Your AI market size is probably a lie.
I know, I know. We all want to believe we're building the next multi-trillion dollar company. We see the hockey stick graphs, the breathless headlines about the AI revolution, and we think, "that's me." But here's a secret from someone who's been in the trenches, built and sold two companies, and invested in over 200 startups including some of the biggest names in AI like Anthropic and OpenAI: VCs can smell inflated numbers a mile away.
I learned this the hard way. With my first company, MovieLaLa, we were obsessed with the big numbers. We talked about the entire global entertainment market. It sounded impressive, but it wasn't real. It wasn't until we got brutally honest about who our actual customers were that we started to gain traction. We were acquired by Gfycat, not because we had a trillion-dollar market, but because we had a real, defensible niche.
With my next company, RemoteTeam, we took a different approach. We went from $0 to a successful acquisition by Gusto in just 18 months. We didn't do it by pretending to be everything to everyone. We did it by being intellectually honest about our market. And that's what I want to talk to you about today. I'm going to show you how to calculate your Total Addressable Market (TAM), Serviceable Addressable Market (SAM), and Serviceable Obtainable Market (SOM) in a way that builds trust with investors and actually helps you build a better business.
Ditch the Top-Down Fantasy: Why TAM is a Trap
Most founders start with a top-down TAM analysis. They take a huge market number from a Gartner report, say, the “$1.5 trillion global AI market,” and then claim they’ll capture 1% of it. That’s a $15 billion company, right? Wrong. This is a lazy, and frankly, dishonest way to look at your market. It tells investors nothing about your actual strategy or your ability to execute.
Think about it. Are you really going to capture 1% of the entire AI market? Are you going to compete with Google, Microsoft, and every other startup in every single vertical? Of course not. Your real market is much smaller, and that's a good thing. A smaller, well-defined market is a market you can actually win.
When we were building RemoteTeam, we could have said our TAM was the entire global workforce. After all, any company could use our tools, right? But that would have been a fantasy. Instead, we focused on a much smaller, more specific market: tech companies with 50-500 employees that were already hiring remotely. That was a market we could understand, a market we could reach, and a market we could win.
So, how do you do it right? You start from the bottom up.
The Bottom-Up Build: Finding Your Real Market (SAM & SOM)
Instead of starting with a fantasy number, you need to build your market from the ground up. This is your Serviceable Addressable Market (SAM) and your Serviceable Obtainable Market (SOM).
- SAM (Serviceable Addressable Market): This is the segment of the TAM that you can actually reach with your product and sales channels. It’s your real addressable market.
- SOM (Serviceable Obtainable Market): This is the portion of the SAM that you can realistically capture in the short term, usually the first 3-5 years.
Let's go back to the RemoteTeam example. Our top-down TAM was massive and useless. Our bottom-up analysis looked like this:
Identify the Customer Profile: We started by defining our ideal customer. For us, it was a US-based tech company with 50-500 employees that was actively hiring remote workers. We weren't going after giant enterprises or tiny startups. We had a specific target.
Count the Customers: We used LinkedIn Sales Navigator, Crunchbase, and other tools to count the number of companies that fit this profile. We found there were about 30,000 such companies in the United States.
Calculate the Price Point: We had a tiered pricing model, but our average annual contract value (ACV) was around $5,000.
Now we can do some real math:
- SAM: 30,000 companies * $5,000 ACV = $150 Million
See the difference? We went from a meaningless trillion-dollar number to a very real, very specific $150 million market. This is a number an investor can believe in. It shows you've done your homework and you have a real plan.
But we didn't stop there. We knew we couldn't capture that entire $150 million market overnight. That's where the SOM comes in.
We figured that with our initial team and resources, we could realistically capture about 2% of that market in our first two years.
- SOM: $150 Million SAM * 2% = $3 Million ARR
This became our north star. It was an ambitious but achievable goal. It focused our sales and marketing efforts. And because it was based on real data, it gave us credibility with investors. We didn't just hit that goal; we surpassed it, which is what led to our acquisition by Gusto.
Your Market Size is a Story, Not Just a Number
At the end of the day, your market size isn't just a number in a pitch deck. It's the story of your company. It's the story of who you serve, how you reach them, and how you're going to win. A top-down, fantasy TAM tells a story of delusion. A bottom-up, intellectually honest SAM and SOM tells a story of a founder who is grounded, strategic, and ready to execute.
I've seen hundreds of pitches as an angel investor. The founders who get my attention aren't the ones with the biggest, most outlandish numbers. They're the ones who have a deep, nuanced understanding of their market. They're the ones who can tell me a believable story about how they're going to build a real business.
So, I challenge you. Throw out the top-down TAM. Get your hands dirty. Do the bottom-up work. It's harder, it's more time-consuming, but it will force you to build a better company. And when you're sitting across from an investor, you won't be selling a fantasy. You'll be selling a plan. And that's a story any investor will want to be a part of.
Frequently Asked Questions
How has this view evolved over time?
My thinking on most topics has changed significantly over the years. Early in my career, I held many conventional views that experience proved wrong. I try to update my beliefs when the evidence changes.
How can I apply this thinking to my own situation?
Start by identifying the core principle behind the opinion, not the specific example. Then ask yourself: does this principle apply to my context? If yes, test it in a small, low-risk way before going all in.
What's the most common pushback you get on this?
People often push back by citing exceptions or edge cases. And they're usually right that exceptions exist. But building a strategy around exceptions rather than patterns is a losing game for most founders.