Did you know the tallest man ever recorded was American giant Robert Wadlow (1918–1940), who stood 8 feet 11 inches.
“How’s the weather up there?” I can hear the jokes now.
In today’s email:
We learn how to assess the size of our startup's market so that when investors ask, "What's the size of the market?" we have a well-prepared response.
UNDERSTANDING YOUR MARKET SIZE
Size Matters to Investors
When raising VC, you must have a strong answer to the question: "What is the size of the market?”
Investors love seeing a clear roadmap to profitability, and understanding the market size enables them to assess this. They also just want assurance that you have at least thought of this and can effectively communicate it.
1️⃣ 𝐓𝐨𝐭𝐚𝐥 𝐀𝐝𝐝𝐫𝐞𝐬𝐬𝐚𝐛𝐥𝐞 𝐌𝐚𝐫𝐤𝐞𝐭 (𝐓𝐀𝐌):
TAM represents the total revenue opportunity available in a specific market or industry. It encompasses the maximum potential demand for a product or service if there are no limitations or competition.
Example:
Let's say you're launching a mobile app targeting the global e-learning market. The total number of potential customers is estimated to be around 1 billion, and you anticipate generating $10 in revenue per customer per year. The TAM for your app would be $10 billion ($10/customer * 1 billion customers).
“If you want to raise VC, a general rule of thumb is to target a TAM of over $1 billion.”
2️⃣ 𝐒𝐞𝐫𝐯𝐢𝐜𝐞𝐚𝐛𝐥𝐞 𝐀𝐝𝐝𝐫𝐞𝐬𝐬𝐚𝐛𝐥𝐞 𝐌𝐚𝐫𝐤𝐞𝐭 (𝐒𝐀𝐌):
SAM refers to the portion of the TAM that your company can realistically target and serve. It takes into account factors like geographical limitations, industry constraints, or specific customer segments you intend to focus on.
Example:
You decide to concentrate on English-speaking students and professionals aged 18-35. After market research, you estimate that this segment represents 30% of the global e-learning market. Applying this percentage to the TAM calculated earlier, your SAM would be $3 billion (30% * $10 billion).
3️⃣ 𝐒𝐞𝐫𝐯𝐢𝐜𝐞𝐚𝐛𝐥𝐞 𝐎𝐛𝐭𝐚𝐢𝐧𝐚𝐛𝐥𝐞 𝐌𝐚𝐫𝐤𝐞𝐭 (𝐒𝐎𝐌):
SOM represents the portion of the SAM that your company can realistically capture within a specific timeframe. It takes into consideration your company's resources, competition, etc.
Example:
Taking into account your marketing budget, team size, and competitive landscape, you estimate that you can capture 20% of your target market. Applying this percentage to the SAM calculated earlier, your SOM would be $600 million (20% * $3 billion).
PODCAST OF THE WEEK
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Mike Cessario came up with the idea for a viral water brand by asking himself “What is the dumbest possible idea we could have?” His answer was Liquid Death: An aluminum can of water that looks like a cross between beer and poison. His founding story here…it’s awesome! Listen Here
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