So let’s do some simple math, the assumptions Market Assumptions: - $10B TAM - 10k customers in market VC assumptions: - $100M fund - 10% entry ownership - 5% exit ownership (50% dilution) - $2B outcome to return the fund ($100M/5%) - 10x ARR multiple - $200M exit ARR ($2B/10x)

Based on these assumptions we are solving for what must be true for this startup to get to $200M ARR. In regards to TAM that means - How many customers are needed? - What penetration is needed? The top down calculations are - Revenue / TAM = penetration - $200M / $10B = 2%

This approach assumes that all dollars spent are already equally across the 10k customers This would imply a $1M ACV (Average Customer Value) or $10B/10k However, most markets follow the 80/20 rule. 80% of spend is by 20% of customers so the ACVs are much lower for most

In reality, there are prob 2k (20%) customers with $1M+ ACVs and 8k (80%) customers with $100k+ ACVs Most startups can’t serve both markets so it’s important to know exactly the target customer profile. We have seen a majority of B2B target the $100k+, not the $1M+

So the bottom up calculation is - Target customers x ACV = TAM Simple math then is - 8k customers x $100k ACV = $800M TAM - $200M ARR / $800M TAM = 25% penetration 25% penetration is much harder to get than 2%

Some market shares of the biggest companies Google 92% Uber 72% Apple 62% Doordash 59% Netflix 45% TikTok 44% Amazon 38% Spotify 31% Salesforce 24% Snowflake 20% Slack 18% Shopify 11% Workday 8% It’s hard to get 25%+ penetration, but possible. We don’t model more than 10% tho

It’s important to note that the highest market shares are largely consumer focused companies. It’s much harder to get 25%+ for enterprise given those often aren’t winner take all markets Keep that in mind depending on what industry you are building in

Ultimately, the total market spend is less relevant bc every customer will have a spend cap for your product regardless of their size. A 10x larger company won’t have a 10x ACV There will be a distribution curve of customer sizes and ACVs, I used averages for simplicity

Try to determine the number of available customers based on your target profile. This will be much more informative to determining your true TAM Want to learn more, follow me @hpierrejacques

@hpierrejacques This is good. Do you underwrite each investment to 1x the fund as opposed to say 10x the investment?

@roosontheloos Yea we stopped caring about MOIC. Coming from PE that was what we thought mattered, but ultimately dollars returned are what matter. 10x on $2M initial check for $100M fund can't be the winner. We typically model 50% of fund as base case and 100% as upside case

@hpierrejacques Is targeting the larger pool the better option? Or should they be targeting the larger customers?

@Bmosier4 Most can't start with larger customers given product requirements, sales cycle, cash for sales team. Might be able to move upstream over time though

@hpierrejacques are there different assumptions used for # of customers implied by ACVs when pushing for a fund return of 300%?

@knycksutherland Either you would need 3x the customers or you have to move upstream to larger ACV customers

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