From TAM to SOM: Your Intro to Market Sizing As An Early-Stage Founder

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Market sizing is the cornerstone of every strategic decision in your startup. Whenever you’re looking to allocate resources, from product to marketing, you always start with market sizing.

Why? Some quotes that I love are a good starter:

• "If you haven't sized your market, you're playing poker blindfolded." (Steve Blank)
• "If you don't understand your market, you're gambling, not investing." (Warren Buffett)
• "When a great team meets a lousy market, the market wins. When a lousy team meets a great market, the market wins. And when a great team meets a great market, something special happens." (Andy Rachleff)

I recently spoke with a company growing at 5%. When I asked if that was good, they seemed confused. But my question was simple: Are you outgrowing the market and gaining market share, or is the market outgrowing you and you're losing share?

They didn't know. That's a problem.

So today, I want to share how to actually do market sizing well. (Spoiler: no, you don’t need to always go for the largest market.)

The 3 Parts of Market Sizing

1. Market Analysis

This gives you the segments, size, and underlying markets, plus how they'll grow. It tells you where to play.

2. Competitive Landscape

This shows who else is playing there and helps you position yourself. It helps you find pockets of opportunity and understand if markets are under-penetrated or over-penetrated.

3. Company Performance

Based on the market and competition, what can you do? What are your strengths? How do you play to them?

At the earliest stage, you might not need to look too far down (things are constantly changing). But always keep them at the back of your head.

Understanding TAM, SAM, and SOM

Your TAM (Total Addressable Market) is if everyone would use your product – 100% penetration. If I'm selling braces, my TAM is everyone who could use braces.

Your SAM (Serviceable Addressable Market) is how many people actually use braces today. That's the number you'd use to calculate market share.

Your SOM (Serviceable Obtainable Market) is what's actually obtainable for you. Maybe you're selling braces only in Brazil – China might be the largest market, but it's not obtainable for you in the short term, so calculating your market share from that number wouldn't be representative.

Look at Uber's pitch: Their TAM was the global transportation industry. Their SAM was taxis and limousines in the US. Their SOM market was New York and Francisco. They went broad on vision, but specific on execution.

The Disruptor's Market Sizing Challenge

Here's something critical: Sizing the market for a disruptor based on incumbent market share is like “sizing the car industry by how many horses there were in 1910” (Aaron Levie).

In 1980, AT&T asked McKinsey to assess whether they should go into mobile phones. AT&T was the strongest company in cellular telephony – they started the technology.

McKinsey concluded there would be 900,000 users in 20 years. AT&T decided not to allocate resources to mobile phones.

Well, McKinsey was wrong by 100X. There were around 110 million users. AT&T had to acquire McCaw for $12.6 billion.

The mistake? Assuming linear growth on a new technology that was actually exponential. It's hard to predict the future, even harder with exponential curves.

This is even more true today. With AI, it's uncertain whether the world will go one direction or another, and that makes sizing markets extremely hard.

Clearly articulating your market sizing methodology is paramount. Show investors your beliefs, drivers, and how changes can affect projections.

How to Do Market Sizing

Market sizing breaks down into two main pieces: structure and values.

Structure Step 1: Define Your Market Reach

What's included in your market and what's not? Define your boundaries, the market to be sized, clearly by setting guardrails.

Structure Step 2: Segment Definition

The market is a cake, but you can cut it in different ways. How will you break down the market? Cut it based on where you think opportunities exist, what pockets are untapped.

Always do this cut within a wider market people can relate to, so you can say, "I'm tapping into this niche market growing at 36% per year, which is part of this broader market growing at 10%."

Structure Step 3: Define Your Methodology

Will you go top-down or bottom-up? Demand-side or supply-side? A combination of all of them?

• Top-down starts with a broad number and applies filters to get to your figure. It's fast but generic.
• Bottom-up builds from granular data on sales by segment, scaling up to the total market. It's time-consuming and data-intensive but accurate and realistic. Great for convincing investors.
• Supply-side sizes the market by analyzing how much is sold by existing suppliers, Works better for B2B, especially when there’s a supplier concentration (e.g., how many dentists sell braces).
• Demand-side sizes the market by analyzing how much is bought by existing customers. Works for B2C or B2B with customer concentration (e.g., how many people need braces and actually buy them).

Best practice? Use multiple approaches, including external reports.

Value Step 4: Derive Assumptions

Once you have your structure, you need to establish assumptions for your selected baseline. Leverage public data as well as interviews and surveys.

This is about quantity drivers (number of companies/people, penetration rates) and price drivers (average spend per segment). Find your underlying market and your story inside it.

Value Step 5: Define Trends

The easy part is coming up with structure and baseline. The hardest part is predicting the future and justifying why your thesis will actually happen. Form a view of the trends that will impact the market, understanding what levers will be pulled.

Value Step 6: See Your Expected Growth

Overlaying baseline and trends forms a granular view on the historical and expected growth for the market in question.

This is your opportunity to build a robust internal perspective of the future. You need confidence in where the future is going and what will drive that change–enough to go out there and keep refining it.

My Unsolicited Advice On Market Sizing

Trust your gut and focus on what you're building.

There's too much noise right now. Everyone on LinkedIn thinks they're Steve Jobs. Someone will always seem to be doing what you're doing.

It's not like that. Be focused. Pick something and develop that solution. Trust yourself – you're here for a reason.

It's okay to focus on niche markets.

People will say, "This market isn't big enough."

First: Why are you doing what you're doing? Are you solving a specific problem you're passionate about?

Second: Not big enough for whom? Don’t underestimate the potential of a “small” market by number of users. Analyze high willingness to pay instead.

Market sizing isn't just an exercise for investors.

It's how you truly understand your opportunity, communicate your vision, and make strategic decisions about where to focus your limited resources.

Put extra effort into the structure and get it right from the get-go. Be thoughtful about your assumptions, and don't be afraid to go niche if that's where the real opportunity lies. Once you understand your market deeply, you'll know exactly where to play and how to win.

Stay close to your customers.

Don't assume that because a problem existed when you experienced it, it still exists the same way. Things change incredibly fast. Make sure you're close to potential clients or customers to figure out what pain points they actually have right now.