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TAM for Seed Stage SaaS: Overrated
Just Say No To TAM Analysis
Some early stage investors care a lot about TAM (total addressable market). They often want to see quantitative research showing market research, surveys, and so forth that show a large TAM.
For some industries and business models, TAM is useful. For seed stage software? Not so much. I regularly see seed stage software founders who have prepared elaborate TAM analysis. Not only is this a poor use of time, it shows a misunderstanding of what enables disruptive software startups.
Pre-Internet, founders had limited leverage to grow a market. Conventional VC wisdom held that finding a large and growing market was a necessary condition to a venture-scale outcome. A seed stage investment was often a bet on not just great founders, but a large market.
For a SaaS startup today, it’s a different world. The ability to distribute software on the Internet at zero marginal costs changes everything.
For b2b software, there is no limit to the Jobs To Be Done. Product expansion is limited by imagination, not TAM. Once one task is automated there will always be another to automate. Once one bottleneck is solved, there will always be another that software can address.
This doesn’t mean that expanding software product over time is easy - making great software is really hard! But the best software companies these days are defined by their product execution prowess. They are bottoms-up or product-led & capable of remarkable product development at scale.
In this landscape, great software products have the power to effectively create their own markets. Founders have enormous leverage.
This idea isn’t entirely radical - category creation in software is not a controversial strategy. Yet there are many who understand category creation, yet still worry about a small TAM. There are a few seed stage VCs who ignore TAM, but most consider it and many weigh it heavily.
Yet there have been many, many examples of software startups that have entered a small or nonexistent market and then have grown it via brilliant product execution. To pick a few:
Canva - The TAM for design software used to be bounded by the number of graphic designers. But Canva made a product so good that anyone can be a designer. At 60m+ Monthly Active Users, Canva has massively expanded the market for design software.
Stripe - By letting any developer accept a credit card online, they significantly expanded the market for online credit card processing. Textbook disruption.
Veeva - At inception, it was named “Verticals On-Demand” and planned on making CRM for many different verticals. But the 1st one, pharma, turned out to be much larger than expected, so they stuck with that. It’s now a 25b market cap SaaS business.
Here’s another way to think about it. If a startup is funded today and is doing 30m in ARR in 5 years, it’s doing very well. How big does a market need to be today to support 30m revenue in 5 years? It can be tiny, as long as it’s growing rapidly - and a great product can trigger that growth.
There is one caveat - heavily regulated industries might create limits on software innovation. Although the most exceptional founders will sense this and find market signals that direct them to greener pastures.
Is TAM really that bad? The problem is that at the seed stage, looking for TAM will push a startup towards existing markets & existing budgets. This can take a startup away from finding the best early adopters for a disruptive product. It can also stifle the long-term orientation needed for startup greatness.
The beauty of software startups is their potential for alchemy over a long time horizon. TAM is an output of a disruptive software startup, not an input.