Q: Can you please address the issue of estimating Addressable Market when the product or service is trying to solve an emerging problem and opportunity that is about to hit in the near future.  For example, FeedBurner raised money long before bloggers were convinced that feed management could use some professional help and long before VCs saw that an advertising and paid model would emerge at some point. In other words, Dick Costello was not taking out an incumbent or providing a better solution than the market offered for a given problem. He raised capital on the belief that a market was about to emerge and FeedBurner wanted to be the first to address it. In this scenario how does one estimate addressable market (other than assumptions and forecasts) or in such cases can you be light on addressable market numbers.

A: (Brad) There are two schools of thought on this one: (1) measuring addressable market (or "TAM" – "total addressable market") matters or (2) measuring TAM doesn’t matter at all.

I’m in the "measuring TAM doesn’t matter at all" camp, especially in an early stage company in an emerging market.  Almost every presentation I’ve seen has a market size section.  Almost every market sizing presentation is incorrect – by a lot. Enough to make it irrelevant.

Most of the companies I invest in are in markets that are early in their life.  I can assure you that if you are in year two of an emerging market, there is a slide somewhere at Gartner or Forrester projecting a $1.5 billion market in year 7 that compounds 75% year over year after that indefinitely (or at least until the X-axis runs out of room).  Whatever.

Now, there’s definitely value in trying to articulate how the market you are playing in will develop.  I’m usually more interested in understanding “proxy markets” (are there markets out there that are good proxies for what you are going after?) and “market drivers” (what has to happen for the market to grow big, and quickly?)  While you can wrestle this information into a spreadsheet or a bottoms up powerpoint slide with a pretty triangle in it somewhere, anytime I see any number with two decimal points of precision, you’ll probably lose credibility with me.

Remember, at the beginning I mentioned that there are two schools of thought and I land firmly in one of them.  There are plenty of VCs in the other (e.g. measuring TAM matters). This just reinforces a point we’ve made many times on this blog – make sure you know who your audience is and what they care about.