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Uber\u2019s first iteration was a simple SMS system for hailing taxis. Aimed at professionals in NYC, Uber estimated its Total Addressable Market (TAM) to be USD $4 billion.<\/p>\n\n\n\n
Today, operating multiple driving and delivery services across 60 countries, predictions for Uber\u2019s TAM range between USD $300 billion and $1 trillion<\/a>. <\/p>\n\n\n\n In Shopify\u2019s early days, Bessemer\u2019s original investment memo predicted the best case scenario was a USD $400 million exit. Even with the recent tech stock turmoil, as of July, its market capitalisation lies just shy of the $40 billion mark. <\/p>\n\n\n\n But things can go the other way when we\u2019re talking about TAM.<\/p>\n\n\n\n When Sears was acquired for USD $11 billion by K-mart in 2005, it sought to grow the portfolio of its large off-mall stores and expand its retail empire. Fast forward to 2018, Sears filed for bankruptcy as it struggled to compete against online e-commerce giants like Amazon. K-mart had overestimated Sears’s real TAM as innovations in the online space resulted in Sears crashing from its retail throne. <\/p>\n\n\n\n TAM is the market size a company hopes to sell to (hypothetically) if they could get all of it (usually in the billions of $). Although it might be easy to assume the TAM of a product by doing a quick Google search of the industry it\u2019s in, as you can probably tell from the above, it\u2019s a little more complicated than that. <\/p>\n\n\n\n There are three main ways<\/a> to traditionally identify your TAM. <\/p>\n\n\n\n The top down approach is where you\u2019ll start by looking at the market at large, narrow it down to the portion spent on your sector, then narrow it further into your category. You might then break it down even further into things like location and customer demographics.<\/p>\n\n\n\n The bottom-up approach uses your early selling efforts to predict future growth in market sizing. The downfall is that you can easily underestimate the potential of your market. The process involves identifying your target buyer, figuring out how many of them exist, and multiplying that number by what you charge. <\/p>\n\n\n\n The value theory method is based on the willingness of buyers to pay for the product. This is often used for companies looking to disrupt a current market or form a completely new one. This method is based more on assumptions rather than data, which means the TAM can be quite unpredictable. <\/p>\n\n\n\n Although these are methods to help calculate the TAM, all three methods show a common trend between them. They are all not reliable ways to help calculate a company\u2019s potential market share. <\/p>\n\n\n\n As David Skok, General Partner at Matrix Partners, puts it: <\/p>\n\n\n\n TAM\u2019s role in a pitch deck is to convince investors that the company is chasing an opportunity big enough to achieve venture-scale returns with the right execution. <\/p><\/blockquote>\n\n\n\n In other words, founders think it\u2019s a quick and easy way to show investors a feasible market for the startup they\u2019re building. <\/p>\n\n\n\nIs Total Addressable guessable?<\/h2>\n\n\n\n
So why do we even use TAM?<\/h2>\n\n\n\n