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vc-market-sizing

Bottom-up market sizing (TAM/SAM/SOM) for venture capital analysis. Use when: (1) sizing a startup's market opportunity, (2) calculating TAM/SAM/SOM for an investment memo or due diligence, (3) validating a company's market size claims, (4) comparing bottom-up vs top-down market estimates, (5) building ARPC-based revenue models by customer segment. Produces structured, source-backed market sizing with segment-level ARPC decomposition and top-down sanity check.

personAuthor: jakexiaohubgithub
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VC Market Sizing

Bottom-up market sizing using the ARPC decomposition method, validated by a top-down sanity check. Designed for early-stage VC analysis (Seed through Series B).

Core Formula

Market Size = Customer Count x ARPC x Penetration Rate

Where ARPC (Annual Revenue Per Customer) is decomposed as:

ARPC = Volume Per Customer (annual) x Price Per Unit

Customer Count is NEVER part of the ARPC formula. All values in USD, annualized.

Workflow

Step 1: Classify the Business Model

Determine the primary revenue model from available evidence (pricing pages, pitch decks, meeting notes). Select the ARPC formula that matches:

| Model | ARPC Formula | Example | |-------|-------------|---------| | Subscription | Months x $/month | 12 x $100/mo = $1,200/yr | | Seat-based | Seats/customer x $/seat/yr | 15 seats x $120/seat = $1,800/yr | | Transaction | Transactions/yr x $/txn | 1,200 txns x $5 = $6,000/yr | | Take-rate | GMV/customer/yr x rate | $50K GMV x 3% = $1,500/yr | | Usage | Units/yr x $/unit | 18,250 API calls x $0.01 = $182/yr | | Hybrid | Stream 1 ARPC + Stream 2 ARPC + ... | $1,200 sub + $6,000 txn = $7,200/yr |

For monthly pricing, Volume = 12 months (not "1 subscription"). For annual pricing, Volume = 1.

Step 2: Segment Customers

Create 3-8 mutually exclusive customer segments based on industry, company size, use case, or geography.

Rules:

  • Classify each segment as Target (can use existing product) or Adjacent (requires new capabilities)
  • Max 20% overlap between any two segments
  • Never count service providers AND their clients as separate segments — pick the primary payer
  • Each segment may have different revenue streams

Step 3: Research Data Points

For each segment, research:

| Data Point | Source Priority | |------------|---------------| | TAM customer count | Industry reports, government census, trade associations | | SAM customer count | Subset of TAM within company's current operating markets | | Volume per customer | Company data, industry benchmarks, competitor metrics | | Pricing | Company pricing page, competitor pricing, meeting notes | | SAM penetration | Market research, adoption studies (typically 50-100%) | | SOM penetration | Competitive analysis, market entry benchmarks (typically 5-15%) |

Never derive customer counts from market size reports (circular logic). Always cite sources.

Step 4: Calculate ARPC Per Segment

Single revenue stream:

Segment ARPC = Volume/Customer/Year x Price/Unit

Hybrid (multiple streams):

Stream 1 ARPC = Volume_1 x Price_1
Stream 2 ARPC = Volume_2 x Price_2
Segment ARPC = Stream 1 + Stream 2

Validate: Volume units x Price units must cancel to $/year.

Step 5: Calculate Market Sizes

For each segment:

TAM = TAM_Customers x ARPC
SAM = SAM_Customers x ARPC x SAM_Penetration
SOM = SAM_Customers x ARPC x SOM_Penetration

Adjacent segments: calculate TAM only (no SAM/SOM in totals).

Sum across all target segments for totals.

Step 6: Top-Down Sanity Check

Run a parallel top-down estimate:

TAM = Industry Revenue x Category Spending Rate
SAM = TAM x Segment Filter x Geographic Filter

Compare bottom-up vs top-down. If they differ by more than 3x, investigate:

  • Bottom-up ARPC may be unrealistic
  • Customer counts may be inflated
  • Geographic scope may be misaligned

Report: Overestimate / Adequate / Underestimate with confidence level.

Output Format

Present results as three tables:

Table 1: ARPC Breakdown

| Segment | Type | Revenue Stream | Volume/Cust/Yr | Price | ARPC | |---------|------|---------------|----------------|-------|------|

Table 2: Market Size

| Segment | Type | ARPC | TAM Customers | TAM ($) | SAM Customers | SAM Pen. | SAM ($) | SOM Pen. | SOM ($) | |---------|------|------|--------------|---------|--------------|----------|---------|----------|---------|

Table 3: Sources & Assumptions

| Data Point | Value | Source | Notes | |-----------|-------|--------|-------|

End with a summary:

TAM: $XXM    SAM: $XXM    SOM: $XXM
Top-down check: [Adequate/Overestimate/Underestimate] (confidence: High/Med/Low)

Quality Checklist

Before finalizing, verify:

  • [ ] All values in USD, annualized
  • [ ] ARPC = Volume x Price (customer count NOT in ARPC)
  • [ ] No segment overlap > 20%
  • [ ] Customer counts from direct sources (not derived from market size)
  • [ ] Each revenue stream calculated separately
  • [ ] Adjacent segments have TAM only (no SAM/SOM in totals)
  • [ ] Every number has a cited source
  • [ ] Top-down sanity check completed

Example: B2B SaaS Expense Management

Business model: Seat-based subscription + transaction fee (hybrid)

Segments:

  • Target: Mid-market companies (100-1,000 employees) in the US
  • Adjacent: Enterprise (1,000+ employees) in the US

ARPC (Mid-market):

  • Stream 1 (Subscription): 45 seats x $8/seat/mo x 12 = $4,320/yr
  • Stream 2 (Transaction fee): 2,400 expense reports/yr x $1.50/report = $3,600/yr
  • Total ARPC: $4,320 + $3,600 = $7,920/yr

Market size (Mid-market):

  • TAM: 85,000 companies x $7,920 = $673M
  • SAM: 42,000 companies x $7,920 x 80% = $266M
  • SOM: 42,000 companies x $7,920 x 8% = $27M

Top-down check: US expense management software market ~$3.2B (Gartner 2025). Mid-market = ~25% = $800M. Bottom-up TAM of $673M is within range. Adequate (High confidence).