TAM is a Sham

When pitching a seed stage company, founders spend too much time on market size

One of the first slides that founders put together when preparing their investment presentations is the “Market Size” slide. Of course, it’s well known that investors are only interested in investing in opportunities that have the potential to be unicorns, so it makes sense to attempt to demonstrate the opportunity of your fledgling business with numbers. And business school or not, all entrepreneurs prepare the same slide that displays a top-down and/or bottom-up analysis of the potential annual revenue their company could generate. This is colloquially referred to as the Total Addressable Market, or, TAM. It usually looks something like this:

(Random TAM image courtesy of Google)

I personally skip this slide in all of the decks that I review, and oftentimes tell founders to move on when they reach this slide in a presentation. Why? Because the entire notion of a TAM analysis at the seed stage is a sham. Let me explain. But before I do, a few caveats. Firstly, what I’m about to argue is applicable exclusively to early stage companies. Secondly, while this is my personal opinion, please don’t start excluding this slide from your pitch decks. For better or worse (cough, cough…worse), there is a certain template investors want to see in a deck, and this is simply part of it.

New Markets

More often than not, we meet with founders who are addressing new phenomena, or building a solution for a nascent market. If that’s the case, presenting a large TAM is akin to presenting financial projections that prophesies $50m in revenue by year three (p.s. - don’t do that). There’s simply not enough real world data upon which to base a market sizing, and that’s ok! It’s significantly more useful as an investor for you to explain why, despite the market size being unclear today, you believe the market is on the cusp of exponential growth.

Established Markets

If you are building a company in an established market (healthcare, cyber security, financial services, manufacturing, etc…), the existence of a large market is intuitive and doesn’t need to be stated. In fact, more often than not, founders do themselves a disservice by saying something along the lines of the following: “There are 25 million developers globally. If we capture just 5% of the market, each paying around $8 a month, we’ll surpass $100m in annual revenue”. While that may be true, that’s not how company building works and simultaneously provides zero insight into what the current interesting market opportunity is. Also, quoting the latest Gartner or IDC report that mentions that a market is expected to grow at a 25% CAGR over the next five years is unhelpful.

Niche Markets

The exception to my overall disdain for reviewing TAM analyses is when dealing with a niche market. In these circumstances, founders are not addressing a new market and there is also a lack of intuition regarding the market opportunity. With niche markets, it is surely worthwhile to take investors through the data of the size of the market. An example of this that I’ve been taking a close look at recently is the size of the card collecting market. Not only is this niche, but intuitively most people would say this market is small. So if you wanted to demonstrate that indeed card collecting represents a large market opportunity, walking me through eBay, StockX, and Facebook Marketplace sales data would be incredibly powerful. It may even be helpful to mention that over 100,000 people attended the recent virtual sports card investor conference.

Show Me Your Conviction

As I mentioned above, you should still include a market size slide in your presentation. But instead of relying on dry numbers that you pulled from a Gartner report, or regurgitating numbers you artificially created in an excel spreadsheet, take the opportunity to let your conviction on the market opportunity shine through. As an extension of the “why now” section of your presentation, clearly outline upward trends that are occurring in your market, or explain why a new technological breakthrough is applicable to an outdated market. Persuade investors with macro insights on the market or interesting customer observations from early market research you did. Not only will this give investors a better understanding of the opportunity, but you have now positioned yourself as thoughtful and insightful.

At the end of the day, I can’t remember a time that we passed on a company because their market size slide represented too small a market, nor can I remember a time that we decided to invest in a company because the market size slide represented a massive market. Most investors don’t spend much time reviewing decks - so instead of mindlessly writing “$10bn market”, make the most of your opportunity and present thoughtful insights on the market opportunity.