Lesson 1, Topic 1
In Progress

Market Sizing

A Market is the mechanism by which a business delivers its value proposition.

A Market Opportunity is a metric for estimating the long-term potential for an early stage company. Some investors invest in companies that are targeting market sizes of at least $100M. At that size, a market is large enough to support a $25M+ company. Many early stage companies are opening up new markets, so determining overall market size is not easy, so market sizing should be attacked from several angles.

The most daunting task is to convince investors that your business idea is economically feasible and that they should fund it. Since their money is at stake, investors mostly think about the numbers you present to them regardless of the personal throws you’re about to make.

Investors are mainly interested in generating a guaranteed return on their investment.

Investors look for a market that is big enough and durable enough over the long term (i.e. product needs which are not just a fad), and has an opportunity to grow, meaning it’s market conditions are going to allow companies to increase value to the entity much faster than they spend the entity’s resources (cash/equity). In an established market, that means growing faster than the overall market growth and thereby taking market share. In a new market, that means educating and acquiring customers for much less than the lifetime value of those customers.

It is important when looking at market opportunity to do your best to gauge how much customers are willing to pay for the product, since this will be a key driver of top line revenues.

Market Size

The financial potential of your business.

The volume of your Business Model Canvas.

Helps you refine Business Model Canvas hypotheses:

Very small market size may not be worth pursuing.

May be difficult to gain traction in a gigantic market.

Two measurements:




Consumption (e.g. washloads, room nights, kilowatt hours, etc.)

Total Addressable Market (TAM): what is the maximum market size/revenue a business idea can generate by selling a service or a product?

Value of all of the buyer/seller relationships participating in the market.

Served Addressable Market (SAM): how big is the market segment within the TAM which can be targeted by your services?

The part of the TAM which fits your business model’s most closely.

Target Market: (Usually) demographic segment of the SAM with the most direct path to success.
Total Addressable Market (TAM)
Quantifies the entire chain of buyer/seller relationships in your market.

In BMC terms, the sum total of all the revenue streams for all of the customer segments of all businesses connected by their business models
The top-down approach uses industry research from such companies as Statista, Forrester, Gartner, and others to estimate the population that comprises the target market. Then you should logically apply geographic, demographic, and economic assumptions to eliminate irrelevant segments and narrow down the large part to a specific market segment.
The bottom-up approach is more reliable because it is based on primary market research. You should count / estimate the total number of customers in a market by adding up the number of customers that each company has and multiply that number by the average annual customer revenue in this market.
Only need to estimate the value of the relationships at point of consumption (incorporates the value of all relationships in the chain)

Usually very broad.

Easiest to estimate.

Give a sense for how your startup fits in the market, pivot alternatives, and growth opportunities

Usually can find a number online – DON’T FORGET CITATIONS


Mobile apps

Energy consumption

Health & fitness

Served Addressable Market (SAM):
In BMC terms, the value of ALL the Revenue Streams that apply to YOUR BMC for the entire population of your Customer Segments, whether they are your customers or not, and ONLY for your Value Propositions
A value proposition rarely applies to an entire TAM.
Opportunity to sharpen your focus on a particular part of the market.
Think in terms of combinations: SAM usually bounded by Value Proposition, Customer Segments and Revenue Streams
The part of the TAM that can be reached. A more refined version of TAM, communicating the size of the opportunity that you can address with the products you have and expect to build in a reasonable time frame (~the next five years)

Less likely to find a top-down number, like TAM
Bottom-up approach more likely:
Estimate ENTIRE population of Customer Segments to which Value Proposition applies.

Factor in revenue streams that apply.

Sanity check against TAM.

Sometimes acceptable to just estimate an addressable market
Mobile healthcare apps for seniors

Self-generated renewable energy storage

Health & fitness at work

Target Market
What Serviceable Obtainable Market really means
One more level of refinement or SAM. It will be difficult for a startup to penetrate the entire SAM, so you will need to set realistic goals and target a subset of SAM that you can realistically reach during your business’s first few years.
Often a subset of Customer Segment.

In your estimation, Value Proposition applies to this Customer Segment most directly.

Target Market also can be Cost Segment constrained, usually to a geographic area.


Mobile healthcare apps for seniors, targeting retirement homes and large gerontology practices.

Self-generated renewable energy storage, targeting the oilfield services, food manufacturing and automotive industries.

Health & fitness at work, targeting new male employees aged 25-40 in companies with annual sales of $500M or more.

Share of Market
Expressed as a percentage (Sales/Market Size)*100

Sales can be actual or forecast

Market size can be TAM, SAM or Target

Size matters very much

Too big:

Unrealistic expectations

Inaccurate market size estimate

Too small:

Plan not aggressive enough

Inaccurate market size estimate

Which measurement to use?
Depends on your story

You can have more than one of each

Common to precede TAM estimation with market segmentation, then calculate TAM for each segment

Presenters sometimes fold TAM and SAM into Addressable Market

Investors looking for reasonableness and fit with business model and financials

Quantifying Market Size
If you’re lucky:

Find an industry or market study that fits your business model

If you’re not:

Build a market map

Important to differentiate:



Extrapolation Algorithms

Run multiple scenarios

Two time frames:


In 5 years

Is bigger better?
It almost always depends. For example, which is better:

10% SOM of a $100M SAM = $10M

0.1% SOM of a $10B SAM = $10M

They’re equal. Duh!

Expanding vs Contracting vs Stagnant Markets
Market sizes are dynamic

Anticipating change is critical




Business model implications

Blue Ocean Opportunity

Competition for new Customers

Competition for existing Customers

Implications for Metrics

Customer Acquisition Cost (CAC)

Life Time Value (LTV)

Two time frames:


In 5 years

Helpful Hints
USA-only estimates OK (unless the foreign market is critical to success)
Market size projections are usually large numbers
Shoot for 10-25% SOM within 5 years
Even if you don’t do a financial projection, test reasonableness of SAM with a hypothetical SOM
Changes to BMC can affect TAM and SAM, and vice versa

Next Steps
Financial projections

Estimate market share

Common fallacies:

“Our SAM is 50 gazillion dollars, so if we achieve on one hundredth of one percent market share, we’re a billion dollar company.”

“We target a $5 million niche and expect to capture 75% of the market.”

Test against Business Model Canvas

Adjust market size assumptions

Re-visit Value Proposition, Customer Segments & Channels

Rules of Thumb
Market size projections are usually large numbers.

Shoot for 10-25% market share within 5 years.

The smallest business that might attract outside investors should project $10 million in sales within 5 years (minimum $40 million SAM).

Is there a minimum size to a potential market below which investors won’t invest?
One angel investor says:

Well, it is hard for early stage equity investors to make the numbers work with a market less than $100M in total size. It is basic arithmetic. Here is why: early stage investors need to be able to credibly model a 10X return at the outset of every investment, since so many companies fail. If, …

They are only going to own part of the company, and

The company is going to have way less than 100% market share, and

The company is likely to be acquired for a revenue or EBITDA multiple of less than 10X…

Then the arithmetic won’t work for much less than a $100M market.

Here’s an example from that same investor:
Let’s say a company ends up with 5% of a billion dollar market, and the early investors put in a total of $4M in early rounds and end up holding about 12% of the company after dilution from later rounds. And let’s give the company a good but reasonable revenue multiple from a buyer of, say, 7X. In that scenario, the company is worth 7 times $50M revenue (5% of a $1B market) or a total exit valuation of $350M. In that scenario, the early stage investors end up with $42M for their 12% of the $350M, which is a solid 10X return.

Running that same model with a smaller market size:
Let’s say a company ends up with 5% of a $100M dollar market, and the early investors put in a total of $4M in early rounds and ended up holding about 12% of the company after dilution from later rounds. And let’s give the company the same revenue multiple from a buyer of 7X. In that scenario, the company is worth 7 times $5M in revenue or a total valuation of $35M on the company. In that scenario, the early stage investors end up with $4.2M for their 12%, which is a break-even 1X return.

Data Sources
Statista should be one of the first places you check! I have access through Cal Lutheran, so if you hit a pay wall, send me the report you’re trying to get access to and I’ll send it to you.

Data Collection

CIA World Factbook: https://www.cia.gov/library/publications/the-world-factbook
NationMaster: http://www.nationmaster.com
Wikipedia: http://www.wikipedia.org

Bureau of the Census: http://www.census.gov
Data.gov: http://www.data.gov
U.S. Energy Information Administration: http://www.eia.gov

Barrons: http://www.barrons.com
The Economist: http://www.economist.com
Wall Street Journal: http://www.wsj.com

Accenture: http://www.accenture.com
Booz Allen: http://www.boozallen.com
Deloitte: http://www.deloitte.com
Forrester: http://www.forrester.com
IBM: http://www.ibm.com
McKinsey: http://www.mckinsey.com
PwC: http://www.pwc.com

Industry Groups

And if all else fails…Google.


(1) Calculate your TAM, SAM, and Target Market. If you need access to any information on Statista, let me know and I’ll download it for you.