August 23, 2021 • 10min

Breakthrough Lessons: The Myth of TAM

Pattern Breakers

In this episode of Pattern Breakers, Mike Maples Jr. challenges the conventional wisdom around evaluating startup opportunities based solely on Total Addressable Market (TAM). He argues that for breakthrough startups, focusing too much on the available market of today can cause entrepreneurs to miss enormous opportunities. Instead, he advocates for estimating the total potential market of the future. Maples draws on examples like Lyft, Coinbase, and Eventbrite to illustrate how the eventual market size for innovative startups often vastly exceeds initial TAM estimates. He provides a framework for evaluating potential market size and explains why startups need to think in terms of creating movements rather than just capturing market share.

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Key Takeaways

Focus on the potential market of the future, not just the available market of today when evaluating startup opportunities
The conventional focus on Total Addressable Market (TAM) can be misleading for breakthrough startups and cause entrepreneurs to miss enormous opportunities
Potential markets of the future often vastly exceed the available markets of today for truly innovative ideas
Successful startups often create entirely new categories or radically expand existing markets by removing friction
Key questions to evaluate potential market size:
- Are there future market waves that can propel your startup?
- Can you create a new category?
- Are there adjacent markets you could address?
- Will the product be used frequently?
Startups must create movements that shift people from the current world to a different future with massive potential
The eventual market emerges from the movement as it gathers steam, converting from potential to addressable

Introduction

In this episode of Pattern Breakers, Mike Maples Jr. challenges the conventional wisdom around evaluating startup opportunities based solely on Total Addressable Market (TAM). He argues that for breakthrough startups, focusing too much on the available market of today can cause entrepreneurs to miss enormous opportunities. Instead, he advocates for estimating the total potential market of the future.

Maples draws on examples like Lyft, Coinbase, and Eventbrite to illustrate how the eventual market size for innovative startups often vastly exceeds initial TAM estimates. He provides a framework for evaluating potential market size and explains why startups need to think in terms of creating movements rather than just capturing market share.

Topics Discussed

The Problem with Conventional TAM Analysis (01:58)

Maples outlines three key problems with overemphasizing TAM for startups:

It can cause entrepreneurs to pursue obvious ideas with too much competition
It can lead to missing enormous breakthrough opportunities
TAM estimates are often wildly inaccurate for innovative ideas

He cites examples like Lyft and Coinbase, where the eventual market size vastly exceeded initial TAM estimates:

Lyft: Started as a service for shared commutes, not a massive transportation network
Coinbase: When they raised funding in 2013, the total Bitcoin market cap was only about $1 billion

"Had the entrepreneurs been so focused on their TAM, which seemed relatively small at the time, they probably wouldn't have started these companies in the first place."

The Importance of Potential Markets (03:59)

Maples emphasizes that while eventual market size is vital for startup success, the addressable market of today is usually the wrong starting point. He explains:

Breakthrough products can expand demand far beyond existing markets by making things super easy and convenient
What matters most for startups is optionality and unbounded upside
Founders should seek to understand the possible potential market in the future

Evaluating Potential Market Size (05:01)

Maples provides four key questions for evaluating potential market size:

1. Are there future potential market waves that can propel your startup? (05:04)

Successful startups often ride waves bigger than themselves
Technology and adoption waves can propel startups to massive outcomes
Example: Coinbase rode the massive wave of cryptocurrency adoption

He emphasizes the importance of having a strong "why now" argument:

Address what significant shifts in technology or usage you foresee
Example: Ride-sharing benefited from GPS in smartphones and rapid smartphone adoption

2. Do you believe you can create a new category? (06:46)

Breakthrough startups often create entirely new categories
This usually happens by removing friction in existing markets
Example: Airbnb created a new category by improving trust in short-term rentals

3. Are there adjacent markets your startup could address? (07:20)

Startups can expand into related markets over time
Example: Amazon started with books but expanded to selling everything online
The key is knowing where to start and which adjacencies have real potential

4. Will the product be used frequently? (07:42)

Frequency of use increases the potential size of the opportunity
Products that become habits have a chance to build big businesses
Stickier products make it easier to develop and grow adjacent services

Creating Movements vs. Capturing Market Share (08:09)

Maples contrasts how startups should think about markets compared to conventional companies:

Conventional companies: Think of markets as already existing, aim to gain market share
Startups: Must create movements that shift people to a different future

He explains the process of market creation for startups:

Start with a small fraction of early believers
As the movement gathers force, more people join
What was once heresy becomes conventional wisdom
The market emerges from the movement as it gathers steam
Converts from a potential market with early believers to an addressable market

"The market emerges from the movement as it gathers steam and converts from a potential market with early believers to an addressable and available market that's well defined."

Rethinking TAM for Breakthrough Startups (09:13)

Maples concludes by emphasizing why startups shouldn't rely on traditional TAM analysis:

Don't define your TAM based on the market of today
Always think about the size of the potential future market you plan to serve
Use the heuristics provided to evaluate potential market size
Never let the myth of a small TAM stop you from building something great that changes the future

Conclusion

This episode challenges the conventional wisdom around evaluating startup opportunities based on Total Addressable Market (TAM). Mike Maples Jr. argues that for truly innovative ideas, the potential market of the future often vastly exceeds the available market of today. He provides a framework for evaluating potential market size, emphasizing the importance of riding market waves, creating new categories, and building products that become habits.

Maples encourages entrepreneurs to think in terms of creating movements rather than just capturing market share. By shifting people from the current world to a different future with massive potential, startups can create entirely new markets or radically expand existing ones. The key takeaway is to never let the myth of a small TAM stop you from pursuing a truly breakthrough idea that has the potential to change the future.