One of the most common questions we get is calculating a Market Size slide on a startup pitch deck. After so many years at this, I believe I can come up with better market size estimations than I used to.
But, in order to explain this in the best possible way, we invited Steve Barsh, an angel investor and one of the managing partners at the DreamIt startup accelerator.
In this episode, he breaks down basic definitions such as TAM, what are the most common mistakes made while calculating and presenting this to investors, and how to estimate it properly. Steve will also demonstrate how the simple formula applies to every startup, no matter what their industry is.
- TAM or Total Available Market is the total market demand (ALL REVENUE) for a product or service.
- SAM or Serviceable Available Market is the segment of the TAM targeted by your products and services which is within your geographical reach.
- Your TAM is NOT Top Down.
- Your TAM is NOT the size of the problem.
- Your TAM is NOT the size of the market today.
Startups always come up with an erroneous TOP-DOWN approach, but they must do a BOTTOM’S-UP calculation.
- Make sure all customers apply (and not a subset).
- Consider if your number of customers is vetted and real, where in the world are they located, if your price is real, and how do you know.
- Other useful questions are: Is that what people are paying today? Have you tested your price and de-risked that assumption?
- When showing this info in pitch decks, like your high school math teacher would say: “show your work!.”
In the video, Steve demonstrates in detail, by asking the real kind of questions startups receive at DreamIt, how this simple formula can become complicated (if you don’t do the work), but how it also adapts to every business idea, independently from the industry they belong to.
Specifically, the model is broken down for a fictitious cybersecurity company as well as Slidebean!