As an early-stage company with little traction and revenue, demonstrating that you're embarking on the startup journey with your eyes wide open is critical in proving to investors that you're a sound deal.
Does a mobile app that notifies you when your plants need to be watered have $20B worth of market potential? If only I had a nickel for every time I've asked companies who their target customer is and got "anyone who has a computer" as a response. Unless you're Facebook, saying "virality works when your target market is everyone" makes you look clueless or unrealistic at best.
No doubt this is a challenging position for founders: you've started a company because you believe it could have a positive impact on society and want to convey to investors a blue sky of opportunity.
You don't want to put a cap on how you might change world, but finding a balance between naive optimism and realistic goals is a necessary step to take for any entrepreneur.
The more aggressive you are in targeting the right segment of the market, the less money you'll waste on marketing to people who aren't interested in your product.
Say we're a company that connects chefs with local organic farmers to source ingredients. Breaking it down:
TAM - Total Available Market
How much money is generated by a specific segment of the market?
Sources for market reports: Forrester, Gartner, Kline
Example: Amount spent by US restaurants on organic produce - $25B
SAM - Serviceable Available Market
What's the value of your niche market?
Example: We have distribution centers in SF, NY, LA only - $16B
SOM - Serviceable Obtainable Market
What market share can you realistically capture given competition, sales/distribution, etc.?
Example: Sysco serves 79% of restaurants in these cities. We'll capture 20% - $3.2B
Now get to that slide!