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Part 2 Doing Your Homework
In the first issue of this series on Back to Business Basics (B2B2)
we looked at
the
traditional
business
models that
software
companies
used to adopt
and how the
current
economic
environment
has forced
our industry
to adopt a
collaborative
approach to
developing
new
technologies.
This issue
will deal
with
understanding
how to size
and scale the
markets you
are trying to
reach in
order to
establish the
capital you
will need to
succeed, and
also to
explain the
dynamics that
will underpin
the creation
of a
successful
business plan.
The Value of Market Research
When
entrepreneurs
develop a new
product it is
normally done
so after an
assumption
that there is
a market
need. This
assumption is
based on the
theory that
there will
always be a
buyer for new
technologies.
Very few
people are
brave enough
to conduct
objective
research
before
embarking on
development.
If they did,
these are the
things they
should look
at:
Technology Trends in the market
What benefits do you bring and to whom
Who are and will be your competitors
How big is your market
What will be your market share?
Technology trends in the Market
At
the moment
the mood in
the market is
ROI, ROI,
ROI. Will
that be the
case when
your product
comes to
market in a
year or two’s
time? Are you
defining the
market as
your local
territory or
global? If
what you are
developing is
so
innovative, a
market for it
may not exist
yet, so how
do you
determine
future trends?
Are
you up to
date with
research
projects
emanating
from the
Universities?
Freed from
commercial
shackles much
innovation
has emerged
from the
world’s
leading
institutes
such as
Cambridge,
M.I.T,
Berkeley, and
Stanford.
Besides the
numerous
industry
magazines,
Red Herring
and Tornado
Insider are a
barometer as
to where
venture
capital is
being
invested.
What benefits do you bring and to whom?
The
days of
technology
looking for
problems to
solve are
genuinely
gone forever.
All
technology
must have a
clearly
defined
purpose and
improve upon
the
technology
that it
supercedes.
In the market
of today that
difference
must be
clearly
measurable
and
demonstrable
to potential
buyers.
It is
also
essential to
define
clearly your
‘buying
audience’.
You need to
articulate
why they have
the need.
Asking
potential
buyers these
questions is
a good
starting
point.
Getting
corporate
sponsors is
even better.
Benefits
should always
be expressed
in terms of
either ‘cost
savings’ or
‘performance
improvements’.
Also make
sure you
distinguish
between
quantifiable
benefits and
‘soft’ or
hidden
benefits. A
common
mistake that
is made in
conducting
initial
research is
to assume
that great
benefits reap
great rewards.
It is
vital to
understand
the scale of
the benefits
chain. If
your product
provides
benefits to
users, are
they also the
decision
makers? If
not, what
benefits do
you offer the
decision
maker(s) when
they are not
beneficiaries?
Avoid
the mistake
of one our
clients’
products,
whose major
benefit was
reduction in
headcount. In
parts of
Scandinavia
and the Far
East labour
laws and cost
of labour
meant that
this was
perceived as
a negative!
Who are and will be your competitors?
A
common
mistake in
our industry
is that we
naturally
assume that
threats will
come from
other vendors
of competing
products. The
reality is
that the
biggest
threat to
success is
the inertia
of the buyer
or that other
solutions are
adopted.
Charles
Wang,
Chairman of
CA, once used
the analogy
of the
software
industry
being like
the railways
of late 19th
Century
America. The
rail barons
assumed that
they were in
the ‘rail
business’,
rather than
transport and
travel. Along
came air
travel and
the rest ,as
they say, is
history. We
must always
be aware that
competition
is not how we
define it,
but what the
buyer
perceives are
his choices.
Another
mistake is to
assume that
‘better’ or
‘more’
features are
a must. While
there is some
value in
comparing
features,
this
comparison
will be
forever
changing. Of
far greater
value is to
understand
how your
competitors
are
capitalised,
their
channels to
market and
the market
segmentation
they have
chosen.
How big is your market?
Until
recently it
was quite
common to
read from
respected
analysts that
markets were
worth
€Xbillion
over the next
three years.
VC’s would
often fund
companies on
expectations
that their
portfolio
companies
could obtain
significant
market share
and large
capitalisations
prior to an
IPO or trade
sale.
Now reality
has hit home
and market
capitalisations
are
significantly
lower, which
has made it
harder to
raise funding
and also for
VC’s to get
the return on
capital they
once did.
Quite
simply this
is your
chance to be
brave and
honest.
Demonstrate
that you will
deal with the
current
reality and
not fantasy.
By appplying
a few rules
and simple
models you
can be honest
with yourself
as well as
other
investors.
You need
to know the
difference
between the
‘real’ market
and the
‘actual
market’, by
applying some
of the
principles of
understanding
your buying
audience.
The real market is the total number of ALL potential buyers during the life cycle of your product. The actual market are those who have a need but are roughly categorised as follows:
Innovative buyers: Buyers who love new technologies for their own sake
Early Adopters: Mainstream buyers who are forced to seek a solution outside of their preferred buyers.
Early Mainstream: Mainstream buyers who see competitive advantage and medium risk
Late Mainstream: Mainstream buyers who see moderate advantages and no risk
Laggards Build own solutions or no interest whatever
Let us say that your local market has a real market of 30,000.
Let us assume a five year life cycle
Let us assume that you get a 10% market share of the innovator and early adopter markets in the first two years
Therefore your actual market for the first two years is 150 +300 =450
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What will be your market share?
As the above model illustrates estimating the size of your market and potential market share requires
using methodologies such as above. Another significant factor is the markets you choose.
SSP recently met with a highly innovative company that had developed a tool that automatically
generated J2EE code. They had struggled to raise interest or capital in the UK. SSP pointed out that
they should set up in the USA for the following reasons:
1.The actual market for j2EE applications at that time was approximately 350 companies in the UK
2.The actual market for the same applications in the USA was over 3000
The logic was compelling but making the decision to start in another country is a brave one. However,
bravery is not in short supply in our industry. This bravery needs to be combined with an objectivity
gained from market knowledge.
Investors and other business partners need to know that you fully understand all the risks or at best
that you have understood the mechanisms to assess them objectively.
Next month: Developing the Business Plan
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