Escaping the TAM Trap

A different way to think about market size

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This post was written by Lynx Fellow - Shazeem Kudchiwala, a 2nd year MBA at Columbia Business School, focused on Venture Capital.

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Investors pass on companies all the time because the TAM is too small. Sometimes it goes like this: an investor meets a founder they like, the product is strong, the team is capable of executing, but because the perceived TAM is too small, they pass. It makes sense given venture math requires large outcomes, but this logic has a blind spot. It assumes the market is fixed, when some of the largest outcomes in venture came from markets that didn’t exist yet or were too small at the outset.

In 2014, NYU professor Aswath Damodaran published a valuation arguing Uber was worth $5.9 billion, not the $17 billion the market had priced it at. His math was straightforward, but flawed. The global taxi and limousine market was $100 billion, Uber could maybe capture 10%, so that’s your ceiling. Bill Gurley, who led Benchmark’s Series A in Uber, wrote a rebuttal called “How to Miss By a Mile.” His argument wasn’t that Damodaran’s math was wrong. It was that the frame was wrong. The question isn’t “how big is the taxi market.” It’s “how big is the market for better, cheaper transportation that you can summon from your phone.” Gurley projected the real opportunity at $450 billion to $1.3 trillion. Uber’s market cap today is around $180 billion. Gurley was right.

That was a decade ago and still investors continue to size the market as it is today instead of asking what it could be.

Size the problem not the market

Figuring out what the market could be requires a two-step process. First, take a step past what the current product or service is and imagine how much better and cheaper it could become. Second, evaluate who is a paying customer today and who else might become one once it improves.

It’s easy to visualize “better and cheaper”, but harder to picture the actual behavioral changes that come from it. This is the same framework Gurley articulated in his blog. Uber went beyond taking rides from taxis and limos. It pulled in rental car customers, people who would’ve driven drunk, parents who needed to get their kids across town, commuters who realized they could sell their second car. It’s Jevons paradox applied to market sizing, where better and cheaper products / services create explosive demand.

This concept is also known as the Total Addressable Problem (TAP). TAM asks “how much are customers paying today.” TAP asks “how big is the problem, and who else would pay to solve it.” They’re complementary. TAM sizes the market as it is. TAP helps you see what it could become.

What TAM misses, TAP catches

This pattern of using the TAM as the upper bound shows up over and over. In 1980, AT&T asked McKinsey to forecast cell phone adoption by 2000. McKinsey predicted 900,000 subscribers, but the actual number was 109 million. As a result, AT&T sat out of the cellular market and later had to acquire McCaw Cellular for $12.6 billion to enter the arena. More recently, Airbnb struggled to raise its seed round and 21 investors passed on Anthropic’s first round. The perceived TAM was too small.

However, when investors size the problem instead of just the market, these opportunities become clear. Gurley understood what Uber was actually solving. Similarly, Emergence Capital invested in Veeva Systems in 2008, when the pharma CRM market was $400 million. They were betting Veeva could solve the problems life sciences companies had and that those problems were big enough to matter. Today, Veeva’s $36 billion market cap validates that thesis.

Now, most startups won’t realize their potential and most won’t even get close. The power law remains dominant and the outcome for most companies is failure or modest at best, but the companies that do end up creating the most value end up breaking past their original projections.

So why do many investors still default to TAM?

I think it’s because TAM is safer. It’s grounded in what exists. If you pass on a company and cite TAM, you can point to the data. TAP requires you to stake a claim on your vision of the future and convince others to see it. That’s a more vulnerable position to take.

And yet, early stage investing is about seeing the future before it happens. The point isn’t that TAP has to be precise…it probably won’t be. It’s more to guide you to think beyond the existing market and answer the question that truly matters for power law companies.

What if this works?