Hear from CIOs, CTOs, and other C-level and senior execs on data and AI strategies at the Future of Work Summit this January 12, 2022. Learn more
This article was contributed by Marjorie Radlo-Zandi
When founders seek pre-seed, seed, series A, or series B funding, angel investors and venture capitalists want to see a breakthrough product or service that scales and can acquire a significant market share within a sizable market.
What do investors expect going into a funding round? Investors need you to understand the data as you use market size metrics to project the market size and future growth of your company.
To satisfy investor expectations about your estimated market size, include a realistic set of percentages and dollar values in every slide deck you present to prospective funders. While no investor expects accuracy down to the penny, take extra care to present realistic market size metrics based on independent outside studies when possible.
TAM, SAM, and SOM: the acronyms and real data points of market sizing
When you present your market size data, investors will look for the acronyms TAM, SAM, and SOM. Using them will prove you fully understand what each means and why they’re critical to your product or service.
Even when you’re scaling your business, TAM, SAM, and SOM numbers are critical for P&L projections and goals for the company. Use TAM, SAM, and SOM when you’re selecting which projects and geographical market areas to fund from operating capital, and to benchmark against goals you’ve set for the company.
TAM (total addressable market)
Also referred to as the total available market, TAM is the total revenue possible if a product or service were to achieve 100% market share. TAM answers the question, who theoretically in the world could buy your product or service. It describes the total revenues a company could theoretically make if it had an all-encompassing monopoly or total market share with its product or service. When you calculate TAM, discard any factors that could prevent the company from achieving this total market state. Ignore real-world constraints such as competition, production, and logistical capacity limits, language barriers and geographical distances, and other uncontrollable factors such as climate change.
Using non-alcoholic beverage companies as an example, the TAM for this market takes in the total worldwide non-alcoholic beverage market, looks at all revenues from beverage purchases, imagines sales in all countries in the world, and assumes no competition except tap water.
According to the research site Statista, the global non-alcoholic drinks market was $1.2 trillion in 2021; the TAM for the Non-Carbonated soft drinks segment, which includes the gut health/herbal tea category, was at $334.6 billion in 2021.
SAM (service addressable market or served available market)
SAM is the TAM segment within geographical reach that you can target with your products or services. Many beverage sector companies start out targeting only the U.S. market and have distribution capabilities only for the U.S.
Waku is a beverage in the gut health/herbal tea category, which also includes Kombucha. According to Statista, gut health/herbal tea is considered a non-carbonated soft drink — a category with a 2021 market size of $83 billion in the U.S.
For Waku, the geographic SAM would be the U.S. market in the gut health and herbal tea beverage category, within the larger category of non-carbonated soft drinks. Note that angel investors generally invest when the SAM is $100 million or more, whereas venture capitalists look for an even higher minimum SAM.
SOM (serviceable obtainable market or share of market)
Think of SOM as the portion of SAM you can realistically capture. Waku would need to research and estimate their SOM, this being a realistic percentage and dollar value of the gut health and herbal tea market within the non-alcoholic soft drink category that they will capture.
Spending time understanding and communicating the TAM, SAM, and SOM are critical to attracting investors to the company, scaling the business, and achieving the goals we set. The TAM, SAM, and SOM market sizing data points where operational funds would yield the best results. Using the data, you would be able to consider an array of new products and geographical areas to expand into.
A note of caution: If you ignore the data, you’ll be flying blind instead of strategically deploying resources where they matter most in your business. Use the data, and you’ll set the company on a path to attaining optimal ROI.
Make market size metrics and research your friend
There are a number of publicly available market research sources that will help you understand both existing and future markets. Data in these research reports were essential in setting goals, benchmarking progress, driving business, and seeing future opportunities.
Even free research reports are full of valuable market data. Look around, and you’ll find abstracts rich with information that cost nothing. For a fee, it’s a good idea to tap into market research companies Frost & Sullivan, Nielsen, Statista, and Gartner. For the non-alcoholic beverage example, Statista is a good choice because of their specialized research in the beverage category. You can also retain a market research organization to do custom market research that specializes in the beverage category. You can use this data to plan your product roadmap, scale, and establish distribution.
It’s important to note that with TAM, SAM, and SOM data you can make clear market projections going out multiple years. If you are unfamiliar with creating projections that cover longer timeframes, you may want to consider hiring professional assistance. A custom market researcher can provide critical insights and give you the numbers you need to make the right choices.
You may be wondering how market data works if you’re in a highly specialized industry, or if your technology is new, and you’re not clear on how to pinpoint relevant market trends. It’s a scenario that shows it pays to hire a market research consultant specializing in your market. An expert will be more than worth their weight in gold.
When you envisioned your product or service, your focus was on SAM — the segment within a defined geographic area of your total addressable market. As a business seeking funding and targeted operating capital to grow and scale, set your path forward with a deep understanding of your TAM and SOM — the percentage of the SAM market segment you can realistically capture.
By understanding TAM, SAM, and SOM key market data and market size metrics, you’ll eliminate financial projections’ guesswork, show prospective investors how they stand to gain from investing in your company, and put yourself in the best possible position to achieve your goals.
Marjorie Radlo-Zandi is an entrepreneur, board member, advisor to startups, and angel investor who shows early-stage businesses how to build and successfully scale their businesses.