Over the weekend, Tobi, the founder and CEO of Shopify, discussed the major reason investors passed on Shopify in the early days : market size. I remember that financing round, & I remember having the same concern, & making the same mistake. Living in the valley & driving on 101, the billboards & logo-adorned headquarters of successful companies provide a daily infusion of all the mistakes in I’ve made in guessing how a company or a market might evolve. Years later, I listened as Bill Gurley shared his thoughts about market size. He asked himself a question : whether the startup was increasing, decreasing, or maintaining the market size? (I can’t seem to find the link - but I have it in my notes!) I added that question to my diligence list when meeting startups. Now much later, having seen many companies create categories or reinvigorate aging ones, the question I ask myself has evolved. It’s not as the market size large enough? Instead, it the question is : do we believe this company can create the market? Market size is the output of all the players marketing, selling, building. Their efforts alter, distort, & juice the supply/demand curves of macroeconomics. It’s not a given - not an output or a steady-state CAGR. Often it’s the startups that engender the demand, change the market dynamics, & make markets massive by taking risks with products. When done right, these founders create category-defining businesses like Shopify (now worth $90b)!
@ttunguz There is a better lens for this = focus on the "use case", instead of current $ TAM = category creating companies remove friction from *existing* large use cases & when that friction is removed, the latent demand translates into $ TAM = Canva & The RealReal were like this too.
@ttunguz Sometimes when you build it, they do come. Sometimes, they even stay ; )
@ttunguz It’s definitely true that they created the market. Hard to imagine E-commerce at this scale without them
@ttunguz “Nobody’s buying a PII data privacy vault. The few companies that care about it are going to just build it.” Infinitesimal TAM.
@ttunguz AI is big-time doing this. Or at least has the potential. Is the tech and the companies creating the market.
@ttunguz As I like to say it’s not the TAM you start with but it’s the TAM you exit with.
@ttunguz If you look back, what evidence would there be that Tobi/ the team could execute make the market if you sized the market opportunity properly the first go around?