A VC’s contrarian view on TAM



Starting way back in the early 1990’s the many VCs I met with drilled the concept of TAM into my head: Totally Addressable Market. In fact “too small a TAM” was one of the several excuses given for turning down a number of startup ideas I presented. But Matt Helman‘s article Why ‘TAM’ doesn’t matter to me on TechCrunch presents a contrarian view which I feel I really need to share, as I’ve hammered TAM into my many mentees whose pitch decks I’ve reviewed. Helman is a VC with Greylock, so he knows whereof he speaks.

Here’s how VCS define TAM: “the existing revenue opportunity available for a product or service,” and it’s often calculated by taking the existing top-down market size and whittling down segments of the market that are not addressable.

As we’ve all heard, VCs need to make 10X on their investments, as most of their portfolio companies crash and burn, or worse yet, turn into “zombie companies” that never grow, but stay alive sucking up the VC’s energy and putting a large blot on their portfolio. Because what VCs won’t tell you, but what is obvious, is that venture capital like Hollywood movies, is a hits business. The big hits have to pay for the many losers. And since no one can reliably predict what will be a big hit and what will be a big bust, VCs have to swing for the fences every time. Unlike baseball they don’t care about singles, doubles or even triples. It’s not about batting average, or even RBIs, it’s all about hitting homers and grand slam home runs. Because they also strike out a lot.

So it stands to reason that if every company they invest in has to at least have the potential to be at a grand slam home run that means they must be serving a huge market. And preferably a growing one. However, as Matt Helman points out:

The only problem is that if you had applied the TAM framework over the past 25 years, you would have passed on most of the best venture investments of all time. A cursory examination of these companies in their early years highlights the danger of too heavily weighting TAM. In fact, at the time of their Series A rounds, many of the very best venture investments would have had relatively small — or even undefined — TAMs.


As screenwriter William Goldman so famously said about Hollywood, Nobody knows anything…… Not one person in the entire motion picture field knows for a certainty what’s going to work. Every time out it’s a guess and, if you’re lucky, an educated one. He might as well have been talking about the venture capital industry.

So what’s wrong with the TAM model? Helman points out the key flaw in the logic:  Yes, eventually the market size has to be very large to support the blockbuster companies they need to stay in business. But “it can be directionally misleading in the early years.” He outlines four reasons why there are other factors to consider besides traditional TAM when assessing the size of your startup’s market opportunity. I’ll list and define them below, but read Matt’s entire article for the important details:

  1. TAM expansion: hit companies like Uber fundamentally change the markets in which they operate.
  2. Credible adjacencies: Amazon’s a great example of a company starting with a small niche (books), which acted as the camel’s nose under the tent (online sales). Books were just an entry point into a much larger ecommerce market.
  3. Nascent market potential: this is a fancy way of saying catching a giant tech wave. That rising tide can lift a lot of boats, witness the mobile app phenomenon. Facebook rode it; Microsoft missed it.
  4. Frequency of use: this is mainly a B2C measure. I would add that not only is frequency of use critically important, so is depth of engagement. Facebook is such a giga hit because not only is it used daily by millions, but they spend more time in that app than almost anything else they do on their phones – where they are increasingly spending most of their waking hours. TV was an early example of a consumer product that was used both frequently and deeply, for hours a day.

Helman concludes on a cautious but optimistic note:

… founder should continue think about the size of the market they serve. Doing so helps prioritize development, understand customer segmentation and uncover non-obvious insights. But take it with a grain of salt; and if you see an opportunity, don’t let a TAM number stop you from building something great.founders.

As a result of reading his eye-opening article I’ll be changing the feedback I give entrepreneur’s when I review their pitch decks and how they have defined the size of their market opportunity.




Author: Mentorphile

Mentor, coach, and advisor to entrepreneurs, small businesses, and non-profit organizations. General manager with significant experience in both for-profit and non-profit organizations. Focus on media and information. On founding team of four venture-backed companies. Currently Chairman of Popsleuth, Inc., maker of the Endorfyn app for keeping fans updated on new stuff from their favorite artists.

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