How to talk about TAM to Investors

Mark Donnigan

When founders are building products that create markets rather than capture existing demand, presenting the opportunity’s economic potential, Total Addressable Market (TAM), can be challenging. Here’s how a founder might approach the TAM question when presenting to an investor trying to understand the potential market opportunity.

Start with the Vision and the Problem

  • Define the Vision: Begin by clearly articulating your company’s long-term vision. What new reality are you trying to create? How does this shift current consumer behavior or industry practices?
  • Problem Identification: Explain the problem or unmet need that your product addresses. Highlight why existing solutions are inadequate and how your approach is fundamentally different.

It’s important to clarify your company’s long-term vision and the problem you aim to solve. Clearly articulating the new reality you’re trying to create and how it differs from existing consumer behavior or industry practices is needed to convince investors and early customers to put their faith in you and the company. 

This requires a holistic understanding of the industry and its current trends and a deep understanding of customers’ needs and pain points. Once you have a clear vision, you must identify the problem or unmet need that your product addresses. Highlight why current solutions are inadequate and explain how your approach is fundamentally different. This will help you establish and differentiate your product’s unique value proposition from the competition. 

To further refine your approach, consider conducting market research and gathering feedback from potential customers. This will help you validate your assumptions and ensure that your product truly addresses the needs of your target audience. Taking a customer-centric approach, you can create a product that solves the problem and provides value to your customers.

Present the “Beachhead” Market

  • Identify Your Initial Target Market: While your product might create a new market, there should be a smaller, identifiable group of early adopters or a “beachhead” market. Describe this initial segment, why they are a good entry point, and how you plan to expand from there.
  • Evidence of Demand: Provide any evidence of demand from this initial market segment, such as customer interviews, pre-orders, or pilot programs.

It is important to identify your initial target market, or what is commonly referred to as the “beachhead” market–a smaller, identifiable group of early adopters who are likely to be the first to accept and use your product.

When identifying this initial segment, consider several factors such as demographics, psychographics, and buying behaviors. You also need to understand their pain points, preferences and needs your product can solve. 

Once you have identified this segment, you can create a marketing strategy targeting it. Explain why this is a good entry point and how you plan to expand. This means you need to clearly understand the potential for growth beyond the initial segment.

Outline how to leverage the feedback, data, and insights you gather from this initial market to refine your product or service and expand to other market segments. 

Conduct customer interviews, pre-orders, pilot programs, or other market research methods to provide evidence of demand from this initial market segment. You do not need many user or customer surveys, but the subjects interviewed should be highly relevant or likely users of your product. This will help you validate your assumptions, gather feedback, and improve your product or service before launching it to a wider audience.

Use Analogous Markets for Reference

  • Draw Parallels: When direct market data is unavailable, look for analogous markets to draw parallels. Describe how similar products or services have created new markets in the past and how those might relate to your venture.
  • Growth Trajectories: These examples illustrate potential growth trajectories and how markets can expand beyond initial expectations.

When working on a new venture or startup, finding direct market data to inform your decisions can be difficult. However, this doesn’t mean you should give up on using data to guide your strategy. Instead, you can use comparable or similar markets as a reference to help you understand how similar products or services have created new markets in the past.

Start by identifying analogous markets that share similarities with your venture. This might involve looking at other products or services that target a similar audience or solve a similar problem.

Once you’ve identified these markets, you can start to draw parallels between them and your venture, identifying commonalities and differences that can help you make informed decisions.

One key benefit of using analogous markets as a reference is that it allows you to illustrate potential growth trajectories. By examining how similar products or services have grown, you can understand how your venture might expand beyond its initial expectations. Drawing on the experiences of similar products or services, you can make more informed decisions and increase your chances of success.

Quantify the Total Addressable Market (TAM) Creatively

  • Bottom-Up Approach: Instead of traditional top-down market sizing, use a bottom-up approach by estimating how many potential users or customers exist for your product and multiplying by the potential revenue per user.
  • Consider Adjacent Markets: If your product could expand into adjacent markets or applications, include these in your TAM calculations to show the broader potential.

When it comes to quantifying the Total Addressable Market (TAM) for your product or service, there are a few creative approaches that you can take. Rather than using the traditional top-down market sizing approach, which involves estimating the total size of the market and then determining your share of it, you can use a bottom-up approach that starts by estimating the number of potential users or customers for your product, multiplying this by a potential revenue per user to arrive at your TAM.

The bottom-up approach is often more accurate than the top-down one because it considers your product’s specific characteristics and target audience. To use this approach, you’ll need to understand your product, its value proposition, your target market, and the potential revenue per user.

Another creative way to quantify your TAM is to consider adjacent markets or applications your product could expand into. By including these in your calculations, you can show the broader potential of your product and capture additional revenue streams that may not be immediately obvious. If you sell a software product currently used in one industry, consider how it could be adapted in other industries or adjacent applications.

Ultimately, quantifying your TAM requires creative thinking and careful analysis. Using a bottom-up approach and considering adjacent markets, you can arrive at a more accurate and comprehensive estimate of your product’s potential market size.

Showcase Traction and Momentum

  • Early Successes: Present any traction your product has gained, even in a nascent stage. This could include user growth rates, engagement metrics, partnerships, or technological breakthroughs.
  • Roadmap for Market Creation: Outline your strategic roadmap for market creation, including key milestones, marketing strategies, and product development plans.

When presenting your product or idea to potential investors or partners, showcasing any traction and momentum you’ve already gained is important. This could include early successes that your product has already achieved, such as user growth rates, engagement metrics, partnerships, or technological breakthroughs. Even if your progress is early, it’s worth highlighting all positive indicators of traction.

In addition to presenting your early successes, it is important to outline your strategic roadmap for market creation. This roadmap should include key milestones, marketing strategies, and product development plans to help you achieve your goals. 

By laying out a clear and detailed plan, you can help build confidence in your product and show you have a solid strategy for bringing it to market. Remember that investors and partners want to see both short-term wins and long-term potential, so provide a balanced view of your plans and progress.

Highlight the Economic Rationale

  • Value Proposition: Clearly articulate your product’s value proposition to users and stakeholders. How does it save money, increase efficiency, or create value in a way that nothing else currently does?
  • Startup Model Innovation: If your approach includes innovative startup models (e.g., subscription models, freemium models), highlight how these could be leveraged to capture and grow the market.

To create a successful product, it is important to articulate its value proposition to users and stakeholders clearly. This means identifying how your product saves money, increases efficiency, or creates value in a way that nothing else currently does.

By highlighting the economic rationale behind your product, you can show potential customers and investors why it is worth investing in. Note that to do this well, the company will need a very good understanding of the jobs that need to be done for their product. Also, having a command of the buyer’s journey and the constituents involved in the process is essential.

If your approach includes innovative startup models such as subscription or freemium, highlight how they can be leveraged to capture and grow the market. By showing how your startup model is unique and different from others in the market, you can demonstrate how your product has a competitive edge and is better positioned to achieve the outcome that users are looking for. By understanding and communicating the economic value of your product, you can increase your chances of success and drive long-term growth.

Company Financials with Assumptions

  • Model Different Scenarios: Present financial projections under different scenarios, including conservative estimates and more aggressive growth scenarios. Clearly state the assumptions behind these projections.
  • Explain Funding Use: Detail how the current funding round will help you achieve key milestones and expand the market potential.

Presenting both modeled and actual financial data is a critical aspect of communicating a startup’s current status and future potential to investors, especially in the early stages. Investors must understand your startup’s model, revenue potential, cost structure, and path to profitability. They seek clarity, realism, and insight into your financial presentation. Guidelines:

    1. Demonstrate Viability: Show that your startup model can generate revenue and become profitable.
    2. Highlight Scalability: Illustrate how your startup can grow revenue significantly without a corresponding cost increase.
    3. Prove Sustainability: Present data that suggests your company can sustain itself through its operations and cash flow.

Your financial presentation should blend historical (actual) data and future projections (modeled data). Here’s how to structure it:

1. Historical Financials

Start with Actuals: If available, begin with your startup’s actual financial performance. Include income statements, cash flow statements, and balance sheets for the periods you have data.

Key Metrics: Highlight important metrics such as revenue, gross margin, operating expenses, EBITDA, net income, and cash burn rate. Use graphs and charts for clearer visualization.

Growth and Trends: Point out any trends, such as month-over-month or quarter-over-quarter growth in revenue or users.

2. Financial Projections

Projection Period: Financial projections typically cover 3-5 years. Be realistic in your assumptions and clearly state them.

Revenue Projections: Explain your revenue model and project future revenue. Use a bottom-up approach, starting with unit economics (cost to acquire a customer, lifetime value of a customer) to build your revenue forecast.

Expense Forecast: Include projected operating expenses, cost of goods sold (COGS), and capital expenditures. Highlight how economies of scale will affect costs as the startup grows.

Cash Flow Projections: Present a cash flow statement that showcases when your startup expects to become cash flow positive.

Break-even Analysis: Include a break-even analysis to show when your startup expects to become profitable.

Best Practices for Presenting Financials

Simplicity and Clarity: Present your financial data in a simple and understandable format. Avoid jargon and overly complex models.

Use Visuals: Graphs, charts, and tables can make financial data more digestible. Use them to highlight key points.

Be Prepared to Explain Your Assumptions: Investors will scrutinize your assumptions. Be ready to explain how you arrived at them, especially for key drivers like market size, pricing strategy, and customer acquisition cost.

Scenario Analysis: Include best-case, worst-case, and most likely financial scenarios to show that you’ve considered different outcomes and are prepared for volatility.

Link Financials to Strategic Goals: Show how your financial projections align with your strategic objectives and milestones.

Common Pitfalls to Avoid

Over-optimism: While it’s important to show ambition, unrealistic projections can damage your credibility.

Ignoring Competition: Failing to account for competitive pressures in your financial projections can lead to unrealistic forecasting.

Lack of Detail: While simplicity is key, omitting important details or assumptions can leave investors with more questions than answers.

Static Planning: Treat your financial model as a living document. It should evolve as your startup grows and more data becomes available.

Presenting financial data effectively is about telling your startup’s story through numbers. It should convey not just where your startup is today but where it’s headed and, most importantly, how it will get there. By combining actual performance with realistic projections, you provide a comprehensive view that can build investor confidence in your startup’s potential.

DO NOT FORGET TO EXPLAIN HOW YOU ARE USING THE FUNDS YOU ARE SEEKING. Though you don’t need a comprehensive startup plan per se, you also need to be very well prepared to explain and clearly articulate what the funds you are raising will be spent on. 

Do not simply say “expansion” or “growth.” Instead, you could say that of the $15 million you seek, you plan to build a marketing function, which will mean hiring 4 to 5 FTEs. You intend to expand the go-to-market team with six people in various inside sales, customer success, and revenue operations roles to support the four additional account executives you will be hiring in fast-growing markets.

Demonstrate the Team’s Capability

  • Why You: Emphasize why your team is uniquely positioned to execute this vision. Highlight relevant expertise, previous entrepreneurial successes, or unique insights into the market you are creating.

When your TAM is not immediately evident because the market has yet to be created, founders should focus on illustrating a compelling vision. It will also be essential to show evidence of demand in initial or analogous markets and creatively project the market size, demonstrating the company’s potential to lead and grow.

Here is a summary of what to say and how to position your pitch for maximum investor resonance.

VC’s like Bill Gurley seek teams that see the world differently but have a credible plan to make their vision a reality and transform the market landscape. Gurley notes, “Any good venture capitalist knows you can’t quantify a new market.” The key is conveying your vision of what’s possible. 

Historical data holds little relevance for disruptive startups. Jim Breyer explains, “Don’t obsess over the inhibitors of the past. Articulate your view of the future.” Outline how you will capture value even as market boundaries shift.

Emphasize network effects and winner-take-most potential early on. “We invest in companies that could be 100x larger than they are today,” states Neeraj Agrawal. You must detail how your solution contributes to exponential growth through self-reinforcing adoption. 

Use analogies and case studies instead of traditional forecasts to make your case. Leading Midas List VC Hemant Taneja suggests, “Tell us if this is like earlier companies we know that have been successful in creating large markets.” You should be able to compare how your platform mirrors those that have achieved escape velocity.  

Demonstrate your market entry strategy and elaborate on your beachhead market and how it serves as a wedge into vastly larger opportunities. Small beginnings are usual for a startup; you should not hide them. But it must be clear when and how you will cross over from small deal sizes and limited market potential to much larger, more lucrative opportunities.

As Palantir co-founder and prominent angel Joe Lonsdale advises, “Have a good answer for how you expand after dominating your wedge market.”  

Provide any data illuminating your economic model. Emphasize margins over TAM if monetization mechanisms aren’t apparent yet. Benchmark’s Peter Fenton says, “We look at margin structure first when investing in highly novel startups. If there’s a high margin, there’s probably a big TAM.” 

The overarching takeaway from these top investors? For markets that must be forged, demonstrating your expansive vision matters more than forecast precision. Showing a $10 billion TAM with largely fabricated data will never be believable.

Gurley concludes, “It’s okay to talk about unlimited TAM if you can make a credible argument.”

Focus on conveying your vast possibilities, but do not oversell. You need to be confident and have answers to the typical and most common questions that may arise. Investors do not expect that a founder knows every aspect of the market they are entering. However, where information is accessible and considered common knowledge, the founder is expected to have complete command of that rubric.

On this episode of He Said, She Said: Razor Branding Podcast, I discussed valuable insights into contemporary marketing strategies, emphasizing the importance of understanding audience needs, prioritizing quality engagement, and aligning marketing efforts with measurable outcomes.

Delve into various aspects of brand development and marketing strategies, primarily focusing on the challenges and opportunities faced by companies in today’s digital age. 

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