📰 - A look into how to calculate your market size
📊 - Data behind the importance of small angel checks
🎙️ - Podcast w/ Frank Licea
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------------------------------------------------------------------------------------------------------------------------------------------------------------TAM/SAM/SOM? - You're Probably Doing It Wrong. Let's Talk About Properly Calculating Your Market Size
How big is your market? What are you telling VCs?
Are you sure it’s that big? I'm willing to call your bluff. Most founders use the wrong numbers when describing their market size.
We will take the example of a startup that sells AI baby diapers.
A quick Google search will tell us that the global baby product market is $320 Billion. Is that the right market size? Definitely not. This number includes cribs, clothing, toys, and services. None of those subsectors will be replaced by the AI diaper. Additionally, entire markets will almost certainly be unable to afford the AI diaper.
Another Google search will tell us that the US baby diaper market is $11.3B. Is that the right market size? Maybe, but probably not. This number includes ALL diapers, but not everyone wants or can pay for an AI diaper. The AI diaper is much more expensive than a traditional diaper and, therefore, will only appeal to upper-class families.
To begin, let’s define our market sizes. The three main metrics used are:
There are also two different ways to calculate these metrics:
Most VCs prefer the bottom-up approach since it gives a much better view of who your customer base is, how much you can earn, and what you will need to do to expand your market.
Now, let’s work this example through in terms of how to calculate (FYI numbers used are mostly fictional).
TAM
According to the World Bank, the total population of babies (0-4 years old) in the world was 681 million in 2020. Assuming that each baby uses 6 diapers per day on average, the total number of diapers needed per day in the world is 4.1 billion. Assuming that you can sell your diaper for $1, the total revenue potential of the diaper market in the world is $4.1 Billion per day or $1.5 Trillion per year. Lots of diapers and lots of money.
Again, this is including many people who could never afford to buy your diaper. But the size of the market is large enough to
SAM
In 2022 there were 22 million children in the US between 0 – 4 years old. Using the same method as above, the total number of diapers needed per day is 132 million. Assuming that the average price of a diaper is $1, the total revenue potential of the diaper market in these countries is $132 million per day, or $48 Billion per year. Still a lot of diapers. And still a lot of money.
SOM
We assume that only higher-income earners will be able to afford a more expensive diaper. According to the Pew Research Center, 19% of US households had an annual income of more than $100,000 in 2019. This means that 4.18 million babies are part of families that can afford AI diapers or 25 million diapers per day. With a cost of $1 per diaper, this leads to a potential earnings of $25 Million per day, or $9.12 Billion per year.
While this number is still very large and there are other factors to consider, it demonstrates the available behemoth market.
As you can see, the market sizes vary significantly depending on the assumptions and calculations you make. It is important to be realistic and transparent about your numbers and sources and to explain your logic and reasoning to your potential investors. You should also update your market sizes as you get more data and feedback from your customers and competitors. Remember, your market size is not a fixed number, but a dynamic and evolving estimate that reflects your vision and strategy.
Market Growth
In addition to the classic TAM, SAM, and SOM, it is valuable to show market growth. Using a top-down approach for this section is usually acceptable since it is quite difficult to calculate for your specific product type. Investors are looking for fast-growing markets since those are the ones where new potential revenue and opportunities are always available.
Some ways you can find growth metrics:
Expanding Your Markets
Finally, once you’ve shown how big your market is, and how fast it is growing, it is time to show where else you can expand to.
Every large company has expanded to industries they never expected to when they were small. However, this natural growth shows how much larger your startup can be if you succeed.
For example, with AI diapers, a natural market to expand to would be adult diapers. Demonstrating that this market is a natural expansion from a successful baby diaper technology emphasizes how much larger your market can be.
Relevant Articles for Calculating Market Size
-------------------------------------------------------------------------------------------------------------------------------------------------------------Data Corner
Embrace the Small Checks
It may seem annoying to collect many small checks when a few large ones would fill your need easily. However, small checks (less than $25K) made up 62% of the money raised for very early-stage rounds (less than $250K). Even larger rounders that raised $1M had close to 40% of their money from small checks.
These investors are often your biggest champions. Embracing them can be key to raising a successful round.
-------------------------------------------------------------------------------------------------------------------------------------------------------------Fundraising Demystified Episode #30 is Live!
In this episode, Frank Licea talks about his employee-to-entrepreneur journey and the unexpected fundraising success of Howdy.com as a service-oriented company that raised $18 million in funding. He also shares his perspective as a Chief Technical officer and how bootstrapping has helped them create an upper hand during fundraising pitches and negotiations.
Here are the key takeaways:
How Howdy started:
Bootstrapping vs. Y Combinator:
Masterclass in Finding a Technical Co-founder:
Fundraising Experience:
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