my $1b market is bigger than yours

When I stepped into my second consecutive Starbucks to meet Nir Eyal at the end of a long day, my brain was squishy.  The hamster in there was just sitting on his wheel, biding his time.  But from the moment Nir opened his mouth, the ideas flowed out and forced me to think and reconsider assumptions.  We had an invigorating conversation on sundry topics; we landed on the delicate topic of size before the barista kicked us out to close up shop.  As far as total addressable market (TAM) is concerned, does size matter at all?

In “Go Bottom Up, Not Belly Up” I reflected that the plan for how you saturate your Total Addressable Market (TAM) is far more important to a seed-stage company than its absolute size.  This sparked an email chain and conversation with Nir that left us wondering whether TAM – for solutions solving previously unmet needs – can be defined in any meaningful fashion.

At 500 Startups Demo Day last week, passionate entrepreneurs unveiled intriguing models and new technologies.  They attacked undefined or newly-defined market ailments in the hopes of receiving funding.  A majority of the 30 companies claimed to target $1 billion plus industries.  Yet history indicates that many of these 30 companies will be unable to raise a Series A and most of them will fail.

What does this mean for a seed stage entrepreneur hoping to construct a business model, raise funding, and find traction?  I’m not sure.  Nir reminded me that Zuckerberg’s initial need was finding a girl – what’s the market size for that?  So when David Morin had too many girls in his network and launched Path – did he size the same market differently?  Is one person’s pain point quantifiable?

Perhaps the answer lies in the “unexercised option value” of all future revenue streams of a product.  It’s the reason free dating service OkCupid is worth more multiplies of revenue than subscription-only  It explains how feature-, partner- and subscriber-rich social networks are worth unprecedented multiples of advertising revenue.

Still, I wonder: who evaluates theoretical revenue streams?  With public companies, I’ll pay attention to your stock tickers.  But for seed stage entrepreneurs, you better claim at least 10% of $1 billion.

Nir Eyal is a lecturer at Stanford Graduate School of Business and a mentor for 500 Startups, the Founder Institute, and the Thiel Fellowship.  He writes about the intersection of technology, psychology, and business in his blog: Nir and Far.

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