How do I estimate TAM when I am creating a new product category?

Sometimes startups feel that they cannot estimate the market because what they are doing has never been done before. Therefore, they cannot find an analyst report that provides a market size estimate for their business. Therefore, they feel that they cannot come up with a TAM estimate.

As summarized by this how-to article on TAM estimation, there are 3 ways to estimate TAM: Top-down, bottom-up, and value theory.

Startups in the process of creating a new solution category who feel they cannot estimate their market size are falling into the trap of thinking top-down is the only way to go. And they are right: You cannot extrapolate / interpolate from existing data if you are creating something revolutionary that will change how the world works.

This is why we advocate that startups and corporate entrepreneurship ventures use the bottom-up way. Not only is it possible, it is necessary for entrepreneurs to go through this exercise, as it gives them an early litmus test on whether the venture will be financially rewarding and worth their time and energy as it is currently conceived.

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