After a brief description of the problem and the solution you’ve developed, the next slide in your pitch deck should be market size. This tells investors who your customers will be, how many of them there are, and how you plan to interact with your competitors.
The overall goal of the pitch deck is to convince investors that buying shares in your business is a good investment that will pay off big time. This will happen because the company will grow exponentially and reach $100 million+ in revenue within a few years and get acquired, or stay on a billion-dollar revenue trajectory and go public. When you’re building a niche product, market size often determines whether or not to invest, and investors need to understand the details.
The first mistake most founders make is not understanding what is meant by a “market opportunity.” It is not the size of the entire industry. For example, the current market size for lithium-ion batteries is about $70 billion. A nice, big market. If you are developing a completely new battery technology that will replace lithium-ion batteries in electric cars, laptops, phones, etc., then that is your market size. However, if you are developing a new coating for the cathode of a lithium-ion battery, then your market size is the total potential sales of lithium-ion battery cathode coatings. Obviously, this is a much smaller portion of the entire battery industry. The answer to the question — how big is it? — is what a potential investor should find in the pitch deck.
Let’s say you are developing an e-commerce platform for bowling equipment, and the entire market for bowling equipment is $10 billion. Assuming you take 10% commission on sales, your total opportunity is not $10 billion, but $1 billion from your platform.
TAM is not the total size of the industry, but the total market for your product. The annual revenue you would make if everyone who needed your product bought it. If you are making cathode coatings, it doesn't matter how big the battery market is. You need to know the size of the cathode coating market.
SAM is the service-oriented market. From TAM, we subtract the use cases that your product cannot serve. If half of the battery manufacturers are in China and won't buy from a US company (or you are prohibited from selling to China), then half the market is unavailable. So when you subtract the market segments that your product cannot serve, you are left with a viable market.
SOM is the available services market. SOM subtracts from the addressable market everyone you could sell to who won't buy from you. This usually means competition or alternative solutions. If you expect 3 competitors to split revenue equally, SOM is one-third of SAM.
Most importantly, SOM is how much revenue you expect to make if you sell your product to everyone you can. It may take 5 years to realize that opportunity, or it may take 50, but that is the upper limit of your revenue. After exponential growth, the product's revenue will eventually level off and asymptotically approach SOM.
The whole point of market sizing is that investors need to know how much a company can grow. So the only number that matters is SOM.However, looking at TAM/SAM/SOM provides a lot of contextual information in a simple graphic that an investor can understand at a glance.
Market sizing is an essential part of customer discovery and takes time and analysis. If you are in a niche market, it is perhaps more important than product development as it determines what product to build and how to bring it to market. There are two ways to estimate market size: top-down and bottom-up.
Top-down
TAM/SAM/SOM is essentially a top-down approach to estimating expected revenue. Start with your specific market data if you have it, or estimate it based on any available market data, such as industry size. If all you have is the lithium-ion battery market size, try to figure out what share the cathode coating market could potentially be - 1%, 5%, 10%? Then estimate the SAM and SOM to get your expected revenue.
Bottom-up
Answer two questions: How many customers do you have and how much would each pay for your product? This is your potential annual sales volume.
Industry expertise. Talk to competitors (e.g. at trade shows), distributors, resellers, and customers who have a broad view of the industry.
Competitor analysis. Add up the sales of all existing competitors and you will get the current market size. Or, if you know one competitor owns half the market, find the revenue for that product and multiply it by two times the market size. Read and analyze the annual reports of all competitors in the industry that provide information.
Proxy products. Find other related products sold to the same customers. If battery manufacturers spend $2 billion on electrolytes, you can use that amount to estimate the potential size of cathode coatings.
And remember, you may get investors’ attention for a moment by claiming a huge market opportunity, but you will quickly lose credibility once they realize that your product is a small niche in a huge industry. Investors invest in founders who impress with their industry knowledge and detailed planning for bringing their product to market.
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