Pet Peeves Part Two (TAM, SAM, SOM)

I posted a blog like this the other day.  This is about elements that I have been seeing in pitch decks that are driving me crazy.  This is a way to help entrepreneurs and get this off my chest.  This post is about the Total Addressable Market or TAM slide.

One of the focus areas of my firm RTP Ventures is Big Data and Analytics.  In more than a few pitch decks recently, the market slide includes the information:  IDC has pegged the big data market for technology and services at $16.9 billion by 2015, up from $3.2 billion in 2010, a CAGR of 39%.  Ask the entrepreneur, “What’s the size of the market you are going after?”  He or she will answer, “about $6.18 billion.” That is (($3.2*1.39)*1.39).

No it’s not!

First of all, that should be a hint to me that the market is overheating – when an entrepreneur doesn’t know or doesn’t care what the size of the market it is.  Second of all, please don’t insult me or waste my time trying to convince me that a single analytics algorithm that decides the sentiment of a twitter stream is cable of capturing $6.18 billion in revenue (if all other competition disappeared). It won’t, because your market is only a subset of the big data market for technology and services.

So entrepreneurs, here’s my advice… don’t just settle for an IDC or Gartner generated number.  Take the opportunity to impress.  Figure out your TAM, SAM and SOM for yourself.  Show a calculation.  Explain to me why the market is a significant subset of the ridiculously huge, but not fully relevant, number you wanted to show me. Prove to me that you have a more granular understanding than what IDC or Gartner has provided.

In order to help, here’s some info on TAM, SAM and SOM.

TAM: Total Available Market. This is the total revenue generated / amount spent (both internally and externally) on a specific segment of the market. This number is typically larger than the simple calculation of ‘total number of customers times Average Selling Price’ because of all the in-house, home grown solutions that get counted.  Again, using analytics as an example, companies like Google or Facebook or Twitter spend a lot on this but are not paying an outside vendor or selling this as a product.

SAM: Serviceable Available Market. This is the subsegment of the market that a product actually reaches.  This is the number that a VC really wants to know. In our analytics example, this is the size of the market for an analytics algorithm that decides the sentiment of a twitter stream.  IDC doesn’t produce this, the entrepreneur does.

SOM: Serviceable Obtainable Market.  This is the realistic market share that can be obtained by a company given the competition, countries, sales/distribution channels and other market influences.  In other words this is the SAM time whatever percent of market share you think you can justify.

Reasoning this through… if IDC says the big data market for technology and services is $6.18 billion, the market analysis slide should start with that number and then haircut it  for just algorithm software… let’s say a third.  The TAM in this instance is about $2.06 billion.  And let’s say the sentiment analysis piece of the market is 25%.  The SAM is $520 million.  That number should be on the slide.  And let’s say there are 10 competitors of which this company has a definable competitive edge, so a 15% market share at the beginning is reasonable.  The SOM is $80 million.  That number should be on the slide.

Yes, $80 million is not as big as $6.2 billion, but at least the VC will believe the entrepreneur.  In addition there are plenty of VCs that will invest in a $520 million market with an initial chance to reaching $80 million with only one product.

Take a cue from Direct TV.  Do a good TAM calc and the VC will have a better chance of believing it.  If the VC believes it, she/he may have an easier time agreeing that a two person company can somehow take the business from $360,000 top line this year to $16 million in two years without hiring anyone or raising more money.  And if she/he is  nodding their head on that, they just might invest at a good valuation.  The lesson: do a good TAM slide and get a high valuation.