Search results for: tam sam som

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.

VC Jujitsu

By now most people know that the term Jujitsu describes a form of self-defense that uses the power of the attacker’s own weight and strength against them.  When you are the little guy this is not a bad strategy.  In a pitch meeting, the entrepreneur is definitely the little guy.  So here’s a little VC Jujitsu to keep in your back pocket for the next time you are in combat.

First, you need to know what is coming.  You can hardly expect not to get your beak a little bent while you guard, turn, parry, dodge, spin and thrust if you enter into a contest not knowing what to expect.  So let’s think it through.  A VC will likely reject funding your startup for the following reasons:

  1. We don’t see this enterprise as a a good fit with our strengths as a firm.
  2. We as a firm don’t have experience or knowledge in the space you are in.
  3. I don’t have the bandwidth that you as an entrepreneur deserve.
  4. We see this being competitive to one of our portfolio companies.
  5. We have concerns that there are not strong competitive barriers to prevent others from doing what you are doing.
  6. We don’t have more room in the current fund to invest.
  7. We don’t think it is a big enough market.
  8. We would like to see more customer traction before we feel comfortable moving forward.
  9. This investment is a little too early for us. We are more likely to get involved in the next round.

There are a number of good ways to mitigate these types of objections well in advance of ever meeting face-to-face with an investor.

Not a good fit with our strengths. This is usually a reference to investment stage.  A VC website will tell you what they like to invest in.  If not just look at the portfolio companies.  If you are searching for seed stage or early stage funding, don’t go into a firm that likes to write bigger, lower risk checks in later stage deals.  If the VC likes to straddle the line on stage ask in the introductory email what their capacity is to do deals of your startups stage.  If the VC ignores the question that’s a bad sign.

No sector Expertise.  Hopefully you have read enough of these blog posts to know that you should be choosing your VCs carefully.  That means knowing in advance what type of VC they are, what stage they like to invest in, what sectors they are strong in, who the best partner is to speak with, etc.  Hopefully you are not starting from scratch, but if you are, go to your nearest business library. Ask the reference librarian for a volume that lists all the different venture firms and provides contextual information about them.  I think that it is even online and search results can be sorted and downloaded. 1) don’t target firms that aren’t strong in your sector and 2) if a VC that you have targeted tells you this startup is not a good fit at least be prepared with a reason why you it is. If you still get the run around, get out of that place as the VC is not investing and just stringing you along for information.

Bandwidth. A VC has a changing responsibilities along the investment lifecycle.  Sometimes it is prospecting for new investments.  Sometimes its nurturing portfolio companies to success.  Sometimes its harvesting and exiting.  When a VC says that they are bandwidth constrained, either they already have enough portfolio companies or they are in a different stage of investment for a given fund.  The solution, find out how many boards or portfolio companies the person you are meeting with has.  If it’s much greater than 5 or 6, the partner doesn’t have the time you deserve anyway. Check on their LinkedIN or bio page.

Portfolio related competition. Duh? If you walk into a meeting not knowing if you are providing competitive G2 to a VC because of a similar portfolio company, shame on you and shame on that VC for taking the meeting and not telling you. On the other hand if you see a company that could be competitive, do your homework on why you are not. Ultimately that is up to the VC and or the portfolio company.

No barriers to entry. The VC might be right. It’s you job to convince them why there is or why that doesn’t matter.  Be prepared.

No room in the current fund.  Ask in the introductory email.  Make sure that not only is there room for the initial investment, but there is money being reserved for follow on investment. Nothing worse than getting stuck without support or worse yet the appearance that you are damaged goods because your initial investor will not commit to a follow on investment.

Market not big enough. Again the VC might be right.  However there may also be a disagreement about how big the market is or how big the market needs to be to justify an investment. Please check out my TAM, SAM, SOM post. Also make sure the market is $500 million or more.  Also figure out from portfolio companies what size market the VC likes to invest in.  Finally, think big and disruptive so there is no doubt.

Customer traction.  If you are looking for a Series A, you should be able to show customer interest and perhaps some paying customers.  A big name customer or OEM is worth a bunch of little, no name customers.  Customer access by the VC and customer feedback in the form of case studies are valid data points.  It is on the entrepreneur to know what the rule of thumb requirements are for a certain stage investment.  In addition, ask the VC early.  Six months before raising money start a dialog with VCs and ask what will you need to show to get an investment.  Save the correspondence and be prepared to show that you have met those requirements.

Too early.  Once again it is on the entrepreneur to know the stage the VC they are meeting with likes to invest in.  Make sure you can point to examples of other investments the company has made in your stage.  Or have an ass-kickingly good reason why they should go out of their comfort zone to invest in you.  Maybe it their area of expertise.  Maybe it’s a personal relationship. But it better be good or time is being wasted.

Moral of the story: Information is power.  Power is strong Jujitsu.  Be armed with information!

VC Blog’s I Read

I was talking to my blog co-founder the other day about what we should put in the blog roll.  I told him that I would send him a list.  Then as I thought about it more it seems like kind of a waste of space and way too long for a scroll on the side of the blog.  I also figured that almost everyone looks at the same blog sources on venture capital so there wouldn’t be a whole lot of revelations to those reading this.

What I decided to do is write a post that lists what I read.  You can bookmark it or add it to your reader or whatever.

Additionally, I’m always looking for new sources of interesting thoughts, gossip and information. So I hope that my sharing this with you will lead to 1) the first comment down below 2) you will share some of yours with me.  Hope this is useful.

Tell me what I’m missing. Thank you.

btw – It has been nice for NYers to have a team in the Conference Championship game for each of the last 4 years.  Even nicer to actually win one.  Go Giants!