Vision, Mission & Market Sizing: Often Overlooked Yet Critical (Part 3)

One of the most eyebrow-raising sections in many pitch decks is market sizing. It is hard to find a well-thought-through market sizing in early-stage start-ups. Almost every opportunity I come across claims to target a market worth hundreds of billions of dollars, but few actually make sense. This begs the question: Does the founder truly grasp the real potential of their market?

For instance, if your startup manufactures cell phones, is the entire global cell phone market your maximum potential? If you're tempted to say “Yes,” think about this: if your startup makes hats for women, does your market size include every woman with a head? Suddenly, that earlier “Yes” doesn’t seem so clear, does it? The real answer is “Yes and No.” Market sizing isn’t black and white. It needs context—the founder's vision and product specifics—to truly gauge potential.

Now, as a founder, if you don't grasp this aspect and can't clearly articulate a sensible market sizing, you leave it to the investors to form their own opinions about market size. Each investor brings biases and may naturally view the opportunity you're excited about with skepticism.

Consider this story from Paul Graham’s blog (Co-founder of Y Combinator), where he shares emails with Fred Wilson on investing in Airbnb. It’s interesting to note how Fred Wilson and his team struggled with market sizing. Eventually, Fred Wilson passed on investing in Airbnb, a decision that became legendary as Airbnb went on to achieve massive success. As a reminder of this missed opportunity, Fred Wilson keeps a cereal box in his VC firm’s conference room.

These stories illustrate a crucial point: As a founder, you need to have an upper hand in accurately assessing market potential and clearly articulating it to investors.

How Do You Assess the Market Size?

TAM-SAM-SOM Framework is a commonly accepted framework for market sizing. This framework was developed as part of broader fields of business and marketing strategy. But VCs adopted this framework, and as a result, it has pretty much become the standard for assessing a startup’s potential market size.

TAM-SAM-SOM Framework:

TAM (Total Available / Addressable Market):

This is the total demand for the product / service. This is the 100% market share and serves as a broad indicator of how big the opportunity could be. This includes all potential customers and revenue opportunities. The global market size in short.

When calculating the TAM, discard any factors that could prevent your start-up from achieving this state.The goal is to gauge the overall magnitude of the opportunity, considering all participants in pursuit of it. You can ignore constraints, such as competition, production constraints, logistical constraints, language barriers, geographical barriers, etc. when calculating the TAM.

SAM (Serviceable Available / Addressable Market):

This represents the segment of the TAM that your product or service can target based on its specific capabilities. Here, factors such as your business model, geographical reach, and practical constraints are considered. SAM reflects the portion of the market that would realistically purchase your product (or a competitor's).

SAM provides a more realistic estimate of market size compared to TAM because it excludes inaccessible or irrelevant market segments.

SOM (Serviceable Obtainable Market):

SOM is a subset of SAM. SOM is that part of the market that you can realistically capture, given your current resources, competition, and market conditions. SOM is the real estimate of what is possible in the next 24 to 36 months.

In simpler words:

TAM: Who all are out there in this problem space looking different products & solutions?

SAM: Who all will like to buy a product similar to what we are thinking?

SOM: Who will buy the product that we have designed and from us?

 And in short, the above 3 stands for Available, Addressable & Obtainable market

Vision, Mission & Market Sizing

Now returning to my earlier question, if your start-up manufactures cell phones, is the TAM all the global cell phone purchases?

As mentioned earlier, it's challenging to provide a binary answer without knowing more about the startup. This is where the interplay of Vision, Mission, and Market Sizing comes into play. In Part 1 of this series, I emphasized the importance of Vision and how to craft a compelling one. Following that, in Part 2, we delved into Mission Statements.

To recap, Vision represents the change you aim to bring to the world. It's an inspirational, forward-looking, customer-centric statement that provides stakeholders with clarity on why you started and where you envision yourself in the long run. On the other hand, Mission focuses on the present. Its purpose is to guide stakeholders on core activities, define your target customers, and outline strategies to gain market share.

If you have a well-articulated vision and well-defined mission, then market sizing is fairly straightforward and together. the three will rhyme the same tune.

If we take the example of the cell phone market, if your startup’s goal is to be in the cell phone manufacturer business catering to all sorts of customers, then the TAM would be all global cell phone purchases. But if your startup’s goal is to operate as a premium cell phone manufacturer and use it to acquire customers with high paying capacity to then build a slew of products for these customers, then your TAM will be based on purchasers of high-end global cell phones, not all users. Because in your vision you don’t see wanting to operate in any other space but high-end. And SAM in this case would be Indian high-end mobile purchases (if India is the market you are looking to initially cater to). And SOM would be what percentage of this market you can realistically achieve given your production & sales capacity and capital availability for expansion.

And that is the reason in Part 2 of this series on Mission Statement, I gave the below as one of the possible formats to articulate your mission statements. This then ties in your vision and market sizing into a realistic & coherent strategy that investors can easily visualize.

Mission: To empower middle-income families in the [Location] with affordable and personalized financial planning tools, targeting a [•] billion serviceable market and aiming to secure a [•] % market share within [•] years

You may note that the first part of the mission is tied to the vision, and the latter half of the mission is not only tied to SAM and SOM but also mentions a clear timeline to achieve the mission. This is how you link Vision, Mission, and Market Sizing.

Conclusion

In conclusion, understanding and effectively communicating market size is crucial for any startup seeking investment. The TAM-SAM-SOM framework offers a structured approach to dissect and present market potential, ensuring that founders and investors are on the same page.

However, by aligning market sizing with your vision and mission, you provide a realistic and compelling narrative while building credibility with investors. Remember, a well-defined market opportunity is not just about numbers; it's about showcasing a clear path to capturing a meaningful share of that market. As a founder, your ability to accurately assess and articulate market potential can significantly influence investor confidence and, ultimately, the success of your startup.

So, take the time to dive deep into your market analysis, understand the nuances, and present a well-rounded view that underscores your startup's potential to thrive and grow. Additionally, remember that VCs are inclined to see an optimistic and exciting future… they belong to the class of people willing to look at a glass half full. And if they are not confident about your market potential, then either you are pursuing the wrong idea or you have not been able to assess and articulate the market sizing.

Stay tuned for the Annexure

With this, we conclude the 3 part series on Vision, Mission & Market Sizing. I will soon be posting an article on some common mistakes founders make in Market Sizing.