- Is your market identifiable and accessible ?
Test yourself as to whether you can identify the size of the market, and whether you can overcome the many barriers to access customers and effect change in your niche.
2. Where is the industry life cycle ?
If your vision is for a product or service that fills a need in a mature industry, you may be flying against the prevailing winds as a market shrinks over time, taking your business with it. Conversely, a fast-growing industry lifts most all good participants, making excellent companies excel even more and grow even faster, like a small plane flying at 150 knots with a 75-knot tailwind.
3. How large is the total market ?
If the total market for your niche is under $100 million per year, it is going to be difficult, if not impossible, to build a $50 million business. Conversely, if the market is ten times that size, there will probably be competitors – and therefore a need to fight for dominance.
4. Can you dominate the market ?
The dominant player in any niche controls pricing, often sets business terms, highlights the risk with new entrants in the market. To get traction, a new company needs to be good at articulating a very compelling value proposition and providing a very appealing solution over existing player’s products or services – that meaningfully improve outcomes for Customers.
5. Have you created high barriers to entry ?
If your business is a “ me too ” entrant into a market, even the smallest success will soon attract competitors that will impact your potential growth. What can you do to have a barrier to entry for competitors ? Is it the advantage of time – years of development ahead of any competitor ? Do you have or plan to have a core patent or “ thicket ” of patents protecting your offering ? Which large Customers / Partners should we form strategic relationships with ?
6. Are margins high ?
Some great ideas just can’t make money and ultimately die for lack of profit potential. Profit margins are higher for unique products or services early in the life of an industry niche, or for products protected by patents that prevent others from undercutting you simply by releasing a cheaper product. High profit margins reflect a product / service having high value and a sign of high barriers to entry that attract investors and ultimately good buyers for your business.
7. Can the business grow to $20MM and higher in annual revenues in the next few years ? This is a basic test for investors, separating your business from those with smaller visions. There is nothing wrong with a small business where there is no need for outside investors to assist in making it a reality.
8. Do you have a world-class leadership / management team ?
The best way to protect against failure is to attract highly competent and results oriented people who have experienced success and failure plus have good look ahead – to get past the many unknowns and can meaningfully contribute to good decision making. This is essential to improve the probability of venture success and better managing risk by avoiding the pitfalls previously experienced from their past failures. From a professional investor’s perspective, the team should have several strong competencies, recognizes and is pro-active at mitigating risk, be flexible, coachable and experienced enough to get a business through breakeven and beyond the next level of outside investment, is great at execution, etc.
9. Can you translate an idea into a compelling product ?
Some great ideas cannot be made into a product at a reasonable price or in a reasonable time. And some attract early adopters but cannot create a mass market. Sometimes, an idea is just too early for the available technology to make it attractive, or product messaging doesn’t articulate a very compelling value proposition. An example of this is early cell phones were large bricks that required a large carrying case and cost up to a dollar a minute to use. As technology caught up with more capabilities as well as miniaturization and light weight, mass adoption drove the price down and allowed the building of infrastructures everywhere to support the use with inexpensive minutes. Determine what’s needed to develop compelling products or early prototypes as proof there is an opportunity with the ability to meaningfully improve outcomes, make innovation more rewarding, as well as to reduce business and technology risk to move forward.
10. Is there an exit strategy for the Stakeholders / Investors ?
There are many professional services businesses that make fine lifestyle opportunities for architects, doctors and dentists. But these types of businesses are not attractive to potential buyers willing to pay a premium for businesses that are worth millions more than their asset value. Building a great business to create wealth for stakeholders at exit means thinking of the exit strategies from the beginning. Based on the business scaling successfully, determine who or what type of buyer would be attracted to the company ? And recognize, creating great wealth is made from selling great businesses at immense profit.
June 29, 2023 by Dave Berkus & Ron Thompson CAIL Venture Investing Insights for Founders
www.cail.com info@cail.com 905-940-9000