Opening my third pitch of the day, I click through to the market opportunity slide. The business promises to combat the scourge of food waste, and boasts a total addressable market (TAM) of more than a trillion dollars. It sounds great, but as I read on it becomes clear that this is far from the whole story. In fact, the business being pitched to me operates in a small niche, one that touches the food waste problem but doesn’t come anywhere close to the market opportunity described. The figure offered is in fact an estimation of the total cost of food waste. The pitch might have caught my attention for a moment, but it’s lost when I recognise the common mistake that’s been made: confusing the size of the problem with the TAM.

While everyone agrees that a reference to TAM is an essential part of any pitch, I’ve started to think both entrepreneurs and investors are approaching it the wrong way. The temptation to grab attention, by putting the biggest possible number front-and-centre (“we only need 1% of China”), is understandable – but by misrepresenting it, entrepreneurs open the door for scepticism to creep in, and introduce the possibility of friction points down the road. 

Investors aren’t blameless in this. I’m not dunking on my colleagues when I say that, at times, we have a predisposition towards binary thinking. With huge numbers of pitches regularly crossing our desks, TAM is an invaluable metric in helping us distinguish between unmissable opportunities, and ones we might prefer to pass on.

So how can we do things better? By thinking differently about TAM, moving away from the show-stopping figure and instead engaging with the subject more pragmatically. Rather than understand it as a box to tick, we need to approach TAM with a more open mind. In doing so, we can turn something that at times feels like a formality into a process with real utility.

Be realistic

The key error founders make is to overstate their TAM by highlighting the problem. The global cybersecurity market, for example, might be worth around $156bn, but an entrepreneur launching a B2C security app for the over fifties isn’t addressing all of it. TAM shouldn’t be thought of as the total size of the problem, or even the total size of every possible customer that has the capability to buy the product. In fact, it’s the corner of the market that a startup stands to impact. It can be straightforwardly worked out as the total number of customers a company can possibly win within its ideal customer profile, multiplied by the price it can charge. 

Serviceable available market (SAM) and serviceable obtainable market (SOM) are sometimes used to break a huge TAM down into more reasonable numbers. They can be helpful but, to my mind at least, they’re a bit academic, and tend to overcomplicate things for entrepreneurs. Thinking about them too much can lead to an overinflation of the TAM to make SAM and SOM work, leading to a distorted view of the potential a company has to scale. Rather than spend too much time working all the figures out, I think it’s much more use to calculate the addressable market from the outset as one number.

From the investors’ end, an over-inflated TAM can undermine faith in a company and raise concerns about just how well a business knows its customers — and how it’s going to approach the market. What’s more important, however, is that spending some time really thinking out the TAM gives the entrepreneur a chance to closely consider the viability of their business, and its go to market strategy. It also presents an opportunity for the entrepreneur to really pin down who their ideal customer group is. 

A quick example of good practice can be found in Octopus Ventures’ portfolio, APLYiD. The business provides digital onboarding solutions for companies that need to verify customers’ identities. The know your customer/anti-money laundering software TAM is around $7.5bn — but that isn’t an accurate snapshot of APLYiD’s market. The company only operates in a few key territories. Its customers have a specific set of needs, namely speed and ease of use. APLYiD has been clear and focused on these two key criteria from the outset. By doing so, and reaching a TAM that reflects them both, it has established both investor confidence and a roadmap for expansion.

Defy binaries

As I’ve written: the TAM problem doesn’t just sit with entrepreneurs — it’s also an issue at the investors’ end. While entrepreneurs commonly misrepresent their TAM as the size of the problem, investors have a tendency towards binary thinking: if a TAM isn’t of a certain size, they don’t see it as a viable opportunity.

By fixating on the initial TAM as a yes/no binary, investors miss out on opportunities. A TAM might be modest, but the core product or service might very well have what it takes to grow beyond the initial TAM. The company itself may even be able to create the market. Investor focus needs to be wider, to take in not just the current addressable market, but the potential for a business to scale laterally.

The business landscape is littered with examples of how a binary approach to TAM could have caused investors to miss some of the world’s greatest recent success stories. Remember, Facebook’s original market size was just the student population of Harvard Business School; Uber’s was the San Francisco limousine market. Not much of a TAM!

At the heart of my argument is this: in isolation, TAM isn’t a useful metric for investors. It needs to be considered in context, alongside a company’s avenues for what I describe not as a pivot — but a tilt.

Prepare to tilt

If pivoting describes a direct change to a core business, a tilt is something rather more gentle: a company, and investors, recognising that its product or service has use-cases beyond its current application, and expanding into adjacent markets. 

When AirBnB first launched, it projected a modest 10.6 million bookings every year. In 2019, it achieved 272 million. The company’s initial TAM was the existing short-term home rental market — but it quickly tilted into other sectors. As it scaled beyond its initial proposition, AirBnB has come to challenge and disrupt the global hotel market; ultimately, it has come to create a market that, it could be argued, didn’t exist when it started. An investor who decided that the initial projection didn’t represent a big enough opportunity would have missed out, while if the founders had shied away from the company’s tilt its growth would have stalled.

Closer to home, The Safeguarding Company, which sits in Octopus Ventures’s portfolio, provides safeguarding solutions for the UK’s schools. This puts its TAM at around 25,000 institutions — but it has plenty of room to grow beyond them. Tilting into the US market, or edging into the corporate space, both represent a dramatic increase in the company’s addressable market. 

As both of these examples show, a founder with the vision to seek out new use-cases for a product or service will find plenty of opportunities to scale. At the investment end, it underscores the importance of thinking about TAM — and being prepared to see beyond it.

Conclusion

The key takeaway here is that, for investors and entrepreneurs, thinking about TAM should be more important than TAM itself. For entrepreneurs, the process of working out the TAM is, itself, a productive one. It builds investor faith, demonstrating that founders know their customers, and have a realistic view of where – and how – their company might grow. Working it out, and thinking about these questions, is an essential step in developing a business. 

In return, investors need to take a less binary view. Beyond TAM, investors should consider the ease of the tilt — and whether the entrepreneur has the capability, and mindset, to execute on it. Investors who can do this stand to unearth the hidden gems passed over by other VCs.

At Octopus Ventures we believe that investing is more than checking boxes and think deeply about all aspects of a potential market. If you’re a startup looking to raise, we’d be delighted to speak with you. Get in touch to talk TAM or tilting on [email protected].