How to determine the right funding amount for your startup

When it comes to raising funds for a startup, determining the right amount can be a challenge. Investors want to see a well-researched and data-backed projection of the potential market size and the startup’s share of that market.

Asking for too little can lead to insufficient resources, while asking for too much can lead to dilution of ownership or unrealistic expectations from investors.

In order to ask for the right funding amount, it is important to have a clear understanding of the Total Addressable Market (TAM), Serviceable Obtainable Market (SOM), and Serviceable Available Market (SAM) of the business.

TAM, SOM, and SAM are important metrics that investors look at when evaluating a startup’s potential for growth and profitability. These metrics provide a clear picture of the market opportunity for the startup and the potential size of the business.

Total Addressable Market (TAM)

The Total Addressable Market (TAM) is the total market demand for a product or service. It represents the entire market for a product or service, regardless of the competition. This is the total number of potential customers for the product or service, assuming that there are no competitors in the market.

For example, if a startup is launching a new food delivery app in a city, the TAM would be the total number of people in the city who could potentially use the app to order food, regardless of the competition.

TAM is important because it helps startups understand the potential size of their market and the demand for their product or service. It is also an important metric for investors, as it helps them evaluate the growth potential of the business.

Serviceable Obtainable Market (SOM)

The Serviceable Obtainable Market (SOM) is the portion of the TAM that a startup can realistically target and serve. It represents the market share that the startup can realistically capture, given the competition and the resources available.

For example, if a startup is launching a new food delivery app in a city where there are already several established competitors, the SOM would be the portion of the TAM that the startup can realistically capture, given the competition.

SOM is important because it helps startups understand the realistic potential size of their market and the demand for their product or service, given the competition and the resources available. It is also an important metric for investors, as it helps them evaluate the scalability of the business.

Serviceable Available Market (SAM)

The Serviceable Available Market (SAM) is the portion of the SOM that a startup can realistically reach, given its marketing and distribution channels. It represents the market share that the startup can realistically capture, given its marketing and distribution strategy.

For example, if a startup is launching a new food delivery app in a city where there are already several established competitors, and the startup plans to target only a specific demographic, such as students, the SAM would be the portion of the SOM that the startup can realistically reach, given its marketing and distribution strategy.

SAM is important because it helps startups understand the realistic potential size of their market and the demand for their product or service, given their marketing and distribution strategy. It is also an important metric for investors, as it helps them evaluate the effectiveness of the startup’s marketing and distribution strategy.

In addition to understanding TAM, SOM, and SAM, startups can take the following steps to ensure they are asking for the right amount of funding:

Develop a clear business plan: A well-developed business plan outlines the startup’s goals, market analysis, marketing and sales strategies, financial projections, and more. A clear business plan helps startups determine the resources they need to achieve their goals and can provide investors with a comprehensive understanding of the business’s potential.
Conduct thorough research: Startups should conduct thorough research on their target market, competition, and industry trends. This research can provide valuable insights into the potential demand for the product or service, the competition, and the potential barriers to entry.
Determine the funding needed to achieve milestones: Startups should determine the specific milestones they need to achieve and the resources required to achieve them. This can include the cost of product development, marketing, sales, and other expenses.
Consider the startup’s valuation: Startups should consider their valuation when determining the funding amount needed. Asking for too much funding can result in a high valuation that may be difficult to justify in future rounds of funding. On the other hand, asking for too little funding may result in insufficient resources to achieve the startup’s goals.
Consider the investor’s expectations: Startups should consider the investor’s expectations when determining the funding amount needed. Investors may have specific expectations regarding the startup’s growth potential, profitability, and return on investment. Startups should ensure that they have a clear understanding of these expectations and can realistically meet them.

Th writer can be reached via LinkedIn: Daniel Kwabena Owusu, MBA.