Coleman McCormick

Archive of posts with tag 'Investing'

On Markets, TAMs, and Agency

September 16, 2022 • #

If you’ve been involved in investing or fundraising activities in the past, you’ve likely heard about “TAMs” (total addressable market), as in “So what’s your TAM look like?” The general idea is to determine a metric that communicates in few words the nature of a given market for a product or service. Investors want to know how a company thinks about its market opportunity (investors generally want large ones), and startup founders need to have a sense for what they can realistically target, build for, sell to, and capture to build a business. You may also have heard of TAM’s cousins, like SAM and SOM (serviceable addressable market and serviceable obtainable market), but let’s stick to the big one here.

TAM is part of the lingua franca of the fundraising process, a term thrown around casually and understood in a variety of ways by investors and operators alike. For those of us on the operator side of the table, calculating your TAM is a necessary part of the company-building and fundraising process. Most founders don’t start with the question of “What’s the biggest TAM I could target?” before starting on their idea. Picking apart the market specifics is typically downstream of prototyping an idea for a job to be done. As a founder you have to think about how to effectively communicate just enough here to be useful to the audience. But how is TAM useful? What is an investor doing with those numbers beyond saying “Yep, this is big enough”?

Forest

What TAM analysis is good for

Firstly, a TAM serves to communicate how a company thinks about its target customer. Let’s say you build a team collaboration tool for cross-company projects. Who are the targets? What size companies? Is there a narrower industry focus? Generally the wider your target, the harder it will be to convincingly portray a useful TAM. Simply saying “anyone on Earth could be a customer, our TAM is $500 trillion” won’t persuade anyone, not to mention you’ve got quite the uphill battle to build and sell to such a broad audience. Being narrower isn’t a flaw, it’s a feature.

Which brings me to the second use for TAM: signaling the quality of your thinking about your business. A thoughtful, concise TAM analysis functions not only as a means to convey who your target is, but also as a sign of how thoroughly you’ve thought about the prospects of the business itself, meaning how to tackle a go-to-market. If you can tell a persuasive story about your target market, it lends credibility to why an investor should trust you with their money. A sloppy, or overconfident, or poorly-articulated market description (even if you have a baller product) doesn’t reassure anyone that you’ll be a good steward of the dollars. It’s like some people say about college degrees: they’re useful as signals of wherewithal and commitment as much as they are on their own merits of intelligence. They signal that you see something through to the end, a quality in higher demand by some employers than whether you have a BS in physics or a BA in philosophy.

But enough about the reasons why TAM matters. Let’s cover some reasons it’s not very useful, at least beyond a “qualifying variable” stage.

Then what’s wrong with TAMs?

Well, nothing is “wrong” with them, but they are quite often overvalued. For investors, how you read a TAM analysis and what emphasis to place on it is something to be circumspect about.

For one, markets aren’t static fixtures; they move, expand, and contract all the time. They’re moving targets. Sure, even with an understanding of this factor, a TAM can be useful as a snapshot in time as it stands the moment a deal is getting done. Even well-defined categories move all over the place. It’s more informative to look at it directionally — whether the market is expanding, or if it’s shrinking or being subsumed by an adjacent one.

Some of the best startups are great precisely because they’re targeting a strange combination of submarkets, or they’re in the early stages of creating a category, where there isn’t even an agreed-upon way of describing it yet. Conjuring TAMs for startups like this involves a mixture of alchemy and storytelling that can sometimes be unconvincing in the early days1.

For example, I’ve been building a low-code platform for field service organizations since 2011, but I’d never heard the term “low-code/no-code” (and we didn’t use it) until the mid-2010s sometime. Had we oriented on the “TAM” of no-code back then, what would we have determined? If you could even define a known boundary around the category at that time, it was probably in the 10s of millions or maybe $100 million total. Now the market is expanding at a CAGR of 30%, headed north of $180 billion by 2030, from around $10 billion in 2019. This market became a known one gradually over time. Initially it was just an undifferentiated, messy mass of people and companies doing things that looked similar to one another with app-builder tools, WYSIWYG editors, and pluggable integrations. Over time the ecosystem became legible and better understood, and now it’s a named category tracked by the likes of G2 and Gartner. But, importantly, some of the best investments in the space happened long before analyst acknowledgement. These are lagging indicators if you’re looking to be the first in, funding the most exciting new ideas.

But an even more important reason why TAMs are dangerous is that even if a market itself is relatively stable over time, your company doesn’t need to be stable. A company has agency. A great product team doesn’t stand still and let their market “happen to” them. Dimitri Dadiomov nails it here — couldn’t have said it better myself:

Part of the calculus with investing in an early product is measuring the future potential of the founders and the company. How a TAM is computed given the current status of a market, or the fitness of a product to said market, is irrelevant to capturing the future potential. A great product team will not stand by and let a better market, or a more focused market pass them by. In the best instances of this, in fact, startups can be singularly responsible for (or close to it) the creation of a market from whole cloth. Or at minimum they can greatly accelerate the realization of latent, obscured demand. Think iPad for tablet devices, Dropbox for personal cloud storage, Salesforce for CRM.

All of this is largely academic if you’re researching your market size to communicate with stakeholders. Take these tips for sizing and refining your definition and run just enough with them to communicate clearly. Just be wary not to internalize too directly the left and right bounds of your market. That’s not to say that defining ideal customer profiles is a bad thing… Far from it! But there’s a difference between “Alex here is the type of persona we’re building for” and “Our market is X big, and defined in this specific way.” Taking to heart what your market looks like without appreciating your own ability to change it can drive fatalistic behavior on the team. If your success in a market is flagging, or you’re making discoveries that the go-to-market angles into a specific customer set aren’t working, you have the steering wheel. You can change course, experiment your way into new markets, and make your TAM simply a snapshot of where you are, not a strict destiny.

  1. But the great angel and seed investors pride themselves on the ability to conjecture about a founder or an idea’s prospects. ↩

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Stealth Objections

August 31, 2022 • #

An interesting post from Sandy on the “stealth objection”: when a customer, investor, user, employee — anyone — harbors some resistance to what you’re selling them, but doesn’t make it explicit.

My experience here is mostly in getting users to buy or adopt our product. Anytime you’re showing off what you’ve got and selling them on the concept, some objections are out in the open. “It’s too expensive”. “It doesn’t support SSO”. “I can’t integrate with X”. These ones are on the easy end of the spectrum. At least you know where you stand!

But a stealth objection can actually look like like acceptance! You see this particularly when seeking feedback from people on a new thing you’ve built. You ask “what do you think? Could you see this fitting into your workflow?” And you get responses like “That’s cool. I could see some teams needing that for sure.” It masquerades as validation, but might be a simple platitude to be friendly. They may be thinking “This would never work for us. This adds extra steps in our specific process.” If you run too far with platitudes and compliments and don’t dig for the real truth, you might not even stop at indifference. You might take it as validation.

I really like this example from Sandy:

For example, sometimes someone working for the prospect gains from the same sub-par status quo that a startup’s solution fixes - that gain is the stealth objection.

Sometimes the time, money, compliance, or quality-of-life benefits of your solution run against the incentives of stakeholders in the room. Being aware of this possibility helps you keep your hackles up to make sure there isn’t closet resistance you’re up against.

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TAM for Seed Stage is Overrated →

May 12, 2022 • #

One of my favorite ideas from my friend Sandy Kory is that “great product-led companies create their own TAM”. His latest post is on this topic, that worrying about deep TAM analysis is a distraction for early companies:

Is TAM really that bad? The problem is that at the seed stage, looking for TAM will push a startup towards existing markets & existing budgets. This can take a startup away from finding the best early adopters for a disruptive product. It can also stifle the long-term orientation needed for startup greatness.

The beauty of software startups is their potential for alchemy over a long time horizon. TAM is an output of a disruptive software startup, not an input.

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Lines Not Dots →

May 11, 2022 • #

A classic from Mark Suster on patience and pattern recognition for investors:

The first time I meet you, you are a single data point. A dot. I have no reference point from which to judge whether you were higher on the y-axis 3 months ago or lower. Because I have no observation points from the past, I have no sense for where you will be in the future. Thus, it is very hard to make a commitment to fund you.

For this reason I tell entrepreneurs the following: Meet your potential investors early. Tell them you’re not raising money yet but that you will be in the next 6 months or so. Tell them you really like them so you want them to have an early view (which is what all investor’s want). When you’re with them lower the bar by telling them, “we haven’t shipped product yet, we have lots of decisions still to make, but we’d like to show you our prototype” or obviously if you’re more advanced show what you have and what your roadmap looks like.

Because early-stage investing is such a long relationship game, this view seems obvious. But people still make snap decisions to jump into deals (both investors AND startups) based on who’s hot or who’s trendy, which they have little empirical evidence on performance, grit, commitment to do what they say, and other important data points.

(HT to Sandy for this one!)

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A Brief History of Construction Startups →

May 5, 2022 • #

The construction market for startups (one that I’m fairly involved in, but only as a segment of our market) has been a historically tough nut to crack for technology companies.

This is a great breakdown from Brian Potter on the past couple decades of construction startups and funding amounts, with a useful segmentation by category into slices like builders, materials, energy use, construction software, digital twins, and more.

It wasn’t surprising to see builders taking such a huge proportion of the funding — after all, trying to scale a soup-to-nuts homebuilding company is enormously capital-intensive. Management software scoops in an ~8% share, with Procore at the top. This bit hits on one of the challenges I’ve observed anecdotally working with construction companies: a slog to scale within big orgs due to various reasons:

Most VC returns come from a small number of huge successes that end up being worth 10s or 100s of billions (for instance, 65% of the value of YCombinator startups comes from just 5 companies), but construction has yet to see any $10 billion+ startups. Part of this is possibly due to a sort of natural throttling (caused by, among other things, rational risk aversion) that limits how fast even a software company with strong network effects can grow in construction. For instance, at its IPO, Procore estimated that it had captured just 2% of its potential market despite being around for over 15 years and having a category-defining product.

Some of the frictions are common in other markets, but particularly acutein construction — risk aversion, resistance to tech, and fragmented cost centers until you get to enterprise-scale (departments compete for their own revenue/budget, and the company wants to book software expenses as op-ex to a project). Plus the multiparticipant nature of every construction project (a sea of subs and contractors) makes it difficult to go upstream with a single stakeholder buyer.

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Weekend Reading: Robotic Bricklaying, Medici and Thiel, and Airtable, Roblox of the Enterprise

August 13, 2021 • #

🧱 Where Are the Robotic Bricklayers?

Brian Potter wonders why work as taxing and seemingly-mechanically simple as brick masonry is difficult to automate:

Masonry seemed like the perfect candidate for mechanization, but a hundred years of limited success suggests there’s some aspect to it that prevents a machine from easily doing it. This makes it an interesting case study, as it helps define exactly where mechanization becomes difficult - what makes laying a brick so different than, say, hammering a nail, such that the latter is almost completely mechanized and the former is almost completely manual?

Even with the number of problems we’ve solved with machines and AI, something as basic as handling mortar still requires the finesse of human hands, a task which, while actually very hard to learn (it’s why masons are still skilled artisans millennia after its invention), can be taught and repeated on autopilot by masons. It turns out non-Newtonian materials are hard for machines:

There seems to be a few factors at work. One is the fact that a brick or block isn’t simply set down on a solid surface, but is set on top of a thin layer of mortar, which is a mixture of water, sand, and cementitious material. Mortar has sort of complex physical properties - it’s a non-newtonian fluid, and it’s viscosity increases when it’s moved or shaken. This makes it difficult to apply in a purely mechanical, deterministic way (and also probably makes it difficult for masons to explain what they’re doing - watching them place it you can see lots of complex little motions, and the mortar behaving in sort of strange not-quite-liquid but not-quite-solid ways). And since mortar is a jobsite-mixed material, there will be variation in it’s properties from batch to batch.

💶 On Medici and Thiel

Rohit Krishnan makes the case for more Genius Grant-style programs.

📊 Airtable: The $7.7B Roblox of the Enterprise

Will Airtable become the “Metaverse for the Enterprise”? In this detailed analysis, Jan-Erik Asplund dives into the bear and bull cases for what could become of the unicorn spreadsheet successor.

The world Airtable is imagining is a world where knowledge workers no longer have to assess different vendors’ offerings when they want to build a new functionality or experiment with some new type of workflow. Instead, Airtable argues, workers should be able to spin up their own tools using building blocks as simple, but capable of as much complexity, as a set of legos.

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Weekend Reading: Koestler on Awareness, 21st Century Alchemy, and the Gini Coefficient

July 30, 2021 • #

🔮 The Nightmare That Is a Reality

In early 1944, journalist Arthur Koestler was onto the horrors of the Holocaust taking place in Europe. He wrote this essay, originally published in the New York Times, calling attention to the atrocities in a climate where most in media were denying or claiming conspiracy.

At present we have the mania of trying to tell you about the killing, by hot steam, mass-electrocution and live burial of the total Jewish population of Europe. So far three million have died. It is the greatest mass-killing in recorded history; and it goes on daily, hourly, as regularly as the ticking of your watch.

We say, “I believe this,” or, “I don’t believe that,” “I know it,” or “I don’t know it”; and regard these as black-and-white alternatives. Now in reality both “knowing” and “believing” have varying degrees of intensity. I know that there was a man called Spartacus who led the Roman slaves into revolt; but my belief in his one-time existence is much paler than that of, say, Lenin. I believe in spiral nebulae, can see them in a telescope and express their distance in figures; but they have a lower degree of reality for me than the inkpot on my table.

Even during the war, the levels of denial were palpable. People didn’t believe the available evidence of what the Nazi regime was doing. He closes out the essay with a remarkably prescient observation of what happens when communications are pervasive: we have more evidence than ever before, and yet still have trouble separating fact and fantasy:

Our awareness seems to shrink in direct ratio as communications expand; the world is open to us as never before, and we walk about as prisoners, each in his private portable cage. And meanwhile the watch goes on ticking. What can the screamers do but go on screaming, until they get blue in the face?

See also episode #40 of The Portal, where Eric Weinstein discusses the essay.

⚗️ 21st Century Alchemy

Alex Crompton responds to the supply problem in investing in companies:

There are way more investors than there are companies that make investors money. By some estimates, less than 1% of the companies investors fund generate over 75% of the profits across the entire industry.

Since investors are always seeking the opportunities from the same supply of founders and companies, there are only a few tactics that can work to differentiate yourself and find the truly great returns — primarily access, exposure, and quality selecting (picking the winners from the group).

But at his firm EF, a unique sort of incubator, they focus on generating supply. If you can generate founders no one else is finding (because they’re otherwise never founding companies), you create a type of alchemy that spawns ideas that’d never get off the ground otherwise.

This is what we’re doing at EF. We are taking in raw materials — hundreds of extraordinary people from across the world every year — and putting them through an iterative, data driven methodology. We are experimenting all the time: collecting information about the founders we support; understanding their qualitative experience; and learning what works and doesn’t work. From the moment we first make contact, we are building a methodology to get them from Day minus 100 to Day 1 of something valuable.

📊 Against Overuse of the Gini Coefficient

Vitalik Buterin on the Gini coefficient’s problems when measuring distributions in crypto:

A typical resident of a geographic community spends most of their time and resources in that community, and so measured inequality in a geographic community reflects inequality in total resources available to people. But in an internet community, measured inequality can come from two sources: (i) inequality in total resources available to different participants, and (ii) inequality in level of interest in participating in the community.

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Bessemer Investment Memos →

September 9, 2020 • #

Internal memos are insightful resources to look at how organizations work and make decisions. Bessemer has published an archive of the investment memos that their partners have written to their internal investment committees. A few neat ones:

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Building in World 2.0 →

April 20, 2020 • #

Daniel Gross has a good list of things that will change post-coronavirus lockdown — patterns of lifesytle, businesses, real estate, and others:

A few notable ones:

  • The (temporary) end of cities. We might see a temporary exodus to the suburbs until there’s a vaccine. A few realtors have told me interest in SF apartments is down while suburban homes are up.
  • Trust. Suddenly all humans are suspect of carrying biological weapons. How do you feel when you see a stranger on the street today? The virus increases trust between smaller groups, decreases it towards strangers.
  • Public transit is seen as dangerous. World 2.0 doesn’t like human density. And nothing is as dense as a rush-hour subway. Some cities need urban transit to thrive, and in those metros I think we’ll either see very rigid enforcement (Taiwan) or mass infection and subsequent herd immunity (NYC). Maybe this is a boon for Uber.
  • Schools return, with it supercharged online education. Parents will demand it, rightfully so. It’s quite possible college campuses are the safest way to resume life. You want to centralize all the youth together, away from the elderly, since they are mostly immune to the virus. New digital alternatives should emerge too. It’s extremely unlikely that attending school over Zoom is the best we can do.

Here were my notes from a couple weeks into lockdown.

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Weekend Reading: The Anti Portfolio, Downlink 2, and nucoll

February 1, 2020 • #

📂 The Anti-Portfolio

Bessemer maintains this page of companies they passed investing on. I like the idea of publicly acknowledging your big misses or errors as an organizational accountability tool. Some big names here like eBay, Airbnb, Google, and FedEx.

🌏 Downlink 2.0

Almost a year ago I shared a link to the first version of Downlink. The main feature added here is you can create your own custom views by putting a bounding box around your area of interest. Then you’ll get a live look at the Earth as your desktop background.

🐦 nucoll

A collection tool for retrieving and analyzing Twitter data. I’ve seen some neat social network analyses shared from folks that have used this to map degree relationships between Twitter accounts.

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Weekend Reading: Enemies of Writing, Wealth, and the Superhuman Inbox

January 25, 2020 • #

✍🏼 The Enemies of Writing

A great piece from the Atlantic’s George Packer, a transcript of his acceptance speech for the Hitchens Prize.

At a moment when democracy is under siege around the world, these scenes from our literary life sound pretty trivial. But if writers are afraid of the sound of their own voice, then honest, clear, original work is not going to flourish, and without it, the politicians and tech moguls and TV demagogues have less to worry about. It doesn’t matter if you hold impeccable views, or which side of the political divide you’re on: Fear breeds self-censorship, and self-censorship is more insidious than the state-imposed kind, because it’s a surer way of killing the impulse to think, which requires an unfettered mind. A writer can still write while hiding from the thought police. But a writer who carries the thought police around in his head, who always feels compelled to ask: Can I say this? Do I have a right? Is my terminology correct? Will my allies get angry? Will it help my enemies? Could it get me ratioed on Twitter?—that writer’s words will soon become lifeless. A writer who’s afraid to tell people what they don’t want to hear has chosen the wrong trade.

💵 Wealth Is What You Don’t Spend

Morgan Housel:

It might seem obvious that savings is your ability to reject what you could spend. But the majority of financial goals are about earning more – better investment returns and a higher-paying career. There’s nothing wrong with that. Earning more is wonderful, just like exercise. We just shouldn’t lose sight of the fact that earning more will do little for building wealth if every extra dollar is offset by a dollar of new spending.

The world is filled with the financial equivalent of athletes who finish every workout with four Big Macs. Wealth, at every income level, has less to do with your gains and more to do with your ability to leave gains alone without cashing them in.

📨 Superhuman and the Productivity Meta-Layer

An interesting response argument to Kevin Kwok’s post from a while back called the Arc of Collaboration. The meat of the argument is that corralling notifications from the dozens of input streams we all have is challenging, and that a “command line”-style interface like Superhuman’s could function as a filter point to visualize the input stream, but also engage with items in real time. A compelling case with mockups of how it could work (if service providers wanted to plug into this sort of “notification nexus”).

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Every Great Investment Hurts →

October 11, 2019 • #

Morgan Housel on investing:

Every great investment is born from decisions that were harder than they appear to an outsider. There are so few exceptions to this. Investors have a fascination with no-brainers, obvious decisions, and easy money. The phrases should be chapter titles in a book on the ease of deluding yourself.

The “edge” is in enduring stress and putting skin in the game:

Finding above-average investments requires either being smarter than others, or willing to endure more discomfort and uncertainty than others. It’s natural to focus on the former, because the industry is full of people who are either very smart or think they are. But most edges are found in the latter, specifically because the “I’m-really-smart” edges get competed into the ground.

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Entrepreneurs, Then and Now →

July 7, 2019 • #

I always enjoy conversations with Marc Andreessen and Ben Horowitz. This interview (conducted by Slack founder Steward Butterfield) reviews their experiences as founders back in the pre-bubble era and compares and contrasts that thematically with the tech landscape today.

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Counterintuitive Competitive Advantages →

March 25, 2019 • #

Investor Morgan Housel writes here about features that can, at face value, appear to be competitive advantages at one scale, while being destructive disadvantages at another. On being wiped out (local disadvantage) and being forced to start clean (long term advantage):

The two highest costs many companies face are employee compensation and an attachment to sunk costs. Sunk costs are so entrenched that it often takes a disaster to wipe them away. Part of the reason the German military was so powerful in the early years of World War II is because it had to forfeit every gun, tank, ship, and plane to the Allies after World War I, which meant it rearmed in between wars with brand new, state-of-the-art supplies while other armies used outdated equipment. Having everything taken away from them in 1917 was a counterintuitive competitive advantage.

A practical example of this is when successful new industries can only be run by young people because they’re not burdened with past conceptions of what a product is or how an industry should be managed. Investor Dean Williams once said: “Expertise is great, but it has a bad side effect. It tends to create an inability to accept new ideas.”

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Luck, Risk, and Avoiding Losers →

March 6, 2019 • #

The latest episode of Shane Parrish’s Knowledge Project podcast is an interview with investor Howard Marks. There’s a ton here on how he thinks about opportunity and risk. I loved the sound beliefs on cycles — people commit excesses to the upside which have to be corrected, leading to overshooting to the downside. And the reason these things happen is because companies and customers, producers and consumers, are all people with emotions:

There’s no such thing as a market… All there is, is people. And people have feelings. And so the emotions tend to get people to buy, buy, buy at the top, until the last potential buyer has bought and spent all his money—at which point the top is reached and the second derivative goes negative—and sell, sell, sell at the bottom, until the last person who’s going to panic out does so.

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How Investors Think About Ideas

March 4, 2019 • #

A good overview from YC’s Kevin Hale on how to break down startup ideas:

The “solution looking for a problem” trap is all too easy to fall into, and to justify your way out of even if you fall prey to it. I love the approach here of starting with the end goal ($100M ARR) and backing into what the market size and price point would need to be to hit that target. So simple, but most of us don’t approach the thought process from that end.

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Weekend Reading: AV-Human Interaction, iPad Pro, and Buying Out Investors

November 3, 2018 • #

🚙 How Self-Driving Cars Could Communicate with You

Interesting work by Ford’s self-driving team on how robotic vehicles could signal intent to pedestrians. You normally think Waymo, Tesla, and Uber with AV tech. But Ford’s investment in Argo and GM with Cruise demonstrates they’re serious.

📲 The iPad Pro is a Computer

Jason Snell’s thoughts on the new iPad Pro release last week:

I love the new design of the iPad Pro models. The flat back with the flat sides, which remind me of the original iPad design and the iPhone 4/5/SE, is a delight. But when you pick one up, the first thing you notice is that the bezels are even all the way around—and they’re almost, but not quite, gone entirely

An improved keyboard case, new revision to the Pencil, reduced bezel width, and Face ID support are all the right updates to make to get me closer to the goal of iPad Pro over laptop. The Folio idea for the case sounds fantastic, and with the Pencil, it’s amazing how innovative it can seem to add a small flat segment to keep it from rolling off the table.

💵 We Spent $3.3M Buying Out Investors

Buffer’s Joel Gascoigne with an in-depth overview of how they bought out their Series A investors to reset. Their Open blog series is worth a follow. They openly publish all sorts of insider details on running and growing a startup that are insightful for comparison.

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