In the world of venture capital, assessing the size of the market or Total Addressable Market (TAM) is paramount when evaluating startups. Given the high failure rate of startups, it is crucial for venture capitalists (VCs) to identify investments that possess the potential for substantial returns. However, traditional methods of calculating TAM using industry data often fall short in accuracy. In this blog post, we will explore the limitations of relying on industry data, the significance of international expansion, and the importance of product roadmap expansion in maximising TAM.
Overcoming Limitations of Industry Data in TAM Calculation
While industry data has traditionally been used to gauge TAM, its reliability has been called into question. Startups frequently offer products that surpass existing offerings in terms of quality and affordability, leading to the entry of a significantly larger customer base. This disruption renders industry data almost worthless, as it fails to capture the true potential of startups. Consider the case of Netflix, which revolutionised the home entertainment industry by offering a convenient and cost-effective streaming service. By disrupting the traditional video rental market, Netflix expanded the TAM far beyond what industry data would have predicted. For instance, consider Salesforce, a SaaS company that transformed the customer relationship management (CRM) industry. By offering a cloud-based CRM solution that outperformed traditional options, Salesforce expanded the TAM well beyond initial industry projections.
To accurately assess TAM, venture capitalists must shift their focus beyond industry data. Instead, they should consider the total number of customers in the existing geographic market, the potential for broader geographic sales, and the startup’s product expansion roadmap. Placing more weight on further penetration of current products in existing markets provides a more precise TAM calculation, while sales of new products in unproven geographies receive less emphasis.
Expanding Horizons: Leveraging International Markets
For SaaS startups, international expansion presents a significant opportunity to increase TAM. One of the advantages of SaaS is its ability to enter new markets without significant physical presence. By localising payment options, language support, and tailoring marketing efforts, startups can validate the demand for their products worldwide. Slack, a collaboration software provider, successfully tapped into international markets by offering localised experiences and targeting specific regions. This approach enabled Slack to expand its TAM and attract a global customer base.
Expanding into new markets internationally presents an excellent opportunity to increase TAM. One of the remarkable aspects of Software-as-a-Service (SaaS) startups is that they can tap into global markets with minimal physical presence. Merely establishing payment pages in local languages and currencies can validate the existence of potential customers worldwide. While scaling and supporting customers in different regions may require additional resources, acquiring a few customers in a specific market can validate a substantial worldwide TAM.
Nurturing Growth: Product Roadmap Expansion for Long-Term Success
While international expansion offers immediate TAM growth, sustaining long-term success requires the development of new products to cater to existing target customers. Expanding the product roadmap is crucial to meet evolving customer needs and outpace the competition. However, this expansion demands substantial investments of time and resources compared to international expansion.
Dropbox, a cloud storage and file-sharing service, achieved significant TAM growth by continuously expanding its product offerings. By introducing features such as Dropbox Business and Paper, Dropbox successfully attracted new customers and increased its TAM by targeting various segments of the market.
When evaluating startups, venture capitalists must acknowledge the limitations of relying solely on industry data for TAM calculation. Embracing a comprehensive approach that incorporates factors like international expansion and product roadmap expansion is essential for maximising TAM and identifying investments with significant growth potential. By harnessing the power of disruptive products, startups can transform markets and create opportunities that surpass industry expectations.
Amit has two decades of experience in the industry and an MBA. He supports entrepreneurs with every aspect of their business including concept and product development, investor presentations, and fundraising. Amit & 7startup assist startups in the pre due-diligence process and help connect them to our vast network of investors. Reach out to us today and see if we’re a fit!