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Have you ever wondered what TAM is and why itโ€™s so important to VCs?

Have you ever wondered what TAM is and why itโ€™s so important to VCs? Well, Total Addressable Market, also known as TAM, is a crucial metric for VCs. It helps them determine a companyโ€™s potential for growth and profitability. Hereโ€™s why:

๐Ÿ. ๐”๐ฉ๐ฌ๐ข๐๐ž ๐๐จ๐ญ๐ž๐ง๐ญ๐ข๐š๐ฅ: TAM indicates the maximum revenue a company could generate by selling its current products to everyone in its target market. This helps VCs understand the companyโ€™s upside potential. For instance, itโ€™s impossible to build a billion-dollar business if the TAM is only $100 million.
๐Ÿ. ๐Œ๐š๐ซ๐ค๐ž๐ญ ๐๐ž๐ง๐ž๐ญ๐ซ๐š๐ญ๐ข๐จ๐ง: VCs focus on the total number of customers in the existing geographic market, the size and likelihood of broader geographic sales, and the product expansion roadmap. This helps them assess how much of the market the company can realistically capture.
๐Ÿ‘. ๐†๐ซ๐จ๐ฐ๐ญ๐ก ๐‚๐จ๐ง๐ฌ๐ญ๐ซ๐š๐ข๐ง๐ญ๐ฌ: In later stages, TAM becomes more important as there might be situations where a businessโ€™s growth is constrained because they start to run out of new customers.
๐Ÿ’. ๐…๐ฎ๐ญ๐ฎ๐ซ๐ž ๐๐ซ๐จ๐ฃ๐ž๐œ๐ญ๐ข๐จ๐ง๐ฌ: VCs are trying to look six years down the road, not six months. Therefore, understanding the TAM helps them evaluate long-term revenue opportunities.

In summary, a large TAM can indicate a significant business opportunity, which is why VCs pay close attention to it. However, itโ€™s also important to note that other factors should be considered alongside the TAM.

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