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5 Steps To A Good Market Analysis For Your Startup (aka Market Analysis 101)

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Market Analysis

I met an entrepreneur on Monday who is a young (fresh out of college), enthusiastic and a quick learner. Over the last 6 months, he and a friend from college have started working on a very interesting idea in the eCommerce space.

Both came in and presented “what they had done so far” – to get feedback from me and also get some pointers on how to prepare their pitch and company so they can get outside investment. The conversation got to “how big is their market”.

I wanted to document what I shared with them so you can help me with some feedback if I have missed anything. I have used these metrics consistently for a few startups and keep adding as needed an on going basis. Its not “quick and dirty” but at the same time its not meant to be “paralysis by doing immense analysis”. 

This is market analysis 101 which I suspect most seasoned entrepreneurs already know about.

First two metrics: Total market  and addressable market. The total market is the total revenue generated in a particular segment of the economy. The addressable market is the total amount of revenue that your company could generate if it acquired every potential customer.

1. Understand the total market: Its usually a good start to look for numbers at a general macro level. Say you are looking to build a eCommerce site to sell widgets online. Top down analysis of your market looks at overall demographic, economic and other trends to find out how many people buy widgets (of all types). This is less about how many widgets are sold and more about what’s the total need for widgets overall. Subtle difference, but an important one. 

2. Compute the Addressable market:  Currently widgets are sold offline via physical stores. You should be able to get current total number of widgets sold. This is your addressable market. This assumes every person will buy widgets online and give up buying widgets offline. This is a highly unlikely scenario, but in certain segments, such as travel, increasing number of people are going online than to a travel agent to book tickets.

3. Determine the possible Market share: Take into account factors such as internet penetration (low in India), penchant for people to buy online versus offline and you will arrive at another number that will tell you the market for widgets online. Assuming excellent execution, your market share of that number will be anywhere from 30% (you are one of several players in the space to sell widgets online) to 60% (you are the dominant player in the space).

So, if the total market for widgets is $5 Billion, of which currently $2 Billion worth of widgets is being sold, assuming 10% of widgets will be sold online, you arrive at $200 Million. This is the amount of widgets sales that can occur online. Of this if you assume 30% market share with a first mover advantage, then you can possibly get about $67 million in sales, assuming you execute well.

4. Ensure you double check with price and unit sales. If you can only source 10% widgets, and assume you charge a lower price than offline vendors, this also lowers your potential revenue. So if offline stores sell 500 Million widgets at $4, and you can only get 5 Million widgets, sell them at $3, then you can get a max of $15 Million revenue.

5. Analyst reports based projections: Usually I dont give much credence to market projection by analyst firms. Many go through the same process but get lot more data points. Usually more data points is better accuracy, but the projection business is tricky and paying someone to get “more accurate” numbers is not worth the money in my opinion.

Read Also: What If You Were Given 10x The Amount Of Money You Wanted To Raise?

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Creating Artificial Constraints as a Means to Innovation

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Artificial Constraints

Many of the entrepreneurs I know have created new innovative startups thanks to real constraints they had. For example, I was hearing AirBnB’s Brian Chesky, on the Corner Office podcast and he mentioned that when he and his cofounder were trying to get some money to get started and the only way to keep afloat was to “rent” their air bed they had in their room. That, then led to Air Bed and Breakfast, which is now AirBnB.

This was a real constraint they had – no money to “eat” so they had to make it happen somehow.

I have heard of many stories of innovation where in the protagonists had real constraints of either financial, technology, supply, demand, economic, social or any number of other characteristics.

The interesting story that I have also recently heard of how Facebook has “pivoted” from being a desktop offering to getting a significant part of their revenue from mobile is how they were given the arbitrary constraint of only accessing Facebook via the mobile phone.

So there are ways that you can create “artificial” constraints to force innovation to happen.

Most larger companies and some smaller ones as well, have to constantly find ways to create artificial constraints – to find a way to innovate and be more be a pioneer.

While some constraints are good – lack of funds at the early stage for example and lack of resources, there are entrepreneurs that are stymied by these constraints and those that will find  a way to seek a path to go forward.

I think this is a great way for you to think about innovating in a new space. If you have constraints, find a way to use it to your advantage.

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The Great Mobile App Migration of March 2020

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Mobile App Migration

Over the last few weeks as many in the world have been in lockdown, there has been a temporary “mobile app migration” happening. There are new apps downloaded and they replaced existing apps on the “home screen”.

While some of these apps are likely temporary use, for e.g. I have 6 “conferencing apps” – Zoom, Uber Conference, Webex, Google Hangouts, Blue Jeans and Goto Meeting. That is because of the many people I have conference calls with – each company seems to have chosen a different web conference solution.

Other apps seem like they will have staying power – Houseparty, for e.g. which has games, networking and video conferencing all built into one app to keep in touch with friends and relatives.

Houseparty

The apps that have moved away from my “home” screen, which I expect will come back once the crisis will be behind us include – Uber, Lyft and all the airline apps from Delta, Alaska and United.

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Perseverance with the Ability to Pivot on Data: 21 Traits We Look for in Entrepreneurs

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Perseverance with the Ability to Pivot

There are 5 key inflection points I have noticed which makes founders question their startup, to either make a call to continue working on their startup, pivot to a new problem or quit their startup altogether.

It is at these points that you really get to know the startup founder and their hunger and drive to be successful. I don’t think I can characterize those that choose to quit as “losers” or “quitters” because of many extraneous circumstances, but there is a lot of value that most investors see in entrepreneurs who face an uphill part of their journey to come out on the other side more confident and stronger.

These five inflection points are:

  1. When you have to get the first customers to use and pay for the product you have built after you have “shipped” an alpha / beta / first version. Entrepreneurs quit because they have not found the product-market-fit – because the customer don’t care about the product, there is no market need, or the product is really poorly built, or a host of other reasons.
  2. When you have to start to raise the first external round of financing from people you are not familiar with at all. Entrepreneurs quit because while it is hard to get customers and hire people, it is much more harder to get a smaller set of investors to part with their money, if you do not have “traction”, or “the right management team” or a “killer product”.
  3. When you have to push to break even (financially) and sustain the company to path of being self sufficient. Entrepreneurs quit at this stage because they have now the ability to do multiple things at the same time – grow revenues and manage costs, and many of them like to do one but realize it is hard to do that without affecting the other. So, rather than feel stuck they decide to quit.
  4. When you have to scale and grow faster that the competition – which might mean to hire faster, to get more customers, to drive more sales, or to completely rethink their problem statement and devise new ways to grow faster. Entrepreneurs quit at this point because they are consumed by the magnitude of the problem. They overassess the impact the competition will have on their company, give them too much credit or focus way too much on the competitors, thereby driving their company to the ground.
  5. At any point in the journey, when the founders lose the passion, vision or the drive to succeed. Entrepreneurs quit a these points because they have challenges with their co founder, they don’t agree with the direction they have to take, or encounter the “grass is greener on the other side” syndrome.

While I have observed many entrepreneurs at these stages at  discrete points in time, I have also had the opportunity to observe some entrepreneurs in the continuum, and I am going to give you my observations on 3 of the many folks I have known, who, have quit.

Perseverance separates great entrepreneurs from good ones
Perseverance separates great entrepreneurs from good ones

One went back to college to finish his MBA after getting a running business to a point of near breakeven, another found the business much harder than he originally thought he would and got a job at a larger company and the third was just unable to have the drive to go past 11 “no’s”‘ from angel investors.

Over the last 8 years, if I look at my deeper interactions with over 90 entrepreneurs, who I would have spent at least 100+ hours each, I would say that of the 24 people that are not longer in their startup, the one thing that stands out among the ones that persevere is that it is not “passion” or “vision” at all.

It is the inherent belief that they are solving a problem that they believe is their “calling”. They also don’t believe that there is any other problem that’s worth solving as much, even though there may be easier ways to make money.

So most of my questions of entrepreneurs to test whether they will pivot or quit are around why they want to solve this problem (which I am looking to see if they know enough about in the first place) versus any other one.

The answer to that question is the best indicator I have found to be the difference between the pivots, the leavers and the rest.

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