Startups and their investors love to talk about big markets and how they are going to go about tackling them. Total addressable market, or TAM, refers to the dollar value of what a startup wants to sell to a certain population. If you make a widget that plugs into a browser, your TAM might be the total number of users of that browser, cut down to the fraction that might use your technology, multiplied by the yearly value of that usage.
For startups chasing a new or burgeoning market, TAM can be a very bullish indicator. A growing market will have plenty of room for upstart companies to attack incumbents; sometimes startups create their own market, but that’s a bit rarer. (Big TAM doesn’t always lead to outsize success, and smaller TAMs can still yield big companies that can yank strong margins from hooked customers.)
All this is to say that TAM matters for startups, how they pitch investors, and how investors make investment decisions. It’s super critical. We’ve written about it on TC a lot over the years. And I think that it is also a bit insufficient today.
I posit that if the macroeconomic environment winds up as bad as some fear, that the TAM question for startups will be more like reading tea leaves than making realistic projections, especially for those busy selling their product instead of merely proving that a market exists for what they are building.
