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Know Your Market

Written by: Bill Warner

Article Overview: Whether you are starting a new company, launching a new business initiative or spinning out a company, the first and most important thing you must do is know your business. I think there are two constituencies that you have to convince, other than yourself. First, you have to know your business concisely enough so that you can quickly explain it to your grandmother; so that she understands it. The second is you have to comprehensively explain it to sophisticated investors so that they are convinced it's an attractive investment. If you can do this successfully, you understand the business.

Know Your Market

Whether you are starting a new company, launching a new business initiative or spinning out a company, the first and most important thing you must do is know your business. I think there are two constituencies that you have to convince, other than yourself. First, you have to know your business concisely enough so that you can quickly explain it to your grandmother; so that she understands it. The second is you have to comprehensively explain it to sophisticated investors so that they are convinced it's an attractive investment. If you can do this successfully, you understand the business.

Understand the overall landscape picture

Before you commit an investor's money or your own money, you need to do some research to assess what you are buying. This does not mean that you merely go to the market research library and read some important statistics that loosely relate to your market. It means that you have to really know specifics about the breadth and depth of the market segment that your company plans to pursue.

I refer to this task as understanding the industry landscape. Others call it market research or market analysis. Intel calls it understanding the ecosystem. Others call it understanding the food chain. You can draw a picture of the industry landscape. Imagine boxes named with companies, organizations, customers, suppliers, distributors, wholesales, integrators, resellers, competitors and investors, all interconnected with arrows describing their relationships. Within the landscape picture you then can focus on the area where your business will exist. By whatever name or means of describing the market, it all comes down to understanding the dynamics of your business environment.

What market are you in?

The first step is to describe the market landscape, including its size and growth trends, segmented into revenue categories. This requires some extensive research, although sometimes there are research reports that will provide most of the information you need. I am an advocate of the top-down approach. Start with a broad description of the landscape. Examples of this step are: describing the need for a high bandwidth switch, the self-service segment of the online service market, the importance of a drug that lowers cholesterol, or the need for security encryption for business data. At this point, you are simply trying to describe what the forest looks like and the kinds of trees that grow in it. You are not ready to describe the leaves on the trees, the weeds that grow on the forest floor or the moss on the tree bark. After explaining what the landscape looks like, you are ready to isolate the market segment that you are pursuing, in the context of the overall picture you just described. The size and growth of the market can be determined with a simple analysis of market demographics like number of businesses of certain sizes, the size of the installed base of certain equipment, census data and others. Often, if you are making a new market, and you will have to build it bottoms-up by looking at the market participation of similar companies and what their revenue is. Of course, you have to put the time dimension on this data, and show that your market segment is sizable enough to go after and that the opportunity is still growing. Investors need to be convinced there is an attractive market.

What problem are you solving?

Finally, determine and explain the compelling business problem that you intend to solve. In today's economy, with constrained budgets, companies are not spending money on nice things to have. They are strictly prioritizing their needs and making tough decisions to buy only what they need to succeed. In the context of your industry landscape picture, explain what problem you solve and how solving it will bring tremendous value to the buyer. Give some details about near term cost savings, new revenue achieved, or new businesses that can be spawned, and in quantifiable terms that demonstrate a very attractive return on the investment in your product or service. It's important to any investor to know that the problem is worth solving.

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Article Tags: arrows, attractive investment, breadth, business environment, business initiative, constituencies, extensive research, food chain, grandmother, growth trends, industry landscape, market landscape, market research, market segment, new business, resellers, revenue categories, sophisticated investors, specifics, wholesales



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