Stop Underestimating Your B2B SaaS startup
By Lior_Ronen | Founder, Finro Financial Consulting
Uncover the real potential of your B2B SaaS business and achieve it with startup valuation and financial modeling assistance.
It sucks when you thought you have found a solid prospect for your business.
Only to later discover they’re not as interested as you initially thought.
Or perhaps, you missed out on a great opportunity just because your initial impressions didn’t accurately address your prospect’s pain points.
That sucks too.
Knowing your TAM (Total Addressable Market) can mitigate these risks and help you grow and expand your B2B business.
In this post, we address the importance of proper TAM valuation for your B2B SaaS startup and why a small TAM is not necessarily a death sentence.
What is TAM (Total Addressable Market)?
When estimating the value of any business, it is crucial, yet often overlooked, to begin by calculating TAM (Total Addressable Market).
In B2B, the TAM of your business is the total market demand.
The total revenue opportunity of your market given a 100% market share.
Think of it as:
The number of customers that can get value from your product X the price they are willing to pay
100% Market Share?! Are you kidding me?!
We hear you.
And we’re not asking you to be a Monopoly!
It’s impossible to entirely capture the total addressable market unless you operate as a Monopoly.
And even with just one competitor, it would be difficult for a business to convince the entire market to buy from them only.
So…
Does that make calculating TAM redundant?
Certainly not!
If a business wants to follow a realistic plan to succeed, knowing TAM is vital.
Proper TAM valuation is the crux of any successful B2B SaaS business
How TAM helps YOU
Proper TAM valuation helps founders who have been struggling to show and articulate through financial modeling and valuation the real potential of their business.
Proper TAM valuation helps founders achieve that potential.
Proper TAM valuation indicates the required effort, resources, and market opportunity necessary to achieve the real potential of the business.
Proper TAM valuation, therefore, is a vital step before you start creating a smart business plan and marketing strategy.
How TAM helps investors, so ultimately YOU
Proper TAM valuation helps founders communicate a viable value proposition to potential investors and buyers.
Proper TAM valuation avoids you from getting caught out when investors ask follow-up questions on your market sizing.
Proper TAM valuation is favoured by VCs because it helps them see the potential of your product if after investing in your business, your business grew in every marketable facet.
Proper TAM valuation shows investors you’ve done your due diligence because you know your startup’s potential value and future financial projection. This is key!
I’m sold, so how do I calculate TAM?
I’d be lying if I said calculating TAM is easy. It’s complex and requires an understanding of different metrics.
And then there’s deciding what approach to use, Top-Down, Bottom-up, Value-Theory approach.
Rendering these calculations can be nothing short of exhausting.
That is where we come in.
Finro Financial Consulting can assist you with financial modelling, valuation, and due diligence.
So now that your TAM has been calculated...
And you have your North Star. It’s time to…WAIT!
My TAM is small.
Is it too small?
Oh no!
I’m…
DOOMED!
Fear Not Founder! A small TAM isn’t the end of the world.
It’s natural to worry investors will assume your business is not worth pursuing if your TAM valuation is small.
Why invest when you only have a small number of potential clients?
Fear, not. A small TAM for a B2B SaaS startup is not necessarily a death sentence.
I've seen super-niche B2B SaaS companies generate ten million dollars in annual recurring revenue, on average, after five years, and others struggle to cross the one-million-dollar line.
It all depends on approach and strategy.
If you approach every problem in your business as though it were a B2C SaaS company or as though you had a huge TAM, you'll miss the point.
Clients in a super small and specific niche have their own needs.
They're not looking for a generalist solution but something specific that solves a specific problem.
You'll need to approach it that way and have a different approach to sales, marketing, account management, and product development than a SaaS product with a large market.
I’ll give you an example.
How a B2B SaaS business, with a super small TAM, can build a very successful and sustainable business
I have a client, a European SaaS company in the fintech sector.
This client has a very niche product for specific financial institutions.
Some might say the TAM is too small. That there are not enough potential clients.
But my client has a B2B SaaS mindset and uses it to their advantage.
Since my client has a small number of potential clients, they thoroughly research their client’s needs.
And the current technologies they use before approaching them.
My client is clever and acknowledges the long sales cycle, which is typical of B2B, using this to their advantage.
They sign clients on multiple years contracts, understanding that clients of that size will not move to another provider after using their product for a few years.
Because they only have a few clients, they know their real pain points and can always give them super-high-quality support.
Which also helps with client retention.
Clients pay a large annual fee and remain clients for many years.
So, you could say the riches are in the niches 😉
Summary
A small TAM doesn’t need to spell Doomsday for your B2B SaaS business. It’s just something to acknowledge and work with.
Yes, fewer clients may find value in your product, but these clients are likely to be willing to pay larger annual fees because your business is an expert in solving their pain points.
If this post has been helpful to you, let us know in the comments below.
And if you would like an accurate valuation for your B2B SaaS startup. Feel free to drop us a line!
