As an early-stage B2B founder looking to raise seed funding, or a mid-stage business owner looking for capital to scale up your growth, you won’t get too far with investors without first understanding your Total Addressable Market and Serviceable Obtainable Market (SOM).
Essentially, you want to figure out the total number of existing companies that could potentially buy your product or service, and the total revenue you could generate from selling to them, so you can prove to investors that you’ve got a winner on your hands.
Here are a few ways that founders do this.
Top-down analysis: the most common (yet least helpful) way to calculate TAM.
Most founders Google around for industry research that says something like, “this industry will be worth $100bn globally by 2025,” then put that on a slide next to a hockey-stick chart.
Assuming that this research is even accurate, and applicable specifically to your product or service, how much of that market are you likely to actually reach?
Most founders will pick an arbitrary percentage of the total industry that sounds about right and say, “That’s my Total Addressable Market.” Investors know you’re just guessing, and it tends reflect negatively by showing a lack of thoughtful analysis.
Even though calculating your Total Addressable Market is in many ways a guess, you can approach it in a more evidence-based way that shows investors you have a clear vision for scaling your business.
So, how do you calculate your TAM and SOM in a way that’s more accurate and actionable?
Bottom-up analysis: a more accurate way to map your market.
First, decide on the company categories (based on number of employees, industry, funding, location, or other significant characteristics) that are likely to buy your product or service, along with a defensible argument as to why those categories will buy.
Do the opposite as well: define the company categories that won’t buy so you know who to exclude from your analysis.
For instance, hotel chains with more than 500 employees are likely to buy an app that improves communication between hotel staff, whereas smaller hotels with less than 10 employee are probably not.
Conversely, small tech companies with less than 10 employees and more than $500k in funding are likely to rent an office in a coworking space, whereas larger companies with 50+ employees and millions in funding are probably not.
If you’ve already successfully sold products/services to your market categories, that’s even better. You’ll have price-point data to paint a more accurate picture of your revenue potential… but let’s focus on accurately figuring out the number of companies you can reach.
The next step is to find a database that tells you how many companies exist within the categories that you’ve defined.
Why LinkedIn isn't a great tool for calculating TAM and SOM.
You can access some company data from sources like LinkedIn and Crunchbase, but often their counts are wildly inaccurate because they return data from past jobs and also include job titles that weren't in your original search — so you can get a very skewed view of how many contacts are actually available within your chosen categories.
Personas, on the other hand, shows you your Total Addressable Market by default when you select the ultra-specific company categories that you’re targeting… plus, it also provides you with the direct contact details of the person you want to reach.
You can niche down companies based on all of the factors mentioned above, plus a few more that are unique to Personas, like:
- Companies who have x people in y department;
- Companies with employees who have a particular role title;
- Companies who use a particular piece of software;
- & more.
And you can easily exclude companies based on your category exclusions.
Having this data on hand changes the TAM/SOM discussion with investors from an arbitrary guess of industry size (with no real evidence to back it) into a much more accurate number of companies and contacts that you can actually sell to.
So, Personas gives you an easy way to calculate your Total Addressable Market as well as your Serviceable Obtainable Market — because you can actually reach the decision maker at every company in this market directly through Personas.
