Venture Capitalists looking to invest in a startup look for the TAM – Total Addressable Market. But not only is Total Addressable Market important but how the startup plans to address that market. In Hunter Walk’s post, “Your Total Addressable Market Stat is probably a lie” he writes:
If your pitch includes “And if you think of all the people who currently have a pet, that’s $80 GAZILLION DOLLARS of TAM,” you don’t even have to say “if we get only 1% of that we’re a unicorn,” before I start rolling my eyes.
He ends the post with an advice: “…focus on the A in TAM”.
Turns out great products often don’t sell themselves. Great startups don’t raise money from VCs and splash it on TV ads and billboards (as MBAs are prone (taught?) to do). The following great startups have been highly innovative in how they address their market.
Facebook reached college students first and built a huge market share (within a short time) in whichever college campus they launched.
Twitch.tv, a live streaming video platform focused on video gaming tapped into existing offline gaming communities first to build their first set of users. Once the power users were on the platform, the momentum was very high. Twitch has 45 million monthly unique viewers and is considered the fourth largest source of peak internet traffic in United States. Amazon acquired Twitch for $970 million.
Flipkart.com, the e-commerce leader in India followed the footsteps of Amazon and launched books as its first category. The founders back in 2007 used to hand over free bookmarks with the name flipkart.com to people outside bookstores. When Flipkart was getting traction, they hit another road block – Indians’ great mistrust of using credit cards to transact online. They rolled out ‘Cash on Delivery’ where customers would pay cash after their orders were delivered.
PayPal focused on eBay users (with Elon Musk and Peter Thiel shutting down other services). More than 70% of eBay auctions accepted PayPal payments and 1 in 4 transactions were via PayPal. The story is well known – PayPal competed with eBay’s own subsidiary Billpoint and eventually eBay bought PayPal for $1.5 billion. PayPal addressed its market with a simple referral structure. In Peter Thiel’s words:
“PayPal’s big challenge was to get new customers. They tried advertising. It was too expensive. They tried BD deals with big banks. Bureaucratic hilarity ensued. The turning point was when Luke Nosek got a meeting with the chairman and top brass at HSBC in London. Several old school bankers crowded into a large wood paneled conference room. They had no idea what to make of these California startup guys talking about the Internet. They looked so dazed and confused that they very well could have been extras who knew nothing about payments and tech at all. Luke, despite being on a life-extension calorie restriction diet, found a Häagen-Dazs. And over ice cream, the PayPal team reached an important conclusion: BD didn’t work. They needed organic, viral growth. They needed to give people money.
So that’s what they did. New customers got $10 for signing up, and existing ones got $10 for referrals. Growth went exponential, and PayPal wound up paying $20 for each new customer. It felt like things were working and not working at the same time; 7 to 10% daily growth and 100 million users was good. No revenues and an exponentially growing cost structure were not. Things felt a little unstable. PayPal needed buzz so it could raise more capital and continue on. (Ultimately, this worked out. That does not mean it’s the best way to run a company. Indeed, it probably isn’t.)”
If you are one of the several million Dropbox users, you would be familiar with its referral program. The unique referral program where you get more storage space for referring someone took Dropbox from 100,000 registered users to four million in just four months (35% of its daily signups were because of the referral program).
AirBnB pulled off one of the most impressive hacks with a Craigslist integration. To tap into the huge Craigslist market (the supple side), AirBnB let users who listed properties on AirBnB the opportunity to post them on Craigslist as well. Andrew Chen calls the hack ‘anything but simple’.
Qualtrics, which lets users create and publish good looking surveys tapped into users at universities to grow its user base. It is now valued at more than a billion dollars.
One of the impressive old stories on addressability would be about Tupperware. Even today Tupperware is sold mostly through its fabled Tupperware parties.
One of the most underestimated points about very successful startups is how they successfully addressed their target market. The eventual winners are highly creative and innovative and highly frugal in this regard. So, as Hunter Walk said, time to think about your ‘A’ in TAM.