How to size a market bottom-up so the number means something, instead of the '1% of a $50B market' slide everyone has seen.
12 min read · Level 2
Market sizing is not really about the market. It is a test of whether you think in specifics or in adjectives, and every experienced investor reads it that way. "One percent of a fifty billion dollar market" tells them you have not counted anything. Twelve thousand firms at forty-eight hundred a year tells them you have — and it invites them to argue with a number, which is the conversation you actually want.
TAM — everyone in the world who could conceivably buy this. SAM — the portion you could actually serve, given your product, geography and model. SOM — what you could realistically win in the next few years with your actual resources.
TAM is the least useful and the most quoted. SOM is the one that affects your plan.
Because investors use market size to judge whether the outcome could be large enough, and because a badly-sized market signals that you have not thought carefully about anything else either.
A credible bottom-up number also tells you something: if the honest SOM is $4M a year, that is a fine business and a bad venture bet, and better to know now.
A scheduling tool for logistics firms at $400/month.
Top-down (weak): 'The logistics software market is $18B. If we capture 1%, that is $180M.' Nobody believes this, because 1% is an assumption disguised as modesty.
Bottom-up (credible):
Every number is arguable, which is exactly why it is credible. An investor can push on the 60% figure and you can defend it or revise it. Nobody can argue with '1%'.
First-time founders often inflate the market to seem more attractive, and it has the opposite effect — an experienced investor spots a top-down number instantly and discounts everything else in the deck.
The second mistake: sizing the market for the product you might build in five years rather than the one you are selling now. Size what you actually sell; mention the expansion separately.
How many organisations or people fit your ICP? Use registries, census data, industry bodies, LinkedIn filters — real sources.
Remove those too small, too large, in the wrong geography, or already locked into something. This gives SAM.
Your actual price, not an aspirational enterprise one.
Based on your real channels and capacity. This is SOM and it is the honest number.
Every assumption visible and sourced. The credibility comes from being arguable, not from being large.
Before raising, and when deciding which segment to focus on first.
Do not spend a week on this pre-revenue. A rough bottom-up estimate is enough until you are actually pitching; precision on an unvalidated idea is false comfort.
Airbnb was widely described early on as addressing a tiny market — people willing to sleep in a stranger's spare room. The category as defined at the time genuinely was small. What the sizing missed was that the product changed who was willing to do it, expanding the market rather than capturing a share of it.
Bottom-up sizing describes the market as it is. Be explicit when your bet is that the product changes who counts as a customer — that is a different, harder claim.
Presenting "if we capture just 1% of this market" is one of the best-known tells of an inexperienced pitch. It is an assumption disguised as modesty, and it signals that no customer has been counted. Bottom-up numbers are credible precisely because every assumption in them is visible and arguable.
Build the number from customers and price, cite the source for the customer count, and let people push on it. Arguable beats impressive.
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