Once we get through the basic definitions of company, product and client, it is important to understand how big the company can become in its current structure and whether or not its markets can be expanded.
Too often when speaking with company principals I hear that they are targeting SMEs (Small and Medium Enterprises). There are nnn SMEs in our area. If we get 5% of the SMEs that will translate to 10m $ in sales. The translation is, “We have no clue about our specific market but we know that some businesses will need our product.”
Structuring any product or service to meet the needs of a broad market is practically impossible. Usually, successful companies will build a product or service for a very small and specific need and the market will then find that the same product can be used in different segments. Their product and business model are structured in a way that allows them to make money with a reasonably pessimistic view of sales. They are then pleasantly surprised when the product has greater penetration than anticipated.
Another way to think of it is from a salesman’s point of view. If the salesman can get the client to touch, handle or use the product he most likely will make the sale. If the client cannot see himself using the product he will not buy it no matter how good “a deal” is offered. The same is true with investments. If the investor can see a way to expand your market, one that you have not told him about, he is using the product and sees upside potential. If he does not see how you are going to make your projections he calculates downside risks.
The days of “I have an idea that is viral, give me money to develop it,” are gone. Investors are looking for realistic expectations and cautious demeanor by management.
Tags: Small Business Private Equity Business Plans Financial Model Financing Marketing Sales Investments
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2 comments:
Very sensible advice, David.
My own experience with start-ups has been that the market (and business) always proves to be different from that originally enisaged. Starting with a narrow targeted market focus allows you to get out quickly, thus providing practical market feedback.
Jim At one time the buz word was "sequential". No matter how it is called, your description is correct, target and focus, expand and focus, review and refocus.
Boring but practical.
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