tytchme

What Are TAM, SAM, SOM And Why Do They Matter?

April 6, 2018
Venture Capital

If you have been fundraising lately, chances are you heard about these acronyms from Angel Investors or Venture Capitalists. It’s one of the most fundamental pieces of information they need to decide whether it’s worth spending more time on your investment opportunity.

What Do The Acronyms Mean?

Simply put, this is the way investors look at the market you’re in. They are trying to assess whether you will make it big, or remain in a niche segment of the market.

So what do the acronyms stand for?

TAM = Total Available Market

SAM = Serviceable Available Market

SOM = Serviceable Obtainable Market

Think of it as a target: TAM is the larger periphery, while SOM is the bull’s eye.

Let’s Take An Example

If you are developing an app helping drivers locate available parking slots, then TAM are all the drivers in the world.

SAM are the drivers in the areas you are servicing, i.e., the cities for which you have information on parking availability.

SOM is the share of that market that you will eventually capture, taking into account market structure (you may not have information on all the parking spaces in town), competition, and customer usage (some drivers may not use public parking slots).

The Airbnb Illustration

Original pitch decks Airbnb founders used to raise their first round have been published a few years ago.

As you can see, the page is very easy to understand. Airbnb is saying that they hoped to capture 84 million trips over three years, or 15% of the serviceable available market (defined as “Budget & Online Trips”).

No doubt the startup’s founders had to explain why they felt so confident to financial investors they pitched this page to.

Yet, the visually clear rendering, coupled to the efficient research, makes VCs want to know more.

Why Do VCs Care So Much?

Venture capitalists are going after 10x to 100x returns. While they need great teams to create brilliant products and execute on their hypergrowth plan, one critical element is to build large companies.

The most convincing argument for the large-market strategy VCs pursue is made by the legendary Sequoia Capital founder Don Valentine.

Source: Stanford GSB

In this speech to Stanford GSB students, Valentine highlights that Sequoia has always first focused on how promising the market was, not the Founders’ diploma. Sequoia is routinely ranked as the top VC firm in the world, they must be doing something right.

We have always focused on the market: size, dynamics, competition. Because our objective always was to build big companies. – Don Valentine (@sequoia) Click to Tweet

Conclusion

You will most likely find different definitions of TAM-SAM-SOM on the web, but the ultimate goal is the same: educate VCs on your market opportunity, and convince them they should spend more time studying it with you.

Most founders don’t spend enough time researching and analyzing their market, let alone craft a clear and concise Market page for their pitch decks.

The TAM-SAM-SOM grid is a good way to communicate the market opportunity to VCs and get a second meeting to go further.