When planning a serious start-up, TAM or Total Addressable market is one of the most important factors which needs to be considered.
Ideally it is preferred that the TAM(total addressable market) is at-least a billion dollars. It is because when an investor will value the start-up, he will evaluate it on the basis of 5-10% of TAM which one can capture. Lets say, If the product is very good and the service is much required in a niche. But the TAM is only a hundred million or so. What are the chances of making profits where the maximum earning is only a 10 million or so(Considering 10% of market share.)why would I risk a million or two where the best case earning is only a $10 million.
So it is very important to check if the TAM of the idea is something that would interest an investor.
Here’s a small guide on how to calculate TAM.
According to MIT’s Global Startup Labs program, the best way to calculate total addressable market is by doing a bottom-up analysis of an industry. A bottom-up analysis involves counting the total number of customers in a market (which you can do by adding up the amount of customers each company in this market has) and multiplying that number by the average annual revenue of each customer in this market.
IDEAL Market size for investors is $20 million to $100 million per year. his range is ideally has been best investments for the investors. More than a billion dollars of TAM is good but investors will feel the market is saturated unless you have something out of the box. These are also called as UNICORNs.