Entrepreneurs are very used to hearing about the importance of selling into markets which are large and growing especially from potential investors. Entrepreneurs must satisfy themselves at the earliest stages of their own personal due diligence on their business viability that the markets they wish to attack (e.g., the target markets) are large enough to support the entry of their new and better products.
At the earliest formative stages of business definition, when discovery is happening and technology is in the process of being developed, entrepreneurs are not likely to have a fully developed product documented; that is, details of design, expected costs, and market acceptance are assumed but have not been validated by focused research and development. In the case of technology, that technology may have more than one potential application, and it may not be immediately clear which application and market can be best targeted first.
Entrepreneurs may have an idea of what products should evolve from the technology being developed, but even that initial vision can be in error. It would not be unusual to determine through due diligence that the presumed target market is not the best one, and initial thoughts of a product must be altered dramatically to fit a preferred (alternative) target market. Target markets and products optimized for customers in those target markets must be matched.
Matching the (right) product to the (right) market is a central tenet of good new venture thinking.
The central issue of due diligence related to markets is to determine those markets (e.g., the target markets) that are sufficiently large and growing to support the entry of a new competitor (the entrepreneur’s new venture).
Professional investors generally insist that target markets be large and growing so that missteps and errors on the part of the new venture can somewhat be compensated for by the size of the market, which presumably contains large competitors who are not particularly concerned with competing with a small, upstart technology company.
Nevertheless, venture capital firms in particular are interested in supporting companies that target billion-dollar markets rather than those that target million-dollar markets. Both the magnitude of investment considered and the interest of professional investors scale with the size of the markets to be served by the underlying technology.
Market research should consist first of an identification of market size and growth rates based on public data from trade magazines, public company reports (annual and 10-Q reports, for instance), newspapers, Internet blogs, etc. Recent trends in the growth (e.g., declining, rapidly growing, nascent, etc.) of the market should be noted. This information is necessary for purposes of defining the area of the company’s interest, but it is not sufficient for defining the size and growth rate of the company’s target markets. Of the products (and services) sold into the more general market, a determination must be made as to the sales volume and price of each product type sold within that market. While secondary sources of research may be useful, entrepreneurs may need to seek out primary sources of data. The end result, even if data is missing and must be assumed, should be a concise table showing a market segment matched to a product type along with estimates of volume sales, per unit pricing, and total market segment sales. At the earliest stages of founder due diligence, it is necessary only to make an early assessment of the most likely target markets (e.g., segments) the company will enter and their size and growth rates.
The goal for an entrepreneur is to identify a number of potential target markets that collectively (in a summed sense) have a large size, presumably in the billions-of-dollars range.
One of these target markets will eventually be selected as the entry market—the market that offers the best prospect for producing profit soon after funding. That initial target market need not be large, but it must be one for which success is highly probable.