Don't obsess on the TAM, yet
Starting your startup in a niche will improve the odds of success
Hey PMs and Startup founders
One of the frequent comments I hear from startups is they want to go for a big TAM.
This is what I often hear.
”We want to go after a big TAM.”
”Our investors want to see a big TAM.”
“Our solution can work for anyone.”
All these may very well be true.
And why not. You have built a great solution.
So far, you have an initial hypothesis and maybe an MVP for your product. You have grandiose visions on how your company can solve so many problems.
Let’s say you have a built a new AI content creating tool. It can be used for so many use cases - writing emails, blogs, web site copies, ad copies, white papers, course materials, eBooks, ad copies, product descriptions, technical papers etc. And you can do it multiple languages and for multiple industries. It can be used by sales, marketing, agencies, product managers, technical writers, documentation team, legal and so on.
All of this can be powered by your AI platform. You can even argue that adding a new use case or a new language or domain is trivial for your model. So might as well build a generic solution and capture them all.
There is a problem with this approach. It is really hard to execute.
Yes, I want to solve world hunger. But where do you start? By feeding the first person. or a small group of people in your neighborhood. Or donating to one charity.
Imagine Amazon, the giant online store. They didn’t start by selling everything. They began with just books! By mastering book sales, they learned what customers wanted, how to get books to people quickly, and built a loyal group of shoppers. All of this helped them expand into other things like electronics, clothes, and even groceries.
Other companies that started small and became huge:
Starbucks: Began as a small coffee shop focused on high-quality beans and a unique store experience in one city.
Nike: Started by selling running shoes and has now become a global sports giant.
Google: Originally a search engine, it now offers everything from email to self-driving cars.
LinkedIn: Began as a platform for professionals to network, then expanded into job searching, recruitment, and online learning.
Red Bull: Started as an energy drink for extreme sports enthusiasts, then became a global lifestyle brand.
Why did they do this way?
i.e. start in one segment.
Starting in one niche has several advantages and will help your startup gain traction.
There are two main considerations to start in a niche segment.
Product Focus
When you start with a specific segment, you can tailor your product or service precisely to that audience's needs. This leads to a superior product, stronger customer satisfaction, and valuable feedback for improvement.Without a focus, your product effort will be scattered across multiple initiatives. Every segment in your market will have specific needs. Let’s say your product works for all countries. Now you will need to factor in languages, data privacy rules, data residency rules etc.
Or let's say you are building a eSign solution. The needs for a real estate escrow will be different than say for business contracts. Your product efforts will be doubled. Better to focus on one and do it perfectly and nail that segment.
Think of it this way. You start with one segment and create a “case study”. Now you find similar customers where the same case study works and you keep repeating it.
Once you nail a segment, you can do repeatable sales. Which leads to the GTM focus.
GTM Focus
Your goal should be to get a repeatable sales. If you focus on one industry or a use case, then you can repeat the sales in that same segment with less effort. If you go wide, you have to change your messaging and positioning for each. Which can be hard and confusing for the prospects. From a product perspective, you then focus on the most important items and ignore everything else.When you focus on a niche, your prospects feel that you have built the product specifically for their pain points and will be more receptive to buying.
By concentrating on a specific group of customers with unique needs, you can:
Deepen Your Understanding: When your target market is smaller, you can invest more time and resources into truly understanding their problems and desires. This leads to products or services that are perfectly tailored to their needs.
Build Stronger Relationships: A smaller customer base allows you to build closer connections. This loyalty can be a powerful asset for word-of-mouth marketing and long-term customer retention.
Outshine the Competition: In a niche, you're less likely to face overwhelming competition. This gives you the opportunity to become the go-to expert in your field.
Optimize Your Resources: With a clear focus, you can allocate your budget and efforts more efficiently. This can lead to faster growth and profitability.
When do you go broad
The first goal is to nail one segment. This can be a single use case or an industry or a domain or even a persona. Build the traction in one segment before even thinking about expanding.
Then you look for adjacent segments. Which adjacent segments should you go next depends on the incremental effort to your solution.
If you have a horizontal solution, then you can start in one Geo or one Industry or one use case. For example, eSign solution or calendar scheduling. You can find the next segment by determining the level of incremental effort on your product and GTM. Whichever segment has the least incremental effort should be the next focus. If your eSign solution is targeted towards real estate escrow in residential, then perhaps you can expand to commercial escrow or you can expand to rental agreements. Assess the effort for the next segments and then choose.
For most horizontal solutions, the incremental effort to the next segment is quite low. And you should be able to expand quickly. But resist the urge to expand too early or too soon. I still maintain that you should nail one segment and get the traction.
If you have a vertical solution, then the incremental effort could be significant. Here the trick is to find an initial segment that is big enough. Let’s say, you have a built a CRM for physical therapists (real startup). It’s a big enough market to keep you busy and get significant revenue. Once you are ready to expand, you will need to find a segment, that is adjacent and not very different. You could expand to say chiropractors.
What’s the narrative then
The narrative is very simple. You have a vision to solve for X. And that’s a big TAM. That’s your end goal.
And for your GTM, you start in one niche and get traction. Once you have a market fit on one sub segment, then you will expand into adjacent territory. How fast or when will depend on how you do on the first segment.
By starting in a niche you improve the odds of your success and also obtain initial traction in terms of revenue.
If you are a B2B SAAS founder, I provide a 3 day bootcamp where we cover :
Finding your niche segment
Customer discovery process and building questionnaire
What experiments to create to assess demand
What to build in MVP? What not to build?
How to do competitive analysis
How to do market sizing
Pitching to enterprises
We can start with a free 30 min chat
This is gold. I agree. The problem is that investors often look for a TAM, and perhaps have not read the book "Crossing the Chasm" (that formulated the idea of first going after a small niche and then expanding).