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).