It should come as no surprise that investors want to see a large, growing market. As Harry Stebbings of 20VC once said, “A massively growing market can cover a lot of operational sins.”
However, it is critical not to exaggerate the total addressable market (TAM). If you operate a pet grooming company, your TAM is the total pet grooming industry, not the $222.93 billion global pet industry. Using numbers like that makes you look naive at best and untrustworthy at worst.
Don’t reinvent the wheel here. It is best to use the default TAM / SAM / SOM model:
Total Addressable Market (TAM) - The total revenue opportunity available for your product or service, assuming 100% market penetration. It represents the upper limit of the market potential. To calculate TAM, you can use a top-down approach (industry reports, market research) or a bottom-up approach (number of potential customers multiplied by the average revenue per customer).
It’s wise to also include the compound annual growth rate (CAGR) of the industry to show the growth potential over the next decade. Much of this information is publicly available and can be found through a Google search.
Serviceable Addressable Market (SAM) - The segment of the TAM that your startup can realistically serve, considering factors such as geographical location, target customer demographics, and competition. SAM is the portion of the market that your product or service can directly address and is a more accurate reflection of the opportunity size.
Serviceable Obtainable Market (SOM) - The share of the SAM that you realistically expect to capture within a certain timeframe, usually 3-5 years. This takes into account factors such as your go-to-market strategy, competitive landscape, and available resources. SOM is a critical number for investors as it indicates the near-term revenue potential.