Market size in angel investing: What is it, why it matters and how to calculate it?

In 2009, angel investor Peter Thiel made a notable investment in a relatively unknown startup, which is now known as Facebook. Peter Thiel is one of Facebook’s, SpaceX’s, Airbnb’s and LinkedIn’s first investors, the Co-Founder of PayPal and Chairman of Palantir.  

When Facebook first launched, it was primarily focused on connecting college students and it had gained some traction in that niche market. However, Peter Thiel saw Facebook as much more than a college campus social network. What caught Peter Thiel’s attention was not just the product or the team behind Facebook but the enormous market potential it represented. He believed that if Facebook could scale and capture even a small fraction of the global social media market, it could become an immensely valuable company.

Based on this market size and growth potential assessment, Peter Thiel invested $500,000 in Facebook as an angel investor. His investment helped fuel the company’s expansion and allowed it to attract further investments from venture capitalists.

As we know today, Facebook surpassed its initial college-focused market to connect billions of people globally, generating substantial revenue and establishing a powerful advertising ecosystem.

Peter Thiel’s early recognition of the market size and growth potential of Facebook played a crucial role in his investment decision. By understanding the immense scale and possibilities within the social media market, he made a strategic investment that yielded significant returns and positioned him as a successful angel investor in the technology space.

So what is market size and how does it work?

What is “market sizing” in angel investing and why does it matter?

Angel investing is an inherently risky business, therefore, it is important, where possible, to mitigate any risk as much as possible to maximise your chances of making a return on your investment.

One way angel investors can reduce their risk of making a loss on their investment is by estimating the market size in which the startup operates. This might sound a bit strange but there is a good reason behind this thinking. 

You might meet a very interesting founder who is developing a product but turns out that the market is very small and very niche and there are only a few hundred customers for this product. The likelihood of making a substantial return on your £10,000 investment if there are only 100 customers in a market and the product costs £10 is very low even when you assume that all potential customers in this small market will buy your product. 

On the other hand, if the potential market has 10s of millions customers then there is a much higher chance for you to make a return on your investments as there are more customers available to purchase the product. 

Larger markets also indicate a larger potential for revenue growth and overall scalability in the future. Scalability means that a business is growing in revenue whilst preventing its costs from growing at the same rate. Highly scalable products include SaaS (software as a service) products for example as the software remains the same (maintained cost) but a large number of customers can be acquired (scalability).

Since larger markets mean potential growth in the future, this also means that there is a higher likelihood of attracting future investment from other investors such as venture capitalists (VCs). VCs tend to invest in startups in sizable markets which have large growth potential and just like growth after an angel investment can lead to VC investment, VC investment can lead to further investment (pre-seed to seed and beyond). 

A few important terms

Before diving into how to calculate the market size, let’s look at some important terminology you need to be aware of as an angel investor when discussing market size. There are three key terms to remember: TAM, SAM and SOM.  

Total Addressable Market (TAM): TAM represents the total market demand for a specific product or service. It is the total revenue opportunity available if a company captures 100% market share in a given market. TAM encompasses the entire market, including current and potential customers, regardless of whether they are currently being served by any companies.

Serviceable Addressable Market (SAM): SAM is a subset of the TAM and represents the portion of the market that a company can realistically target and serve with its products or services. SAM takes into account factors such as geographical limitations, customer segments, industry verticals, or other constraints that affect a company’s ability to reach and serve the entire market.

Share of Market (SOM): Or Market Share refers to the percentage or proportion of the total market that a company controls. It is calculated by dividing a company’s revenue or sales by the total market revenue or sales. Market share indicates a company’s position in relation to its competitors and its ability to capture a portion of the market demand.

Understanding these key terms is critical to estimating the market size of your product or service. 

How can you calculate market size?

Calculating the market size seems more daunting than it has to be. There is no one way to do so and there are several approaches you can take as an angel investor, the two main ones being the top-down and the bottom-up approach. It mainly depends on the industry you invest in and the available data. 

Top-Down Approach

This top-down approach involves identifying a broad industry or market and then narrowing it down to the specific product or service of interest.

Here is a great example from a LinkedIn post:

For example, if you want to size the market for electric vehicles in the US, you could start with the total number of vehicles sold in the US, then multiply it by the percentage of electric vehicles, and then adjust for other factors such as price, demand, and competition.

It typically relies on secondary research, industry reports, government data, and market studies. The process involves gathering data on the total market revenue or sales and then estimating the portion of the market that corresponds to the product or service in question.

Bottom-Up Approach: 

The bottom-up approach involves aggregating data from individual customers, companies, or specific segments and then extrapolating it to calculate the total market size. 

Here is a great example from a LinkedIn post:

For example, if you want to size the market for electric vehicles in the US, you could start with the number of customers who are willing and able to buy an electric vehicle, then multiply it by the average revenue per customer, and then adjust for other factors such as market share, growth rate, and competition.

This method often relies on primary research, surveys, interviews, or customer data collection. By analyzing the market demand of individual segments or customers, an estimate of the overall market size can be derived.

Other approaches, which are less common but also less useful are the value-based approach and the revenue-based approach.

Value-Based Approach

In some cases, market size can be calculated based on the value or volume of goods or services consumed by customers. For example, if the market is for a specific commodity or resource, such as oil or electricity, the market size can be determined by the total consumption or demand for that resource.

Revenue-Based Approach

This approach involves estimating market size based on the revenue generated by companies operating in the market. By analyzing the financial statements, reports, or industry data of companies within the market, an estimate of the overall market size can be derived.

It’s important to remember that market size calculations are often based on assumptions and estimations since it’s challenging to obtain precise and comprehensive data for every market. Different sources and methodologies can lead to variations in market size estimates. When doing market sizing, it’s crucial to rely on multiple data sources, triangulate information, and consider various perspectives to arrive at a reasonable estimate of market size and where possible to conduct a sensitivity analysis to check the robustness of the market size calculations and pinpoint the key drivers of the model. 

A sensitivity analysis in simple terms helps to understand which key assumptions drive the market size model. For example, if I change the number of customers who use portable chargers from 80% to 60%, how much would the overall market size change if I had 20 other assumptions in my market size model?


In conclusion, market sizing holds significant importance in angel investing. A large market size indicates growth potential, scalability, and the ability to attract future investors. Investing in startups operating in sizable markets increases the likelihood of achieving high returns on investment. 

Overall, market size serves as a key factor for angel investors in evaluating investment opportunities and maximizing their chances of success.

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  1. […] out these articles “The 3 biggest mistakes angel investors make when investing in startups” or “Market Size in Angel Investing: What is it, Why it matters and How to calculate it?”. Putting the work in ahead of time and by familiarising yourself with some key concepts and terms […]