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With Tanya Boyko

Estimating your TAM Like a Boss

Knowing your TAM (total addressable market) can be a key piece of what gets your company funded. Being knowledgeable about your market size is not only important while building the initial framework of your business, but also shows investors that you’re well-informed and allows them to calculate the future value you’ll create.

We sat down with Tanya Boyko to discuss all things TAM- what it is, how to size it, and what to do with the number. Tanya is Chief of Staff and Head of Operations at Siteline and was previously on the Investment Committee of the Unreasonable Collective and a Principal at ArcTern Ventures.

So, what is TAM?

Total addressable market refers to the revenue opportunity for your product or service if you were able to capture 100% of your target market. The number you’re looking for is your potential annual revenue. Effectively, TAM is the number you’d get if you're able to reach everyone who could get value from your product or service.

To calculate, multiply your average r ACV (annual contract value) by the total number of customers in your market to yield your TAM; you may need to do this separately for different customer segments (e.g. small, mid-size, enterprise) or customer verticals, if applicable. The calculation itself is fairly straightforward, but accurately sizing your market is the tricky part.

Sizing your TAM

To find your TAM, start with a reasonable geography that your company can capture. If you want to be even more precise, pare your geography down to where you will be realistically operating– this is called your SAM (serviceable addressable market). For example, if your product can technically be accessed globally, but is only available in one language, it would result in a narrower SAM for now.

  • Finding data: Getting specific about your market size requires some research. It’s easy to incorrectly quote the geography your product can reach or the market size that exists if you have inadequate sources. Start with credible sources like Bloomberg or other analyst reports where research already exists. Gather data on return on investment (ROI) and dollar flow per customer to start.
  • Assumptions: Of course, no matter how much research you do, the TAM value you come up with is still based on assumptions. When talking to potential investors, it is imperative to communicate these assumptions clearly and openly. The TAM you present will always be a lot larger than the market you actually end up capturing. Be ambitious about your vision and how fast you want to run, but be realistic on the math and assumptions– showing your work goes a long way.

From there, you have two ways to go about estimating market size:

  • Consider your target market and how much money prospective customers are spending on a comparable solution. In finding your TAM, you will be considering the amount of revenue that would come from displacing the entirety of this market.
  • Alternatively, you might be trying to calculate your TAM for a market in which there isn’t anything to displace yet – effectively, you’re creating the value in that market or competing against the status quo. In this case, a bottom-up approach based on your specific business model and expected pricing makes more sense - pricing assumption that delivers 10-20x ROI is a good place to start.

What Investors are Looking for

When talking to investors, understand that they’re doing the math on how your TAM contributes to your potential exit value. Most investors won’t hold more than a 20% stake at exit, so they’ll be backsolving to see if you have the potential of being a “fundmaker” to them (i.e. that your exit would return the entirety of their fund).

Hence, market size is a key determinant to see how optimistic they should be about their exit. For example, if you're tackling a trillion dollar market, you're in a space that gets 10 times revenue multiples, and you’re raising from a $50M fund, it's easy to see how you don't need to capture a huge percent of the market in order to be an attractive prospect. On the other hand, if your TAM is less than $1B, it’s easy to see that a $2B fund will be much less likely to invest.

Adjusting over time

Once you have your initial TAM, realize that it will likely shift over time. Consider future changes in value per customer and adjusting your TAM narrative over time. For example, with most startups there's an expectation that you will adjust pricing downwards over time, though you still want to offer a strong return on investment (ROIC). Companies often underestimate how much of their customer base may end up (a) smaller and more price sensitive or (b) larger, but slower to adopt and often interested in corporate discounts for prepayment, etc. All of these dynamics could impact your TAM.

If your TAM is not attractive enough to VCs (and you have decided you need VC capital), there are a few ways your can increase the size of your prospective market:

  • Expand your range of consumers. Figure out how you can sell your existing product to a different customer profile– you could work on its accessibility, or make it more visible to a different group of people.
  • Expand your product. Consider any potential features or products you could add that allow you to attract more sales from your current customer base. Generally, it’s a good idea to focus on selling more to your existing customers. This way, you don’t need to change your understanding of your TAM, and can instead improve your product(s) by tapping into additional unmet demand.

Tanya Boyko is currently Chief of Staff and Head of Operations at Siteline, a company modernizing construction billing and payments. She was previously Principal at ArcTern Ventures and Chief of Staff at Autzu, a sustainable carsharing platform. She holds an MBA from Harvard Business School and did her undergraduate degree in civil and environmental engineering from University of Toronto.

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