How would you go about estimating market size for a horizontal saas company?
Trying to do an informal case study analysis for an early stage start up in preparing an investment memo. However I am getting stuck on thinking through tam for a software company like salesforce, shopify, or what not... like isnt their total customers any business out there that would need their services? How would you provide a focused approach to doing this as opposed to just figuring out the total number of SMEs and large enterprises in US? Feel like even if thats the case it would be really hard to show I truly understand the market as im sure these companies have heavier concentrations in some industries vs others. For example shopify caters to fashion and creatives or small businesses....
Tldr- how to calculate tam for horizontal saas companies that is believable?
following
Following
In your TAM calcuation, you need to first find number of SMEs and enteprises (US labor dept / bureau has these numbers for the US). Then you need to use heavy/analyst discounts to make sure that you are narrowing the focus down to ensure your TAM is realistic, this can be anywhere from 25 - 50 - 75 - 85% that's your call on the market size/opportunity/reach. Then you use ACV (average customer value /contract) to multiply the discounted number of potential SMEs and enterprise clients. Sum that up and that should give you a rough TAM calculation. There are a lot of nuances that go into this calculation and the more you can narrow down your market, the more realistic your calcuation is going to be. Generally speaking, TAM opportunities over $1bn are preferable but that doesn't mean it's has to be above that. My fund has even invested in firms with just $250M TAM but that was a vertical SaaS and users absolutely loved the product and growth was great!
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