Bottom Up TAM

I’ve written a lot about what I did wrong building Distil. For a change of pace I’m going talk about one of the things we did right.

Early on when Steve and I were first looking for seed capital, we needed to prepare financial charts and graphs to show potential investors. One piece of the puzzle we knew we needed was a TAM. I say TAM, which means Total Addressable Market, pretty casually now, liked I’m a grizzled MBA. At the time we didn’t know what a TAM was, just that we needed to know how many people might want to buy Distil’s product.

We had never done anything like this before. Our first product was training materials around ISO 9000 certification. Steve was an expert in this area.

“Steve, how many people get trained in ISO 9000 each year?” I asked.

“Well,” he replied, “there’s RABQSA and CSA and…”. He the proceeded to rattle off a string of multi-letter acronyms.

We started putting all of the training organizations into a spreadsheet. Pretty soon we had a few dozen organizations. From there it was possible to look up how many people were trained by those organizations.

After a few weeks of research we had built up a spreadsheet that showed tens of thousands of people receiving training through almost a hundred organizations.

“We need to figure out how much we can make” I mused.

Steve dived in. “RABQSA is the largest. If we can convert them to our solution it will be worth… Next is….”. Soon we had a plausible idea of how much we could actually get and a detailed plan of how to go about winning that revenue.

Without realizing it we had built a bottom up TAM. Commonly, when lacking specific information, businesses construct a top down TAM. This involves finding how much is spent annually in a market and then estimating what percentage might covert to the new product. A bottom up TAM starts with who the customers are and then builds up from there. Bottom up TAMs are usually preferable since there is less guesswork and their construction suggests a clear market plan.

The first VC we met with started the meeting off by saying “I’m very busy and can only give you half an hour”. We started into our presentation. He wasn’t impressed. Until we got to our TAM slide. “Stop right there” he said. “How did you come up with that?”

We switched to the spreadsheet we had prepared. For the next hour we went over the figures and assumptions (turns out saying he only has 30 minutes is a tactic he used to gracefully get out of meetings that were going no where). While his firm didn’t invest, he was impressed enough with our bottom up TAM to make personal introductions to other VCs he knew. It was through his network that we eventually closed our seed round. All because he was impressed that we had prepared such a thorough TAM.

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