One of the most common mistakes entrepreneurs make when trying to raise business funding from Angel Investors and Venture Capitalists, is to talk in terms of ‘market size’ rather than Total Addressable Market (TAM). Get this wrong and a potential investor may conclude that either you are trying to mislead them by suggesting your revenue potential is bigger than it is, or that you don’t understand business. Either way they may conclude you are not investable.
The two concepts are fairly straightforward. The market size is the total revenue generated by a segment of the economy e.g. the total amount of revenue spent on automobiles.
The Total Addressable Market is defined by your specific industry and will be a sub-segment of the market size. To stick with the automobile example, a sub-segment might be convertibles.
If $100 Billion is spent on automobiles each year and of that $3 Billion is spent on convertibles, your TAM is potentially $3 Billion rather than $100 Billion. In fact your TAM is likely to be even narrow depending on the cost of your convertible and other variables and the different sub-segments that exist within the convertible market e.g. high end vs popular.
There are two ways of calculating your TAM; bottom up and top down which I’ll address in a subsequent post. On a final note, it’s worth noting that some high profile investors have opposing views on how useful it is to look at the TAM. Unless you know your potential investor’s preferences, it makes sense to make sure you address your TAM in your investor presentation materials and during your investor pitch. No entrepreneur is ever refused funding for being over prepared but many are for being under prepared.