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Market Research for Startups

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Rodrigo Sepúlveda Schulz demonstrates the importance of market research for startups, detailing the all-important process of market strategy. He encourages entrepreneurs to develop a deep understanding for their market area: knowing what to look for, who the competition may be, and which tools you will need to succeed.

This content was produced for the 2011 Berlin Spring semester of the Founder Institute by Founder Institute mentor Rodrigo Sepúlveda Schulz, founding Partner at Expon Capital, and President of Sepúlveda Capital.
Follow him on Twitter to learn more:

https://twitter.com/rodrigo

Published in: Business
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Market Research for Startups

  1. 1. (cc) BY NC SA, Rodrigo A. SEPULVEDA SCHULZ – www.rodrigosepulveda.com Founder Institute – March 27th , 2011 - Berlin Pix (cc) BY NC SA, Rodrigo SEPÚLVEDA
  2. 2. (cc) BY NC SA, Rodrigo A. SEPULVEDA SCHULZ – www.rodrigosepulveda.com
  3. 3. (cc) BY NC SA, Rodrigo A. SEPULVEDA SCHULZ – www.rodrigosepulveda.com Summary  Why is it important ?  Understand your market type  How do you estimate it ?  Design a market entry strategy
  4. 4. (cc) BY NC SA, Rodrigo A. SEPULVEDA SCHULZ – www.rodrigosepulveda.com 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
  5. 5. (cc) BY NC SA, Rodrigo A. SEPULVEDA SCHULZ – www.rodrigosepulveda.com 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
  6. 6. (cc) BY NC SA, Rodrigo A. SEPULVEDA SCHULZ – www.rodrigosepulveda.com 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)
  7. 7. (cc) BY NC SA, Rodrigo A. SEPULVEDA SCHULZ – www.rodrigosepulveda.com 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 = $22m
  8. 8. (cc) BY NC SA, Rodrigo A. SEPULVEDA SCHULZ – www.rodrigosepulveda.com DCF Note : Let’s assume here the currency is irrelevant
  9. 9. (cc) BY NC SA, Rodrigo A. SEPULVEDA SCHULZ – www.rodrigosepulveda.com
  10. 10. (cc) BY NC SA, Rodrigo A. SEPULVEDA SCHULZ – www.rodrigosepulveda.com VC’s share • Valuation bracket at exit = [$ 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
  11. 11. (cc) BY NC SA, Rodrigo A. SEPULVEDA SCHULZ – www.rodrigosepulveda.com 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
  12. 12. (cc) BY NC SA, Rodrigo A. SEPULVEDA SCHULZ – www.rodrigosepulveda.com 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
  13. 13. (cc) BY NC SA, Rodrigo A. SEPULVEDA SCHULZ – www.rodrigosepulveda.com 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
  14. 14. (cc) BY NC SA, Rodrigo A. SEPULVEDA SCHULZ – www.rodrigosepulveda.com
  15. 15. (cc) BY NC SA, Rodrigo A. SEPULVEDA SCHULZ – www.rodrigosepulveda.com
  16. 16. (cc) BY NC SA, Rodrigo A. SEPULVEDA SCHULZ – www.rodrigosepulveda.com
  17. 17. (cc) BY NC SA, Rodrigo A. SEPULVEDA SCHULZ – www.rodrigosepulveda.com 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 : 1st mover advantage • You define the rules
  18. 18. (cc) BY NC SA, Rodrigo A. SEPULVEDA SCHULZ – www.rodrigosepulveda.com Sample new markets  Classic examples :  Walkman  Post-its  Netbooks, then tablets  Space travel  Twitter (?)
  19. 19. (cc) BY NC SA, Rodrigo A. SEPULVEDA SCHULZ – www.rodrigosepulveda.com A word of advice about innovation  Feature company  Product company  Solution company  Nice-to-have  Got-to have
  20. 20. (cc) BY NC SA, Rodrigo A. SEPULVEDA SCHULZ – www.rodrigosepulveda.com A mature market  #1 or #2 strategy  Not enough: redefine your market as 10% max of revenue
  21. 21. (cc) BY NC SA, Rodrigo A. SEPULVEDA SCHULZ – www.rodrigosepulveda.com 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
  22. 22. (cc) BY NC SA, Rodrigo A. SEPULVEDA SCHULZ – www.rodrigosepulveda.com guesstimate http://shop.wetfeet.com/Browse/Ace-Your-Case/asd-%281%29.aspx
  23. 23. (cc) BY NC SA, Rodrigo A. SEPULVEDA SCHULZ – www.rodrigosepulveda.com 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 !
  24. 24. (cc) BY NC SA, Rodrigo A. SEPULVEDA SCHULZ – www.rodrigosepulveda.com http://www.comscore.com/Press_Events/Press_Releases/2010/3/comScore_Reports_January_2010_U.S._Mobile_Subscriber_Market_Share
  25. 25. (cc) BY NC SA, Rodrigo A. SEPULVEDA SCHULZ – www.rodrigosepulveda.com
  26. 26. (cc) BY NC SA, Rodrigo A. SEPULVEDA SCHULZ – www.rodrigosepulveda.com Sum of all players  Hard not to compare oranges and apples  Take only direct competitors  Gives you a current picture, not a projected one
  27. 27. (cc) BY NC SA, Rodrigo A. SEPULVEDA SCHULZ – www.rodrigosepulveda.com 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
  28. 28. (cc) BY NC SA, Rodrigo A. SEPULVEDA SCHULZ – www.rodrigosepulveda.com
  29. 29. (cc) BY NC SA, Rodrigo A. SEPULVEDA SCHULZ – www.rodrigosepulveda.com How big is your market ? Reality check #1
  30. 30. (cc) BY NC SA, Rodrigo A. SEPULVEDA SCHULZ – www.rodrigosepulveda.com What problem are you solving ? Reality check #2
  31. 31. (cc) BY NC SA, Rodrigo A. SEPULVEDA SCHULZ – www.rodrigosepulveda.com Why will someone PAY for your product ? Reality check #3
  32. 32. (cc) BY NC SA, Rodrigo A. SEPULVEDA SCHULZ – www.rodrigosepulveda.com 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’”
  33. 33. (cc) BY NC SA, Rodrigo A. SEPULVEDA SCHULZ – www.rodrigosepulveda.com 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%
  34. 34. (cc) BY NC SA, Rodrigo A. SEPULVEDA SCHULZ – www.rodrigosepulveda.com Summary : entering a market  Why is it important ?  Understand your market type  How do you estimate it ?  Design a market entry strategy
  35. 35. (cc) BY NC SA, Rodrigo A. SEPULVEDA SCHULZ – www.rodrigosepulveda.com www.rodrigosepulveda.com twitter: @rodrigo www.slideshare.com/rodrigo1971 Pix (cc) BY NC SA, Rodrigo SEPÚLVEDA

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