When raising investment, startup founders must present a compelling case that their business has the potential for significant growth. One of the most critical factors investors evaluate is market size – specifically, how large the opportunity is and how much of it the startup can realistically capture.

Market sizing is not just about impressing investors with a massive Total Addressable Market (TAM); it is about demonstrating a clear, credible path to revenue through the Serviceable Obtainable Market (SOM). Investors need data-backed projections to assess the potential return on investment (ROI), and an overinflated or poorly justified market size can undermine credibility.

This article provides a step-by-step guide to accurately calculating TAM, Serviceable Addressable Market (SAM), and SOM. By following this framework, founders can avoid common mistakes and ensure their market sizing aligns with investor expectations.

Understanding TAM, SAM, and SOM: Definitions & Differences

Market sizing consists of three key layers:

• Total Addressable Market (TAM) – The entire potential market demand.
• Serviceable Addressable Market (SAM) – The segment of the market the startup can realistically serve.
• Serviceable Obtainable Market (SOM) – The share of the market the startup can realistically capture.

Each of these figures helps investors assess whether a startup is pursuing a high-growth opportunity and whether its revenue projections are realistic.

1. TAM (Total Addressable Market) – The Big Picture

Definition:

TAM represents the total demand for a product or service if every potential customer were to use it. This is the broadest market size estimate and serves as a high-level industry overview.

Why It Matters:

• Demonstrates the overall revenue opportunity.
• Helps investors assess whether the market is large enough to support a venture-scale return.

Formula:

TAM = Total number of potential customers × Average revenue per customer per year

Example:

A SaaS startup developing HR automation software may identify 100 million businesses worldwide that require HR tools. If the average revenue per customer is £500 per year:

TAM = 100M × £500 = £50B per year

However, TAM alone is not enough – it must be refined to show a more realistic target market.

2. SAM (Serviceable Addressable Market) – The Realistic Market You Can Serve

Definition:

SAM is the portion of TAM that a startup can realistically serve, taking into account geographic, regulatory, and business model limitations.

Why It Matters:

• Helps focus on reachable customers rather than an overly broad market.
• Investors use SAM to filter out unrealistic market claims.

Formula:

SAM = TAM × Percentage of the market that fits your business model

Example:

If the HR SaaS startup initially targets UK-based businesses and the UK accounts for 10% of the global market, then:

SAM = £50B × 10% = £5B per year

This figure shows a more refined and achievable market than TAM.

3. SOM (Serviceable Obtainable Market) – Your Actual Market Share Potential

Definition:

SOM is the portion of SAM that the startup can realistically capture, considering competition, marketing budget, and adoption rates.

Why It Matters:

• Investors use SOM to estimate revenue potential and traction.
• Helps startups set realistic growth projections and funding requirements.

Formula:

SOM = SAM × Estimated market share

Example:

If the HR SaaS startup expects to capture 5% of the UK market within three years:

SOM = £5B × 5% = £250M per year

Key Takeaway:

SOM is the most critical number for investors – it represents real revenue potential, not just theoretical market opportunity.

How Investors Evaluate Market Sizing in Pitch Decks

Investors scrutinise market size estimates to determine:

• Is the market large enough? Venture-scale returns require a sizeable market.
• Are the TAM, SAM, and SOM figures logically justified? Investors expect clear reasoning behind the numbers.
• Does the SOM align with the startup’s resources and strategy? Unattainable market share projections raise red flags.

Common Mistakes That Undermine Credibility

• Claiming huge TAM figures without a clear SAM or SOM breakdown. Investors do not fund “potential” alone – they fund achievable growth.
• Unrealistic SOM estimates, such as stating “We will capture 30% of the market in Year 1”. Market penetration takes time and strategic execution.
• No credible data sources to support the calculations. Market sizing should be backed by research from industry reports, government data, or market intelligence firms.

Example:

A startup pitching a £20B TAM but failing to define its SOM may struggle to gain investor confidence.

Step-by-Step Guide: How to Accurately Calculate TAM, SAM, and SOM

Step 1: Define Your TAM (Total Market Demand)

• Use industry reports (e.g. McKinsey, Statista, CB Insights).
• Leverage government and trade association data.
• Apply the formula: TAM = Number of potential customers × Average revenue per customer

Step 2: Narrow Down Your SAM (Realistic Market You Can Serve)

• Consider geographic focus, regulatory barriers, and customer segments.
• Apply the formula: SAM = TAM × Percentage of the market that fits your business model

Step 3: Estimate Your SOM (Achievable Market Share)

• Analyse competition, marketing capacity, and adoption rates.
• Apply the formula: SOM = SAM × Your estimated market penetration

Pro Tip:

If no competitors hold more than 10% of the market, claiming 50% SOM in Year 1 is unrealistic – adjust estimates accordingly.

Case Studies: Who Got It Right vs. Who Got It Wrong

Winning Case: Airbnb’s Market Expansion

• Started with a niche SAM (backpackers and budget travellers).
• Expanded SOM gradually, proving traction before scaling globally.
• Became a £100B+ global business.

Failed Case: WeWork’s Overestimated Market Size

• Claimed a massive TAM but failed to assess realistic demand.
• Ignored profitability issues and failed to justify SOM viability.
• Resulted in a collapsed IPO and valuation crash.

Final Takeaways & Best Practices

• Investors care most about SOM, not just large TAM figures.
• Always justify assumptions with credible data.
• Avoid unrealistic market share projections, as investors will question them.
• Market sizing should be a living metric, updated as the business scales.

Action Step for Founders:

Refining TAM, SAM, and SOM calculations will strengthen an investor pitch and business strategy.

By using a structured approach to market sizing, startups can demonstrate realistic growth potential, build investor confidence, and increase their chances of securing funding.