Investors Should Always Care About The Total Addressable Market (TAM)

A few months ago, when we were out fundraising, private investors and Venture Capital (VCs) would always zone in on the Total Addressable Market (TAM) to understand what is the size of the opportunity here for your business to grow into.

And of course as a retail investor myself, I often focus on the market opportunity which companies I invest in by buying their stocks have not only a defensible moat, but more critically - a massive market opportunity.

I created this opinion with some excepts quoted from the CB Insights newsletter which popped into my mailbox today.

The Size Of The Market Opportunity - TAM

When evaluating a new business — whether it's a big co or a startup — how important is TAM (total addressable market)?

Opinions vary quite a bit among both operators & investors, with technology investors tending to have the most divergent (and strongest) opinions. Many investors say they don’t look at TAM for new markets, because it's often too small or undefined to even be interesting or valuable.

In these cases, doing any sort of TAM analysis is actually misleading and will make you overlook opportunities.

What was the TAM for something like Airbnb (couch surfing) or Amazon (books) when they started?

Some Ways To Identify Your TAM

For example in the space of Airbnb (which recently listed)

"Airbnb's mission is to create a world where anyone can belong anywhere"

As a Travel startup you can see that the mission is always greater than what it currently is, to sell a vision that it could grow beyond you could imagine the TAM to be:

• Couch surfing (when it first started)

• Short term rental homes

• Long term rental homes

• Hotel industry (cross border and domestic)

• Lifestyle and Entertainment aggregation industry (eating into Tripadvisor, TRIP, Expedia's market share entirely)

As you can see, the TAM can start to evolve and grow as the company evovles, as seen very clearly above with Airbnb.

On the flip side are many investors who view the market as critical and perhaps the top dimension when evaluating a company.

In this camp is Philippe Laffont, the founder of Coatue. In a great tweetstorm on Coatue’s investment in Meituan (think of it as a Chinese version of DoorDash or Uber Eats), he writes about how private market investing can benefit public market investing.

He specifically discusses TAM here:

OG of the tech world, Marc Andreessen, also talks about the importance of market selection in his essay “The only thing that matters” .

In summary, Andreessen asserts that when in doubt, the market wins.

Warren Buffett also gives a nod to the importance of market selection in this great quote below. More on Buffett’s shareholder letter wisdom here.

Whether you are an investor or operator, how important is TAM in your view?