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"Founders think of startups as ideas, but investors think of them as markets. If there are x number of customers who'd pay an average of $y per year for what yo

"Founders think of startups as ideas, but investors think of them as markets. If there are x number of customers who'd pay an average of $y per year for what you're making, then the total addressable market, or TAM, of your company is $xy. Investors don't expect you to collect all that money, but it's an upper bound on how big you can get." I would really love some more color on this. What about a product that addresses a genuinely new market? For example our market is a subset of the analytics market targeted at a new set of data, similar to Mixpanel or KissMetrics. I honestly have no idea how to talk about the market because there is no analogue at this point. How can I apply this advice? "But every company that gets really big is "lucky" in the sense that their growth is due mostly to some external wave they're riding, so to make a convincing case for becoming huge, you have to identify some specific trend you'll benefit from." Is this the answer to my question? It doesn't give me an $xy, but it does give me the "wave" I'm riding. Is that a solid foundation for talking to investors? "It's slightly dickish of investors to care more about who else is investing than any other aspect of your startup" You have a silver tongue, PG :)

deleted 13y ago
[deleted]
tptacek 13y ago
One way to take a stab at this is to try thinking about how much money you'll make for anyone else; your TAM will probably be some fraction of that number.
- jasonkolb 13y ago
  This seems like great advice if your customers are paying you directly. Do you think the same dynamics apply with advertising models or businesses that create a market in something? For example if I can cause someone to spend $50 and a product distributor makes $40 on that, can I justifiably charge say $20, or is the cap set by whatever Google charges for related keywords?
  - wtvanhest 13y ago
    Hopefully you will see this. I went and looked at your site: http://www.applieddatalabs.com/ http://www.applieddatalabs.com/ and tried to understand what you do. It looks like you have a bunch of stuff going on all at once which is hard for investors to analyze and understand. It is important to break each invention/IP/idea in to separate concepts and analyze the market size of a niche market of each. For your "cognitive data visualization and comprehension" IP you are working on, the key would be understanding a business type it could be sold to, then figuring out how much you would get. Lets say you looked at the xBox One and Connect along with the PS4. Is there a way to license your technology to those two companies or maybe even game developers? If so, what do you think the licensing would get you per Xbox, PS4 or game? You need to estimate two numbers: (# of units) and ($ per unit). Where the unit could be consoles or titles etc. Anyway, hope that helps a little. Feel free to email me, same name at gmail.
pmarca 13y ago
Genuinely new markets are really rare. They do happen -- VMWare was a great example. But they are few and far between. This is why lack of competition is often scary to potential investors -- paradoxically -- they ask themselves, how attractive can this supposed new market be if there are no other companies going after it? The advanced way to do market analysis -- which only the most experienced entrepreneurs ever actually do, but which works really well, at least with us -- is to spend very little time on market theory or top-down market estimates (handwaving), and instead put a lot of effort into building a solid, well-though-through BOTTOM-UP market analysis. What I mean by bottom-up is, literally, start at the bottom -- with an individual customer -- what is their problem, and how much are they plausibly going to pay for the solution, and then how much is it going to cost to acquire that customer. Then sum up how many customers like that exist at various sizes and in various market segments. E.g. "I estimate that in the US alone there are 50,000 small companies that need this solution and will pay $10,000 each, and I think I can acquire them for $3,000 of sales and market expense each. And then there are another 5,000 midsize companies that will pay $50,000 each..." and so on and so forth. You can slice and dice it however makes sense for the specifics of what you are doing. This kind of analysis answers several questions at once for the investor: (a) Is there a big market? (b) Does the entrepreneur actually understand the dynamics of the market she's going after? (c) Does the entrepreneur understand the sales and marketing requirements and costs of her business? (d) Is this an entrepreneur who takes every aspect of her business seriously and rigorously?
- mindcrime 13y ago
  What I mean by bottom-up is, literally, start at the bottom -- with an individual customer -- what is their problem, and how much are they plausibly going to pay for the solution, and then how much is it going to cost to acquire that customer. Then sum up how many customers like that exist at various sizes and in various market segments. Interestingly enough, that totally jibes with the Customer Development methodology from @sgblank, where he talks about developing and validating your "Problem Hypothesis", "Market Hypothesis", "Channel Hypothesis", etc. E.g. "I estimate that in the US alone there are 50,000 small companies that need this solution and will pay $10,000 each, and I think I can acquire them for $3,000 of sales and market expense each. And then there are another 5,000 midsize companies that will pay $50,000 each..." and so on and so forth. You can slice and dice it however makes sense for the specifics of what you are doing. This is the approach we're taking at Fogbeam. We've identified a beachhead market we're going to pursue to try and get initial traction, done some simulations based on the number of such customers, potential price points, etc., and come up with some potential revenue numbers and what-not. NOW, the next step is to get out and prove that our numbers actually make sense and hold up in the real world. Of course, they won't really, at least not according to our most optimistic projections. But the hope is that they do hold up well enough to get this thing off the ground...

deleted 13y ago

[deleted]

tptacek 13y ago

One way to take a stab at this is to try thinking about how much money you'll make for anyone else; your TAM will probably be some fraction of that number.

jasonkolb 13y ago
This seems like great advice if your customers are paying you directly. Do you think the same dynamics apply with advertising models or businesses that create a market in something? For example if I can cause someone to spend $50 and a product distributor makes $40 on that, can I justifiably charge say $20, or is the cap set by whatever Google charges for related keywords?
- wtvanhest 13y ago
  Hopefully you will see this. I went and looked at your site: http://www.applieddatalabs.com/ http://www.applieddatalabs.com/ and tried to understand what you do. It looks like you have a bunch of stuff going on all at once which is hard for investors to analyze and understand. It is important to break each invention/IP/idea in to separate concepts and analyze the market size of a niche market of each. For your "cognitive data visualization and comprehension" IP you are working on, the key would be understanding a business type it could be sold to, then figuring out how much you would get. Lets say you looked at the xBox One and Connect along with the PS4. Is there a way to license your technology to those two companies or maybe even game developers? If so, what do you think the licensing would get you per Xbox, PS4 or game? You need to estimate two numbers: (# of units) and ($ per unit). Where the unit could be consoles or titles etc. Anyway, hope that helps a little. Feel free to email me, same name at gmail.

pmarca 13y ago

Genuinely new markets are really rare. They do happen -- VMWare was a great example. But they are few and far between. This is why lack of competition is often scary to potential investors -- paradoxically -- they ask themselves, how attractive can this supposed new market be if there are no other companies going after it? The advanced way to do market analysis -- which only the most experienced entrepreneurs ever actually do, but which works really well, at least with us -- is to spend very little time on market theory or top-down market estimates (handwaving), and instead put a lot of effort into building a solid, well-though-through BOTTOM-UP market analysis. What I mean by bottom-up is, literally, start at the bottom -- with an individual customer -- what is their problem, and how much are they plausibly going to pay for the solution, and then how much is it going to cost to acquire that customer. Then sum up how many customers like that exist at various sizes and in various market segments. E.g. "I estimate that in the US alone there are 50,000 small companies that need this solution and will pay $10,000 each, and I think I can acquire them for $3,000 of sales and market expense each. And then there are another 5,000 midsize companies that will pay $50,000 each..." and so on and so forth. You can slice and dice it however makes sense for the specifics of what you are doing. This kind of analysis answers several questions at once for the investor: (a) Is there a big market? (b) Does the entrepreneur actually understand the dynamics of the market she's going after? (c) Does the entrepreneur understand the sales and marketing requirements and costs of her business? (d) Is this an entrepreneur who takes every aspect of her business seriously and rigorously?

mindcrime 13y ago
What I mean by bottom-up is, literally, start at the bottom -- with an individual customer -- what is their problem, and how much are they plausibly going to pay for the solution, and then how much is it going to cost to acquire that customer. Then sum up how many customers like that exist at various sizes and in various market segments. Interestingly enough, that totally jibes with the Customer Development methodology from @sgblank, where he talks about developing and validating your "Problem Hypothesis", "Market Hypothesis", "Channel Hypothesis", etc. E.g. "I estimate that in the US alone there are 50,000 small companies that need this solution and will pay $10,000 each, and I think I can acquire them for $3,000 of sales and market expense each. And then there are another 5,000 midsize companies that will pay $50,000 each..." and so on and so forth. You can slice and dice it however makes sense for the specifics of what you are doing. This is the approach we're taking at Fogbeam. We've identified a beachhead market we're going to pursue to try and get initial traction, done some simulations based on the number of such customers, potential price points, etc., and come up with some potential revenue numbers and what-not. NOW, the next step is to get out and prove that our numbers actually make sense and hold up in the real world. Of course, they won't really, at least not according to our most optimistic projections. But the hope is that they do hold up well enough to get this thing off the ground...