Market Size Theory: What You Need to Know About TAM, SAM, and SOM
Understanding your startup’s potential market size is more than just a strategic tool—it's a key factor that can make or break your chances with investors. Market Size Theory revolves around three core metrics: TAM (Total Addressable Market), SAM (Serviceable Available Market), and SOM (Serviceable Obtainable Market).
Each of these metrics offers unique insights into the viability and scalability of your business, and knowing how to use them effectively can differentiate your pitch from the thousands of others.
But how can you translate these theories into actionable insights that matter for growth-stage fundraising and startup equity distribution? Let’s break down these concepts and explore how to use them effectively.
TAM, SAM, and SOM: The Basics
TAM is the broadest of the three, representing the total demand for a product or service within a specific market. This is your startup’s full potential market size—if there were no competition and your business captured every possible customer.
Example: If you’re building a new fitness app for corporate wellness, your TAM could be the entire corporate wellness market in the U.S., valued at $25 billion.
SAM narrows this down to the market segment your product or service can target, considering geographic, demographic, or behavioral constraints. SAM is important because it reflects the realistic scope of your initial target market.
Example: For your fitness app, SAM could be limited to medium-to-large companies with employee wellness programs, narrowing your target market to $7 billion.
SOM is the most specific and actionable, representing the portion of the market that you can realistically capture within a defined timeframe, typically within the next 1-3 years. This is your sales pipeline, and understanding your SOM helps with operational and fundraising decisions.
Example: For your fitness app, SOM could be the $500 million in potential customers who are actively seeking new wellness solutions within the next 12 months.
Why Investors Care About Market Size Theory
Venture capitalists (VCs) are keenly interested in the scalability of your business. Market size theory is essential to answering their critical questions: “What’s the potential for growth?” and “How big could this market get?”
VCs often use the TAM, SAM, and SOM breakdown to gauge whether your startup can grow quickly and generate substantial returns on investment. If your SOM isn’t large enough, your startup might struggle to achieve the revenue needed to scale. If your TAM is unrealistic, investors might view your business as overly ambitious without enough grounded metrics to support your claims.
Understanding how to size your market effectively also helps with startup equity distribution. For example, if you can prove your SOM is substantial but attainable, investors might offer more favorable terms in exchange for equity, knowing there’s a clear path to significant market penetration.
Market Sizing for Startups: Best Practices
Best practices for market sizing include:
Start From The Top
Begin with your TAM, understanding the entire scope of the market and industry trends. Make sure this is based on solid data (industry reports, market research, etc.) rather than inflated assumptions.
Narrow It Down With Precision
Move to your SAM by narrowing down the factors that constrain your reach, like geographic location, price points, or specific consumer behavior. The more precise your SAM, the more accurate your projections for growth and sales will be.
Focus On Actionable Data
Your SOM should be grounded in reality. If you can’t prove you can capture a specific portion of your SAM in the next few years, it’s time to reassess your approach and pivot accordingly.
Use Real-World Data
Reference market sizing examples from similar companies, industries, or emerging markets to provide concrete evidence of potential growth. If possible, show how market dynamics are shifting in your favor, especially in growing sectors.
Update As You Scale
Market sizes are fluid. As you grow, revisit your SAM and SOM regularly to ensure that your fundraising pitch stays relevant and that you’re on track to meet your growth targets.
Practical Application of Market Size Theory in Pitch Decks
A strong pitch deck is essential for successful fundraising, and market sizing should be one of its cornerstones. Here’s how you can incorporate Market Size Theory into your pitch:
Clearly define your TAM: Demonstrate the overall opportunity in the market. Investors want to know how big the market could get with the right execution. Make sure to include reliable figures and any industry trends that could indicate future growth.
Provide a roadmap for your SAM: Offer a detailed view of how your product fits into the current market landscape. Be specific about which segments of the market you plan to target first and explain why these segments are ripe for disruption.
Realistic SOM expectations: Be transparent about your immediate goals. Investors need to know that your SOM is achievable within your first few years, so provide evidence (customer acquisition strategies, sales forecasts, partnerships) to back up your claims.
Tie market size to startup KPIs: Use your market size figures to project critical KPIs like revenue, customer growth, and market penetration. This will help investors see that you have a clear plan for scaling.
Example of Market Size Theory in Action
Let’s take a quick look at how an emerging market startup used Market Size Theory to secure funding:
Company: A startup focused on electric vehicle (EV) charging solutions in the U.S.
TAM: $90 billion (total U.S. EV market by 2030).
SAM: $20 billion (targeting fleet operators and public charging stations within major cities).
SOM: $2 billion (projected capture of 10% of the market in key urban areas over the next five years).
By clearly demonstrating the market opportunity with these figures, the startup was able to secure Series A funding to expand operations.
Conclusion: Next Steps for Your Startup
Mastering Market Size Theory and incorporating TAM, SAM, and SOM into your fundraising strategy is essential for attracting the right investors. The clarity and specificity in your market sizing give investors the confidence that your startup has the potential to grow at scale.
Now, take the time to refine your market sizing and ensure that your pitch deck is as compelling as it can be. For more help in structuring your fundraising journey, contact us at Get Decko for tailored support and expert pitch deck assistance.
Need help crafting the perfect pitch deck? Contact us today to get started on securing your next round of funding.
