The Only Market Sizing Guide Every Founder Needs

When pitching a startup, founders often focus on the problem they’re solving and their innovative approach. However, one of the most common stumbling blocks when talking to investors is explaining market size. A great idea is meaningless if it exists in a tiny, unscalable market. Worse yet, many founders either overinflate their numbers or struggle to articulate how they calculated them. This lack of clarity can be a major red flag.

In this article, we’ll break down how to correctly estimate market size using the TAM, SAM, and SOM framework, why it matters for startup success, and how to present it convincingly to investors.

1. What Is TAM, SAM & SOM?

Understanding market size starts with three key concepts:

• TAM (Total Addressable Market): The total revenue opportunity if you captured 100% of the market, assuming no competition.

• SAM (Serviceable Addressable Market): The segment of the TAM that your product or service can realistically serve.

• SOM (Serviceable Obtainable Market): The portion of the SAM that your startup can reasonably capture in the short term.

These three layers help investors and founders gauge the true potential of a startup beyond just an ambitious vision.

2. How to Calculate TAM

TAM is the theoretical maximum revenue your startup could generate. While you’ll never fully capture it, a well-researched TAM provides a clear picture of overall opportunity. There are three primary methods to calculate it:

Top-Down Approach

• Starts with broad industry data and narrows it down.

• Uses sources like Gartner, Forrester, or industry reports.

• Example: If the global e-commerce market is $5 trillion and you focus on online pet products (which make up 10%), your TAM is $500 billion.

Bottom-Up Approach

• Builds TAM using real-world pricing and customer estimates.

• Formula: (Number of potential customers) × (Annual Contract Value).

• Example: If you sell a $1,000/year SaaS tool for 100,000 small businesses, your TAM is $100M.

Value-Theory Approach

• Used when launching an innovative product without clear market data.

• Estimates TAM based on what customers would be willing to pay.

• Example: If existing AI transcription tools cost $10/month, but yours is 2x more accurate, you might estimate demand at a $15/month price point.

3. Narrowing Down to SAM

TAM is exciting, but investors know that no startup can capture an entire market. That’s where SAM comes in—filtering out the portions of TAM that aren’t realistically within reach.

SAM considers factors like:

• Geography: Are you launching in a specific country first?

• Target Customers: Are you focused on enterprises, SMBs, or consumers?

• Product Fit: Are there industry regulations or technical barriers?

For example, if your software is specifically built for public hospitals and not private ones, your SAM would exclude the private hospital segment of your TAM.

4. Estimating SOM – The Realistic Market Share

SOM is where reality meets execution. It represents the market share you expect to capture based on competition, budget, and market dynamics.

To calculate SOM:

• Look at your current traction (if you’re already in-market) or use benchmarks from competitors.

• Multiply last year’s market share by this year’s SAM to project growth.

• If entering a crowded market, assume a small percentage of SAM initially.

Example:

• Last year, you captured 1% of your SAM.

• This year’s SAM is $50M.

• Your projected SOM = $50M × 1% = $500K.

If you’re pre-revenue, use competitor market share as a reference. If your closest competitor owns 10% of the market after 5 years, investors won’t believe you’ll hit 20% in two.

5. Why Market Sizing Matters for Startups

Investors use market size to assess:

• Scalability: A TAM that’s too small limits long-term growth.

• Competitive Landscape: A high gap between TAM and SOM means expensive customer acquisition.

• Funding Potential: A clear, realistic TAM, SAM, and SOM can attract larger investments.

6. How to Present Market Size to Investors

When creating your pitch deck, follow these best practices:

1. Use a Bottom-Up Approach – Shows deeper research than a generic Google statistic.

2. Keep It Realistic – Overinflated numbers signal inexperience.

3. Specify Geography – If you’re launching in Europe, don’t use global figures.

4. Defend Your Pricing – If pre-revenue, ensure your pricing assumptions are reasonable.

5. Show Growth Potential – Explain how your TAM expands over time (e.g., Facebook started with college students and later scaled globally).

Conclusion: A Market-Savvy Startup Wins

A well-researched market size isn’t just about impressing investors—it’s about knowing whether your startup is worth building. Understanding TAM, SAM, and SOM ensures you’re entering a space with real demand and growth potential, rather than an idea that sounds exciting but lacks market viability.

At Cordillera Digital, we help founders validate market opportunities, craft solid MVP strategies, and scale effectively. If you need support refining your market size analysis or ensuring your startup is positioned for success, let’s talk!

Have you struggled with market sizing in your startup journey? Share your experience in the comments!

How Cordillera Digital Can Help

At Cordillera Digital, we specialize in helping startups navigate market research, refine their business strategies, and scale efficiently. Whether you're unsure about your market size, need assistance with investor pitches, or want to fine-tune your growth plan, our team provides expert guidance.

From validating your TAM, SAM, and SOM to building a data-driven roadmap, we help you maximize your startup’s potential. Get in touch today to see how we can accelerate your journey!