In Part I of this series, we framed Google’s incredible disruption of the advertising industry over 20 years ago and how it would have been near impossible to predict back in 1999. However of greater concern is that using the traditional top-down, Total Addressable Market (TAM) framework, an investor would have measured Google’s revenue opportunity (TAM) at each point-in-time over the last 20 years and concluded the business was un-investible as it had already saturated the online advertising market.

Today we will consider some techniques the team at Montaka Global use to help us identify when a disruption is potentially on the verge of a massive inflection or if in fact, there is no upside beyond what has already been achieved for a business.

While there is no “silver bullet” here, some of the perspectives the team explore in parallel with the traditional TAM framework to get a better sense of a market:

• TAM Expansion: The highest quality businesses will often fundamentally alter the markets in which they operate. These companies are often seen as disrupters and may remove friction in legacy systems (e.g. Expedia), increase convenience (e.g. Uber), enable new use cases (e.g. Airbnb), lower price (e.g. Amazon), etc. By innovating in this manner, these businesses can dramatically expand the size of their markets and point-in-time TAM, as Google has been doing for over 20 years.

• Credible Adjacencies: Another powerful mechanism a high-quality business may use to expand its TAM is by either creating an entry-wedge (service or product) or leveraging an existing one into a larger opportunity. For example, Amazon started its business selling books because the category had a large number of SKUs, were easy to ship and had broad mass-market appeal. However, books were just Amazon’s entry-wedge into selling “everything” online. An example of an existing entry-wedge is Microsoft’s Windows and Office suite. Microsoft is leveraging these legacy offering to open up the cloud computing market via its Azure platform to tremendous effect. The complexity for an investor is judging when a proposed adjacency is real and when it is fiction.

• Nascent Market Potential: With many technology businesses, there is a tremendous competitive advantage in being the first to scale in an emerging category. For instance, Facebook wasn’t the first social network (MySpace, etc came before it), however it was the first to scale its offering, achieve mass appeal and effectively owns the highly profitable category now.

• Frequency of Use: A rule of thumb in consumer technology, is that the frequency with which users interact with a given product or service, tends to correlate with the size of the opportunity. Something that is habit forming and becomes regular behaviour with a large part of the population, generally presents an opportunity for significant TAM. While Ofo and Mobike, the Chinese bike-sharing companies, have had mixed success, they are examples of this phenomenon. While the point-in-time TAM for bike-sharing remains relatively small, and the businesses only collect cents for each ride, investors see opportunity in something that people use 2-3x per day for the critical task of commuting. So far it has largely proven to be an unprofitable / unsuccessful business however.

As can been seen, we can easily underestimate TAM, resulting in excessive conservatism and sustained missed opportunities and by the same token, it is all too easy to become overly optimistic and significantly overestimate opportunities with disastrous results.

Unfortunately striking the correct note is not easy, it involves a myriad of insights, perspectives and conclusions, none of which will be immediately obvious. Take for instance the prestigious business consultancy, McKinsey & Co. In 1980, McKinsey carried out a detailed market study that confidently concluded mobile phone penetration in the United States would be less than 1 million by 2000. In reality the number turned out to be around 110 million. A potential example of over-optimism may be found in Uber’s IPO prospectus. In it, Uber claims its TAM is approximately US$6 trillion for rides and around US$3 trillion for meal delivery. This would imply that every person, in every country Uber is in, forgoes all other means of transportation and just uses Uber, in addition to never eating in a restaurant again and instead, only ordering off Uber Eats, time will tell!

The team at Montaka Global thinks extremely deeply about the size of the markets companies we own serve and how those markets are moving. This helps us prioritise developments, understand customer segmentation and uncover non-obvious insights on both the long and short side, as we strive to deploy our collective capital in the most productive pursuits possible.

Please click here to access Part 1