Many of those who follow me through LinkedIn or who have heard me speak, know that I am part of the TechCoastAngels of Orange County. And as a TCA member, we evaluate investing opportunities. Over the past four months I have listened to many presentations and tried to understand whether the investment made sense to me. It always struck me that the focus of most of these meetings is on the financials and metrics such as EBITA. Why? We, as angel investors, are taking a risk and therefore want to make sure the return compensates us for that risk.
The entrepreneurs who present normally have a wealth of information and mostly a solid technical understanding of their products and services. Yet, I have found that the entrepreneur sometimes doesn’t understand how to make a case for the investment. Ergo, this blog is intended to help the entrepreneur or business person by providing a template for analyzing and presenting a good business opportunity. It is far from complete though. This format and template can also be applied by business people in companies who are evaluating a new product, a new service, and even potential partners.
Before the marketing plan i.e. the “go to market” plan, can be implemented, the content of this basic template is necessary to understand what to market. This template and consists of four fundamental questions and a raft of supporting questions. Feel free to add as you see fit:
1. Is there a market? This sounds so simple but it is probably the most difficult item to classify. How many times have you heard: “If I only get 1% of all the Chinese people in X province, I will have a billion dollar business in two years? Were it so simple! The answers have to come from the following supporting questions.
a. Who is the target market? What is the specific need or pain point you are trying to solve? Can you specifically identify your customers so you can market or sell directly to them, e.g. are they small businesspeople in a geography or businesses that need to improve their accounts receivable? The former is easier to identify. The more specific and easier to identify, the better. Interestingly, the more precise the definition, the broader the market!!
b. Is the market stagnant or growing? Will you be looking to increase the size of the market or take share from the competitor and which competitor are you aiming at? (My personal opinion is to go after the expansion of the market and go after the leader in some way, and if not directly, by outflanking that leader.)
c. Consider the juncture of three elements as you consider positioning the product and service in the market: customer, competitor and competencies (within the company). Do you want to position your product more towards the customer i.e. a custom product or a series of products? Or do you want to position it against the competition because it is better, faster, larger, smarter or any of the other ways to differentiate? Do you want to position the product relative to special competencies that are inherent in the company today or ones you intend to add to the company over time? In defining the market, the use of this simple paradigm helps determine if in fact there is enough of a market to claim.
2. Can you make the product or service? This question relates to the ease of which the product can be made, the raw materials to make it, the talent necessary to manufacture, and the intellectual property that can sustain a differential advantage. Specific questions to address include:
a. What is the Intellectual property and will you be able to patent that IP? Just as importantly, is the IP sustainable? What are the unique advantages of the product or the management teams that can help make the product unique? Maybe it is their creativity and if so, how will you sustain the creativity or keep the team intact? Or is it the interface, ease of use, customer service, support, processes? Do you have the human capital and talent to build the product, specifically the technical skills on board now and in the future? Do you have a ready source for technical experts?
b. How easy is the product to build? Do you need new processes? New equipment? New delivery systems? New materials? Or can you use existing processes and materials? If you use existing processes and materials and IP, will a larger competitor come in and get to market before you will?
c. How fast can you bring the service or product to market? Is first mover advantage critical? Or is getting it right with a quality product more critical. Does anyone remember the first portable computer and who made it? It certainly had first mover advantage but neither it nor the company survived. (The answer: the Osborne computer.)
3. Can you make money? Clearly this is the operative question whether you are an entrepreneur or intrapreneur (an entrepreneur within a corporate setting). Some specific supporting questions include:
a. What is the revenue growth? Sales growth (number of units)? Is this growth realistic? (How many times have you seen business cases that went from zero revenue in year one to $200 million in year 3? How many of those companies have achieved that type of explosive success?)
b. What is the EBITA and how does it compare to other competitors at the same stage of their lives? What is the cash flow and when does the business case turn cash flow positive? To me, cash is king!!
c. What is the cost of goods? How does that cost change relative to the sales unit and revenue growth? What are the ways you are looking to improve the cost e.g. by vertically integrating, sourcing, partnerships, or other means?
d. What is the growth path, or as I like to say, ROUTES TO REVENUIE, over time that will continue to grow the business and make it flourish and minimize the risk of being a one trick pony? Have you mapped out the product and service architecture that enable you to provide more products to the market segments you targeted or find more market segments in which to sell? And while we are talking about selling, have you considered all the selling expenses and the distribution costs?
4. Can you support it? This is particularly true in a service business but equally true in a software business or a complex product. Some additional questions include:
a. Will there be online service and support? Will stores in which the product is sold support the product or will there be an 800 lines or self service on the web? How easy is it to service the product, service or software via a knowledge ware system on the web? How many of you have actually tried to solve a problem with Microsoft software by using their tech support and knowledge base?
b. Do you have an adequate training program for those on the front line, in customer service, or account support? Is the product so complex you need to have technical sales experts and if so do you have the wherewithal to hire, train, and pay them?
Let’s not assume that these are all the questions to address. Yet, this is a reasonable start in getting a good handle on whether the business will make sense. And more interestingly, by answering these questions, the marketing team will have a better understanding of “how to go to market.” And by so doing, they will have the opportunity to be successful.