Market size is a critical factor for any company, and usually, one of the areas investors (both on the public and private side) spend a lot of time evaluating. Important questions could be not only how big a market is, but how much depth exists? Is the company picking off low hanging fruit? How fast is the market growing (or contracting)? Is the company creating a new line item or is there existing spend? Has the product expanded the market? All important areas to understand. I’ve been looking through high-growth SaaS/cloud company S-1’s to benchmark relevant data (ARR, post-IPO performance, ARR growth) and wanted to also see — how big of a TAM (total addressable market) does a SaaS/cloud company need to get public? In some ways, the TAM number is a vanity metric, but when a company goes public there needs to be a story for continued growth.
For example, to get public, a SaaS company typically needs to be at ~$100M+ of ARR, growing 60%+ YoY. Investors want to point to a large market (and ideally growing) to build a case for continued growth years after an IPO. According to ~45 high-growth SaaS/cloud IPOs, the median TAM is $10B with the average at $15B. You can see each company’s TAM at IPO in the chart below.
TAM Disclosure from High-growth SaaS/Cloud S-1s ($B)
As you can see, the actual TAM disclosure varies widely, with the high of $46B for Twilio and low of $2.9B for Responsys. Does it matter? Maybe a bit. It’s not correlated to ASPs (average selling price) or growth, but slightly correlated with ARR scale and therefore valuation, which makes sense. These numbers mostly come from an industry research vendor (such as Gartner) or using company internal estimates. For example, a company might cite their solution is relevant for any company over x dollars in revenue, of which there are y companies. They then apply y number of companies to their annual ASP for a theoretical market size. Most investors do their own market sizing work, though. While it’s nice to show a multi-billion dollar TAM number in an S-1, a company’s growth and unit economics tend to be better indicators of success. I think the difference in showing $10B vs $30B for a fast-growing and capital efficient software business is less relevant.
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