TAM Part 3: Framing the Opportunity
If you are a frequent reader of our posts, you’ve seen us opine on whether TAM matters and how to expand your TAM. Lately, TAM has once again become a topic of conversation for us.
As you can imagine, we see a lot of pitch decks for early growth-stage companies that seek to frame their market opportunity for Series A and B investors. We also work with a lot of later-stage portfolio companies to help frame their opportunity for PE and strategic investors. In both cases, we often see founders leaving out a piece of the picture, which can weaken the overall story.
We recommend speaking to your opportunity on four levels:
End Market
How big are the overall end markets you are focused on? These numbers are your end customers’ metrics as opposed to yours, and the metrics can vary in different sectors. It might be total revenue of the industry or total number of deployed units (or technicians deployed, for example, in field service). In most cases, this is a massive number and a good one to ‘anchor’ in investors’ minds. For example, if you are a media tech company, and your customers are publishers then their end market is the $1 trillion in global advertising spending. You can then speak to the challenges publishers are facing as they chase this $1 trillion in spending.
2. Value Unlock
How much value can your solution deliver for customers over time if your vision is fully realized? Again, this is about your customer’s metrics, not yours. How much revenue does the industry (or at least the portion of the industry that adopts) stand to gain, or how much expense will they be able to eliminate if you can solve their current challenges? This number is also typically massive, and again, good to anchor in investors’ minds. It’s also a very helpful frame of reference over time on your pricing, as in many cases it’s reasonable to capture at least 20-30% of this value as your revenue. You don’t need to be extraordinarily detailed here, but you need some credible logic to your claim. Going back to the media tech company example, the value unlock may come from automating sales operations or leveraging advanced data and analytics to improve yield and revenue optimization across channels. Solving these challenges can unlock tens of billions of value for customers.
3. Total Addressable
How much revenue could your company capture over time if you have 100% adoption of your solution, and your vision is fully realized? This is finally where you start to speak to your revenue opportunity. We recommend including planned product expansion, price expansion, and adjacent opportunities in this framing.
4. Currently Addressable
How much revenue could your company capture if you had 100% adoption from current customers of your current solution with current pricing? This is the more narrow framing often referred to as SAM – serviceable addressable market – and does not factor in future product expansion, adjacencies, or future pricing.
The best decks we see outline the end market metrics and value unlock opportunity at a high level upfront to set the stage on the impact the solution will have, then provide more detail on the total addressable market and data to back it up later in the deck. The currently addressable metrics are typically provided as backup or data room materials to enable investors to drill into what’s more proven and what’s more forward-looking.
We find that early-stage founders are often stronger on end market and value unlock but weak on outlining and defending the total addressable and currently addressable markets. Some naively present the end market as their TAM, which does not build credibility with investors and is not helpful in assessing how much and how quickly the company can scale. In contrast, later-stage founders (sometimes assisted by bankers) typically drill more deeply into total and currently addressable markets, but often overlook telling the end market and value unlock story up front to help anchor the impact the company can have. In the rush to (appropriately) brag on their traction, they can lose the storyline of the overall opportunity. Fundraising/recapping/selling your company is ultimately about good storytelling, and great stories use all of these metrics in a powerful way to get the ‘buyer’ excited about the next phase of growth.