Size Matters

Part of a series of essays for the Creative Founder class at CCA
Previously:
What is a Market? and Picking a Market

TAM, SOM and SAM. If you take a class on entrepreneurship (or are a startup founder), these acronyms mean you are entering the dreaded land of market sizing.

Why do we even bother with TAM/SAM/SOM? Two reasons:

  • To determine if the market can sustain a business. Are there enough people with enough money seeking to solve this problem to support a thriving business?
  • To make an argument for raising startup capital to fund the venture.

In other words, we do market sizing in order to prove our startup idea’s value to ourselves, then prove it to others. Otherwise you are just betting your livelihood on a hunch.

I’ve taught Creative Founder for four years now at CCA, for three at Stanford Continuing Education and numerous mini-versions as workshops and I’ll tell you, these phase are important and hard to get your head around. Students struggle and guest-VC judges poo-poo the results.

So here the simple explanation I’ve arrived at after explaining myself blue:

When you first pick a market, you are considering the market’s viability: how many people with how much money and are those numbers growing or collapsing in size. This is likely your TAM — your Total Available Market.

If you owned all the online education market share or all the health care needs of baby boomers, just how much money would that be?

When a venture capital firm considers whether or not to invest, they want to know: is this a big market or a really big market? Or are you wasting my time? Venture Capitalists seek a 10x return. They won’t invest in something that makes a million dollars a year.

YOU might be quite excited by such a prospect, but you’ll have to do it without funding. A lifestyle business is a fine choice. You can do meaningful work and get meaningful pay. Not everyone has to be the next Facebook, and not everyone should try.

TAM can inform your funding strategy. If the TAM is in the hundreds of millions or billions, you can consider raising. If it’s in the millions, it may be better to either bootstrap or reconsider your TAM.

All this said, TAM should not be utterly unrealistic. Let’s take the food example. No company is going to feed everyone in every way people wish to be fed. But you can have a TAM that is “ready to eat meals” or “restaurant delivery” or a “farmer direct to consumer” TAM. It’s what you hope to achieve, if you could be as big as IKEA.

Start Here

SOM — Serviceable (or segmented) Obtainable Market — is where you begin. If you want to “own” online education, you might begin by offering a series of classes that reach a certain demographic, be it geographic or psychographic. For example, you might be able to provide online coding classes, or online design classes. You should feel confident in your ability to reach these people, thus the “know” I wrote next to it above. You more-or-less know (barring validation) you can reach these folks.

Climbing the start-up cliff

I call it the toehold market for a simple reason: when a mountain climber is scaling a ridiculously steep cliff, they seek toeholds: a small yet sturdy place to put their weight so they can move upwards.

The struggle my students face is how big should the SOM be?

I’d argue big enough that if you never moved past it to SAM, you’d have a thriving small business. The SOM is where you prove there enough people willing to spend money on your solution that you have real potential. It’s more than just your earlyvangelists; it’s who you can get in 1–2 years of being in business.

Basecamp

Next is SAM. SAM I saved for last, because it’s usually the hardest to figure out and most VCs I’ve met aren’t interested — they are more interested in the two questions “How big can you get” and “Where are you going to start?”

But it’s a great thinking exercise to determine your SAM, and it helps you tighten both SOM and TAM.

So what is SAM? SAM is your expansion plan.

Once you owned your SOM, what would be the next expansion toward TAM? If you were doing food delivery in the Bay Area, you might move to other key cities in North America. If you provided learning plans to college professors, you might move out to elementary and high school teachers. SAM is a meaningful and exponential increase in your SOM toward the TAM. It’s what you think you can achieve, if you were as successful as Philz Coffee or In-and Out Burger. Consider it the basecamp between small business and IPO.

Sizing

So how do you determine how big these are? Put on your deerstalker, because you have to become a detective.

Just how many people in the Bay Area need childcare? Just how many dog owners in NYC need pet care during the day? How many people in America eat frozen food? Every market is different, and researching them takes elbow grease. Public companies make their number public record, which helps. There are a million market analysts writing articles about their forecasts, which also helps. Mary Meeker helps. But you know who really helps? Librarians. Especially research librarians in business school libraries.

When I was researching my startup so many moons ago, I was really struggling to do sizing. But somehow my journey led to me get a day pass to the GSB- graduate school of business, at Stanford. And those librarians were the best. They helped me formulate my queries, they pointed out useful databases, and they were lovely the entire time.

No matter what though, you’ll have to do some guestimating, find similar markets that are better known to compare, and cobble together micromarkets to find macro ones. It’s messy, and if there is a simple way to do it, I’ll like to hear about it.

The good news is along the way you’ll learn a lot about who is in the market, how people solve the problem already, and who your competitors are. Don’t outsource this research. It will make you smarter.

Put it all together

My pal James Cham writes:

Let’s use Uber as a example: their first market was black cars in SF. How much would someone be willing to pay for a black car, how many are there and how much does Uber get out of it?
Then how big is that market for the US? Then how big is it for the world?
The trick here is then to ask how you would measure the market if they went after taxis — which dramatically expands the market size.

He adds…

It strikes me that the fear for most of your audience is that the math sounds more intimidating than it actually is — we aren’t talking about figuring out the area under the demand curve but just basic multiplication.

Printed with permission, natch.