The value of any idea is directly related to the opportunity size and execution. Both of them are critical to any good business, as strong execution on a small opportunity likely won’t cause a breakout success, while poor execution on a massive opportunity also is less than ideal. Execution happens over a long period of time, and when it comes to early funding, is often hard to quantify and prove, so one of the most important metrics that early stage investors look for is TAM (Total Addressable Market).
Total Market Opportunity vs. Total Addressable Market
It’s important to consider what investors are looking for versus what TAM provides. Investors are looking for the potential of an idea to see if it can grow to something meaningful that consumers are willing to purchase. Metrics like TAM are meaningful in order to give an estimation of the possible disruption potential an idea has. However, TAM doesn’t exactly translate well to helping determine the potential of an idea. TAM simply surmises a potential group of people that could be sold to, which often is a highly imprecise and directional value at best.
The Total Addressable Market is commonly defined as the size of the market of potential customers. While that may be a good approach initially, it’s important to note that rarely do ideas stay the same or stick to a single market. I’ve found that a more meaningful metric for investors is the “Total Market Opportunity”. This is an important distinction as it frames the TAM as a combination of multiple markets that could evolve over the life of an idea.
As an example, let’s take the invention of the SMS/MMS. An initial analysis might consider the potential customers people who use email. Thus, the total possible opportunity would hypothetically be capped by getting 100% of email users to stop sending emails and solely use text messages. Today, around 205 Billion emails are sent daily, while 60 Billion messages are sent just from WhatsApp and Facebook Messenger today. Emails and messaging both exist and have different purposes. Messages are used for a variety of purposes that emails are not directly involved in including sending money, playing games, and even sending location information. In a traditional analysis, markets like payments, and gaming might not be analyzed. Thus, taking the Total Market Opportunity might look more like getting percentages of a lot of different markets, creating new markets, and diminishing others. This number is significantly different than the TAM, and tells a much deeper story that includes understanding of a product roadmap, disruption potential and go to market strategy that a TAM may not have.
How to Build a Total Market Opportunity
Now that we’ve established a meaningful difference between TMO and TAM. How does one go about creating a TMO? The first step is build an articulation of the big vision of your product. This might be something that is 10 years away, but its important to make it clear and attainable.
We previously outlined looking at your “market score”, which is the basis for a lot of the information and calculation you should gather when discussing your market opportunity. We combine a few of our other scoring metrics to give us a full view of the market opportunity for ideas that come through High Alpha.
With this big vision, you need to compartmentalize the different industries and markets that your product could play in. If we go to the SMS example, it could be the email market, the messaging market, and potentially things like payments, etc. The important thing to know here is not necessarily quantifying the opportunity by estimating percentages of each market you could take, but providing data and information about those markets and supposing reasons why your product might fit and compete in them.
Understanding TMO vs. TAM is a big driver in helping you unlock the full value and potential of your future business ideas and accurately conveying that to prospective investors.
