Editor’s Note: This post was originally published on Seattle 2.0, and imported to GeekWire as part of our acquisition of Seattle 2.0 and its archival content. For more background, see this post.
By Matt Hulett
One of the frequent comments that I make to entrepreneurs who are in the early stage of their business is how they are defining their Total Addressable Market, or TAM. Your TAM is basically the sum of all of the potential sales that your company could make if it didn’t have any competition. So, if you could reach 100% of your customers with your product or service, then that’s the definition of TAM. An example would be if you were defining your online ad business you would cite the $20 billion online ad business but then get specific as to your specific service. Using a dummy example, lets say you have a vertical target of all 18-35 year old car enthusiasts. You are now a % upon a % of the overall market size number since you have sliced it down from the broad online ad category by demographic and by psychographic (not just general new and used car enthusiasts).
Here are three tips that are geared toward defining your TAM for angel and venture capital financers:
1. Show the pain
Express the market pain and what market is being addressed. The key point that you will want to illustrate is defining a large enough market to have significant returns for your investors. If you are looking to buy a tattoo parlor or a dry cleaning business, you obviously are not worried about your TAM. But, if you are building a speculative startup, then the investors are going to be looking for a total addressable market that is large enough where a small % of the market share that your company addresses could be an interesting business. They are looking to see if your opportunity can be a $100M business. If you are presenting an opportunity where in 5 years your $20 million in revenue equates to 50% of the TAM, then this is just too small. Investors will typically want you to have a healthy revenue line in 5 years equating to single digit market share. I was recently talking to a friend of mine who had already reached 20% of their business with their next competitor, which has nearly the same market share. Out of their specific market, their TAM was $100M so their really isn’t a lot of room to grow or to hit the specific rate of return that most investors would require.
2. Know the TAM
Understand what a TAM is and what it is not. Many companies make the mistake of defining their TAM as their total industry, market share, or target market. The mythical comment that one tends to hear is, “Heck, if I sell one gadget to everyone in China, then that’s a big market.” That works great assuming that everyone has the same tastes, discretionary spending, likes/dislikes, etc. You need to get very granular when defining your TAM by showing the specific market opportunity by size and segmentation. Build out the math backed by primary research numbers by demographic, psychographic, SIC code, etc. Another tip is to also study your competition. You can effectively do a bottoms-up analysis from their data even if it’s a private company. Also, layer in specific detail around segmentation growth rates if possible.
3. Tell a Story
You should work hard on structuring all of the data that you have collected on your TAM to tell a specific story. Think about showing the overall market, your TAM, and possibly other comparable competitors. You will want to state very clearly the starting point in year 1 and what year 5 looks like. The goal being that even at single digit market share your business can be a large business.
Remember, your goal is to answer two key questions: 1) whether your opportunity big enough and 2) can your team fill a need in the market they are addressing. An example unrelated to business is T. Boone Pickens presentation on how to reduce this country’s reliance on foreign energy. It’s a great example of how slides and a white paper bring together a market view of the energy dilemma. I could definitely see this as inspiration for the next time I present my TAM or present strategic planning materials.
