If you have a new invention, it’s really fun to calculate your TAM, your Total Addressable Market. It shows the commercial opportunity and impact your invention might have. And it’s the outlook with which you excite investors, new hires and your mom. Founders can be forgiven for getting carried away. A good many pitches we see have HUUUUGE TAMS, with BIGGLY opportunities. It’s all fun and games until it leads you to a misguided strategy and you are killing your exit options. Let’s dive in and see where ambition meets fantasy and how an inflated plan can kill you.
Imagine you’re forecasting a TAM of $10bn for an innovation that really only has TAM of $50MM. What are the implications for your strategy and planning?
Maybe you have a great pitch and can get an investor to believe in your $10bn TAM. With a large investment on a high valuation you will look successful. You can now hire lots of people, move into a pristine space, pursue an aggressive plan and get some press. This will all be very exciting. The press will applaud you and your mom will be so proud.
Reality arrives quickly. Your ambitious plan and actual results start diverging within 12 months. However, the hype can stick around for a while. Especially on the flat part of the hockey stick you’re easily forgiven. Maybe you double down and raise another round: hire more people and push even more aggressively. But when the exponential growth doesn’t arrive, things are starting to get tense. The early signs that something is out of whack - you can’t retain and attract:
Top talent will likely recognize your story as inflated first and notice that the option package on offer is worthless. Partners and clients will not work with you, because to their sober eyes, your inflated ideas show up as unattractive terms in your proposals. As for the “smart money” – smart is as smart does (~Forrest Gump).
Nobody expects a founder to be a pessimist about their business, so an aggressive forecast is expected (and discounted) by every investor. But don’t forget that when you’re taking in financing, you are making a promise. If it becomes clear that you were either disingenuous, or simply incompetent, you are in trouble.
Some founders might consider what price their integrity has:
“If someone offers me a lot of money on an inflated valuation (i.e. cheap money), how can I rationally say ‘no’?” Maybe you think you can take the dumb money and then simply outsmart it. I.e. instead of spending the money on an aggressive and unrealistic plan, you will proceed much more cautiously with a safety cushion in the bank. This strategy faces two problems:
The real consequences of falling dramatically short on your plans are not some uncomfortable board meetings. The problem is that you’ve significantly increased the chance of total failure. You start with an inflated TAM, raise a boat load of money, spend it on a plan that doesn’t fit with reality and end up with a failed business and possibly zero returns for you and your investors - a party train to nowhere.
If you are raising funds or simply exploring the commercial potential of your innovation, we are interested in speaking with you. Send us a note to start a conversation!