Written By: Kelly Bryant
Ask any Venture Capitalist what their #1 deal breaker is when it comes to investing in a company and nine times out of ten I bet you they’ll say size Industry Size. In fact, the majority of VCs in our network tell us they won’t even consider an opportunity if the industry size falls below a given number (typically $1B for a Seed or A-Round investment).
But what exactly is industry size?
The Total Addressable Market (TAM) is essentially the revenue opportunity available for a product or service. It helps an investor prioritize business opportunities by serving as a quick metric of the underlying potential of a new company. As an entrepreneur, understanding your industry TAM inside and out is a crucial first step in the fundraising process.
How should I calculate industry size?
At Nicholas Brinley Capital, we encourage the entrepreneurs we work with to follow a bottom-up approach in their calculation as we find it the most effective. A bottom-up analysis typically looks something like the following:
Total number of customers in a market x Average annual revenue of a customer in the market = TAM
It’s not uncommon that an investor will ask how you calculated your TAM, essentially, working the math live. For that reason, it’s critical you have your analysis and data at hand. It’s even better if you can further support your TAM with secondary research from credible ‘VC-Proof’ sources such as IBISWorld or McKinsey.
Here’s the bottom line: having an intrinsic understanding of your industry and a strong, data-led idea of the value you’re providing is essential. If you follow the calculations outlined above and can prove that you did your research, you will capture a VC’s attention more effectively because you’re validating the business opportunity.