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Advice for Entrepreneurs: Part Six – Market Size and Growth Rate

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:

Global Markets

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).

Market Growth

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.

Product Passion

A nice article from Silicon Valley Product Group

If you’re trying to create major new sources of revenue for your company, you need to have a vision that is compelling to people not just for a few months but for several years.  You need to show your team, your execs and your stakeholders that you have a longer-term vision, and you must demonstrate the passion required to get the rest of your company excited.

That’s why I’ve pursued a life in product / service marketing – it’s that bite point where a great technology hits the sweet spot in a growing market that makes me tingle.

My own methodology is described in an earlier Accelerator Insight post.

Now do it.

Advice for Entrepreneurs: Part Five – Export Strategy

Or what to do when your market isn’t at home

We all know that the UK has 1% of the world population, about 4% of world GDP and that we still have the world’s sixth largest economy.  Despite our travails, the UK leads Europe in a range of innovation indicators and venture finance.

I grew up in a mid-sized instrumentation company where our sales were 95% export. I spent years in Germany, the USA and Japan devising, developing and delivering sales and marketing programmes to take our products around the world.  The home market simply isn’t big enough to feed the aspirations of a growth-oriented technology business.

But that was in the land of established companies – what does this all mean for UK based entrepreneurs who are trying to get their technology businesses off the ground?

Robin and I were at a Cambridge Network Emerging Markets meeting on Monday evening which focused on the dos and don’ts of addressing emerging markets.  Of course this was far too big a subject for the evening or indeed for this article.  Here is a distillation of ideas focused on the planning process rather than individual territories.

Dos

  • Do research the market for your product / service quite thoroughly.  Start with the world as a whole, then focus on regions, countries and regions within those countries.Do select a limited number of ‘A’ list target countries and focus on developing one at a time in your business plan
  • Do research customer preferences within each selected territory.  The world isn’t homogeneous, and you will need to adjust your sales & marketing strategy and perhaps your product / service if you want to gain market share. Be prepared to have failures and make mistakes on the way.  You can learn from them and adapt.
  • Do learn enough about the local language, culture and pleasantries to ensure that you project the right image when you’re there.  Successful export captures the heart of the customer as well as the mind.
  • Do ask for help from people who have experience in developing sales and support channels and negotiating contracts abroad (my plug for Qi3)
  • Do ensure that you have the right financial (currency, tax, cash flow) and legal (contract law, agency, IP) support
  • Do consider where your company should be based, and where manufacturing or services should be delivered.  If half your market is in China, why not relocate there?
  • Do resource your export initiative.  Relationships with customers, staff, agents, distributors and manufacturing partners all need nurturing.
  • Do control costs. Travel the cheapest way possible, but stay in a respectable hotel to impress your clients.

Don’ts:

  • Don’t ignore the rest of the world.  Your technology may have originated in your lab, garage or bathroom, but there may well be many more potential customers in the USA, China or Germany.
  • Don’t spend all your time flying round the world to meet people.  I’ve just seen a funding round fail because the CEO was so desperate to prove that he could build US customer relationships that he couldn’t present his business plan to investors.  I’m a firm believer in building relationships face to face but then using telephone, email, Skype and web conferencing to keep them bubbling.
  • Don’t overstretch yourself.  Select your markets carefully and build them one at a time.  And don’t export for the sake of it.  If the home market is a decent size and less expensive to service, start here.
  • Don’t be proud of collecting air miles or sitting in airports. Your family misses you when you’re away.  I often encounter people who travel to China or Cambodia when they could be selling in Cambridge, Cardiff or Copenhagen.

Lastly, people often ask me whether I think UKTI is useful.  In short, it is an excellent source of information and reports which you must access.  Beyond that it depends on the individuals you are dealing with, many of whom are helpful and experienced.  Beware when they’re in sales mode.

There are plenty of people around with the sort of export experience that Qi3 offers, so ask for help and build the world into your business plan.

Driving value in your business

People often ask me for a simple recipe for success.  The complexity of business is overvalued and marketers often deploy complicated solutions in response.  So how could I boil down the discipline of product marketing into a concise and near universal form?

Some years ago, I was studying several models for buyer behaviour and trying to get to the bottom of marketing as ‘helping buyers to buy’ rather than helping ‘sellers to sell’.  The result was a set of buyer ‘Value Drivers’ that we incorporate in Qi3’s product marketing methodology.  We have deployed this technique with repeated success through the core business of Qi3.

I was recently pleased to read these Qi3 Value Drivers posed in a different way in a book entitled Business Model Generation by Alexander Osterwalder and Yves Pigneur, so I thought I’d share it.

  • What jobs do our clients need to get done, and how can we help? (Problem Solution)
  • What are our clients’ competitive goals and how can we help to achieve them? (Competitive Advantage)
  • How can we fit into our clients’ way of thinking? (System Compatibility)
  • What relationship do our clients want with us? (Supplier Relationship)
  • For what values are clients truly willing to pay? (Economic Value)

If you can get the answers to these five questions right for your customers, your chances of success will be significantly greater.  It really is that simple.  Now try it.

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