Have the incubators, accelerators and all the advisors have gone bananas? There is so much hype and emphasis on the TAM, SAM, SOM and the bigger picture of the market potential that most startups miss and fail to answer the most common and basic questions. This is my last post in this series of how to turn your pitchdeck into a credible story.
Personally, If I were to invest in any business (as a Business Angel) which is in those early stages that little is known, I need to know some very basic numbers. Of course at early stages they will be estimates or sometimes guestimates but I prefer a guestimate based on some numbers than a SAM, TAM, SOM in the millions which I cannot use as a real ball part figure to workout anything. Also what I find with SAM, TAM and SOM is that in most cases they are exaggerated and look at the global value of the overall business in the sector rather than the specific size of revenue directly generated from the service or product sold in question.
Let me give you a simple example. When talking about TAM what I often see a value that is addressing the full revenue generated by that sector. In the case my startup, Urbytus (A web based management for Home Owners Association). In Spain the total money spent by Home Owners Associations (Also known as Commmunities of Home Owners) , on shared costs is about 40 Billion Euros. This number includes all expenses in HOAs (Shared expenses), from the building insurance, to the maintenance of communal garden, swimming pools, gates, staff, security, repairs, etc, etc. It is not really a true representative of the TAM. In reality the TAM is approximately 13 Million Euros. Well even this is incorrect. This is the available figure on what the management companies spend on Software and is the only available figure in market studies. However we are selling something that has never been sold to HOAs directly. There was never a budget for this in that 40 Billion euros and the HOAs will never spend a total of 40B on just software. What is possible is that throughout time a part of these HOAs slowly adopt this software using part of the 5% reserve fund and slowly adding it to their annual budget. Or the cost could be just assumed by the Sundry/Miscellaneous budget as it is a small sum.
If I were to say that the TAM for my market size in Spain is 40 Billion, it would be incorrect and if I were to say that it would be 13M based on the HOA Management companies figures, it would also be incorrect. Each HOA management company manages 10 to 50 or even 100s of HOAs, so the13M euro software sales to HOA Management companies will need adjusting to HOA numbers in order to reflect a possible TAM.
What I often find when I ask how did you get to the TAM, SAM or SOM, the startup founders are unable to give me concrete answer on how they have calculated this number and as such it becomes just one big ambiguous and unverifiable number which is mostly based on extraction of figures from reports that address the total value of the market.
What I like to see, before seeing TAM, SAM, SOM is just a few simple numbers.
- COG: Cost of Good, e.g what is the production cost for one unit of your product.
- EUP: End User Price. What do you intend to sell it at
- CAC: What will it cost us to find and sell to one client.
These are the first three figures that will help anyone build a simple picture of what your business looks like. It is simple numbers from which I can easily see if you are going to need to sell large volumes, or if it is a niche market with high profit margin, etc, etc. You can estimate the above and that’s good enough.
The next three numbers that I would like to see is:
- Number of clients you can sell to immediately in the next 1 to 6 month
- Total number of clients that exist in your local area or area of operation
- Total number of clients in your country of operation.
- You can also also workout total number of available clients WorldWide to give a bigger picture.
For a startup business in its early stages we really need to see if they can even stand on their feet in a local market, before they can fly internationally. Unless you truly have a product that’s borderless and can be used worldwide WITHOUT language barriers, customization and compliance with local regulations or laws; more than often your local market is and should be your starting point.
Can you see how the above numbers allows anyone to quickly workout how many products you can sell. And if you can sell X amount, how much do the investors envisage you to sell if they help you with marketing money and their network of contacts.
So rather concentrating on big numbers, concentrate on building the story from scratch. It begins with you building a product and you tell them what the approximate expected cost of that product will be, how much you think it will cost you to attract and get one client and finally what you will be selling it for. Once you have given your audience these simple numbers then you can work your way up to show them the bigger picture and the market opportunity.
And one final note. Try to avoid those exponential growth curves. There is much talk about THINK BIG, BE AMBITIOUS and little emphasis on being REALISTIC. I am a true believer of aim big, but I have changed my strategy on how I present those ambitions and exponential curves that are more than often not as curvaceous as your beautiful girlfriend or handsome boyfriend. (More on this in the coming blogs).
Are you an accelerator or incubator? Do you want to build more Credible Startups in your portfolio? Then I would suggest you stop teaching fairy tales. I have helped hundreds of startups change their pitch decks to Realistic yet Credible and Amazing Startup stories. Book me for a free session and I am happy to prove you wrong.