Entrepreneurs are very used to hearing about the
importance of selling into markets which are large and growing especially from
potential investors. Entrepreneurs must
satisfy themselves at the earliest stages of their own personal due diligence
on their business viability that the markets they wish to attack (e.g., the target
markets) are large enough to support the entry of their new and better products.
At the earliest formative stages of business
definition, when discovery is happening and technology is in the process of
being developed, entrepreneurs are not likely to have a fully developed product
documented; that is, details of design, expected costs, and market acceptance
are assumed but have not been validated by focused research and development. In
the case of technology, that technology may have more than one potential
application, and it may not be immediately clear which application and market
can be best targeted first.
Entrepreneurs
may have an idea of what products should evolve from the technology being
developed, but even that initial vision can be in error. It would not be unusual to
determine through due diligence that the presumed target market is not the
best one, and initial thoughts of a product must be altered dramatically to fit
a preferred (alternative) target market. Target markets and products optimized
for customers in those target markets must be matched.
Matching
the (right) product to the (right) market is a central tenet of good new
venture thinking.
The
central issue of due diligence related to markets is to determine those markets
(e.g., the target markets) that are sufficiently large and growing to support
the entry of a new competitor (the entrepreneur’s new venture).
Professional
investors generally insist that target markets be large and growing so that
missteps and errors on the part of the new venture can somewhat be compensated
for by the size of the market, which presumably contains large competitors who
are not particularly concerned with competing with a small, upstart technology
company.
Nevertheless,
venture capital firms in particular are interested in
supporting companies that target billion-dollar markets rather than those that
target million-dollar markets. Both the magnitude of investment considered and the interest of professional
investors scale with the size of the markets to be served by the underlying
technology.
Market
research should consist first of an identification of
market size and growth rates based on public data from trade magazines, public
company reports (annual and 10-Q reports, for instance), newspapers, Internet
blogs, etc. Recent trends in the growth (e.g., declining, rapidly growing,
nascent, etc.) of the market should be noted. This information is necessary for
purposes of defining the area of the company’s interest, but it is not
sufficient for defining the size and growth rate of the company’s target markets. Of the products (and
services) sold into the more general market, a determination must be made as to
the sales volume and price of each product type sold within that market. While
secondary sources of research may be useful, entrepreneurs may need to seek out
primary sources of data. The end result, even if data is missing and must be
assumed, should be a concise table showing a market segment matched to a
product type along with estimates of volume sales, per unit pricing, and total
market segment sales. At the earliest stages of founder due
diligence, it is necessary only to make an early assessment of the most likely
target markets (e.g., segments) the company will enter and their size and
growth rates.
The
goal for an entrepreneur is to identify a number of
potential target markets that collectively (in a summed sense) have a large
size, presumably in the billions-of-dollars range.
One
of these target markets will eventually be selected as the entry market—the
market that offers the best prospect for producing profit soon after funding.
That initial target market need not be large, but it must be one for which
success is highly probable.
***
Rocky Richard Arnold provides
strategic corporate and capital acquisition advice to early-stage companies
founded by entrepreneurs wishing to successfully commercialize
high-value-creation opportunities, ideas, and/or technologies. More information
about Rocky can be found at www.rockyrichardarnold.com. His book, The Smart
Entrepreneur: The book investors don’t want you to read, is available as
paperback or Kindle ebook for purchase on Amazon at http://tinyurl.com/pv248qq.
Financial software for use by startups can be purchased on Amazon at http://www.amazon.com/gp/product/B00K2KPSI2.
He posts articles about entrepreneurship on his blog at http://thesmartentrepreneur.blogspot.com.
Connect with Rocky on Twitter @Rocky_R_Arnold; Facebook at www.facebook.com/rocky.r.arnold;
Google+ at www.google.com/+RockyArnold01.
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