Opportunity is missed by most people because it is dressed in overalls & looks like work.
- Thomas Edison
A common thread of dialogue between VC’s and founders, circle around TAM , SAM and SOM, the three musketeers ,while looking deeper into the pitch deck.
While raising funding for startups, founders usually have difficulty with
Total Addressable Market (TAM)
Serviceable Available Market (SAM)
Serviceable Obtainable Market (SOM), segment of pitch deck. Regardless of the number of iterations, this is one area in which there needs to be consensus.
TAM or Total Addressable Market is the total market demand for a product or service.
SAM or Serviceable Available Market is the segment of the TAM which can be targeted by your product or service depending upon - how efficiently your business has captured SOM while maintaining sound business fundamentals and KPI’s.
SOM or Serviceable Obtainable Market is the portion of SAM that you can realistically capture taking into consideration the:
Unique Selling Proposition ( USP)
Minimum Viable Product ( MVP)
Go-to Market Strategy (GTM), the product or service in comparison to competitors.
TAM, SAM & SOM is not just an academic activity of market sizing. If as a founder you are going to spend 10-15 years of your life with strong conviction around your business idea, then it becomes very important to be certain that the idea is worth your time & effort and hence paying attention to these three metrics realistically becomes extremely important.
Let's try to understand this better.
There are two ways to approach it:
Top Down Approach
Bottom up Approach
Example of Top-Down Approach:
Business Idea: Let’s say you want to launch a business of smart watches in a non-premium segment
Example of Bottom-Up Approach:
Business Idea: A burger joint starts its operations on a high street.
Calculating these three matrices is a combination of art and science. While there are text-book methods to measure this, there are no hard and fast rules to determine this, except for one- the approach must be credible and defensible.
So which method is better?
It is specific to a particular industry, however a perfect blend of top-down & bottom-up approach could increase the credibility of your analysis.
There might be a contradictory view on example & methods mentioned above, that the assumptions taken are static and business model, revenue model & many other fundamentals change as business grows which ultimately change the projections of TAM, SAM & SOM.
Yes, businesses do pivot themselves as they go ahead capturing the target market. During the early stages of business, the focus has to-be on minimizing the variable’s so that these three metrics could be in place realistically.
Classic examples of such pivot’s in business are Google & Facebook!
From Investor's point of view:
Investors try to gauge two factors while looking at any investment opportunity,:
De-risking the investment
Substantial upside potential
The SOM and SAM help de-risking the investment while the TAM enables to assess the upside potential.
The rationale behind SOM & SAM metrics is that it helps investors to gauge the competitive landscape while also assessing your plan to compete with them.
Lastly, investors are interested in business ideas which could scale. The idea must have growth potential. So, investors pay attention to your TAM estimation.
As a founder one should have a mental chess board mapped out in your brain on what strategies would be required to capture the target market & size the market more effectively.
All said and done, founders, keeping in mind all of the above, should leverage their expertise & unique insights on how markets are going to unfold and help investors understand the true scope of an opportunity.
Lets skate to where the puck is going to be, not where it has been!