Anyone ever tried to raise venture funding knows, he/she needs to prove to an investor the business can reach $ 100M ARR. I have always been thinking about this, have some questions, and would like to get any inputs you would like to share.
- Using a bottom-up method to calculate TAM, do we use the price of the current MVP or an imaginary product that embodied the full, grandiose full vision? If using the latter, how much validation is expected?
- Is the $ 100M revenue a regional number (e.g US) or the world-wide number?
- Is a $ 1B TAM required to convince an investor of the possibility of this $ 100M ARR requirement?
- Does the type of startup matter? Do investors judge pure software SaaS with other technology-enabled startups under the same rubric? Their margins can be quite different. For the likes of AirBnB, Uber, Amazon (eCommerce department), WeWork, this type of businesses can quite easily achieve a large ARR. They cannot just use their GMV as their ARR, can they? If you count in the goods exchanged, or services involved in these market-type businesses, their gross margin is not likely to be good looking. How are the TAM and ARR calculated for these startups?
Here is my situation:
- I've always used the price of our MVP and end up much lower than $ 100M. I know the mantra of "making a few people really happy" and going after them with a high price tag, only to complete your startup story, but when those a few people became your friends, you kind of don't want to ripe them off for your own purpose. My plan was to expand the product to bring much more value, then get a higher price, but that seems hard to convey clearly during the short period of time people listen to me.
- I have always used the US numbers and ask people to x10 for world-wide numbers. It's perhaps to my disadvantage doing it this way because the 1st number would stuck in people's minds and I can see them thinking, boy that is too small.