[Tweetstorm] What's the TAM Chasm? A #SaaS #startup story
Early stage founders typically get thrown for a loop when they're asked for their TAM. Here's two ways to think about it that both make sense, but not really for the same person at the same time!
Early stage founders typically get thrown for a loop when they're asked for their TAM. Here's two ways to think about it that both make sense, but not really for the same person at the same time!
Let's say you're a domain expert - 10-15 years in manufacturing sw for auto ancillary units. You know the end users, you've done pre-sales, deployment, you know what their problems are, you even know how to solve some
You decide to startup to solve one of the problems Yay!
You decide to startup to solve one of the problems Yay!
The founders of your company hate to see you leave, but also know you're a go-getter. They agree to support you with angel investment, and access to customers. You find a few friends who're hitting a glass ceiling, and want out of mid-mgmt, and into an exciting startup.
You decide you're going to make sw that solves a $1M/yr problem for auto ancillary manufacturers. That should allow you to charge $100K/yr, giving you a solid 80% margin since it's SaaS. You know 10 customers who have this problem right now & 200-300 more like them.
While the sw you're using works for any manufs you decide to stick to the niche you know well, auto ancillary, and later think about extending it out to bigger pastures. You start building with delivery in 180 days, with 3 pilot customers signed up and waiting.
Meanwhile a mentor connects you to a VC firm - no harm in talking, right?
As you describe your prod, the 1st question is "What's your TAM?" & as you quickly multiply, you know it's a $300M problem, and the market will pay $50-$100M for your sw.
You can get to $30M, right!?
As you describe your prod, the 1st question is "What's your TAM?" & as you quickly multiply, you know it's a $300M problem, and the market will pay $50-$100M for your sw.
You can get to $30M, right!?
The VC shakes his head, "80% of startups fail. If you shoot for such a small piece, the risk you're taking is totally disproportionate. An accomplished founder like you should go for a $2B market at least, and shoot for $100M revenue. Otherwise it's not worth it".
Baffling!
Baffling!
"How could I commit such a simple mistake? OF COURSE 8/10 startups fail, and shouldn't I try to make my expected outcome high? So shouldn't I shoot much higher so even if I fail, we make something?"
Let's do a IoT in manufacturing play, you decide. 10000 prospects, $1B TAM.
Let's do a IoT in manufacturing play, you decide. 10000 prospects, $1B TAM.
The next VC likes it, amazing team, great angels, some pilots, $1B TAM, IoT, that's a pre-series-A right away. $2M, with the next round in 18-24m.
Hire more devs, sales people, build more of a platform, than a niche product. Marketing too, since this has to be a big bang launch!
Hire more devs, sales people, build more of a platform, than a niche product. Marketing too, since this has to be a big bang launch!
Suddenly the original auto-ancillary pilot customers are not as happy. Some of their features were delayed after the platform was built-out. So they're not seeing the RoI they want. Some of their integrations are lower priority too, since they won't make a dent in the larger TAM.
But the new pipeline is more than making up for it. HUGE! The conversions are slower, but that's because no one in the team has wider IoT/manuf experience, so everyone's learning. How different can it be?
18m later, very little as it turns out.
18m later, very little as it turns out.
IoT in manuf is not as simple as the niche auto ancillary manuf sw problem you had started with. Many more competitors, different platforms, different prefs, workflows. Building this prod would need tens of millions of $ and many more years!
With runway disappearing, and few sales in sight time to hit the road for the next fund raise. But what to show for the last 18m? Where had they gone wrong?
This is the story of "TAM too small" too often
Trying to be a BIG fish in a BIG pond, vs a big fish in a small pond
This is the story of "TAM too small" too often
Trying to be a BIG fish in a BIG pond, vs a big fish in a small pond
VC shoots for Unicorns w/10% success
Founder can't gamble, they've only one shot at success
Differing risk appetites of VCs and founders cause the TAM chasm
Don't die jumping the TAM chasm!
Read medium.com/swlh/whats-my-… for more
Founder can't gamble, they've only one shot at success
Differing risk appetites of VCs and founders cause the TAM chasm
Don't die jumping the TAM chasm!
Read medium.com/swlh/whats-my-… for more
Even with the same expected outcomes, most founders are better off earning ONLY a few million from a small pond, with very low risk
There's no shame in a $100M startup: techcrunch.com/2017/05/16/the… says @epaley
There's no shame in a $100M startup: techcrunch.com/2017/05/16/the… says @epaley
As @indievc points out: What's a meaningful exit for a founder vs a VC? medium.com/strong-words/m…
And most startup founders earn minimum wage! medium.com/the-mission/be… shows @brandone
While VCs get paid well to lose money shows HBR: hbr.org/2014/08/ventur…
While VCs get paid well to lose money shows HBR: hbr.org/2014/08/ventur…
Maybe be a Zebra? medium.com/@sexandstartup… as @sexandstartups shows the path
As a founder, make sure you're operating within your affordable loss, and winning with as little risk as possible. Learn to survive before you thrive!
Pick your market wisely, and don't fall into the TAM chasm!
Pick your market wisely, and don't fall into the TAM chasm!
And if you're in B2B SaaS, wanting to build a Value SaaS business, hit us up @upekkhaAcc - we'll help you reach your first $1M ARR quickly, efficiently, and scalably!
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