How to choose your $X Billion TAM?
Choosing your TAM is much similar to choosing a winning poker table.
It's much easier to change your product while you might be stuck with your wrongly selected market for life. This is why in the startup terminology you hear a lot about product-market & founder-market fit.
The equation for product-market fit it's not 50%-50% it's more like 1%-99%. A perfectly built product will always fail in the eyes of wrong market. While you can get away with a make-shift solution if the market is going crazy about your product (pet rock, anyone?)
Still don't know what the driver behind this craze was.
Still don't know what the driver behind this craze was.
One of the best analogies for choosing the market is like the choosing the poker table.
One of the key drivers of chances of winning in poker is which table you sit (aka not being the fool) vs how skilled you are in playing poker.
As a founder if you choose a red ocean, regardless of how great your product is your CAC will keep your business in red due to high competition for the same user base. One of my favorite companies that choose blue ocean is Door Dash. While all other solutions, UberEats, Postmates & Grubhub, were focusing on city dwellers, Door Dash focused on suburbs. Lower access to food delivery was more difficult to tackle but market was much more grateful and provided much higher margins.
After winning in the suburbs, they encircled the cities and doubled their market share year on year. This is a page from the Mao Zedong's famous Long March playbook, the encirclement campaign. Oppo/Vivo did the same against Xiaomi who was focusing on Apple like flagship stores and D2C model. Same goes for Pinduoduo vs JD/Alibaba.
Mao Zedong's playbook is used by many successful startups today.
So, the first thing you need to focus is to find a new angle, serve an unmet need of the market, democratize the access.
The richest people today are the ones who democratized access and served the masses for the first time.
Post-Nike we are all wearing sneakers for daily use, people who cannot afford cars in emerging markets are now showing off their iPhones (no it's not the 48MP camera they are buying it for) instead. They technically democratized showing off. SpaceX dropped cost-to-orbit by order of magnitude. Walmart gave much more purchasing power to rural families for their low discretionary income. Tesla brought electrics cars to masses.
What increases your chances of success the most is starting with a mass market focus. Even though your initial model can fail, you can still pivot to a model that works serving this market. You are heading for California for Gold Rush in 1848. If pick & axe doesn't work you can use shovel, if that fails you can dig with your nails. One thing that still stays the same, there is gold somewhere under that soil.
If you choose a massive underserved market, one way or another you will hit the gold.
So, when you choose your TAM aim for a massive XXX$ Billion market. That's a good start. But most of the founders make the mistake stopping there. They say
"If we claim 1% of this $100B market we are a $1B company" NEVER SAY THAT!
It automatically kills the domain authority reputation that you have been building painstakingly. That's a top-down calculation that a first grader can do.
The VC formula is really easy. Can this startup generate $100M revenue in 5-10 years' time?
Instead, you need to show that you did your homework. You can calculate how your startup can generate $100M revenue from this market with a bottom-up-calculation. Knowing your business driver like the back of your hand.
Even the mighty Tesla get to $100M revenue in 7 years and was ready for IPO.
So, how can you best map your business drivers bottom-up?
End of Part
Coming Next
Why distribution always beats the product?
How find your 'actual' business drivers?
How to calculate your business drivers bottom up (real examples)?
Bonus Stuff
Join us at Fundraising Success Group on LinkedIn where we share more in-depth insights and real startup examples.
