The investor is usually looking for the “next big thing” or industrial / specialty product. This means that your market needs to grow at least double-digit.
6 min read
The opinions of the employees of You are personal.
By José Luis Cimental, Project Analyst at AngelHub
As we discussed in the previous columns, there are 5 investment traits that primarily make an angel investor decide whether to invest or not. Today we’re going to look at the importance of having the right definition of Size of your market.
The importance of this process lies in two main points: First, analyze whether the market you are trying to enter is large enough for the investor to get a good return.In the world of venture capital and angel investing, the desired rate of return is at least 10x. So your overall market must be big enough to generate significant sales and growth.Second, the investor often seeks that “The next big thing” Or next industry / special product; This means that your market needs to grow at least double digits as it wants to invest in what will grow strongly in the years to come, not in oil, for example. The most common method used in the ecosystem is TAM, SAM, and SOM. Let us talk about that:
Total Possible Market or TAM (for the acronym in English)refers to the entire existing market for the product you wish to offer, i.e. any person or company who would buy your product or service worldwide, provided there is no competition or no productive restriction. To determine this, you can add the sales of all companies that process similar products to yours or use market studies that report total value. If you don’t have access to this information and / or your product doesn’t have direct competition, the easiest way to achieve your TAM is to multiply the total potential number of customers by the price of your product.Your TAM must be at least a billion dollars.
Once you have your TAM, We have to go to the Market Available to Serve or SAM (for its acronym in English). This point relates to what part of your TAM you will be focusing on to accommodate your strategy. It is impossible to attack 100% of the market. You must therefore define which customer segment you want to serve (gender, age, which socio-economic level, etc.), which sales channel you use and which region you are in.
After all, we have to achieve thatMarket to Serve Obtainable or SOM (for the acronym in English)This is the part of the SAM that you can really serve, taking into account your direct and indirect competence, the resources available to you and your production capacities. Even if you’ve already defined your target customer, it’s unrealistic to assume that you can capture them all right away. Hence, it is necessary to make another filter on the character and land them on what you can attack in the short and medium term.
It is crucial that you avoid using unrealistic assumptions and numbers and instead turn to serious sources of information for the process (reports, papers, articles, reports, market studies, etc.) as this will give you credibility with investors as a serious entrepreneur who are prepared and aware of their competitive environment and enable them to evaluate the attractiveness of the market that you want to enter.
Let’s do a simple example:
- Imagine you have a startup that offers a cybersecurity solution for financial institutions. Cyber security is a trillion dollar problem, but be careful, the size of the problem is not your TAM. To define this in this example, you would need to check the number of financial institutions in the world that could buy your solution, or else get the number from a Financial Institutions Cyber Security Market report. Let’s say you get the number from a study and it turns out to be $ 27 trillion.
- It doesn’t mean you’re going to sell this, this is your TAM. There are too many financial institutions now. Are you going to sell to everyone? (Commercial banks, brokers, sofomes, leasing companies) What geography will you focus on? Once you have analyzed it, you decide that your solution is ideal for Sofomes in Mexico because you have previously tested your solution there. If you do your further research, you will know the total number of Sofomes in Mexico and multiply it by the average cybersecurity spending you received in a technical article on the subject that comes to a figure of $ 100 million. This is your SAM.
- In order to reach your SOM, you need to take into account that you are not the only company offering solutions of this nature and that you do not have the necessary contacts to reach the total number of Sofomes in the short term. To do this, you choose to focus on the CDMX and run a competitive benchmark to understand how the market is divided. Given the number of Sofomes in the area, some competitive sales you’ve identified, and your own service skills, determine your SAM at $ 5 million.
This is a clear, realistic, and workable example of your market that is well seen by investors when looking to raise capital. Be careful, TAM / SAM / SOM is not static, markets grow and shrink. See SAM as your goal in the medium term, but the whole methodology needs to be updated regularly.