What founders should really focus on: TAM is not the main thing

Early-stage founders constantly encounter the concept of TAM—the total addressable market that their startup aims to capture. However, according to Index Ventures partner Jahanvi Sardana, many successful companies entered markets that essentially did not exist at the time. Before the emergence of Google, Microsoft, or Amazon, the corresponding markets were either nascent or entirely absent.

Sardana compares TAM to surfing: every few years, major "waves" emerge in the industry—first the internet, then mobile technologies, then cloud solutions, and now artificial intelligence. The key question for a founder is whether their product can effectively leverage the current wave. This is precisely what product-market fit is about.

Sardana divides TAM into three categories:

Known market: an existing sphere where the startup aims to replace established players. It is crucial for the founder to convincingly justify why their solution is better than the existing one.
Emerging market: when the product is already used by a specific group of users but has not yet become mainstream. There is potential for scaling here if the market can be convinced.
Hidden market: risky but innovative. Here, the founder not only offers a product but also creates a new need and new consumer behavior. This requires convincing arguments and a deep understanding of future demand.

What matters to investors

While showing TAM calculations is possible, investors pay more attention to the founder's unique perspective on the market rather than just the numbers from reports.

In her view, over-reliance on external sources may indicate that the founder has not thought independently and deeply about their market.

TAM and marketplaces

TAM is particularly difficult to assess for large marketplaces. As an example, it was mentioned that Index Ventures did not invest in Airbnb due to its allegedly small TAM. In the end, the company created an entirely new category that eventually surpassed the largest hotel chains in size.

The key is not only to assess demand but also to understand how introducing a new offering can change consumer behavior.

What truly distinguishes a startup

The most important factor that makes a company attractive to investors is the founder themselves. If they have a good understanding of their customer and can explain why the customer will pay for the product, such a project has a high chance of success.

Venture investors evaluate not so much the market or the product but the founder's personality, their ambitions, and the depth of their vision. How they talk about the market reflects the scale of their thinking.

Source: techcrunch.com