7, 2021 -- External Link to videoJason Calacanis | TWiST | Twitter | LinkedIn
• Do NOT do this — you instantly lose credibility with investors
• The great early-stage investors don't care about an insanely huge market size
• We care about the flywheel:
• Great product
• Great team
• Obsessed customers
• If you do want to impress an investor with a TAM slide
• Use a bottom-up approach
• Why? It shows that the founder is starting with reality and building upwards from there
• Let's look at a fictional startup example:
• Acme Corp sells SaaS software to dentist offices
• They charge $1000/month per office
• First, let's do a LAZY TAM example:
• According to an ADA (American Dental Association) report from June 2020, the total projected dental spending for 2021 was between $123.9B and $154B
• Lazy TAM would be taking the average of these two numbers ($139B) and pitching that as your yearly market size
• "We can capture 10% of this market, and if we were at scale in 2021 our yearly revenue would have been $13.9B"
• This calculation would completely miss the mark, and hurt your credibility with investors
• Bottom-up TAM example:
• Remember, you're only selling to dentist offices, so find that number first
• In 2020 there were 201K working dentists in the US, according to the ADA
• But there are only 187K total dental offices in the US in 2021, according to market research firm IBIS World's projections
• This makes sense, as some offices have multiple dentists
• Out of the 187K dental offices, what % can you convert to customers?
• Let's say you think you can capture 10% of the market in ten years
• That's $1000/month x 18.7K = $18.7M/month OR $224M/year in revenue
• $224M in revenue is a great business!
• And if you walk investors through your TAM bottom-up style, you will look prepared, believable, and credible
• Make sure to emphasize that you're only going after the customer segment that fits into your business, not the entire market
• From that example, The Acme Corp selling into dental offices does not care about the total dental revenue of toothbrushes, oral hygiene products, etc.
• You can also put a "looking ahead slide" where you talk about potential markets you can expand into in the future
• Expanding into different markets has made great companies go supernova
• For example,
• Amazon building AWS
• Through the first 9 months of 2021, AWS accounted for ~70% of Amazon's profits ($13B out of $19B)
• And AWS had only 13% of Amazon's total revenue ($44B out of $332B)
• Another example,
• Uber first expanded from black cars into Uber X's, then expanded into delivery
• The first expansion (offering Uber X) basically created the gig economy on a global scale and kicked Uber's business into hyperdrive
• The second expansion (delivery) made Uber's business anti-fragile
• It kept them growing throughout the pandemic as rides shut down for a few months
• Have investors had success in your market before?
• Can dozens (or hundreds) of venture-scale businesses be built in your market?
• Being in enterprise SaaS is much more investable than owning a bunch of laundromats or restaurants
• Why? The path to creating a $1B company is easier in enterprise SaaS
• Venture scale means "can your startup can get to $100M in revenue or a $1B valuation in under 10 years"
• When Calm first started, they were not viewed as a "venture-scale business"
• Investors were skeptical that Calm's market size was larger than people who were currently into meditating
• Once Calm added sleep stories, mental recovery for athletes, and other products, the market expanded
• They did not do this on day one
• They focused on delighting the customers they had and expanded later
• Ask yourself: Can you get to $100M in revenue in 10 years in your market?
• In a February 2017 blog, Elad Gil (Angel S5 E3) described a trick to assess if your market was a good one to be in:
• Elad calls this "The 2% and $1 Billion Rule"
• A direct quote from the article: "In general, you want to be in markets where multiple companies could afford to buy you for $1 billion, or where 2% of their market cap is at least in the hundreds of millions of dollars."
• For Example,
• If you're a startup that's building tools to help creators monetize, you could be acquired by...
• Google: ~$2T market cap
• Facebook: $950B market cap
• Snapchat: $88B market cap
• Twitter: $43B market cap
• Ask yourself: "what are the market caps of the biggest companies in my space"?
• If the market caps are huge, this will help you in three ways according to Elad:
• These market caps reflect market opportunity since they're based on total revenue, growth rate, and margin
• Large incumbents are competitors but they're also potential acquirers (they will create exit opportunities)
• High market cap and cash-rich companies tend to be great strategic investors at the later stages for a company
• Do you know who your competitors are?
• If an investor asks about competition:
• You should be able to name your top 3-5 competitors
• And you should also be able to explain how and why what you're offering is better for customers
• It's also a bonus if you know ballpark revenue numbers
• This information is typically pretty easy to find through Crunchbase or Pitchbook
• Here is a scenario that happens often when founders are pitching me:
• I ask them: "Who are your main competitors"
• And they say: "We don't have any competitors"
• You always have competition!
• If you truly don't have competitors the first question will be:
• "Is there a market for this — why is no one else doing it?"
• Even if nobody is going after the same customer segment, there will still be other companies in your vertical
• If you know the ins and outs of your competition, you will come across more credible to investors
• And when you're trying to raise money, increasing credibility is key!
• What are the barriers to entry in your market?
• For most tech industries, the barriers to entry are pretty low - examples:
• E-commerce
• Enterprise software
• Consumer software
• Marketplaces
• Most of the regulations are common sense stuff
• No lewd content
• No securities fraud
• Don't lie to investors or customers
• etc.
• In crypto, there are almost zero headwinds right now
• In enterprise software, some headwinds start to exist around security and compliance once you get to scale
• Signing contracts worth six figures and up creates additional complications
• In healthcare, housing, and education, there are massive barriers to entry:
• Federal regulations for healthcare
• Zoning and building permits for housing
• Local regulations for education
• All of these barriers take time and money to pass
• That is one reason why VCs are often skeptical about those businesses
• But keep in mind — the bigger the barriers to entry, the deeper the moat

Additional Resources

• How to estimate market size?
• Understanding your market
• Market research and competitive analysis
• Starting Greatness Podcast: From Zero to One to IPO and Beyond
• High level overview version

Activities

• You had previously estimated your initial TAM - rework it if necessary with a more bottom-up approach
• As you get your first paying customers you'll be able to become more accurate with this number

• You will eventually want a slide in your pitch deck with TAM
• While the research is fresh put together a visual representation

Estimated Time

• Reading: ~6 minutes
• Video: ~41 minutes
• Activities: to be completed prior to the next week

Insights

• Most investors do not care about your lazy TAM
• A more meaningful measure of TAM is bottoms-up based on real customers

Total Addressable Market

• The Total Addressable Market (TAM) as described by CFI
• Is the overall revenue opportunity that is available to a product or service if they captured the entire market
• It helps determine the level of effort and funding that a person or company should put into a new business line
• There are 3 main ways of calculating TAM
• Bottom-Up:
• Jason prefers this method as it is the most accurate and shows that the founder understands who the customers are
• It evaluates where products can be sold
• Takes into consideration the sales of comparable products
• And estimates the market share based on current customers
• Top-Down:
• Calculated by determining the total market
• Then estimating the company's share of that market
• Value Theory:
• How much value do consumers receive from your product or service
• And how much they're willing to pay in the future for it
• Difference between TAM, SAM, and SOM

Understanding your Market

• Are you creating a new market or servicing an existing one—how to tell the difference.
• Let's use two consumer subscription companies as examples for this:
• Spotify and Calm
• The market for Spotify was clear - everyone loves music
• Consumers would love all the music in the world cataloged and instantly accessible for a small monthly fee
• The issue with Spotify was figuring out the rights issues that plagued music startups in the past
• Spotify knew their market existed
• They knew everyone loves music
• They had to figure out how to not make the same mistakes as Napster
• For Calm, their market did not exist
• They helped create their own market by launching a great product at the perfect time
• Calm did not know for sure that there was a pot of gold at the end of the rainbow
• But their product was so good it helped create the market they now exist in
• Great products can create markets
• Uber
• Airbnb
• Calm
• Understand the difference between "Lazy TAM" and "Bottom-Up TAM"
• Early-stage investors typically don't need to see a TAM slide
• "Lazy TAM" is a term Jason coined after having hundreds of founders show an uncorrelated Gartner number on their TAM slide
• Episode Date: May 7, 2021 -- External Link to videoJason Calacanis | TWiST | Twitter | LinkedIn
• Do NOT do this — you instantly lose credibility with investors
• The great early-stage investors don't care about an insanely huge market size
• We care about the flywheel:
• Great product
• Great team
• Obsessed customers
• If you do want to impress an investor with a TAM slide
• Use a bottom-up approach
• Why? It shows that the founder is starting with reality and building upwards from there
• Let's look at a fictional startup example:
• Acme Corp sells SaaS software to dentist offices
• They charge $1000/month per office
• First, let's do a LAZY TAM example:
• According to an ADA (American Dental Association) report from June 2020, the total projected dental spending for 2021 was between $123.9B and $154B
• Lazy TAM would be taking the average of these two numbers ($139B) and pitching that as your yearly market size
• "We can capture 10% of this market, and if we were at scale in 2021 our yearly revenue would have been $13.9B"
• This calculation would completely miss the mark, and hurt your credibility with investors
• Bottom-up TAM example:
• Remember, you're only selling to dentist offices, so find that number first
• In 2020 there were 201K working dentists in the US, according to the ADA
• But there are only 187K total dental offices in the US in 2021, according to market research firm IBIS World's projections
• This makes sense, as some offices have multiple dentists
• Out of the 187K dental offices, what % can you convert to customers?
• Let's say you think you can capture 10% of the market in ten years
• That's $1000/month x 18.7K = $18.7M/month OR $224M/year in revenue
• $224M in revenue is a great business!
• And if you walk investors through your TAM bottom-up style, you will look prepared, believable, and credible
• Make sure to emphasize that you're only going after the customer segment that fits into your business, not the entire market
• From that example, The Acme Corp selling into dental offices does not care about the total dental revenue of toothbrushes, oral hygiene products, etc.
• You can also put a "looking ahead slide" where you talk about potential markets you can expand into in the future
• Expanding into different markets has made great companies go supernova
• For example,
• Amazon building AWS
• Through the first 9 months of 2021, AWS accounted for ~70% of Amazon's profits ($13B out of $19B)
• And AWS had only 13% of Amazon's total revenue ($44B out of $332B)
• Another example,
• Uber first expanded from black cars into Uber X's, then expanded into delivery
• The first expansion (offering Uber X) basically created the gig economy on a global scale and kicked Uber's business into hyperdrive
• The second expansion (delivery) made Uber's business anti-fragile
• It kept them growing throughout the pandemic as rides shut down for a few months
• Have investors had success in your market before?
• Can dozens (or hundreds) of venture-scale businesses be built in your market?
• Being in enterprise SaaS is much more investable than owning a bunch of laundromats or restaurants
• Why? The path to creating a $1B company is easier in enterprise SaaS
• Venture scale means "can your startup can get to $100M in revenue or a $1B valuation in under 10 years"
• When Calm first started, they were not viewed as a "venture-scale business"
• Investors were skeptical that Calm's market size was larger than people who were currently into meditating
• Once Calm added sleep stories, mental recovery for athletes, and other products, the market expanded
• They did not do this on day one
• They focused on delighting the customers they had and expanded later
• Ask yourself: Can you get to $100M in revenue in 10 years in your market?
• In a February 2017 blog, Elad Gil (Angel S5 E3) described a trick to assess if your market was a good one to be in:
• Elad calls this "The 2% and $1 Billion Rule"
• A direct quote from the article: "In general, you want to be in markets where multiple companies could afford to buy you for $1 billion, or where 2% of their market cap is at least in the hundreds of millions of dollars."
• For Example,
• If you're a startup that's building tools to help creators monetize, you could be acquired by...
• Google: ~$2T market cap
• Facebook: $950B market cap
• Snapchat: $88B market cap
• Twitter: $43B market cap
• Ask yourself: "what are the market caps of the biggest companies in my space"?
• If the market caps are huge, this will help you in three ways according to Elad:
• These market caps reflect market opportunity since they're based on total revenue, growth rate, and margin
• Large incumbents are competitors but they're also potential acquirers (they will create exit opportunities)
• High market cap and cash-rich companies tend to be great strategic investors at the later stages for a company
• Do you know who your competitors are?
• If an investor asks about competition:
• You should be able to name your top 3-5 competitors
• And you should also be able to explain how and why what you're offering is better for customers
• It's also a bonus if you know ballpark revenue numbers
• This information is typically pretty easy to find through Crunchbase or Pitchbook
• Here is a scenario that happens often when founders are pitching me:
• I ask them: "Who are your main competitors"
• And they say: "We don't have any competitors"
• You always have competition!
• If you truly don't have competitors the first question will be:
• "Is there a market for this — why is no one else doing it?"
• Even if nobody is going after the same customer segment, there will still be other companies in your vertical
• If you know the ins and outs of your competition, you will come across more credible to investors
• And when you're trying to raise money, increasing credibility is key!
• What are the barriers to entry in your market?
• For most tech industries, the barriers to entry are pretty low - examples:
• E-commerce
• Enterprise software
• Consumer software
• Marketplaces
• Most of the regulations are common sense stuff
• No lewd content
• No securities fraud
• Don't lie to investors or customers
• etc.
• In crypto, there are almost zero headwinds right now
• In enterprise software, some headwinds start to exist around security and compliance once you get to scale
• Signing contracts worth six figures and up creates additional complications
• In healthcare, housing, and education, there are massive barriers to entry:
• Federal regulations for healthcare
• Zoning and building permits for housing
• Local regulations for education
• All of these barriers take time and money to pass
• That is one reason why VCs are often skeptical about those businesses
• But keep in mind — the bigger the barriers to entry, the deeper the moat

Additional Resources

• How to estimate market size?
• Understanding your market
• Market research and competitive analysis
• Starting Greatness Podcast: From Zero to One to IPO and Beyond
• High level overview version

Activities

• You had previously estimated your initial TAM - rework it if necessary with a more bottom-up approach
• As you get your first paying customers you'll be able to become more accurate with this number

• You will eventually want a slide in your pitch deck with TAM
• While the research is fresh put together a visual representation