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Genuinely new markets are really rare. They do happen -- VMWare was a great example. But they are few and far between. This is why lack of competition is oft
by pmarca 13y ago
Genuinely new markets are really rare. They do happen -- VMWare was a great example. But they are few and far between.
This is why lack of competition is often scary to potential investors -- paradoxically -- they ask themselves, how attractive can this supposed new market be if there are no other companies going after it?
The advanced way to do market analysis -- which only the most experienced entrepreneurs ever actually do, but which works really well, at least with us -- is to spend very little time on market theory or top-down market estimates (handwaving), and instead put a lot of effort into building a solid, well-though-through BOTTOM-UP market analysis.
What I mean by bottom-up is, literally, start at the bottom -- with an individual customer -- what is their problem, and how much are they plausibly going to pay for the solution, and then how much is it going to cost to acquire that customer. Then sum up how many customers like that exist at various sizes and in various market segments.
E.g. "I estimate that in the US alone there are 50,000 small companies that need this solution and will pay $10,000 each, and I think I can acquire them for $3,000 of sales and market expense each. And then there are another 5,000 midsize companies that will pay $50,000 each..." and so on and so forth. You can slice and dice it however makes sense for the specifics of what you are doing.
This kind of analysis answers several questions at once for the investor:
(a) Is there a big market?
(b) Does the entrepreneur actually understand the dynamics of the market she's going after?
(c) Does the entrepreneur understand the sales and marketing requirements and costs of her business?
(d) Is this an entrepreneur who takes every aspect of her business seriously and rigorously?
- mindcrime 13y agoWhat I mean by bottom-up is, literally, start at the bottom -- with an individual customer -- what is their problem, and how much are they plausibly going to pay for the solution, and then how much is it going to cost to acquire that customer. Then sum up how many customers like that exist at various sizes and in various market segments. Interestingly enough, that totally jibes with the Customer Development methodology from @sgblank, where he talks about developing and validating your "Problem Hypothesis", "Market Hypothesis", "Channel Hypothesis", etc. E.g. "I estimate that in the US alone there are 50,000 small companies that need this solution and will pay $10,000 each, and I think I can acquire them for $3,000 of sales and market expense each. And then there are another 5,000 midsize companies that will pay $50,000 each..." and so on and so forth. You can slice and dice it however makes sense for the specifics of what you are doing. This is the approach we're taking at Fogbeam. We've identified a beachhead market we're going to pursue to try and get initial traction, done some simulations based on the number of such customers, potential price points, etc., and come up with some potential revenue numbers and what-not. NOW, the next step is to get out and prove that our numbers actually make sense and hold up in the real world. Of course, they won't really, at least not according to our most optimistic projections. But the hope is that they do hold up well enough to get this thing off the ground...
- jasonkolb 13y agoThis is an awesome answer, thank you.
- jacques_chester 13y agoThis jives with the overall process advocated in one of my favourite books -- The Strategy and Tactics of Pricing. Identify value to the customer first.