The Investor’s Lens: Separating TAM Facts from Founder Fiction

At OSEIN, we come across startups that serve customers in a wide array of industries, solving problems that might be unfamiliar to the generalist investor. When you’re a new angel investor, one of the trickiest parts of evaluating a pitch isn’t the product demo or even the founder’s storytelling — it’s the understanding of the startup’s market size. At first glance, those numbers are designed to impress. Ten billion here; two hundred and fifty billion there. But as an investor, your job isn’t to be wowed. Your job is to figure out if the Total Addressable Market is realistic or smoke and mirrors.

TAM, in its simplest form, is the total revenue possible if every potential (actual) customer on the planet bought the product. The napkin math is simple: how many customers could possibly buy your product multiplied by the price they are willing to pay.

TAM = Price/unit/year x number of paying customers.

Above is the bottom-up TAM calculation approach, and it’s the primary lens methodology. Yes, it will almost always be smaller than the flashy top-down numbers, but it’s far more credible.

When I started analyzing startups ten years ago, I would typically see founders taking a top-down approach. Meaning they would read some industry research paper, quote the potential market, assume a “conservative 1%” as their TAM, and call it a billion-dollar business idea.

Please don’t let the billions sweep you away. I understand that the FOMO is real, and you don’t want to miss out on the next billion-dollar startup, but it’s best to apply a lot of diligence to your excitement and take a breather to understand if the number is even feasible.

Founders love the top-down approach because it makes their startup look enormous on paper. But here lies the problem: most TAM slides are bloated, miscalculated, or based on sloppy shortcuts. If you learn to read them critically, you’ll save yourself a lot of wasted time and maybe a lot of wasted money.

The most common shortcut you’ll see is the top-down TAM on a global-social-intangible-ambiguous-humanity-threatening problem: “Cybersecurity threats are a $250 billion market, and if we just capture 1%...” It sounds compelling but means nothing. Capturing 1% is not a strategy. It’s lazy math.

Another common mistake is confusing the size of a problem with the size of a market. If someone says the opioid crisis is a $100 billion problem, that number is not the TAM, it’s the societal cost. Or if a ski goggle company points to the entire $3.3 billion U.S. ski industry as their TAM, they’re overstating.

Therefore, you want to see a market that’s built up from the bottom. You want to see a slide that states what the company’s primary customer segment is, and then utilize reliable census data to determine how many customers exist in that market.

We had a company come in that was operating in the healthcare industry, and they had a really great product with seemingly solid customers. We liked their business model, but it was hard to see the TAM they were referencing. They quoted that “disease XYZ, left untreated, leads to $500 billion being spent by the federal government via Medicare.”

We understand that the societal cost is currently huge, but the assumption that the federal government will immediately provide funding to address the issue is incorrect. Perhaps the company can capture a portion of that value, but it won’t be a zero-sum game and its P&L won’t see that money directly.

This startup’s revenue is a clear product of how much they charge for one unit of its product, and the number of people with the disease that are curable. Specifically, an investor would want to see a closely examined customer base. You want to see segmentation assumptions such as “the ideal customer for medication XYZ is women in their retirement years, who have an ABC deficiency and are currently relying on competitor UVW. According to customer interactions, we know that the customer would be willing to pay $50 per product, and we have medical health data that 50,000 women are currently in need.” Now we’re talking great numbers! Believable, real, grounded in disciplined assumptions.

In terms of the second piece, if pricing is borrowed from a competitor without testing, the startup is just doing guesswork. If the founder plans to charge one-tenth the competitor’s price, then their TAM is also one-tenth the size. Pricing must be triangulated from competitor prices, potential value add for customers, and purchasing power of the consumer base, determined via industry research or customer interactions.

As an investor, this is where your questions matter. Who exactly is the customer? What geographical area are they targeting? How is pricing determined? Is there evidence or at least plausible assumptions? If a founder cannot answer these with precision, you know their TAM slide is more aspirational than a calculation.

Think of TAM as a funnel. At the top, there’s the grand vision, the trillion-dollar global problem. But each layer of questioning — including specific customers, regions, and realistic pricing — would narrow it down. That narrowing is a good thing. It shows discipline and realism. It is far better to see a founder present a $250 million TAM built carefully from the bottom-up than to claim a $250 billion TAM with no logic behind it.

As an angel investor, you should absolutely look for billion-dollar markets, but not because every startup needs to tackle a trillion-dollar problem. It’s about scale. If a company can eventually capture even a fraction of a billion-dollar TAM, it’s a viable venture-backed business. However, a credible, realistic TAM is always more valuable than a bloated, hypothetical one.

So, as you sit across the table from founders, don’t get dazzled by big numbers; look for the assumptions and the math. TAM slides aren’t about scale, they’re about discipline. And your job as an angel investor is to spot who’s disciplined and who’s just telling a story.