All TAM Slides are B.S.

A Closer Look at a Startup Venture Presentation Part 2

As long as I’m living in the land of profanity, let me say, “All TAM slides are bullshit.”

TAM stands for total available market or total addressable market, and is the way investors, bankers and consultants talk about market size. In other words, it is one of the ways you can tell if a company has the potential to be a “unicorn.” (Argh. Shoot me now!)

Rather than asking “How big is your TAM?” the question I always want answered is “How big of a company can we build here in a reasonable period of time (say 5–7 years)?” While the objective is often the same, this question leads to different questions and a different process. The easiest way to answer the question (or do the math) is determining the number of companies that need our product X the average price they’ll pay.* Putting it into a financial model both puts it on a timeline and forces you to think through your “go to market” approach to see if it hangs together.

This process makes you really focus on how many companies need your product now as opposed in theory and over an infinite timeline. You can get credit for adjacent markets after securing a beachhead, or for companies that will be later adopters, dumping them all into one TAM slide is useful. It also forces you to think through how much money will be required to get access to all those customers. In order to think through the business, ask yourself questions like these:

• In what sectors do people really need the product? For example, Alation’s product is theoretically horizontal, but financial services and Internet companies that have a ton of data and data growth tend to be riper targets.
• What size companies find the most value? Big companies need the ability to customize products in order to make them fit with existing business processes and systems. Small companies need fast deployment with little or no services (the Model T version). So which are you building? At Intacct, we find companies with 20–2,000 employees to be the sweet spot.
• What is their existing technology stack? At Stitch Labs, we find that customers who are using at least two e-commerce platforms such as eBay, Shopify, Amazon, Magento, Etsy and Big Commerce are our best customers.
• How many companies have bought equivalent (even if substandard) product from our competitors and what is the combined annual revenue of these substitute products? Are those good prospects for us because they will understand the limitations of our competitors or bad prospects because they aren’t ready to go through a replacement cycle? At Victor Ops, we are perfectly happy to talk to a customer who has deployed Pager Duty. They have recognized both the problem and the limitations of that solution.

This process really focuses the mind on pricing, which is the easiest way to create or destroy value in a SaaS company. You can’t answer the question without knowing who is the typical customer, how much they pay for adjacent products, and the likely Return on Investment (ROI) for deploying your product. Pricing typically scales up and down according to some metrics (for example, number of users or number of systems monitored or data volume) and you have to identify what that metric is for your product. It maps to your customer acquisition strategy (big ticket items versus high velocity land and expand approach) and what type of channel (including online sales) or sales reps you think are necessary to sell the product. If you priced for high velocity sales but built the enterprise battleship product, you are screwed.

As a result, I’m much more interested in your actual financial model than your TAM analysis. Your financial model is the representation of your thinking on all these items. Just like code, it forces you to tie together the various functions or else it simply won’t compile. When you talk about your product, your customers, your go- to market strategy, it ought to link back to your financial model and be internally consistent.

When I ask to see your model, it isn’t that I think it is not accurate. In fact, we all know that any early projection of revenue is wrong, but it does show how you think, and whether you have thought through the basic building blocks of your company. If these things are out of alignment, you’ll be making avoidable mistakes. So rather than using a TAM analysis as your opportunity to show what a big sector you are “transforming with your disruptive technology,” use it as a means to test and refine your approach to the business.

This equation is even easier and more useful if it is a software as a service (SaaS) product with recurring revenue rather than a product you purchase once.

Read A Closer Look at a Startup Venture Presentation Part 1: The Use of Proceeds Slide is Dead here and Part 3: The Competition Slide here.

By: Greg Sands, Founder and Managing Partner