In this sixth article in my series ‘advice for entrepreneurs’ I address my favourite subject – the importance of understanding the market for your technology, product or service and representing it to investors.
It’s hardly surprising that three of our five key investment criteria relate to market issues; the others being the credibility of the team and the business model through which value is extracted from the business. Let’s look at the issues of market size and growth rate as a start:
Think about the investors you are approaching and the markets in which they wish to invest. In the case of Qi3 Accelerator, we are keen to participate in businesses that utilise technology to underpin advances in global growth sectors such as environmental sustainability / cleantech, healthcare, security, communications and high value manufacture.
Addressable Market not Total Market Size
Don’t mix up ‘market size’ and ‘addressable market’. The ‘market size’ is the total amount of money spent in your sector (for example, the world demand for electricity). The ‘addressable market’ is the total sales that your business could gain if you had no competitors (for example the market for wind turbines producing under 25kW peak power).
If you use the total market size as the measure in your business plan, you are generally overstating the opportunity and losing credibility with potential investors. Quoting broad ‘telephone numbers’ as market sizes just makes your business look like a tiny speck on the industrial landscape, rather than an important player within a defined market.
The addressable market is a sensible measure to start with. It has the further advantages of showing investors that you have carefully considered the needs of your potential customers and the alternatives that they might buy. It furthermore indicates that you have understood who your competitors are. Growing your market share to a realistic but high number is also important and this means a realistic sales projection within a meaningful addressable market.
Concentrated and Fragmented Markets
It’s important to understand and represent fairly the nature of the market into which you are selling. We describe concentrated markets as those dominated by a few players, where the actions of any of the key companies affect the market itself. Fragmented markets are those in which no single company has sufficient market share to be able to influence the market as a whole.
Your marketing strategy will be very different according to the type of market in which you operate. In a concentrated market, you will need to displace incumbents and will naturally see them as opportunities for future partnership or exit. In a fragmented market, you need to demonstrate to your investors how you will become noticed and thus gain substantial sales. My first suggestion is to subdivide the addressable market further and gain market share in a subdivision (e.g. small wind turbines in Europe or residential installations).
It’s far easier to develop a business in a large and expanding market. Let’s say you’re in a £500m addressable market that’s growing at 20% for each of the next five years. You can grow at a high rate without eating into your competitors. But if the market was growing at only 2%, every step you take will provoke reaction from established players. Simply put, there is more room for experimentation and mistakes in fast growing markets, especially if you are also generating sufficient gross margin to reinvest in product and market advances.
In the next article, I’ll move on to market disruption and sustainable competitive advantage.