Market Size Matters: Why TAM, SAM, and SOM Could Make or Break Your Startup

Let's start with a sobering truth: your brilliant idea—the one keeping you up at night, the one you've mortgaged your house for—might be addressing a market so small that even wild success would look like failure on paper. I've been there, furiously scribbling projected revenue figures based on capturing "just 1% of the market," only to discover later that my "market" was actually the size of a modest wedding reception. Awkward.

The Holy Trinity of Market Sizing: TAM, SAM, and SOM

These three innocent-looking acronyms have crushed more founder dreams than a sudden algorithm change. Total Addressable Market (TAM), Serviceable Available Market (SAM), and Serviceable Obtainable Market (SOM) are the business equivalent of "swipe right, match, actually date"—a progressively narrowing funnel of reality that separates the dreamers from the doers.

TAM is the entire universe of potential customers for your product. It's the "If everyone who could theoretically use this, did use this" number. It's the number that makes investors raise their eyebrows with interest and the one founders cling to when justifying their insane valuation. But it's also the least useful of the three, because unless you're Google or Amazon, you're not capturing the entire market. (And even they haven't, though don't tell them that—it'll hurt their feelings).

SAM narrows things down to the segment you can realistically target with your business model and distribution channels. It's your TAM after it's been through a reality filter. "Everyone in the world who might want artisanal coffee" becomes "coffee drinkers in urban centres within your distribution range who are willing to pay £5 for a cup of something special."

SOM is the brutally honest friend of the trio. It represents what you can realistically capture in the next 3-5 years given your resources, competition, and barriers to entry. It's the difference between "we're disrupting the £50 billion pet food industry" and "we might capture £2 million in premium dog treats in the Greater Manchester area."

When Founders Get Market Sizing Wrong (And Why It Matters)

Having experienced the stomach-churning reality of a market that wasn't big enough, I can tell you that miscalculating these numbers isn't just an academic mistake—it's existential. Here's the ugly truth: investors don't just want to know if your idea is good; they want to know if it's big enough to justify their time and capital.

The classic founder error is to start with a solution and then frantically search for a problem big enough to match it. According to the Bureau of Labor Statistics, over 20% of small businesses fail within their first year, and nearly two-thirds don't survive a full decade, often because they overestimate revenue and fail to account for necessary operational expenses. "I've built an app that counts how many times you blink per day. Surely there's a massive market for that?" (Spoiler: there isn't. I checked.) This is where determining if a problem is actually worth solving becomes crucial.

The market size calculation isn't just investor fodder—it's your business navigation system. With a clear-eyed view of your TAM, SAM, and SOM, you can make rational decisions about everything from how much to raise to whether you should even be building this business in the first place.

How to Calculate TAM, SAM, and SOM Without Deluding Yourself

There are two primary approaches to calculating these metrics: the top-down approach (starting with industry-level data and narrowing) and the bottom-up approach (starting with unit economics and scaling up). The top-down approach is quicker but often wildly optimistic. The bottom-up approach takes more work but tends to be more realistic—and thus more useful for actual business planning.

Here's how to approach market sizing without falling prey to founder self-delusion:

• Start with your TAM by finding credible industry reports (not the one that gives you the biggest number, the one that's most accurate).
• Calculate your SAM by identifying specific demographics, geographies, and segments you can actually reach with your resources.
• Estimate your SOM by analyzing your competitors' market share, your capacity constraints, and realistic adoption rates.
• Now take your SOM estimate and cut it in half. That's your realistic year one target.
• Test your assumptions by running small experiments before scaling—a £500 ad spend can tell you a lot about conversion rates before you commit to a £50,000 campaign.

The bottom-up approach is particularly sobering but valuable. Start with: "How many customers can we realistically acquire per month? How much will they spend? How long will they stay?" Then multiply out. The number will probably be depressingly small compared to your TAM, but it will be honest. And honesty, while occasionally painful in the short term, tends to keep you from walking off cliffs in the long term.

The Investor Perspective: What They're Really Looking For

Let's peel back the curtain on what investors are thinking when they ask about market size. They're not just testing if you understand the concept; they're evaluating whether your business is venture-scale or better suited to being a lifestyle business (which, by the way, can be a perfectly wonderful thing—just not for venture capital).

For most venture funds to achieve their target returns, they need companies that can hit £100 million in revenue within 5-7 years. Working backwards, that typically requires a TAM of at least £1 billion. If your numbers don't support that trajectory, you'll likely hear polite rejections about "fit" rather than outright statements that your market is too small.

But here's the thing—a smaller market isn't necessarily a death sentence for your business idea. It just means you need to be thoughtful about the type of capital you raise (if any) and the growth expectations you set. Some of the most profitable, sustainable businesses operate in modest-sized markets where they can establish dominance without attracting the attention of giants who would crush them.

The Art of Expanding Your Market Size (Without Lying)

What if you run the numbers and discover your market is smaller than you'd hoped? Before you throw in the towel, consider these legitimate strategies for expanding your market definition:

• Identify adjacent markets your product could naturally expand into after establishing your beachhead.
• Look for emerging trends that could dramatically increase your target market (but be prepared to defend your growth assumptions).
• Consider how you might vertically integrate to capture more value from your existing customers.
• Examine international expansion opportunities and their realistic timelines.
• Explore product line extensions that could increase your share of wallet from existing customers.

The key here is intellectual honesty. There's a fine line between strategic vision and delusion. Expanding from "premium dog treats in Manchester" to "premium pet food across the UK" might be reasonable. Expanding to "all pet products globally" probably isn't, unless you've got a few billion in the bank already.

When a Small Market Might Actually Be Your Friend

Here's a counter-intuitive bit of wisdom: sometimes a smaller market can be advantageous, particularly in the early days. A focused beachhead market allows you to:

Build a product that deeply satisfies a specific user rather than superficially pleasing many.

Establish dominance in a niche before expanding outward (the Amazon strategy—they sold books before they sold everything).

Fly under the radar of potential competitors who might be eyeing the same space.

Create a passionate community of users who become evangelists for your brand.

The trick is distinguishing between a small market that's a stepping stone to something bigger and a small market that's just... small. The former is a strategic choice; the latter is a limitation you need to acknowledge in your business model.

From Theory to Practice: Putting Market Size Analysis to Work

Understanding your market size isn't a one-time exercise to please investors; it should inform your entire business strategy. Here's how to put your market analysis to work:

• Use your SOM to create realistic sales forecasts and cash flow projections that won't leave you stranded.
• Align your hiring plans with market opportunity—don't build a team for £10 million in revenue when your market only supports £2 million.
• Determine appropriate marketing spend based on customer acquisition costs and market potential.
• Identify the inflection points where you'll need to expand beyond your initial market to maintain growth.
• Set appropriate expectations with your team, investors, and yourself about what success looks like at different stages.

I've seen too many founders build teams, office spaces, and cost structures for businesses ten times their actual size, burning through cash at an alarming rate because they confused TAM with actual achievable revenue. Don't be that founder. Your future self (and bank account) will thank you.

The Balancing Act: Ambition vs. Reality

There's a necessary tension in entrepreneurship between wild ambition and cold reality. The most successful founders I know maintain both perspectives simultaneously—they dream big enough to inspire but plan pragmatically enough to survive.

Your TAM represents the dream; your SOM represents the plan. Both matter. Ignoring either leads to problems: too much focus on TAM creates castles in the air; too much focus on SOM can constrain your vision unnecessarily.

The founder's journey is ultimately about expanding the gap between what seems possible today and what becomes possible tomorrow. Understanding your market sizing isn't about limiting your ambition—it's about sequencing it appropriately so you live to fight another day.

When I look back at my own business failures, many stemmed from a fundamental mismatch between the market opportunity and the resources required to capture it. I built a battleship to capture a pond. The pond might have been lovely, but it couldn't support the vessel I'd constructed to navigate it.

Beyond the Numbers: The Human Side of Market Sizing

There's an emotional component to market sizing that deserves acknowledgment. For many founders, the size of the opportunity is tied to their sense of purpose and potential impact. Learning that your addressable market is smaller than you thought can feel like a diminishment of your vision.

But here's the truth I've come to embrace: impact isn't always correlated with market size. Consumer behavior has permanently shifted post-pandemic, defined by a "bring-it-to-me" mindset and unexpected trade-offs across categories. Food delivery's share of global food service spending skyrocketed from 9% in 2019 to 21% in 2024, proving that the demand for convenience has become a powerful and lasting economic force, according to McKinsey. This shift shows how some of the most meaningful businesses solve acute problems for smaller groups of people rather than minor inconveniences for massive populations.

Billion-dollar ideas are built on problem-solving, not brainstorming, and patterns in complaints, frustrations, or inefficiencies represent growth gold. As Forbes notes, personal frustration is often the seed of top ventures. The question isn't just "How big is this market?" but "How important is this problem to the people experiencing it?" A £100 million market where you're solving a critical need might be more valuable—both financially and spiritually—than a £1 billion market where you're addressing a trivial want. This is where finding customer pain points becomes invaluable.

The goal is finding the sweet spot: a problem important enough to solve, for a market large enough to sustain the business you want to build.

As founders, we're perpetually balancing on the knife's edge between blind optimism and crushing realism. TAM, SAM, and SOM aren't just investor checkboxes—they're the guardrails that keep us from veering too far in either direction. So calculate them honestly, update them regularly, and use them as the powerful planning tools they are. Your market might be smaller than you initially hoped, but if you build the right-sized vessel to navigate it, you might just find it's exactly the journey you were meant to take.