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Does The Concept of Addressable Market Matter?

Q: Can you please address the issue of estimating Addressable Market when the product or service is trying to solve an emerging problem and opportunity that is about to hit in the near future.  For example, FeedBurner raised money long before bloggers were convinced that feed management could use some professional help and long before VCs saw that an advertising and paid model would emerge at some point. In other words, Dick Costello was not taking out an incumbent or providing a better solution than the market offered for a given problem. He raised capital on the belief that a market was about to emerge and FeedBurner wanted to be the first to address it. In this scenario how does one estimate addressable market (other than assumptions and forecasts) or in such cases can you be light on addressable market numbers.

A: (Brad) There are two schools of thought on this one: (1) measuring addressable market (or "TAM" – "total addressable market") matters or (2) measuring TAM doesn’t matter at all.

I’m in the "measuring TAM doesn’t matter at all" camp, especially in an early stage company in an emerging market.  Almost every presentation I’ve seen has a market size section.  Almost every market sizing presentation is incorrect – by a lot. Enough to make it irrelevant.

Most of the companies I invest in are in markets that are early in their life.  I can assure you that if you are in year two of an emerging market, there is a slide somewhere at Gartner or Forrester projecting a $1.5 billion market in year 7 that compounds 75% year over year after that indefinitely (or at least until the X-axis runs out of room).  Whatever.

Now, there’s definitely value in trying to articulate how the market you are playing in will develop.  I’m usually more interested in understanding “proxy markets” (are there markets out there that are good proxies for what you are going after?) and “market drivers” (what has to happen for the market to grow big, and quickly?)  While you can wrestle this information into a spreadsheet or a bottoms up powerpoint slide with a pretty triangle in it somewhere, anytime I see any number with two decimal points of precision, you’ll probably lose credibility with me.

Remember, at the beginning I mentioned that there are two schools of thought and I land firmly in one of them.  There are plenty of VCs in the other (e.g. measuring TAM matters). This just reinforces a point we’ve made many times on this blog – make sure you know who your audience is and what they care about.

April 7th, 2009 by     Categories: Presentations    
  • http://jobalchemist.com Luke G

    I'd hazard that you need to know what type of market you're in – new, existing, or resegmented – and why. It's probably important to understand 'something like your TAM' (even as an aspect of general domain knowledge) if you're in an existing market or are trying to resegment one , and to know that the idea of it is (currently) useless in a new market.

    The importance of understanding your market type doesn't begin or end with Slide 7 of your deck, either. Different markets call for fundamentally different approaches to scaling your team, your technology, and your customer base. Have you read 4 Steps to the Epiphany (http://bit.ly/1m4R1S) yet? I've learned more about what we're doing from that book and the customer development process than from anything else so far. (So don't read it for investors, read it for you)

    Hope that's at least vaguely helpful.

    • http://www.feld.com Brad Feld

      I haven

      • http://jobalchemist.com Luke G

        It's dense and not-well edited, but the content is pretty righteous. Not to be a fanboy, but Steve Blank (finally) has a blog up at http://steveblank.com/ with some classic and highly entertaining war stories.

  • http://blog.excelsiorstudio.com/ Cory Armbrecht

    My startup is based upon a “market that is about to emerge”, I'll just shoot straight and say that we're not positive on how to do projections for certain things and how big the market really is… at least to put on paper. Would you suggest that just getting the VC to understand the yet to emerge market on their own, and forgo slides that could lose them? Because I believe that I can do that.

    • http://www.feld.com Brad Feld

      It is going to completely depend on the VC.

  • Holger

    Hi Brad,
    well i have a difficult question to ask regarding TAM and hope that you can help me out as I am kinda stuck.
    I am currently working on a business plan for an online apparel company which targets european plus sized women. Specifically, this company focuses whithin the plus sized (= curvy / voluminous women) clothing market on “lagenlook” designs. Lagenlook is German for “layered look”. This kind of fashion stands for comfortable outfits of natural materials and a advantageous combination of garments. We have started an online shop several months ago and until now it has been extraordinarily successful. We are now seeking venture capital to expand our assortment and sell more internationally (we are usually sold out immediately).

    Well now to the problem. Lagenlook is a niche in the plus sized clothing market. Indeed lagenlook is not only for plus sized women but also alot of average to skinny women wear it. It is really difficult for us to estimate the market size / TAM (SAM/SOM) . There are no reports by Gartner and Co. There are competitors, however, none of them is publicly traded and hence there is a limit to the available information. We could try to do primary reseach via a survey but this would take months (we sell primarily to the US, UK and Germany)

    So my question of the scenario described above is: How can we estimate the TAM (SAM/SOM)? Would you say that it is necessary although it is an emerging market? How else could we describe the market potential? After merely 5 months our sales are at 100K monthly without any marketing. Thus we know that there is a market just dont know how large it is.

    I would be very grateful for your advise.
    thx
    holger

    • http://www.feld.com Brad Feld

      Unfortunately, I don