The market is a key element in whether or not the startup becomes successful.
There has to be a market or demand, for the products or services the startup is offering. Otherwise, no matter how great the solution sounds, without a demand for it, the investment will not generate the expected return on investment.
Therefore, it is important to analyze the market and figure out its potential. To do so, we suggest a few key questions to ask yourself.
What is the target market and how big is it?
Assessing the market starts by defining it.
- Who is going to buy this product or use this service?
- Who is it intended for?
Asking these questions should give you an idea of what the target market for the startup’s solution is.
Once the target market has been identified, the next step is to assess its size. Size matters, because there is a significant difference between whether 10,000 or 10 million people need the solution. The larger the market, the bigger the potential.
Ask yourself, how many people have this need that has to be solved? Can this solution be repurchased? If yes, how often? This requires some research, so a good idea would be to dig into some databases, industry reports, and have a look at competitors with similar target markets.
Target market, or the addressable market, is a portion of the total market, but what the company realistically can achieve is less than 100% of it. It is the achievable market. Keep this in mind when assessing the size of the market.
Next step is to figure out, if the market is big enough to gain significant market share or whether it is a niche market. For an investment to be successful, the market has to be large enough to ensure revenue growth.
Niche markets can be a tough playing field regarding growth because they are generally small and it is harder for a company to keep growing in such a market. But sometimes companies can do very well by dominating a niche market.
For example, a company called Blackbaud offers accounting and other software solutions to nonprofit organizations (NPO). They saw that the needs of NPO’s weren’t met by regular accounting software, so they came up with a solution to that problem.
Is it an existing or an emerging market?
Another thing to think about is what type of market is it. Is it an existing market or a new emerging one? Both carry different risks and opportunities, which are useful to know.
Emerging markets have no direct competitors and it is easier to attain market leadership on such markets. For instance, Twitter became the market leader in micro-blogging, since that market was nonexistent before. The risk with new emerging markets is incorrectly assuming that there is a market, while there is not.
In contrary to emerging markets, existing markets have close to none market risk, because there are customers with a proven need for the solution, and the market size can be accurately predicted. To be successful in an existing market, the company has to have a significantly better or cheaper solution to offer. There’s a lot of competition to beat and with a mediocre solution, it can be close to impossible to achieve the necessary market share.
For example, Uber entered into an existing market but due to their convenient way of connecting drivers and passengers, they managed to do well regardless of the tough competition.
Or maybe the market is shrinking? In that case, it is much tougher for a company to survive, regardless whether they dominate the market or not. For example, a company, who would like to open a physical DVD rental store, would probably not do well because the market and need for such service have been declining for years now.
What is their go-to-market strategy?
The startup can have a great product or service and a promising target market, but if they don’t have a plan of getting to the market, none of these encouraging factors matter, because they will not be able to generate any revenue. The target group will not know about this solution and the startup will slowly fade away.
Therefore it is critical for the startup to have a go-to-market plan, or a marketing plan, if they are already on the market. This ensures that their solution is actually going to get out there and reach the potential customers.
Here are some questions to ask regarding their marketing:
- How will they reach their potential customers?
- What will be the cost to acquire a customer?
- What is the customer lifetime value?
- What channels will they be using?
All of this should be done with the target market in focus. Let’s say the startup targets the elderly and focuses on social media to reach them. Will this generate a massive amount of leads? Probably not, because most likely the target group doesn’t use social media that often and the startup, regardless of having a plan, fails to reach its potential customers.
The Market Checklist
The key takeaway regarding the market is to find out if there is a market-product fit and if the startup has an effective plan in place to reach the target group. Use this checklist below as a small guide to figuring it out. Large market and a strong go-to-market strategy indicate a green light to continue on assessing other factors.
The Funderbeam Guide for New Investors
In case you missed the previous chapters in our series and want to know more, check them out here:
- Investing in Startups: 10 Checks Before Your First Deal
- 1) The Problem — Analysing Your First Investment
- 2) The Solution — Does It Solve The Problem And Can We Make Money Doing So?
- More coming soon!
Funderbeam consists of three parts:
- Free data intelligence on investors and startups
- Tools for startups to raise funds and for investors to co-invest
- A marketplace for investors to buy and sell their investments
Our vision is to provide everyone in the world with equal opportunities, whether you are building a company, or looking to fund the next big thing. What if the next Silicon Valley is not a place, but a platform?
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