TAM can be a confusing metric for many entrepreneurs. Too often, it’s inflated into a number so large and ambiguous as to be meaningless. The key word is “Addressable” – in other words, it’s less about the size of the total market, and more about how much your company can really “address” given your product, competition, distribution, etc. The restaurant market, for example, is gigantic, but the addressable portion of it for any individual restaurant in a specific geographic market is dramatically smaller. The more common mistake entrepreneurs make in talking about TAM, rather than it being too small, is that they present it as too large. Some huge multi-billion-dollar number is going to be met with skepticism unless you can support it with sound research and a cogent argument about how you can really address or grow that market.
Venture investors are looking for companies that can achieve significant scale. So, at some size, a market truly is too small. But many of the most successful startups had practically non-existent markets at their outset. How big was the TAM for ride sharing when Uber started? How big was the TAM for private homestays before Airbnb? Turns out the TAMs were quite large, but pointing to the taxi industry or vacation rental marketplaces at the time would have been, at best, poor proxies for the TAM of those businesses. And that’s the inherent dilemma of dwelling too much on TAM – for it to be credible, the market must already exist; but for a company to be a true break-out success, the market often must be created. In fact, it can be easier for a startup to dominate a new, fast-growing market than to penetrate an existing market. So build your TAM estimate from the bottom up by focusing on the economic value of your solution, the number of customers with that pain, and why your business is uniquely suited to solve it. That’s the best way to show the TAM you can really attack and grow, rather than the TAM some legacy vendor already owns.