Leta blog: How to estimate Market size? TAM, SAM, SOM
29 August 2020If you ever read through the startup pitch deck, you should have seen the slide dedicated to TAM, SAM, SOM. What do these acronyms mean and why are they useful for investors when assessing an investment opportunity? These abbreviations give us an idea of the market size for the project. It is important for the investor to understand how large the target market size is and the respective slice that the startup is aimed at occupying on this market. However, understanding the size of the market is equally important for the founders. Oftentimes, the founders of early-stage startups mistakenly present huge target market size in their pitch deck without justifying the numbers with some thorough research behind it. As a result, they fail because that market niche turns out to be much smaller than initially expected. So how to understand which market the project will occupy, how to calculate it better? What are bottom-up and top-down approaches? After roughly estimating the market, the founder can decide whether he should go to a venture investor or not. Maybe it’s easier and better to take a loan. If the market is small, it is possible to build a good business there, but no one can’t build a large, growing company in this market. That doesn’t fit the strategy of a venture investor. We still aim for the 10x return and if the whole market is 10x for investments, how can the investor return the money and also earn?
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