December 4, 2011 by startupengineering .
“Wipe your glosses with what you know.”
James Joyce, Finnegan’s Wake
“To be a good diagnostician, a physician needs to acquire a large set of labels for diseases, each of which binds an idea of the illness and its symptoms, possible antecedents and causes, possible developments and consequences, and possible interventions to cure or mitigate the illness. Learning medicine consists in part of learning the language of medicine.”
Daniel Kahneman, Thinking, Fast and Slow
Startup engineering is improved by clear language. For example, the word “market” is good enough to signify a market in casual conversation, but in the startup context, just as there are supposedly 37 words for snow in the Eskimo language[1], there need to be multiple words or phrases to distinguish more exactly what we mean by a “market.” Herewith, the first of an occasional set of posts toward a glossary of startup engineering terms:
Blank Market. named after Steve Blank, and defined in Four Steps to the Epiphany, A Blank Market is a market with demand structured in a way that makes it accessible to a startup. Specifically, a Blank market is one in which:
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The customers in the segment have a commitment to solving a problem that, in aggregate, is worth a lot of money to solve (see “threshold market”)
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A significant subset of customers in the segment know they have the problem and want to resolve it
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A significant subset of this group is currently devising solutions that they find unsatisfactory solutions
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A significant number in this sub-subset are spending money to solve the problem in unsatisfactory ways.
Threshhold Market. This is the potential revenue available to a company that is necessary for achieving its goals. Threshhold markets can be relatively small for high margin businesses, and vice versa. If the goal is to create a “lifestyle” company, the threshold can be the minimum revenue needed to sustain the desired salaries of the owners.[2] The threshold market for an angel-, venture capital-, or strategic partner-backed startup is a market large enough to enable the investors to meet their liquidity or other goals. While a potential TAM is difficult to assess (see below), threshold markets are much broader and divinable by rules of thumb. The market for cell phones in China is big enough; the market for air conditioners in Helsinki probably isn’t.
Total Available Market (TAM). This is usually an annual revenue number derived by multiplying the number of units of something sold by the sales price. Assessing the TAM is a standard practice when looking at a company’s historical market share or when forecasting changes in a mature market. Assessing the TAM for an innovative startup requires introducing unpredictable variables. In the startup phase, either no actual customers have been validated, or the customers belong a cohort within the TAM that has unique properties (e.g. they are early-adopters, they are reachable by local word of mouth, they got the product for free, etc.) Assessing a TAM in this situation requires obscuring the potentially crucial differences between this cohort and others. The differences, in turn, make guessing about ultimate pricing to the larger group, extremely difficult. Figures proposed as the TAM for a new, innovative product, should (and usually are) treated very critically.
to an early-adopter segment of the potential TAM or The number expected to be sold is in turn, derived as a percentage of the number of potential buyers in the market, or as a percentage of a known existing market. In other words, TAMs are the solution of an equation “X * Y” where both “X” and “Y” are variable, hard to know, and susceptible to various forms of wishful thinking. Most investors will look at whatever data you present to support your assumptions about X and Y, properly assuming that whatever TAM you present is a spurious number.
[1] This is actually false, see http://en.wikipedia.org/wiki/Eskimo_words_for_snow
[2] Along with a positive operating margin as a buffer and a structure than manages cash flow