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
Episode Date: May 7, 2021 -- External Link to video
Jason Calacanis |
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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
Activities
🔲 Recalculate bottom-up TAM
- 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
🔲 Create a visualization of TAM
- 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
Episode Date: May 7, 2021 -- External Link to video
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
Activities
🔲 Recalculate bottom-up TAM
- 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
🔲 Create a visualization of TAM
- You will eventually want a slide in your pitch deck with TAM
- While the research is fresh put together a visual representation