The “Waterfall” TAM
“What is your total addressable market?” is a common question asked during a funding pitch. The consistency with which founders bumble through this answer continues to confound me. The most common response is to define it as a sliver of a very large number e.g. “1% of all smartphone users in the Indian subcontinent”. That is almost the same as saying that if I stand under a waterfall with an empty tumbler, my tumbler will be full of water! (besides getting drenched of course) Is that the right way to define TAM ? I’m afraid not.
Waterfall TAM is a lazy founder’s way of defining the customer profile that he/she wants to target. Without defining the target customer, the problems faced by the company won’t be clear. When the problem statement isn’t clear the solution created by the founder to solve it won’t be either… and its obvious how this would unravel quickly for the founder’s fundraising attempts.
I have put together a few links that will help guide founders to create a well-defined TAM, SAM and SOM. My personal favourite is WeWork’s TAM calculation by Alex Graham. Alex doubts WeWork’s $20 billion valuation and this sets him on a quest to find WeWork’s TAM. He begins by defining WeWork’s Serviceable Addressable Market (SAM) & Serviceable Obtainable Market (SOM) and then utilises the top-down approach to calculate the TAM. Although it is used most frequently, this approach is often misunderstood. Alex’s method to find the TAM, SAM & SOM is an example of the right way to use the top-down approach.
Contrarily, Jeff Haden the author of The Motivation Myth, favours the bottom-up approach. In this post you will find that Alon Amar utilises the bottom up approach to find the TAM for an on-demand dog walking service. I prefer that founders use the bottom-up approach as it encourages them to clearly define their target customer profile.
What are the resources that you refer to for TAM calculations?
Let me know by commenting below!