Month: November 2007

So now that you have generated interest in what your product does and its market potential, the next question from investors will be who are your competitors and what are the barriers to entry? This area of your business will be the most dynamic, especially if you have yet to launch your product or service. You will not be able to predict all possible new companies that may enter your space or how existing companies will react. As such, investors are both trying to understand how your company stacks up against competitors as well as gauge your ability to assess and position your company against competitors. This will determine the comfort level they will have that you will be able to properly identify and react to competitive threats that may arise in the future.

In our iPod case example, as it’s a pretty mature market, you would want to list off the main companies that produce cases, outline their respective market share, and discuss what your company’s advantages/disadvantages are against each competitor. When you outline the market share of each competitor, you should compare this to your financial projections on what market share your company is targeting. Investors will be using this as a benchmark to assess how realistic your financial projections are. For example, if you are in a fragmented market with many established competitors, none of which have more than 10% share, and your financial projections assume you gaining 25% share, investors will want to know why you think your company can achieve this when all your competitors could not.

Even if you are fortunate enough to have a product or service that is truly ground breaking and no other company produces anything similar, do not say that you have no competitors. Although you may have no direct competitors, your target customers probably have a variety of choices for other products or services that address their problem. For example, the Segway personal transporter may have no direct competitors. However, the target customers for Segways have many choices as to how they solve their transportation requirements: they can take public transport, use a bicycle, use a car. You would want to assess the companies that provide alternate solutions and provide commentary on your product’s advantages/disadvantages. You will also want to provide commentary how will these companies will react if your company starts to take away their customers. Will they look to stem the outflow by reducing cost of their product, attempt to lock in their customers, or will they try to develop a similar product to the one your company offers? You should also discuss other companies in un-related industries that may have expertise in some aspect that is important to produce your product. In the Segway example, a potential competitor may come from an aerospace company that has expertise in gyroscopes needed to implement the balancing mechanism. If they see your product taking off, will they want to build off this expertise and try enter your industry with a competing product?

In order to fend off companies trying to produce a similar product to the one your company offers, you need to realistically assess what is the unique expertise that your company possesses that gives it the ability to produce your product. Do you have key employees with the technical knowledge, do you have key suppliers or partners that develop parts of your product, do you have intellectual property that the company has developed. Based on this, you will want to erect barriers to entry to make it harder for a competitor to come in and duplicate your product. This can take the form of employment contracts, patents, trademarks, or exclusivity arrangements with suppliers. This will make it easier for your company to focus on growing market share rather than fending off competitors trying to offer a directly similar product at a lower price point.

One tip, although money is stretched thin in a start up and often the focus will be on funding the development of the product, it would be wise to get legal counsel early on in terms of the intellectual property protection strategy your company will take. Understanding what is patentable can be a complicated area and is something you will want a seasoned legal professional to give you advice on. This is important because when you start to engage other people (investors, partners, suppliers) in discussions about your company and what it does, you need to be careful what you disclose. If you provide information into the public domain that you may want to patent in the future, you will not be able to claim a patent anymore. Having a strong patent strategy can significantly increase the attractiveness of the company to investors, provide justification for a higher valuation, and give potential competitors a reason to buy your company rather than try to work around your patents.

In my next article I will speak about the area that is probably the most important in terms of what investors look for in a company – its management team. As always, if you have any questions, comments, or suggestions for future articles feel free to contact me: craig at mapleleafangels.com

In the last article, we discussed how you would go about describing your company’s product or service. Now that potential investors have a clear idea of what your company does, you need to show them the potential for how much money the company can make. You do this by outlining the market size potential and revenue model for your company.

First lets start with market size. The amount of market share your company will get each year is obviously highly speculative, especially for a new company offering a new product or service. However, rather than just come up with a number such as the number of customers you project to have after the first year, it is important to show the reasoning behind this number. You will need to do research to determine the total potential market you can serve and build up how you will get a share of the market.

If we take our hypothetical company that is building cases for iPods, what is the total market size? In determining the market size, you need to be specific:

Is it everybody that owns a portable MP3 player – no, you are only making cases for iPods
Is it everybody that owns an iPod – no, you are only making cases for certain models of iPods
Is it everybody that owns the specific models of iPods you are targeting – no, not everybody that owns an iPod is going to buy a case for it
Is it everybody that would purchase a case for the specific models of iPods you are targeting – maybe, but will you be attempting to sell to everybody globally day one or will you focus on one region, such as North America

By following a line of reasoning such as the above, you will be able to narrowly focus on the specific market you will be targeting and be able to give numbers in terms of how large this market is in terms of total customers or dollars. You will also want to research statistics for how much the market is growing each year.

Now that you have defined the size of the market, you need to determine how much share you will get of this market.

Here is where things become speculative as you will not have 100% certainty of the uptake of your product. However, again, the main point is not the final number. It is to show you have a well thought out reasoning so you can demonstrate you have a clear understanding on how you will launch into the market. In terms of determining what year over year share you project to get, it is best to try show how your market share is based on fundamental building blocks. For example, if your model for selling iPod cases was to establish your own retail stores as the channel to customers, you would want to show a market share based on how many cities you will establish a presence in over time & how many sales would you expect per store. Or if your model for selling iPod cases was to license designs to existing manufacturers of iPod cases, then you would want to base your market size on which manufacturers you will be able to sign up over time and how much revenue you will get per each manufacturer.

In addition to talking about the market size, you also need to ensure you clearly explain your revenue model –

• Who are your customers?
• How do you reach them to sell your product?
• What are they buying from you?

In our iPod example, depending on the business model you chose there are many different revenue models. Maybe you look to manufacture and sell your product through retail channels such as Best Buy, maybe you look to license your product to other manufacturers of iPod cases, maybe you look to give your product away for free but make money via ad placements on the case. In order to be able to properly assess a company, an investor is going to want to have a clear picture of how your company generates revenue.

When most entrepreneurs pitch what their market share and revenue potential is, they usually mention that the numbers being presented are ‘conservative’. This is good, but does not mean much to an investor. One tip would be to produce a few scenarios of how much market share and revenue your company will get over time. Since you are probably asking for investment money to execute the plan of how you will gain this market share, it is good to show a few different scenarios of what your revenue potential will be given varying levels of investment money. i.e. you may not get the full amount of investment money you are seeking so this way you will be prepared to show the implications of getting less money.

In discussing market share & revenue potential of the company, this is only one side of the equation. Expenses are also important to discus so investors can get a picture of the income potential of your company. I will cover this in part 6 (financials) of this article series. In my next article, I will talk about competition and barriers to entry. As always, if you have any questions, comments, or suggestions for future articles feel free to contact me: craig at mapleleafangels.com