Sramana: What is your algorithm for determining how big your TAM is? When you explore a new product idea, how large does the TAM have to be for that product to make it viable?
Tom Kemp: People get lulled into repeating what analysts or others say about the market. If an analyst says there is a $3 billion market ,you are probably not going to address the entirety of that market in the next three or four releases.
At the end of the day, you still want to know what the size of the market could be. Our algorithm works from the bottom up. We look at a potential product and ask ourselves what we can reasonably expect to sell based on existing customers and our sales capacity. We model it out. We rely on a bottom up approach to figure out what people would be willing to buy. We try very hard to be reasonable with customer adoption rates.
At the end of the day we want to make sure that we also step back and get the big picture. We want to know that we are on a path that leads to something big. We follow an ‘art and hunch’ methodology. We ascribe to a bottom up methodology over a top down methodology, but we don’t completely ignore the top down approach.
Sramana: In our program, we focus entirely on the bottom up approach.
Tom Kemp: I think that is a good approach when you are starting. Playing devil’s advocate, if you want to get into public markets or VCs, then you need to be able to point them towards some trends or analyst reports that validate your claims.
Sramana: Yes, and that all comes down to a question of stages. If you are talking about a really early stage company doing innovative stuff then by the time the analysts have caught on, it would probably be too late.
Tom Kemp: Possibly. To your point it could just be trends.
Sramana: Pointing to trends is a good idea. You need to position something that talks to those. When it comes to TAM analysis, we focus on bottom up. We want to know what we can sell. That is how we assess if an opportunity is worth pursuing and if it is venture fundable. You can pursue a niche or smaller TAM problem if you are willing to bootstrap.
Tom Kemp: You can still build a really nice business in a non-VC fundable space. As long as you are in a big enough market that is still well defined, then even if you screw up in terms of execution there will still be enough there to allow you to stumble a bit. You will see situations where a team or product is not all that great but the company does OK because the markets they are in are so good.
Sramana: I have seen A teams fail in C markets, and I have seen C teams succeed in A markets.
Tom Kemp: I agree with you 100%. It is much better to disrupt a multi-billion dollar market in most cases. There are plenty of people who are happy to bootstrap a $10 million business. They just can’t expect VCs to get excited about what they are doing.