The most useless metric in the history of metrics
Total adressable market calculations are corporate garbage
Total adressable market
If you're reading this blog, you likely belong to the last, tech-savvy generation of entrepreneurs. It's also possible that you've tried to raise funds. You may have sent your great pitch-deck to a bunch of VCs and family offices. If you did, I bet there was the sacred market size slide.
Let me get this straight: total addressable markets only compete with EBITDA1 to win the golden medal of corporate/McKinsey/MBA bullshit that you should not deal with when launching your startup. Startup accelerators, shady advisors, and venture capitalists will sometimes focus a ridiculous amount of time sizing your market.
The method usually follows this script: you do a Google search and end up finding some mysterious numbers on a data brokerage website. Then you try to squeeze the optimal amount of version from the free version, and eventually get a number. You compare it to other sources, and potentially do a cross-product so it fits your country. Finally, you use a wet finger approach and drop something close to the following line: "We estimate we can win 10% of this market by the next five years. One billion times 0.10 and here is a 100 million dollar company.” Easy, that can’t fail.
Well, that’s what some MBAs like to do, and even some people who hold no MBAs. It is useless, and should by no means be your way of evaluating your market.
Does that mean the market you are in does not matter? On the contrary, it is almost what matters most, but traditional voodoo-magic calculus leading to market size estimation won’t get you far.
Don’t think static
The most important feature of your market is not its size. It's better to avoid tackling problems in markets that are too narrow if you aim to build a unicorn. However, starting with a niche is often a good way to understand a customer segment and build credibility.
If you've read this serialized book, you know I favor identifying what doesn't work and avoiding mistakes, rather than prescribing a miracle recipe. In my opinion, here are market features that should raise caution:
Obviously shrinking size for several years, including times when the economy is not in recession.
Dominance by the same large actors in an monopolistic/oligopolistic situation, with the same set of equally large clients2. The oil refining market is a prime example.
Demand that only comes from large, bureaucratic companies: this can mean you're unlikely to ever sign your first contract3.
Highly speculative nature and lack of fundamentals, such as creating new cryptocurrencies4: your product shouldn't have value only for its own sake and shouldn't depend on speculators, like an alt-coin.
Markets crowded with competitors similar to each other, competing mainly on price. The delivery markets are a good recent example; every new actor started by slashing prices and ended up broke.
Seasonal market : Sales depend on favourable economical cycles. That makes your company too fragile to economical downturn.
Optional: Regulatory hidden traps, where the core of your activity depends on a legal loophole. I am not entirely convinced about this one, as some amazingly great businesses exist because of those legal grey zones.
When evaluating a market, you must think about its dynamics. Using different estimations, the neo-banking market was either nonexistent or monstrous. The market size is, by design, a static indicator, even though you can add the estimated annual growth. It’s the estimated annual growth calculated under the condition that all other factors remain equal, and it takes into account the exact same market components over time.
Markets are complext systems, where each addition can impact existing players. Introducing a new element to a segment might decrease the market share of existing competitors, yet simultaneously it can heighten consumer awareness about the market's existence. Hotmail excelled in scaling its personal email service, simultaneously paving the way for others.
Consequently, this market expanded from virtually nothing to a value of several hundred billion dollars, providing opportunities for numerous new entrants. It facilitated the emergence of specialized niches, such as anti-spam solutions, a demand indirectly generated by email service providers.
The most significant potential outcomes come from creating a market, not from competing for a share in a crowded space.
(Long) Conclusion
Understanding market dynamics can only be achieved through experimentation within the given market. Since markets are complex systems, entrepreneurs can't rely on unreliable metrics; they must approach them using scientific methods of trial and error to gain cumulative knowledge of supply and demand dynamics. First, ensure that some people are ready to buy your solutions, in other words, validate the existence of the market, then iterate on your products.
Market statistics provide no information on consumer behavior and trends. In B2B markets, the size and processes of your consumers can have a significant impact on your ability to close deals and generate cash. Avoid obviously shrinking markets and hardcore niches where you lack a competitive advantage. Remember that consumer awareness is a dynamic variable: what they don’t need today may become essential tomorrow.
If you have programming or product creation skills, you should be ruthlessly seeking innovative solutions. Technological breakthroughs can lead to near-monopolistic situations if you allow them to compound for a long time. Competing with old-school competitors, you can act faster and more effectively. Bloated, bureaucratic companies are often both slow and incompetent.
Take calculated risks and don’t focus on market size. Ideally, the company you create should be one of a kind, potentially generating a new market even if you are addressing a very traditional issue. You can solve a well-known problem, but seek innovation in the 'how,' not in the 'what' or the 'why.'
Ignore the total addressable market; instead, ask yourself if a more innovative, more efficient solution can gain some market share. Then ask yourself if you can build and ship that solution.
Keep the faith,
Voss
Cash in hands before you pay things that keep you out of jail, or lawsuits.
Neo-banking doesn’t apply, for example.
Flee bureaucrats at all costs.
I know some VCs justify idiotic investments in crypto companies: they might be lucky, but even if they make money, they likely won’t know how or why. It’s more likely that they'll lose everything, as the catastrophic track records of Web3 investors demonstrate. This is not investing, it’s gambling.