Taming the TAM!

Assessing correct Total Addressable Market (TAM) leads to relatively right valuations and potential right sizing of IPOs!

Climate Change Alert! - Understanding TAM is essential for startup success — especially in a Funding winter scenario when VC dollars are harder to come by!

Recently, Infosys co-founder N R Narayana Murty had some critical views on current venture capital/ funding scene in India. Murthy opined that some venture capitalists are giving undue importance to top line over the bottom-line revenues.

In some ways, this has also become a Ponzi scheme, because you know I am in series B…I sell my first deal at a profit, I get off and it is the series Z fellow that is left with the tin box. - Narayana Murty

Is VC investment a Ponzi Scheme?

Kumaraswamy Murthy 🇮🇳 @Kumaraswamy_SM

@rajeshsawhney Yes and No! Yes, especially seeing the way some of the new-age companies are being valued during IPO. No because, as along valuations are decent its a good avenue to raise funds and scale! Context matters!!

NRN’s statement is true to a large extent and one of the reasons for that is the vicious cycle of wrong TAM, high valuations and overpriced IPOs. (I recollect him saying that he had affinity to communism initially and later embraced capitalism!) One of most common mistakes many early-stage startup founders make is calculating a TAM that’s not necessarily accurate or obtainable.

Zerodha’s Nitin Kamath also echoed something similar, Startup IPO Valuations are also get affected due to these wrong metrics.

Higher valuations are mostly a result of overstating the size of the opportunity. Unreasonable TAM assumptions are a larger problem in India because the revenue opportunity other than lending is limited to the top 2 crore Indians (~1.5% of India) - Nitin Kamath

Kumaraswamy Murthy 🇮🇳 @Kumaraswamy_SM

At any stage of business, TAM SAM & SOM are the key metrics part of any pitchbook & is extensively used to measure revenue opportunity available for a product or service. Optimistic bias may discount risks! Misjudgments on these lead to wrong valuations! open.substack.com/pub/kumaraswam…

Nithin Kamath @Nithin0dha

We celebrate valuations, but the more I speak to founders, the more I'm convinced high valuations are detrimental. Higher valuations are mostly a result of overstating the size of the opportunity. Of course, there… https://t.co/0p7cVfHEit

What’s the way out?

TAM, SOM & SAM metric calculations process needs to be more inclusive by collaborating with more potential customers, tapping into credible market research sources, speaking to SMEs and industry leaders. The calculation/estimation process needs to be more realistic aligned to the three concentric circles: TAM ,SAM (serviceable addressable market) and SOM (serviceable obtainable market)

An alternative and additional approach can also be in terms of not spending much time calculating future revenue or reading Gartner studies for factoids that may sound authoritative. Instead, build a bottom-up model that focuses on the size of the opportunity, not the market!

Overall, the solutions are in having right valuations so that projecting unrealistic growth numbers can be avoided. Although SEBI can facilitate but adherence should come more from self-regulations by VC community. A startup is free to ask for a higher IPO price but needs to disclose how valuations are arrived at, SEBI Chairperson Madhabi Puri Buch says.

Also, mindset of Startups growing at all costs and chasing only growth through more discounts and more performance spends should be avoided. It’s during these times that wisdom from Narayana Murthy and Nikhil Kamath can be useful. Zerodha has done fantastically well in spite of being bootstrapped. The way forward is a healthy co-existence of bootstrapping and rightly valued start-ups.

We hold nothing dearer than a benefit, so long as we are seeking one; we hold nothing cheaper after we have received it. Do you ask what it is that makes us forget benefits received? It is our extreme greed for receiving others - Seneca.