A curse has spread through the startup ecosystem. It is the curse of insanely distorted TAMs, SAMs and SOMs. Focus on Market Opportunity, not Market Size.
Several years ago, a slide template infected the startup community: A Market Size slide with three bubbles. TAM, total addressable market. SAM, serviceable addressable market. And SOM, serviceable obtainable market. Sometimes the slide has the three bubbles side by side, like the porridge bowls of the three bears. Sometimes, the bubbles are very elegantly nested within one another, like a matryoshka doll.
It is amazing to me how this slide has taken over the world. You know how in the movies, when a terrible new infectious microbe is discovered at the beginning of the movie, the politicians ask the scientists to assess the threat this new infection represents for humanity, and the scientists pull up a horrifying animated visualization showing how the infection will start out with a few thousand cases but then will spread exponentially to wipe out all of humanity? That’s how this three-bubble Market Size slide has spread. Now, everywhere I go on the planet, from Stockholm to Shenzhen, entrepreneurs are using this slide. “Our global TAM is XX billion. But we are going to start out in this part of the world, where our SAM is YY billion. And we conservatively project that our SOM is Z hundred million.” They throw in an absurdly precise “CAGR” (compound annual growth rate) just to emphasize their analytical rigor.
It is always a lie. (There are three kinds of lies: Lies, damn lies, and “conservative projections.”)
Apparently, every entrepreneur on the planet has been told that venture capital investors are only interested in unicorns, and so the best way to become a unicorn is to go after a really big market. Presumably the thinking is that it is easier to get 2% of a really big market than it is to get 20% of a much smaller market. So entrepreneurs are busily googling market data so they can claim that their TAM is $56 billion, or better yet, $256 billion, or best, $2.5 trillion!
Please, stop the madness. The reality is that all these market size numbers are fake news. No investor believes your market size numbers, nor do they care. In fact, savvy investors would prefer you to go after a $0 billion market. Really. Investors want you to create a market that doesn’t exist, rather than try to unseat multi-billion established competitors who can crush you like a bug. And the fact is that most startups aren’t really going after the market they are sizing in their Market Size slide.
“We’re going to disrupt the $3.45 trillion healthcare market.” No, you’re not. “We’re going after the $850 billion fashion retail market.” No, you’re hoping to build a business by cutting out the second-hand store middleman in used clothing. That’s okay. That could certainly be a big business, but the size of the fashion retail industry is irrelevant. What is relevant is your answer to the questions: Who are you targeting, how are you going to reach them, and how many of them will join your platform? You are not targeting middle-age men. You are not even targeting the people who sell their used clothes to “vintage fashion” consignment stores. You are probably targeting women who have thought about it, but haven’t bothered, for a variety of reasons.
What investors want to see is not Market Size, but Market Opportunity. Investors want to see that you understand who you are going after, at the individual customer level, why they will love your solution, how you are going to reach them, and how many of them are likely to convert. You need to build a bottom-up model of your customer acquisition process and show how you can build a big, profitable business, customer by customer. Innovators should not be focused on acquiring market share in a big established market. They should be focused on creating a new market and building an ever-expanding cadre of delighted customers.
The Market Size slide is obsolete. There is almost no market that is not big enough. We used to think that shrimp farming was an example of an insignificant market that was not worthy of entrepreneurial innovation. (Silicon Valley solipsistic arrogance.) But it turns out there are a lot of shrimp farms out there, globally, and providing a technology that can improve shrimp farm yields by just a modest amount can be a huge business. We have heard several teams pitch wearable technologies for dogs to keep track of their activity. It’s easy to claim that the TAM for such a product is in the billions. “There are 90 million dogs in the US alone! At only $9.95 per month, ….” It doesn’t matter if there are 50 million dogs, or 150 million dogs. What matters is how many dog owners can you convince, one by one, to sign up for your service?
So please, stop pitching the three bubble Market Size TAM, SAM, SOM slide. Instead, show us that you really understand the Market Opportunity, from the bottom up, customer by customer.
First published on LinkedIn