In microcap investing, Total Addressable Market (TAM) is routinely cited, frequently inflated, and rarely interrogated at the level required for capital allocation. While TAM is often presented as a static scalar - an estimate of market size under idealized assumptions - this framing obscures the dynamics that actually determine microcap outcomes.
In our opinion TAM should be treated not as a number, but as a “regime.” We use the word “regime” deliberately: these are not differences of degree, but differences in the underlying industry “rules” that govern growth and competition. When we use this term, we are describing a specific archetype of structural environment - defined by rules governing a unique set of competitive dynamics, capital efficiency, and time-to-scale. In microcaps, where access to capital is constrained and survivability is far less certain than larger peers, TAM regime frequently dominates valuation, growth, and even business quality in determining realized returns.
This note introduces a “TAM Regime” framework we have started using at Sophon Capital Research.
Existing conventional TAM frameworks, in our opinion, do not capture a sufficient level of nuance when conducting industry/market research.
The canonical TAM framing follows a familiar pattern:
“The TAM is $X billion. If the company captures Y%, revenue is Z.”
This framing is directionally informative in large, well-capitalized companies with diversified revenue streams and access to non-dilutive capital. In microcaps, however, it’s often actively misleading.
The problem isn’t that TAM is irrelevant, but that TAM size alone fails to capture the constraints that bind first in small companies. These include limited cash runways, high fixed operating leverage, narrow customer bases, and a phenomenon we observe and term “asymmetric sensitivity to execution delays.” The latter describes a common pattern you see in very small public companies: small slips in timing often trigger outsized damage through dilution, lost customers, or balance-sheet stress. By contrast, executing early rarely produces equal and opposite upside. In summary - benefits compound slowly, while delays punish immediately.
In this context, the path to TAM matters more than the size of TAM. The relevant question isn’t whether a market is large in theory, but whether the company can traverse it sequentially, internally funded, before capital markets intervene.
Our key insight, once again, is framing TAM as a “regime,” not as a “scalar.” In physics and engineering, a scalar is a single numerical value that represents magnitude only, with no structure, direction, or dynamics attached to it. Understanding these vector-like qualities of TAM is just as important as understanding its raw magnitude. Most fundamental analysts focus on size only.
Our definition of a TAM regime includes several buckets. Each archetype has a structural state that is determined by key factors:
Who controls the purchasing decision (we separate/distinguish between “discretionary” vs “mandated” budgets)
How demand is activated (three patterns - replacement, expansion, or creation)
How competition responds to early success
How unit economics evolve with scale
Whether growth buys time or consumes it
Two companies may cite identical TAMs and yet exist in entirely different regimes, with radically different outcome distributions. It is important to capture the nuance - we believe overlooking the holistic picture of TAM is a common driver of poor returns or outright losses.
Broadly speaking, there are five TAM regimes commonly encountered in microcaps.
“Imaginary TAM”
Structural characteristics:
TAM derived top-down (“global market × penetration”)
Customers lack pre-existing budget line items
Sales cycles are long, educational, and non-repeatable
Revenue is often pilot-based or grant-driven
The defining feature of the “Imaginary TAM” is not lack of interest, but lack of budget ownership. Demand exists rhetorically, but not institutionally and in practice.
An early warning sign is when the first customers look nothing like the customers the company claims it will eventually serve - different size, needs, budgets, or buying behavior. That usually means the company hasn’t found its real market yet.
When this happens, the typical outcome is repeated fundraising that dilutes shareholders, followed by endless “strategic reviews” where management keeps changing the story instead of scaling a working one.
In this regime, TAM should be discounted aggressively by investors - often to zero - until repeatable, budgeted demand is observed.
“Anchor-Customer” TAM
In this regime the TAM exists, but it is concentrated rather than scalable.
This regime describes companies that have real demand, but from very few customers. One or two large customers account for most revenue, contracts are big relative to the company’s size, and revenue comes in uneven chunks rather than smoothly each quarter. Growth depends less on selling more to the same customer and more on whether that customer can serve as a credible reference for others.
These situations are often misunderstood. Screening tools punish customer concentration because it looks risky, while optimistic narratives assume that the economics of the first big customer will automatically scale to the rest of the market. The key issue is not how big the initial customer is, but whether that customer can be repeated —same sales cycle, same margins, same willingness to pay.
The real inflection points are therefore qualitative, not headline growth metrics: can the company sign a second and third similar customer, do contracts renew on reasonable terms, and do margins hold once delivery costs are fully visible? If those questions are answered positively before the company runs out of cash, concentration risk can collapse quickly —often creating asymmetric upside as the market re-rates the business from “fragile” to “scalable.”
Replacement TAM (Microcap Edition)
Replacement TAMs are structurally unattractive to large incumbents, but highly attractive to microcaps.
This regime describes companies operating in boring, mature markets where overall growth is low or flat, but customers are unhappy with existing providers. Demand already exists; the opportunity comes from taking share, not creating a new category. Differentiation is usually practical rather than flashy - better service, faster response times, or more tailored solutions - while pricing tends to remain stable rather than expand dramatically.
In microcaps, this setup is especially powerful because large incumbents often ignore these niches. The market is too small to move the needle for them, so they don’t respond aggressively when a small entrant starts winning customers. That lack of response allows the microcap to grow steadily without triggering a competitive price war or heavy reinvestment from larger players.
The result is usually not explosive growth, but slow, durable compounding. These businesses often trade at modest multiples and are misclassified as “low TAM” stories, even though a $100M-1B replacement market can be enormous relative to a microcap’s starting size.
Re-Acceleration TAM
This regime describes situations where a company that is widely viewed as legacy, broken, or past its prime suddenly appears relevant again due to a new technological, regulatory, or behavioral shift. The story often changes quickly - new buzzwords, new positioning, renewed investor interest - while the financials lag behind. This gap is what creates both huge upside potential and a high rate of false positives.
The key analytical question is whether the shift actually changes who controls the budget. If customers are merely talking about the new use case differently, but spending remains optional or experimental, the regime has not truly changed. In those cases, revenue tends to stay lumpy and fragile, even if the narrative sounds compelling.
True re-acceleration happens only when spending becomes unavoidable and systematic - mandated by regulation, driven by clear ROI, or embedded into recurring operating budgets. Most supposed re-accelerations fail because this never happens: the TAM feels larger rhetorically, but remains discretionary in practice, and the company eventually reverts to its prior trajectory.
Greenfield Microcap TAM
This regime describes true greenfield markets, where a product creates new behavior rather than displacing an existing solution. Customers initially adopt it in unexpected ways, discover additional use cases on their own, and spread adoption organically. As awareness grows, sales cycles shorten, unit economics improve, and pricing power often increases instead of eroding.
These situations are rare in public microcaps because they demand both vision and flawless execution. Failures typically don’t come from the idea being wrong, but from practical constraints - running out of capital too early, mismanaging go-to-market strategy, or scaling costs faster than adoption. The timing mismatch between burn and revenue is often fatal.
When this regime works, the results can be extreme: nonlinear growth, expanding margins, and durable competitive advantage. When it doesn’t, the collapse is usually swift, because without execution and capital discipline, there is little middle ground between breakthrough and breakdown.
In microcaps, capital isn’t neutral.
Growth that would be value-creating in a large company can be fatal in a small one if it extends payback periods, accelerates dilution, or increases fixed cost commitments prematurely.
Thus, the relevant question becomes: Does this TAM regime allow the company to reach self-sustaining scale without external rescue? This is why TAM regime clarity often matters more than valuation, growth, or even product quality.
The framework is orthogonal/directly related to valuation. Many microcaps fail not because they’re wrong, but because they’re early, underfunded, and operating in hostile regimes.
Understanding TAM regimes allows us to reject seductively large but imaginary markets, and correctly price optionality where it truly exists.
Most microcaps don’t fail because the TAM is too small, but because the TAM they believed they were in never existed as a budgeted regime.
Correctly identifying the regime early is one of the few durable advantages available in this segment of the market.