TAMs, SAMs, and SOMs. How to catch fish you can't reach
When sizing a market, we keep running into these terms: TAM, SAM, SOM. What do they actually mean for an entrepreneur and an investor?
Let's skip the textbook translation and picture the market as an ocean — and you're the fisherman. TAM — the entire ocean. SAM — the waters your boat can actually reach. SOM — how much fish you can realistically catch, given your time, gear, the weather, and all the other fishermen 🎣
Okay. How do you estimate it? There are two main approaches: top-down and bottom-up.
1️⃣ Top-down: Scene: Tel Aviv, evening, getting chilly, a cozy café, a beer with a friend. ➡️ An AI business idea drops out of nowhere! BAM! Then Google/ChatGPT tells you: "The global AI solutions market will reach $1.8 trillion by 2030." ➡️ What do we think? "If our startup grabs even a tiny 0.1%, our revenue is $1.8 billion..." That's it, champagne for everyone! 🍾 ➡️ Write that in a business plan or say it in a pitch, and it's an epic fail.
At that exact moment, the bank analyst or angel investor has mentally closed your deck. Bye!!!!
"We'll just take 1% of a huge market" is the classic top-down sizing trap. But why?
This approach has three fundamental flaws: 1. The macro numbers aren't yours. That pie is already sliced up and eaten by corporate giants with billion-dollar budgets (marketing and lobbying). 2. Localization and regulation. The global market may be growing, but if your software needs GDPR compliance in Europe, or has to plug into a specific payment system in Israel, or even support עברית as a language — your real market shrinks by hundreds or thousands of times. 3. No distribution in the formula. The top-down method assumes customers materialize out of thin air (just because the product exists 😂) and ignores the throughput of your sales channels (even the ones you're only planning).
2️⃣ Bottom-up: Back down to earth
Instead of slicing an abstract global pie, we start building our own — from a single invoice and a single customer. Say it's an AI service that automates audits for local coffee shops and bakeries.
Scene two: Tel Aviv, hot morning, 7 cups of coffee, a smoking-hot laptop.
➡️ Our sales team is 2 managers and one cat. A manager can physically make, let's say, 20 quality cold calls a day. ➡️ Per month (22 working days), two managers can reach: 2 × 20 × 22 = 880 contacts. Average conversion 2%. So we can win 17 new clients a month. Over a year — around 200 coffee shops. ➡️ At a $500/year subscription, our real first-year SOM is $100,000.
Oops. Top-down painted $1.8B in revenue. Bottom-up showed just $100K.
Catch me a big one…
Wrapping up. You'll only earn the understanding of an investor or a banker with a bottom-up market estimate. And most importantly — don't let yourself be lulled by the numbers of global markets.
#methodology