Total Addressable Market (TAM)vsRevenue

Total Addressable Market is the total revenue opportunity for your product if you achieved 100% market share. It's broken into three layers: TAM (total market), SAM (Serviceable Addressable Market — the segment you can reach), and SOM (Serviceable Obtainable Market — what you can realistically capture). Investors use TAM to assess if a market is worth entering. VCs typically want a $1B+ TAM to justify their fund economics.

Revenue is the total income generated from selling your product or service before any expenses are deducted. It is the top line of your income statement and the first number investors look at. Revenue quality matters as much as revenue quantity: $1M in recurring subscription revenue is worth 8-15x as a valuation multiple, while $1M in one-time services revenue is worth only 1-3x. Slack grew to $12M ARR before raising its Series A because they focused on revenue quality — recurring, low-churn enterprise contracts — not vanity revenue spikes.

The most common TAM mistake is 'top-down' sizing that inflates the number. Saying 'the global CRM market is $80B, so our TAM is $80B' is nonsensical if you only sell to 500-person tech companies in North America. This 'TAM fantasy' is the #1 reason investor pitches fail — it signals the founder doesn't understand their actual market.

The trap is celebrating revenue growth while ignoring the cost of generating it. A startup doing $1M in revenue but spending $1.5M to get there is dying — it just doesn't know it yet. Revenue is vanity; profit is sanity; cash is reality. Also, one-time revenue spikes (viral launches, seasonal sales, a single large contract) are not sustainable growth. If you strip out the spikes, what's your underlying recurring revenue trend?

Use bottom-up TAM calculation: count the number of potential customers you could serve × what they'd pay annually. Start with SOM (what you can realistically get in 3 years), then SAM, then TAM. Be specific: '12,000 mid-market SaaS companies × $30K/year ACV = $360M SAM.' VCs respect founders who demonstrate precise market understanding over inflated claims.

Track revenue by three dimensions: (1) Source: organic vs paid vs referral — know which channels actually generate revenue, not just traffic. (2) Type: recurring vs one-time — only recurring revenue drives SaaS valuations. (3) Cohort: does each monthly cohort's revenue grow, stay flat, or shrink over time? If older cohorts are shrinking, you have a retention problem hidden by new customer acquisition.