TAM - A Silly Metric

Part of the coverage of the recent SpaceX IPO focused on a particularly juicy aspect of their investor prospects: their claim to have identified a total addressable market (TAM) of 28 trillion dollars—more than the US's annual GDP.

I've always found TAM to be a silly metric, because it is extremely forward-looking and thus subject to wide swings based on the company's trajectory: Which geographies and markets does the company enter? What product lines does it add?

Concrete example: Amazon. Starting out as an online bookseller in the US, the TAM for an angel investor would have been the US book market. But these days, Amazon sells everything, everywhere. And let's not forget the entirely new segment of cloud computing services. There's no way that, in the late 90s, Jeff Bezos could have told an investor with a straight face that their TAM was the whole world of retail plus cloud computing (which wasn't even a concept back then).

Rather than a single number, it would make more sense to carve it up into near-term believable parts, medium-term optimistic parts, and long-term fantastical parts. Two companies with the same claimed TAM could then be compared on how much of that is allocated to the achievable near-term versus the "if everything goes exactly right, maybe" long-term.

If you're an investor, stop asking founders for their TAM estimates. They'll be far off to the point of being useless. And if you're a founder, focus on what's right in front of you rather than painting a dubious picture of future riches.