Crossing the Chasm: A 30-Year Refresh for Tech Adoption

The Evolution of Market Sizing in Tech

During my time at Open Market in the 1990s, our CEO distributed copies of “Crossing the Chasm” to the executive leadership team, urging us to understand the reasons behind a slowdown in our growth trajectory. We had rapidly scaled from inception to $60 million in revenue within four years, successfully completed an IPO with a billion-dollar market capitalization, and then encountered a period of stagnation.

We discovered ourselves facing the challenge described by Geoffrey Moore as “the chasm” – a difficult transition point between early adopters, who tolerate incomplete products, and the mainstream market, which requires more fully developed solutions. This framework for marketing technology products has remained a foundational concept for achieving product-market fit for the past three decades, since its initial publication in 1991.

A Recurring Miscalculation

I’ve been considering why venture capitalists and founders consistently repeat the same error, an oversight that has become increasingly apparent in recent times. Despite our generally optimistic outlooks, we frequently underestimate the true potential market size. Markets have consistently proven to be far larger than our initial projections.

This phenomenon occurs because, presently, a broad spectrum of consumers aspire to be early adopters. Peter Drucker’s assertion – that innovation is essential for survival – has become a reality. The imperative to innovate or face obsolescence is now universally acknowledged.

Illustrative Examples from Our Portfolio

A striking example within our investment portfolio is MongoDB, a database software company. Reviewing our Series A investment memo for this disruptive, open-source, NoSQL database startup, I noted that we predicted the company could capture a segment of the industry, potentially reaching $8 billion in annual revenue.

Currently, we recognize that the product’s appeal extends to a much wider market. Forecasts now estimate this market at $68 billion in 2020, and approximately $106 billion in 2024. The company is anticipated to achieve a $1 billion revenue run rate in the coming year, with considerable potential for continued expansion.

Another case is Veeva, a vertical software company initially serving the pharmaceutical sector. During their Series A funding round, they presented the typical “hockey stick” growth projection, anticipating $50 million in revenue within five years.

We addressed our concerns regarding market size by concluding, alongside the founders, that they could realistically generate several hundred million dollars in revenue from the pharmaceutical industry and subsequently expand into other vertical markets. However, we significantly underestimated their potential! The company’s S-1 filing after five years revealed $130 million in revenue, and projections now indicate a $2 billion revenue run rate next year, while remaining focused solely on the pharmaceutical industry.

The Rise of Vertical SaaS

Veeva pioneered the concept of “vertical SaaS” – software platforms tailored to specific industries – a category that has gained considerable traction in recent years. Squire, a company in which my partner Jesse Middleton made an angel investment, provides another example of vertical SaaS.

When Jesse shared details about Squire – a software solution for barber shops – my initial thought was that it represented a promising niche opportunity to reach $10+ million in revenue and then achieve a profitable exit. They barely secured $1 million in seed funding after graduating from Y Combinator.

“Total available market size was the primary obstacle to our business in the view of investors,” shared co-founder and CEO Songe LaRon. Those investors who declined to invest were ultimately proven incorrect. Today, the company processes hundreds of millions of dollars in transactions and recently secured $45 million in funding at a $250 million valuation.

Growth Rates of Tech Giants

Consider the annual revenue growth rates of the world’s largest technology companies over the last three years:

• Amazon: 30%
• Facebook: 29%
• Google: 18%

These are established businesses with revenue in the hundreds of billions of dollars, yet they continue to experience compound annual growth rates of 20%-30%!

Why the Consistent Undershooting?

Why do optimistic VCs and entrepreneurs consistently underestimate market size in the technology and innovation sectors? I believe there are two key factors: the traditional “chasm” framework is becoming obsolete, and Marc Andreessen’s prediction that “software is eating the world” has proven remarkably accurate.

Understanding Market Size: TAM and SAM

A common challenge in market forecasting stems from a misunderstanding of total available market (TAM) size. The calculation of a company’s TAM is straightforward: it’s determined by multiplying the potential customer count by the revenue generated per customer.

Essentially, TAM represents the overall revenue potential within the entire market landscape.

Serviceable addressable market (SAM), conversely, defines the segment of the market genuinely suited to a specific product or service.

Consider the global database market, valued at $150 billion – this constitutes the TAM. However, MongoDB’s SAM is limited to the portion of this market that aligns with their NoSQL methodology.

Current projections estimate MongoDB’s SAM at $22 billion within the coming years.

It’s generally understood that only a fraction of the SAM can realistically be captured within a defined timeframe, largely due to the challenges presented by the technology adoption lifecycle, often referred to as "the chasm."

Key Differences Explained

• TAM: Represents the total market demand for a product or service.
• SAM: Focuses on the portion of the TAM that a company can realistically serve.

Successfully defining both TAM and SAM is crucial for accurate market sizing and strategic planning.

The Chasm: A Period of 1991-2011

Moore identified the difficulties technology firms face when launching truly novel innovations by outlining a technology lifecycle focused on distinct customer types.

He noted that a company’s success hinges on understanding how readily consumers embrace technologies that demand shifts in established behaviors or alterations to existing dependencies.

Moore categorized customers based on their psychological profiles and receptiveness to new technologies, arranging them along a bell curve: innovators, early adopters, early majority, late majority, and laggards. A significant gap, termed the chasm, exists between the early adopters and the early majority.

This chasm, as Moore details, arises because early adopters actively seek change, aiming for a competitive advantage and anticipating a substantial departure from previous methods. Conversely, the early majority prefers minimal disruption, favoring gradual evolution over radical revolution.

The following image, taken from Moore’s publication, clearly illustrates the distinctions between the early and late markets, along with their respective segments.

Understanding the Customer Segments

• Innovators: These are the first to adopt a technology, often driven by curiosity.
• Early Adopters: Visionaries who seek competitive advantages through new technologies.
• Early Majority: Pragmatists who want proven solutions and minimal risk.
• Late Majority: Conservatives who adopt technologies only when they become mainstream.
• Laggards: Skeptics who resist change and adopt technologies only when absolutely necessary.

Successfully navigating the chasm requires a focused strategy that addresses the specific needs and concerns of the early majority.

Ignoring this critical distinction can lead to even promising innovations failing to gain widespread acceptance.

A Significant Shift: 2012 to the Present

The traditional technology adoption model has experienced a disruption in recent times. This breakdown, it is proposed, is directly linked to Marc Andreessen’s influential Wall Street Journal article, “Why Software Is Eating the World.”

Andreessen accurately articulated a sentiment shared by many within the technology sector when he stated, “We are in the midst of a significant and widespread technological and economic transformation, with software companies positioned to dominate substantial portions of the economy.”

Throughout the decade following the publication of that article, businesses have increasingly recognized this reality. The events of this year, specifically the pandemic, further expedited a worldwide understanding that digital innovation is no longer optional, but fundamentally essential.

Consequently, organizations can no longer afford to await new advancements to naturally emerge and cross the chasm. Instead, proactive adaptation to change is crucial to avoid facing a critical competitive disadvantage.

Integrating Moore’s framework with Andreessen’s insights, it can be asserted that the early market – encompassing innovators, early adopters, and the early majority – has expanded considerably.

Furthermore, driven by competitive pressures, the early majority has readily embraced change and successfully navigated the chasm. The segment of the market represented by the late majority and laggards is now proportionally smaller than ever before.

This organizational drive to adopt change, alongside increased consumer comfort with technology, combined with the growing value of software globally, is fueling unexpectedly large market sizes.

Significant Market Growth

Revisiting how we define market size, the pervasive influence of software across all sectors has substantially increased the Total Addressable Market (TAM). Simultaneously, this has accelerated the pace at which new technologies are adopted, leading to a corresponding expansion of the Serviceable Available Market (SAM).

The observed tendency of markets to grow quickly and continuously, and its indication of potential value generation, signifies a positive shift within our innovation landscape.

Accelerated adoption rates create a beneficial cycle for innovation. Increased adoption by both businesses and consumers empowers entrepreneurs to secure funding for the development of novel solutions.

The Impact of Technology Adoption

• Expanded TAM: Software’s widespread integration has broadened the scope of potential markets.
• Compressed Adoption Lifecycle: Technologies are now embraced at a faster rate than previously seen.
• Positive Feedback Loop: Rapid adoption fuels further innovation and investment.

This dynamic fosters a more vibrant and responsive innovation ecosystem. The quicker a technology gains traction, the greater the opportunities for subsequent advancements.

Consequently, the ability to identify and capitalize on these expanding market opportunities is crucial for sustained growth and success.