TAM is not the reason

Jason Yeh
June 18, 2021

As much as you might hear it discussed, as many times as it may have been given to you as feedback after a pass, and as much as you rightfully should be thinking about it… TAM is never the reason that an investor passes on a company. 

A delicious international treat but not why they passed

This might be confusing given everything you know about investors searching for massive businesses, but look at the facts or rather look at a list of massive companies whose humble beginnings would certainly have seemed like a small TAM on the surface*:

  • Discord ($7B) - chat rooms for video games
  • Patreon ($4B) - tips for youtubers
  • Calendly ($3B) - a calendar link
  • GOAT ($1.8B) - used sneaker platform
  • Carta ($1.7B) - replacing spreadsheet cap tables

Even Amazon ($1.7T… that’s trillion with a ‘T’) started as a bookstore.

*numbers from June 2021

TAM is often discussed as a deciding factor in an investor’s decision to invest, but there are so many examples like these that show how deceptive those initial descriptions can be. And VCs are students of history… their go-to decision-making tool, pattern matching, is literally a reference check on history. Beyond well-known successes within the industry’s record books, you will be hard-pressed to find a VC portfolio that doesn’t have a company whose current focus seems incredibly narrow.

The fact is investors know in their heart of hearts that multiple elements can drive a company to become enormous, no matter where a founder starts. As long as they solve a real problem and establish a valuable customer relationship, there are always adjacent markets to tackle, additional products to add, segments to be bolted on, geographies to expand into, and other unexpected growth vectors to increase the size of the addressable market. 

So if TAM isn’t the reason, then what is? I found myself contemplating an angel investment opportunity that I passed on and told myself it was too niche of a product chasing too small of a market. I gave myself the same excuse that I flag as bogus when delivered by other investors!

Reflecting on this helped me better articulate what is happening when an investor says they’re passing because of TAM. I believe the real reason is this:

They just don't believe YOU will build a big business.

Either you’re not inspiring enough, don’t have a big enough vision, don’t have the skills/experience, or a host of other unexplainable reasons they can’t put their finger on… they just don’t believe you’ll do it. 

That means if you are a founder raising money while focused on a narrow space, you must give investors the sense that you are excited to build a colossal business. They should understand that you are quickly solving a small problem today and are excited to keep expanding. Your vision is massive. You dream about the impact you’ll make on a huge market. If you do not incorporate that feeling into your pitch and your interactions with investors, then yes, focusing on a small TAM to start will greatly undermine your ability to raise venture capital. 

Conversely, founders that exhibit the fire and tenacity to build something large are founders that attract investment, no matter how narrowly focused their initial starting point may seem. 

So, TAM is not the reason for a pass… you are.


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