How To Understand and Define Your Market Size Before You Talk to Investors

As a first-time founder, you're navigating new challenges, juggling countless responsibilities, and learning rapidly. Amid this demanding environment, understanding and defining the market size for your product or service is often rushed. Yet, market sizing is more than just another slide in your investor pitch deck—it's foundational for making informed decisions, achieving strategic clarity, getting investor buy-in, and effectively scaling your startup.

As someone who leads research at Forum Ventures’ AI Venture Studio, I work closely with our early-stage founders to define and refine their market sizes. Every month, we evaluate dozens of emerging markets and regularly face investor feedback—so I’ve seen firsthand what resonates, what raises red flags, and how to build a compelling, defensible case.

Before diving into numbers, you need to understand the three core concepts that structure every market sizing exercise: TAM, SAM, and SOM.

Defining TAM, SAM, and SOM

• TAM (Total Addressable Market): Imagine your TAM as the entire potential market—the maximum revenue opportunity available if your product achieved full market penetration. It's your product's complete universe of potential customers.

• SAM (Serviceable Available Market): Your SAM is a realistic portion of the TAM. It's the specific segment of the market you can practically serve at this stage, based on your current resources, team size (even if it's just cofounders), capabilities, and business strategy.

• SOM (Serviceable Obtainable Market): SOM further narrows down your market, focusing on the portion of your SAM you can realistically capture in the short term, considering your current positioning, competitors, and initial go-to-market strategy.

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Why Generic Numbers Fall Short

It's tempting as a busy founder to pull generic market figures quickly from a Google search. However, such numbers often lack precision, fail to reflect your unique market position, and can indicate to investors a lack of deep market understanding. Your market size calculation isn't just about impressing investors with large numbers. It demonstrates your vision is ambitious yet grounded in reality.

Two Methods for Calculating Your Market Size

When determining your market size, two common methods emerge:

1. Top-Down Approach: Begins with broad industry or macroeconomic figures (e.g., from Gartner or IBISWorld) and filters down to your segment based on assumptions like geography or adoption rate. It’s quick but often lacks specificity and can feel disconnected from your actual business.

2. Bottom-Up Approach: Builds from concrete inputs—your pricing model, customer assumptions, and go-to-market strategy—and scales up. At its core, this method uses a simple formula:

Market Size = Annual Contract Value (ACV) × Number of Potential Customers

This approach grounds your TAM, SAM, and SOM in how your business actually operates, making it far more credible to investors.

While the top-down method can serve as a rough directional check, bottom-up should be your primary approach when presenting to investors. It’s not just more practical—it’s the most credible way to communicate your opportunity.

Key Questions to Refine Your Market Sizing

Effectively sizing your market requires careful consideration of various factors. Before diving into detailed calculations or examples, there are two areas you need to have a strong grasp of: your customer type and your revenue model. While you don’t need to know these things exactly at this point, asking the following questions will guide your analysis and ensure your market sizing accurately reflects the realities of your startup's context:

Customer Type:

• Who precisely makes up your customer base, and where are they located geographically?
• Typically, how many users within an organization will use your product?
• Will your initial launch be regional, local, or global?
• Who exactly are you targeting as your Initial Customer Profile (ICP)? Here is Forum’s comprehensive guide to building out your ICP. 
• What's the current technology adoption rate among your intended customer base?

‍Revenue:

• What is your ARPU (Average Revenue per User) or ACV (Annual Contract Value)?
• How frequently will customers purchase your product, and what's the average transaction value?
• How do your prices compare to your competitors? (Use this for validation rather than as a primary reference.)
• Is your pricing structure per user/month, usage-based, or fixed-rate?

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Bringing It Together: A Practical Example

Once you’ve answered the key questions above; who your customer is and how you plan to make money, you’re ready to apply those inputs to a real-world bottom-up market sizing estimate. Below is a simplified example based on a startup selling AI security agents to small financial institutions:

Scenario: Smaller financial institutions without dedicated cybersecurity teams often rely on generalist engineers to handle security tasks. This creates gaps in expertise, slows response times, and increases the risk of breaches or compliance failures.

Solution: AI agents that handle security workflows alongside existing engineering teams, reducing manual burden and allowing engineers to focus on core priorities.

Clearly Presenting Your Market Size

Now that you’ve worked through the logic behind your numbers, the next step is presenting them in a way that’s clear, credible, and easy for investors to understand. A well-structured market sizing section should include:

• Total number of target accounts
• Your clearly defined ACV
• A breakdown of TAM, SAM, and SOM with realistic market share assumptions

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Here is an example of how to do this visually:

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Final Thoughts

Market sizing isn’t about guessing the biggest number—it’s about demonstrating a clear, well-reasoned understanding of your opportunity. When you ground your TAM, SAM, and SOM in real data, thoughtful assumptions, and your current stage, you not only earn investor trust—you also give yourself a strategic edge in building the business.