Robert Ochtel’s Blog

An Experienced Approach to Venture Funding

Entrepreneurs, A Breath of Markets Approach Will Lead You to the Right Conclusions

Having a business “idea” or “concept” does not necessarily provide the entrepreneur with much direction in getting started in developing a valuable and fundable business proposition.  This beginning point in the development of a start-up company often leaves first time entrepreneurs in the dark as to which direction to proceed forward with regard to their proposed technology, product or service offering.  They often ask themselves: “Where do I start?”  The best answer here is to begin by focusing on the markets.  Why, because it is the markets where you will sell your technology, product or service offering.  It also the markets that will determine the “problem” or “need” you will be solving.  This focus on the markets will also help you determine how to position your technology, product or service offering against your competitors.  In short, by focusing on a broad breath of markets and the possibility of potential opportunities they represent, you will come to the right conclusions as to where to take your initial “idea” or “concept”, how to develop a value added product offering, what your product offering will ultimately look like and it will in the end provide you with the ability to determine the best return on investment for your venture investors. This article addresses this breath of markets approach in determining how to take your product “idea” or “concept” into reality of a valuable business proposition.

Look at a Broad Breath of Markets

In the beginning of your product definition process, all markets look the same.  Why, because at this point you do not have any details on the size of the market, the growth of the market or the potential “market needs” you will be addressing for any particular market.  Therefore, you should look a broad breath of markets that can potentially be addressed by your technology, product or service offering.  Don’t pick a favorite market at this time.  All you need to do is to determine the baseline market characteristics (size and growth), and potential “needs” or “problem” you will be addressing for a given market.  This analysis will provide you with a high level overview of the market opportunity and at the same time give you the necessary background to determine if a particular market or a number of different markets may be of interest to you and your start-up company.  Remember, this is not the time to discount a given market.  Why, because you do not have enough information on the details that will make your product competitive in this space.  All you are trying to do is to determine, from all the markets you could address, which set of markets are of potential interest and why.  This preliminary market data will be useful in drawing your final conclusions as to which markets are of interest and how to prioritize these same market opportunities.

Review the Competitors for Each Market

Once you have a list of the targeted markets that are of interest, you should next look at the competitors in your potential target markets and review their positions and product offerings.  As such, the competitors for each market will most often be different and have unique product offerings to address the market needs and requirements for that specific market. Pay particular attention to the details of each competitor’s product offering by market. Why, because different markets will require different product features, functions and capabilities, and each given competitor’s product offering will provide you with the appropriate insight as to the necessary key differentiators that make their product offerings competitive for a particular market of interest. These key product differentiators are often unique to a particular market or they may be common across a number of potential markets.  This is something you need to pay attention to since you generally at this point are looking to address as many markets as possible with your product offering.  In addition, you are looking to determine the features, functions and capabilities that will give your start-up company’s product offering a competitive advantage over your competitors for a particular target market.  Here, it pays to be very detailed.  As it is these details that will ultimately lead you to the right conclusions in determining the competitive advantage of your start-up company’s technology, product or service offering.

Define the Product Requirements for Each Market

After you have had time to review the various competitor product offerings for each potential target market of interest, you need to spend time sweating the details on the necessary product requirements for each potential market of interest. Here, you need to develop a product feature, function and capability list for each potential target market. Why, because it is this product requirements list that will provide you with the necessary insight as to what it takes to not only be competitive in a target market of interest, but what it will also allow you determine what additional product capabilities are necessary to make your product a “complete” product offering.  This often requires you to add capabilities (e.g., software, hardware, services) to your start-up company’s “core” capabilities that are well beyond the scope of your company and will require you to secure these capabilities through a strategic partnership or by other means.  In the end, you will have a compelling and “complete” product offering that addresses the needs of each particular target market. This is your goal.  Finally, it is through this market driven product requirements process that you may determine that certain markets cannot be addressed by your start-up company or will necessarily need to be addressed in the future, with follow-on product offerings, once you first establish yourself in other markets. Therefore, defining the detailed product requirements, for each given market will give you the insight you need to not only determine the necessary feature and functional requirements, it will given you insight so setting your start-up company’s targeted market priorities.

Develop Focus for Your Targeted Markets

Once you have looked a breath of markets, reviewed your competitors’ product offerings and defined the product requirements for each potential market of interest, you need to focus in on your target markets.  Here, you need to first identify which markets you believe, based on the above information, you have a clear competitive advantage.  Then you need to identify which of these markets have the highest potential for return on investment for your potential investors.  That is, which markets are the largest and have the highest long term growth.  Finally, you need to prioritize these markets in terms of total financial investment requirements and associated risk.  Some, target markets may be attractive, but will require substantial up-front investment and result in much longer time-to-money and profitability. Alternatively, other target markets may not be as attractive, but are easier to penetrate and will allow you start-up company to generate early cash flow and at the same time provide higher potential near term returns while you establish your start-up company in these target markets.  The point here is to take a look at the whole breath of markets that are available to you and your start-up company and develop a focus for a given, limited number of target markets that make sense logically, strategically, financially and opportunistically. Doing so will provide your start-up company with the focus necessary to move forward with a targeted market driven plan and at the same time provide your start-up company with higher potential for success.

As a first time entrepreneur with a product “idea” or “concept” it is not always easy to see how to move forward to develop a compelling, value added business proposition.  To take this leap forward it is always necessary to start from the markets. This market focused approach requires the entrepreneur to identify a broad breath of markets that have the potential to use their start-up company’s technology, product or service offering to solve an unmet market “need” or “problem”.  Following this market opportunity analysis with a both a review of the competitors product offering and the development of listing of the product requirements for each potential targeted market will provide you with the necessary insight to determine which target market you will ultimately have a sustainable competitive advantage.  In addition, it will provide you with the ability to prioritize these same markets, based on market opportunity, investment requirements, potential risk, and projected overall return on investment.  So, take the time to use a breath of markets approach in the development of your start-up company’s “idea” or “concept”. It will lead you to the right conclusions and provide your start-up company with necessary focus to be successful in your final target markets of interest.

This information was taken from Robert’s new book: “Business Planning, Business Plans and Venture Funding – A Definitive Reference Guide for Start-up Companies”.  Available at www.amazon.com.  For more information on the book go to www.carlsbadpublishing.com.

September 21, 2009 Posted by | Business Planning, Competition, Competitive Analysis, concept, Customers, Target Markets, Venture Capital, venture finance, Venture Funding | 6 Comments

Entrepreneurs, No Matter Where You Start with Your Business “Concept” or “Idea”, Your Final Product Offering Will Often Be Quite Different

Many times entrepreneurs start with a business “concept” or “idea” with little or no real knowledge of the market, their competitors, potential strategic partners or the customer requirements. Accordingly, the genesis of an entrepreneur’s business “concept” or “idea” can be based on many different things, including a hunch, a gut feeling, a discussion with a friend or colleague, or even some real market-based experience.  Many times, this “concept” or “idea” initially envisioned by the entrepreneur is correct in terms of the underlying supposition regarding the market need or problem they are trying to solve.  But in the end, the final configuration of their product offering is often very different than their original “concept” or “idea”. The reason for this is that the market realities necessarily dictate the final configuration of a start-up company’s business “concept” or “idea”. Therefore, entrepreneurs often end up with a substantially different product offering than they originally begin with.  This is not a bad thing, and ultimately often results in a much higher level of success in the market.   This article addresses the underlying reasons that an entrepreneur’s original business “concept” or “idea” changes as they become more familiar with the realities of the market.  In the end, the result is a better final product offering that has a much high potential for success in the market.

Review the Markets

With the instantiation of their start-up company and their associated business “concept” or “idea”, entrepreneurs often have a target market in mind for their final product offering. From the beginning, this target market is their primary focus and often they are not to be dissuaded from their single market focus.  This myopic approach to looking at the market(s) is often a big mistake and can result in a failed start-up company. As such, many of these same entrepreneurs often forgo the opportunity to review all the potential market opportunities that can be addressed with their technology, product or service offering.

A much better approach is for the entrepreneur is to step back and review all potential markets from the 30,000 foot level.   With this level of market-separation, the entrepreneur can now take into consideration all of the other potential markets that may be complementary or supplementary to their initial, primary target market.  This approach of reviewing all of the potential markets available for the entrepreneur’s product offering is invaluable for many reasons, including:

  • It allows the entrepreneur to examine the underlying characteristics (e.g., size, growth, competition, etc.) of their primary target market and all other potential markets of interest on their individual merits,
  • It provides the entrepreneur with the ability to identify other new, potential revenue generating opportunities,
  • It provides a market-based approach for the entrepreneur to prioritize the necessary features, functions, and capabilities of their final product offering according to the market needs,
  • It allows the entrepreneur to prioritize all of their potential markets into primary, secondary and tertiary market opportunities, and
  • It provides the entrepreneur with necessary information to determine which markets will provide the highest potential return on investment for their start-up company.

This high-level market analysis is invaluable, as it provides the entrepreneur with the necessary knowledge to make an informed decision on bringing their technology, product or service offering to market.  Having now identified which target markets make sense for their product offering, the entrepreneur can now prioritize these same market opportunities appropriately.  As often is the case, from this high-level market review, the entrepreneur more often than not decides to target another, different market than they originally intended as their initial primary market focus for their start-up company’s technology, product or service offering.  Consequently, this change in market focus often drives the entrepreneur to develop additional and/or different features, functions, and capabilities for their final product offering than originally envisioned at conception. This is a good thing, as this enhanced final product offering can often support multiple revenue streams and a substantially higher return on investment than originally anticipated.

Study the Competition

Often, an initial business “concept” or “idea” by its very nature is half baked. The reason for this is that there is little or no market reality integrated into this initial business “concept” or “idea”.  Therefore, to get these same market realities into the features, functions and capabilities of their product offering and to further develop their start-up company’s business “concept” or “idea”, the entrepreneur must study their competition.

To most entrepreneurs the thought of developing a competitive analysis sounds like a difficult and painful task. More often than not, these same entrepreneurs do not want to spend the time necessary or the due diligence effort required to analyze the competition and their product offerings.  While it is true that developing a thorough competitive analysis is a difficult task that can take a significant amount of time, it can very beneficial to the entrepreneur and their start-up company.  Some of the benefits of developing a complete competitive analysis include:

  • Identifying all the necessary features, functions, and capabilities of their start-up company’s product offering. 
  • Defining the key features, functions and capabilities that differentiate their product offering to that of their competitors.
  • Determining how to position their product offering against their competitors based on these same defining features.

The end result is that through the development of a thorough competitive analysis the startup company’s final product offering is often much different than that of the entrepreneur’s original business “concept” or “idea”.  But, again, this is okay, because this same entrepreneur and their start-up company now has a product offering that provides a competitive advantage in the market and at the same time provides significant value to the end customers.

Identify Strategic Partners

Most start-up companies go to market with a core technology, product or service offering.  At the same time, from the customers’ point of view, this core technology, product or service offering is often “incomplete” and many times requires one or more complementary technologies, products or services to make it a “complete” product offering to properly service the market.  Therefore, to develop a “complete” product offering, it is often necessary for the entrepreneur to identify potential strategic partner candidates that can provide the necessary complementary technology, product or service offerings. These strategic partners can range from hardware providers, to software developers to service partners, etc. By identifying the appropriate strategic partners, the entrepreneur is taking the proper initiative to make their initial business “concept” or “idea” into a “complete” product offering, further ensuring their success in the market.

Finally, take the necessary time to identify and analyze potential strategic partners. Remember, great strategic partners will add significant value to your start-up company beyond their technology, product or services.  In addition, take the time to also consider their market position, customer base and channel access.  These items can add significant value to your start-up company and its ability to secure and create a long term defensible position in the market.

Talk to Your Customers

All of the market research and analysis in the world does not mean much unless it is verified with your start-up company’s customer base.  Also, it is this customer verification process that many times causes a start-up company’s final product offering to vary significantly from its initial business “concept” or “idea”. What an entrepreneur initially believes are both important and necessary features, functions, and capabilities for their product offering are often much different from the end-customers point of view.  This is a significant point, as often, entrepreneurs never talk to their customers and therefore do not really understand what is important to their customer base.  Obtaining customer feedback is invaluable to an entrepreneur and to their start-up company.  It not only allows the entrepreneur to validate or invalidate their initial business “concept” or “idea”, it provides them with the ability to prioritize the necessary features, functions and capabilities of their product offering. Therefore, by talking to their customers, entrepreneurs often find out that their final product offering will be much different than originally envisioned at the business “concept” or “idea” stage.  This is necessarily a good thing in that it provides the entrepreneur and their start-up company with a final product offering that targets the needs of their target customer base.

A business “concept” or “idea” is only the first step in the development of a valuable product offering.  As often is the case, a start-up company’s final product offering will be much different than the entrepreneur’s original business “concept” or “idea”. This is necessarily part of the process of developing a product that addresses a market need, and at the same time provide a long-term, sustainable competitive advantage in the market. So, as an entrepreneur you need to review the markets, study your competition, identify strategic partners, and talk to your customers.  Your start-up company’s final product, although much different than your original business “concept” or “idea”, will be much more valuable to your customers and at the same time put you on a path to success in the market.

This information was taken from Robert’s new book: “Business Planning, Business Plans and Venture Funding – A Definitive Reference Guide for Start-up Companies”.  Available at www.amazon.com.  For more information on the book go to www.carlsbadpublishing.com.

August 24, 2009 Posted by | Business Plans, concept, Customers, Idea, start-up, Strategic Alliance, Target Markets, Venture Capital, venture finance, Venture Funding | 2 Comments

A Go To Market Strategy, and Associated Product Line Objectives and Tactics are Often Missing from a Start-up Company’s Business Plan

I have read and reviewed many business plans developed by first time entrepreneurs. While all of these plans focus on their technology, product or service offerings, many of these same plans leave out their start-up company’s go to market strategy. The lack of a go to market strategy within your start-up company’s business plan represents a glaring hole to potential investors.  After all, developing your technology product or service offering addresses only half of the problem.  The other half of the problem is getting your product to market, securing paying customers, and acquiring market traction and revenue in a timely manner.  Anything less will result in a failed start-up company. This article addresses the need for all start-up companies to have a go to market strategy, as well as associated product line objectives and tactics in their business plans.  Doing so, will allow these same start-up companies to delineate to their investors how and when they expect to secure paying customers, associated revenue and positive cash flow.

Do You Have a Go To Market Strategy?

As the entrepreneur of a start-up company you are necessarily developing a technology, product or service offering to sell into the market.  Therefore, you need to determine who your customers are and how you are going to gain access to these same customers is a cost effective, timely, and efficient manner.  To do this, you must develop a go to market strategy to address the customers within the target market(s) of interest.   As such, your start-up company’s go to market strategy must take into consideration the following:

  • What are the defining characteristics of your start-up company’s technology, product, or service offering for the target market(s) of interest?
  • Which target customers are market leaders and most important to the acceptance of your company’s technology, product, or service offering?
  • What is the “value proposition” of your company’s technology, product, or service offering to your customer base?
  • How do you plan on selling or promoting your technology, product, or service offering to the target customers of interest?
  • How can your company’s technology, product, or service offering best secure significant market share?
  • What are the costs associated with your go to market strategy and various sales channels?

By addressing all of these issues, you can develop a go to market strategy that uniquely fits your technology, product or service offering. This go to market strategy must be included in your start-up company’s business plan, as it is essential to secure customers and at the same time potential investors expect to see this as part of a complete, investor focused business plan.  So, spend the time to think through and then delineate your start-up company’s go to market strategy in your business plan. This will help you achieve success in the market.

What are Your Product Line Market Objectives?

Once you define your go to market strategy for your technology, product or service offerings, you need to develop product line market objectives for each product offering.  These product line market objectives are to be developed in congruence with your start-up company’s overall market strategy and need to have the following characteristics:

  • Align with your go to market strategy,
  • Address all aspects of the target markets and customer base,
  • Are attainable over a defined timeframe, and
  • Have several measurable tactics associated with them.

Therefore, your start-up company’s product line objectives, as defined, need to follow your start-up company’s go to market strategy and address the key issues regarding the implementation and execution of this strategy. 

As an example, let’s assume your start-up company’s go to market strategy is to become the market leader within a defined target market segment.  As such, an associated product line objective could be to: “Secure two tier one customers by the end of year one of operations.”  This objective, as defined, is commiserate with your start-up company’s go to market strategy.  In addition, from your market research and due diligence, you have defined your targeted customers and developed a list of the tier one and tier two customers within this target market segment of interest.  Therefore, having defined your objectives and developed a list of target customers, you can then easily develop a set of tactics that work in conjunction with your defined product line offering market objectives.

Develop Measureable Product Line Market Tactics?

Product line market tactics follow your company’s product line market objectives. Unlike a product line market objectives, previously outlined, a product line’s market tactics should provide definable tasks in order for your company to achieve the objectives of your product line that are in line with the overall go to market strategy. In addition, market entry tactics should also have a time frame tied to them. This provides one more dimension of measurable performance that is tied to meeting the overall corporate market goals and objectives of your company and its technology, product, or service offering.

Product line market tactics need to be definable tasks that are measurable both quantitatively (e.g., revenue growth, customer agreements) and in time. The underlying reason for this is that the business plan your start-up company has developed is based on distinct market objectives, with a time table that reflects a specific return on investment criteria for your company’s technology, product, or service offering. By developing measurable market entry tactics, one necessarily supports the requirements of the resultant objectives of the business plan.

Continuing with the previously outlined example, your start-up company’s product line market tactics could include:

  • Set up meetings with five tier one customers by month three,
  • Secure letters of intent from two targeted tier one customers by month six, and
  • Obtain a signed licensing agreement from two tier one customers by month 12.

These market entry tactics follow the company’s overall strategy and are in compliance with the associated objectives for its technology, product, or service offering. By executing these product line market entry tactics in a defined and commensurate time frame, one can be assured to meet the overall objectives of your start-up company’s business plan.

 First time entrepreneurs often over look the need to develop a clearly defined market entry strategy with associated product line objectives and tactics.  By doing this, you are effectively not addressing half of the problem associated with developing your start-up company’s technology, product or service offering — getting your product to market, securing paying customers and acquiring market traction and revenue in a timely manner. By developing a well defined go to market strategy and the defining the associated product line objectives and tactics to support this overall go to market strategy, you can set your start-up company on its road to success in the market.  Therefore, spend the time to develop your start-up company’s go to market plan. By doing so, you will facilitate both your start-up company’s short term and long term success in the market.

This information was taken from Robert’s new book: “Business Planning, Business Plans and Venture Funding – A Definitive Reference Guide for Start-up Companies”.  Available at www.amazon.com.  For more information on the book go to www.carlsbadpublishing.com.

August 10, 2009 Posted by | Business Planning, Business Plans, go to market strategy, Market Traction, product line objectives, product line tactics, Target Markets, Venture Capital, venture finance, Venture Funding | 3 Comments

Knowing Your Customers Can Help Drive Your Start-up Company to Success in the Market

Every year over 500,000 would be entrepreneurs in the United States prepare and present their business propositions in front of angel investors and venture capitalists. Many of these same entrepreneurs often over look one important item, knowing their customer base. This faux pes can be detrimental to their start-up company, as investors need to understand that you know your customers and their needs, intimately.  Also, by not engaging with their potential customers early on, start-up companies can miss the market by developing the “right” product with the “wrong” features, functions, and capabilities.  In addition, these same internally focused start-up companies may miss the best benefit of all, developing a strong strategic relationship with a customer that is a market leader. This article addresses some of the reasons it is always beneficial to engage with your customer base early and often.

Do You Know Your Customers?

As a potential entrepreneur interested in taking your technology, product or service offering to market, you need to “know” your customers. This includes identifying the market leaders, market laggards, and the up and coming rising “stars” in all of your target markets of interest. This type of familiarity with your customer base will allow you to develop an appropriate go-to- market strategy and associated tactics when addressing your targeted market space.  Market leaders of today are not necessarily the market leaders of tomorrow.  Therefore, doing your diligence on the various competitors in your market and understanding their status, product portfolio, market position, etc. is invaluable when presenting your technology, product or service offering to these same customers. What is important to one customer will not necessarily be important to the next. So, by familiarizing yourself with your customer base and you will be much more comfortable when you call on them and ultimately present your product offering to them.  Remember, Apple was not even in the cell phone market a few years ago, now they are a major player in the “smart phone” segment of the market.  Therefore, anticipating this and familiarizing yourself with your potential customers puts you and your start-up company in the driver’s seat when engaging with your potential customers.

 What Segments of the Market Are You Addressing?

Most markets can be broken up into several market segments.  This generally includes the following:

  • High tier segment,
  • Medium tier segment, and
  • Low tier segment.

These segments are often based on price, but also as such, usually have many different sets of features, functions, and capabilities for each product offering to each market segment.  Often, start-up companies entering a new market cannot afford to address all market segments of a given market space.  Therefore, as a new company entering the market you need to familiarize your company with the various sub-segments within a given market and then determine the product features, functions, and capabilities that are necessary to address these market segments and also at the same time have an understanding regarding those same features, functions and capabilities that are “nice to have”.  This market segment familiarity will drive the features, functions and capabilities of your technology, product or service offering.  Not trying to be everything to every market segment is often a key attribute of successful start-up companies.  When entering a market for the first time, it is much better to be focused on a given market segment than trying to do everything for every potential customer.  Therefore, knowing what market segment or segments you are addressing up front will provide you with focus and allow your start-up company to be successful when entering a new market.  Later on, after you are successful in your target market segment, you can expand your product offering.  This strategy worked very well for the Japanese car companies entering the US market in the late 1960’s and early 1970’s. Originally, they entered the low-end segment of the US car market. Today, these same Japanese car makers are dominant players in all US car market segments.

Develop A Strategic Alliance with a Key Customer

Historically, the most successful start-up companies have often had the good fortune of developing a strategic alliance or “close relationship” with a market leader in their target market space. This relationship can be mutually beneficial to both the start-up company and the market leader. From the start-up company’s point of view developing a strong relationship with a key strategic partner will allow them to focus their product features and develop a first product offering that has a guaranteed market.  This is invaluable to the start-up company, as this key strategic alliance partner knows the end market application better than they do, and at the same time will help them focus their development efforts to a product offering that will be market driven and as a result successful in the market. From the market leader’s perspective, developing a relationship with a start-up company with a unique technology, product or service offering, will often allow them to differentiate their end-product in the market, gain market share, and address new emerging market opportunities, much faster than they would be able to by developing the technology, product or service offering on their own. This mutually beneficial relationship results in a win-win opportunity for the start-up company as well as the market leader.

Allow Customers to Drive Your Strategic Road Map

Many start-up companies do not have a well defined product road map. This is generally seen by investors as a gaping hole within their business plan, as only presenting a single product offering often indicates to investors a lack of familiarity with the market, and the long-term general market trends.  Seldom are start-up companies successful with their first product offering. Often, given market competition and the rapid pace of a changing market, these same start-up companies only become successful, gaining significant market share, after their second or third generation product offering.  So, only presenting a single product offering to your investors is a recipe for disaster.  This is where your customers can have a large impact on the future product offerings of your start-up company.  By engaging early with your customers and listening carefully to their needs and the market requirements, you can allow these same customers drive your product strategic road map. This will provide you with a basis to move forward and although it may change over time, a customer driven product road map is invaluable when presenting to you potential investors.  Nothing is more valuable to an investor presentation than having real customer input, based on actual conversations with your target customers. This provides instant credibility and market expertise not available by any other means.

Develop Valued Customer Relationships for Your Future Success

Developing valued customer relationships is a key to the success of any start-up company. Doing so allows you to gather invaluable input, vet new ideas, and at the same time stay close to the market trends.  Remember a “market driven” company will have much more long term success in their targeted market than that of a “technology driven” company. So, as a start-up company you need to value your customers, listen to their input, and reflect this invaluable information in your product development plans and associated product road map.  Too often, companies tend to believe they know more about the market than that of their customers. This is not the case.  Since your customers are one step closer to the end market application they are the ones to drive the technology, product or service features for your current and next generation product offerings.  Remember to use these same customers as a basis for your decision making and learn to value this relationship, as it will provide you with invaluable insight to both the near term and long term trends in the market.   

Knowing your customers will help drive your start-up company to success in the market.  By knowing your customers, determining your target market segments, developing strong strategic alliances, presenting a customer driven product roadmap and ultimately valuing your customers, you as an entrepreneur will be miles ahead when presenting to potential investors.  This customer familiarity will help you develop successful product offerings, both near term and long term, and at the same time allow your start-up company to secure significant market share, ensuring your long term success in the market.  So get out there and talk to your customers, you can only benefit from such one-on-one interaction ant it will help drive your start-up company to success in the market place.

June 29, 2009 Posted by | Customers, Strategic Alliance, Target Markets, Venture Capital, venture finance, Venture Funding | , , , , | 1 Comment

Burgeoning Markets –An “Uncontrollable” Risk for Start Up Companies and Investors

There are many different types of risks that entrepreneurs face when starting their companies. This can include technology risk, product development risk, market channel penetration risk, staffing risk and others. Many of these risk factors can be “controlled” by investors, in the short term, by investing more money and/or by adding more resources to mitigate these risks. The risk factor that is out of investors’ control and often causes a start-up company to fail is market risk. Market risk, as defined here, is multifaceted, and is a result of the targeted burgeoning market not developing in the anticipated time frame to support the product demand required by the start-up company. This often results bad news for both the start-up company and its investors.

Emerging “Bleeding-Edge” Burgeoning Markets Take Time to Develop
Often, in order to differentiate themselves from large, established competitors, start-up companies believe that they should address emerging markets with “bleeding-edge” technology. More often than not, this “bleeding-edge technology” strategy comes with a large amount of risk. The most important risk factor here is that the underlying, emerging market that supports this “bleeding-edge technology” does not develop in a predictable, near-term time frame. In this situation, the technology pundits always claim that their targeted market or market segment will “take off” within the next year, providing their company with a substantial return on investment in a very short period of time. This optimistic view of the world, usually does not consider the time it takes to roll-out new technology infrastructure or to establish this same new technology with the target customer base. More often than not, this one-year time frame turns out to be five to seven years or more. This makes it virtually impossible for a small, venture-funded company to finance the multiple generations of product development that are required before their burgeoning target market supports the shipment of significant enough volume to make their business model self-sustaining. This often makes this burgeoning market strategy more of a “hope” than a “reality” for the start-up company and its investors.

First Generation “Bleeding-Edge” Technology – Not Be Ready for Prime Time
Many times the first generation of a new “bleeding-edge” technology is not ready for prime time, as it does not meet the expectations of the target customer base. This will also result in substantial delays in market demand for the start-up’s technology, product or service offering. This again can delay any substantial revenue flow for several years.

As an example of this, in the early 1990’s when cellular phone technology was transitioning from analog technology to digital technology, all of the pundits claimed, that due to the benefits of digital technology — higher capacity and better voice quality, the transition would be immediate. As it turned out, the new digital technology made a person’s voice virtually unrecognizable to other callers. This resulted in many digital phone users turning in their phones for their old analog versions. From the users’ point of view, a little background noise was more tolerable than that of the “bad” voice quality of the digital cellular handset. In addition, given the time requirement to roll out the digital infrastructure, to get ubiquitous digital coverage, individuals did not see any real immediate value to the new digital technology.

Therefore, when developing and then deploying new technologies targeting burgeoning markets, often second generation and sometimes third generation technologies need to be developed to meet the consumers’ expectations. This, again, requires additional investment from the venture capitalists and delays any potential for revenue generation for the start-up company.

Burgeoning Markets – Often Result in More Losers Than Winners
Very often new burgeoning markets and their associated technologies attract a lot of investment monies from the venture capitalists. The result is often a “heard” mentality among these same investors to get in these targeted burgeoning markets at all costs, and be a part of these new “homerun” market opportunities. This, more often than not, results in too many new start-up companies chasing the same burgeoning markets. Where are there are often six to eight start-up companies looking to secure a successful market position in an early stage market, the truth is that only one to two will ultimately be successful. This again, results in higher risk for both the start-up company and the investors. In the end, there will be more losers than winners.

Required Investment May not Bode Well for the Start-up or the Investors
As a result of targeting these burgeoning markets, in many cases, these same start-up-companies often secure a tremendous amount of funding (e.g., $50M to $100M) and then as some point cannot secure additional funding from third-party investors. In this situation, the amount of funding secured significantly outweighs any financial value of the company or its technology, product, or service offering, requiring its investors to sell it to the first large company that will pay pennies on the dollar just to get out of the investment.

This scenario is not unusual. In fact, it has been my experience that within the high-technology wireless markets, this has happened to many start-up companies in the digital cellular, Bluetooth, the wireless LAN (WiFi) and WiMAX markets. For all of these markets, the pundits had projected substantial immediate growth in short periods of time, only to have the markets develop over much longer periods of time, causing many of the early, venture-funded start-up companies that targeted these markets to go out of business or to be sold to larger competitors for an insignificant valuation for the company and their investors.

Market Risk – Must be Thoroughly Evaluated by both Start-ups and Investors
The above does not to imply that there are not many cases where venture-funded, start-up companies, developing “bleeding-edge” technologies for burgeoning markets, do not secure significant returns for their investors. In fact, in the high-technology boom of the late 1990s, many large semiconductor companies were purchasing small start-ups to hedge their bets on some of the emerging wireless markets. At the time, many of these small companies were being purchased at valuations between $200M to $400M. These unheard of valuations, although good for the start-up companies and their investors, rarely made significant returns for the acquiring company, which often shut down these operations within one to two years after their purchase.

The accompanying lesson here is that the “market risk” associated with targeting a new burgeoning market is NOT a “controllable” risk. In fact, as outlined, the associated risk from targeting these emerging markets is multifaceted and many times results in significantly higher investment requirements and long delays in anticipated revenue streams. Therefore, both investors and start-up companies must thoroughly evaluate these risks before targeting a burgeoning market as their primary revenue generation opportunity.

The information outlined in this article comes from my new book entitled “Business Planning, Business Plans and Venture Funding – A Definitive Reference Guide for Start-up companies.” Signed copies of this book are available at http://www.carlsbadpublishing.com. The book is also avaiable at Amazon.com. Robert also provides business planning, and venture funding consulting services to start-up, small and mid-sized companies.

March 16, 2009 Posted by | Business Planning, Target Markets, Venture Capital | 4 Comments