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Market research for startups

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Talk at the Founder Institute, 27 March 2011, Berlin, Germany

Talk at the Founder Institute, 27 March 2011, Berlin, Germany

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Market research for startups Market research for startups Presentation Transcript

  • Founder Institute – March 27 th , 2011 - Berlin Pix (cc) BY NC SA, Rodrigo SEPÚLVEDA
  •  
  • Summary
    • Why is it important ?
    • Understand your market type
    • How do you estimate it ?
    • Design a market entry strategy
  • 1. Why is it important ?
    • Gives you
      • A potential target for your revenue (therefore also EBIT)
      • A valuation
      • Assessment of market players, hence your competition
  • Potential target revenue
    • Let ’s say your market is $1b
    • Everyone wants/says a 1% market-share
    • That means you ’re targeting $1b x 1% = $10m of revenues
    • Impact:
      • You ’re a tiny fish in a pond with 99% revenue elsewhere.
        • No barrier to entry (there are other players)
        • Competitive edge is key (geography, product, customers…)
      • Only 2 ways to grow
        • Grow the market size (either by yourself, or the market grows as a whole)
        • Grow your market-share
  • Potential valuation / fundraising
    • VCs are only interested in risk-controlled returns, usually in 5 years.
    • Hence we need to estimate your valuation in 5 years.
    • Usually 3 techniques:
      • Multiples (turnover, EBIT, …)
      • DCF (for going-concerns, not startups)
      • Open market (early stage, or if Ricardian rent)
  • Multiples
    • Former French tech stock market Alternext used to trade with these multiples on average for tech companies:
      • 2,2x turnover
      • 23x EBIT
    • Maybe your industry has different metrics
    • From original example:
      • Your valuation is $10m x 2,2 = $22m
  • DCF Note : Let’s assume here the currency is irrelevant
  •  
  • VC ’s share
    • Valuation bracket at exit = [$ 21,8-22,0m]
    • If series A of $1,5m for 30% equity
    • Then VC ’s value at exit is
      • $22m x 30% = $6,6m
    • That ’s a cash-on-cash return of :
      • 6,6 / 1,5 = 4,4x (excluding tax impact)
    • GREAT, but that ’s only $5,1m made for the VC in 5 years (too small !)
      • cost of opportunity is too high
    • Nota: if you ’re financing the company alone, then it’s a different story : $22m-$1,5m financing = $20,5m profit in 5 years = $4m/year
  • Advice you ’ve already heard:
    • Problem:
      • either target market is too small,
      • or target market-share is too small,
      • or profit is too small,
      • or asset created is too small,
      • or there are too many competitors.
    • Target a BIG MARKET
    • Aim to be the #1 in your (BIG) market
  • 2. Understand your market type
    • 3 options
      • An existing market
      • A market that doesn ’t exist yet
      • An mature market : an opportunity to re-shape it
  • Examples of entering an existing market
    • Richard Branson and all Virgin brands in air travel, finance, rail
    • Steve Jobs and Apple : telephony, music, personal computers, feature software
    • Bill Gates on OS, office software, gaming, etc.
    • Mark Zuckerberg (facebook) : social networks, the Internet
    • Google : Android
    • @jack with Square: payments
    • Innovation and a differentiating factor are key
  •  
  •  
  •  
  • A market that doesn ’t exist yet
    • Tons on literature on this
    • Very risky, because
      • No available numbers
      • No guarantee you ’ll find a market
      • But maybe best way to reach #1 position, globally, because
        • you know something competition doesn ’t know yet : 1 st mover advantage
        • You define the rules
  • Sample new markets
    • Classic examples :
      • Walkman
      • Post-its
      • Netbooks, then tablets
    • Space travel
    • Twitter (?)
  • A word of advice about innovation
    • Feature company
    • Product company
    • Solution company
    • Nice-to-have
    • Got-to have
  • A mature market
    • #1 or #2 strategy
    • Not enough: redefine your market as 10% max of revenue
  • 3. How do you estimate your market size?
    • Many different techniques:
      • Guesstimate (à la McKinsey)
      • Published numbers (always a bracket)
      • Sum of all players in a market
  • guesstimate http://shop.wetfeet.com/Browse/Ace-Your-Case/asd-%281%29.aspx
  • Existing markets
    • Press articles
    • Competitor ’s literature (presentations, website, financial statements)
    • Industry publications
    • Research institutes (IDC, Forrester, eMarketer, comscore, etc.) < beware though
    • SlideShare is great !
  • http://www.comscore.com/Press_Events/Press_Releases/2010/3/comScore_Reports_January_2010_U.S._Mobile_Subscriber_Market_Share
  •  
  • Sum of all players
    • Hard not to compare oranges and apples
    • Take only direct competitors
    • Gives you a current picture, not a projected one
  • http://tvnomics.typepad.com/tvnomics/vido/
  • http://tvnomics.typepad.com/tvnomics/vido/
  • 4. Market entry strategy (in a nutshell)
    • 4C :
    • Customer
    • Company (SWOT)
    • Competition
    • Community (PEST)
    • 4P:
    • Product
    • Price
    • Place
    • Promotion
    Positioning: We sell THIS PRODUCT To THIS CUSTOMER At THIS PRICE To solve THIS PROBLEM PnL
  •  
  • How big is your market ? Reality check #1
  • What problem are you solving ? Reality check #2
  • Why will someone PAY for your product ? Reality check #3
  • 1 strategy is NOT enough
    • You need to assess different scenarii
    4C 4P POS P&L 4C ’ 4P ’ POS ’ P&L ’ 4C ” 4P ” POS ” P&L ” 4C ’” 4P ’” POS ’” P&L ’”
  • What you end up doing depends both on your RISK profile and SWOT X Pos ” X Pos ’ X Pos ’” X Pos Return (m€) Risk (wacc) 10% 20% 30% 40%
  • Summary : entering a market
    • Why is it important ?
    • Understand your market type
    • How do you estimate it ?
    • Design a market entry strategy
    • www.rodrigosepulveda.com twitter: @rodrigo
    •  www.slideshare.com/rodrigo1971
    Pix (cc) BY NC SA, Rodrigo SEPÚLVEDA