Markets, Markets, and Markets

If you add a compounding effect on top of an already large number, it becomes very difficult to predict the size of future outcomes.

I use the word arbitrage because we're not talking about different markets in different geographies. We're talking about different markets that exist in different people's minds. If I can fundamentally understand, and believe in, a market more clearly than any other investors then my equation can change in ways that give me an advantage.

The same can be said of markets. Understanding how big a market really is can be difficult. But the act of attempted futurism can have a clarifying effect on your perspective.

Early on, big things might start out feeling like a toy. But their ability to extend from one value proposition to the next, and address more and more of a market is the secret sauce you want to dream about. That's where high net dollar retention comes from. Companies that are able to drive usage (more volume of the same thing) or modules (adjacent... See more

I don't think of this as an affront to the idea that "no one can predict the future." It is, instead, a statement of belief. You're putting your capital and resources behind a future you believe in. Will Bezos' 2,300% internet growth be long-term? Or more volatile, like OpenSea's NFT volumes?

As VCs imagine the future for any given company, take the time to go through that exercise. Talk to the founders and operators who understand that market most intimately. What do people believe will happen? What could they be wrong about? 

The final question is whether "TAM dreaming" can translate into dollars and cents in terms of valuation and execution. Forecasts have only one thing in common; they're all wrong. But appreciating directional size for a market can impact the equation.

The power of large numbers is significant. If you earned $1,000 a day every day, it would take 1,000 days (or just under 3 years) to earn $1M. But it would take 1,000,000 days to earn $1B (over 2,700 years). 

The second? In 2006, they had the idea that there would be advantages to hosting other people's applications and AWS was born. A few years later in 2008, the entire market for cloud computing was a little north of $5B. Today? AWS alone is generating over $80B in revenue.