110117 markets

(cc) BY NC SA, Rodrigo A. SEPULVEDA SCHULZ – www.rodrigosepulveda.com

Founder Institute – January 17, 2011

Pix (cc) BY NC SA, Rodrigo SEPÚLVEDA


Summary

Why is it important ?

Define your market positioning

How do you estimate it ?

Design a market entry strategy


1. Why is it important ?

Gives you A valuation A potential target for your revenue (therefore also EBIT) Assessment of market players, hence your competition


Potential target revenue

• Let’s say your market is 1b€

• Everyone wants/says a 1% market-share

• That means you’re targeting 1b € x 1% = 10m€ of revenues

• Impact:– You’re a tiny fish in a pond with 99% revenue elsewhere.

• No barrier to entry (there are other players)• Competitive edge is key (geography, product, customers…)

– Only 2 ways to grow• Grow the market size (either by yourself, or the market grows as a

whole)• Grow your market-share


Potential valuation

VCs are only interested in risk-controlled returns, usually in 5 years.

Hence we need to estimate your valuation in 5 years.

Usually 3 techniques: Multiples (turnover, EBIT, …) DCF (for going-concerns, not startups) Open market (early stage, or if Ricardian rent)


Multiples

Alternext used to trade with these multiples on average for tech companies: 2,2x turnover 23x EBIT

Maybe your industry has different metrics

From original example: Your valuation is 10m€ x 2,2 = 22m€


DCF



VC’s share• Valuation bracket at exit = [21,8-22,0m€]

• If 1 round of financing of 1,5m€ for 30% equity

• Then VC’s value at exit is– 22m€ x 30% = 6,6m€

• That’s a return of :– 6,6 / 1,5 = 4,4x (ok, > 3x) or 33%/year

• GREAT, but that’s only 5,1m€ made for the VC in 5 years (too small !)– cost of opportunity is too high

• Nota: if you’re financing the company alone, then it’s a different story : 22m€-1,5m€ financing = 20,5m€ profit in 5 years = 4m€/year


Advice you’ve already heard:

• Problem: – either target market is too small, – or target market-share is too small, – or profit is too small, – or asset created is too small, – or there are too many competitors.

• Target a BIG MARKET

• Aim to be the #1 in your market


2. Define your market

3 options An existing market A market that doesn’t exist yet An mature market : an opportunity to re-shape it


Example of entering an existing market

• Richard Branson and all Virgin brands in air travel, finance, rail

• Steve Jobs and telephony, music– iPhone, iTunes

• Bill Gates on OS, office software, games, etc.

• Mark Zuckerberg (facebook) with social networks

• Google with Android

• Innovation and a differentiating factor are key





A market that doesn’t exist yet

• Tons on literature on this

• Very risky, because – No available numbers– No guarantee you’ll find a market– But maybe best way to reach #1 position, globally,

because • you know something competition doesn’t know yet :

1st mover advantage• You define the rules


A word of advice about innovation

Feature company

Product company

Solution company

Nice-to-have

Got-to have


What problem are you solving ?Reality check #1


Why will someone PAY for your product ?

Reality check #2


Sample new markets

Classic examples : Walkman Post-its Netbooks

Space travel

Twitter (?)


A mature market

#1 or #2 strategy

Not enough: redefine your market as 10% max of revenue


3. How do you estimate your market size?

Many different techniques: Guesstimate (à la McKinsey) Published numbers (always a bracket) Sum of all players in a market


guesstimate

http://shop.wetfeet.com/Browse/Ace-Your-Case/asd-%281%29.aspx


Existing markets

Press articles

Competitor’s literature (presentations, website, financial statements)

Industry publications

Research institutes (IDC, Forrester, eMarketer, comscore, etc.) < beware though

SlideShare is great !


http://www.comscore.com/Press_Events/Press_Releases/2010/3/comScore_Reports_January_2010_U.S._Mobile_Subscriber_Market_Share



Sum of all players

Hard not to compare oranges and apples

Take only direct competitors

Gives you a current picture, not a projected one


http://tvnomics.typepad.com/tvnomics/vido/


http://tvnomics.typepad.com/tvnomics/vido/


4. Market entry strategy (in a nutshell)

4C :-Customer-Company (SWOT)-Competition-Community (PEST)

4P:-Product-Price-Place-Promotion

Positioning:We sell THIS PRODUCTTo THIS CUSTOMERAt THIS PRICETo solve THIS PROBLEM

PnL



1 strategy is NOT enough

You need to assess different scenarii

4C 4P POS P&L

4C’ 4P’ POS’ P&L’

4C” 4P” POS” P&L”

4C’” 4P’” POS’” P&L’”


What you end up doing depends both on your RISK profile and SWOT

X Pos”

X Pos’

X Pos’”

X Pos

Return(m€)

Risk(wacc)

10% 20% 30% 40%


Summary : entering a market

Why is it important ?

Define your market positioning

How do you estimate it ?

Design a market entry strategy


www.rodrigosepulveda.com twitter: @rodrigo

Rodrigo A. SEPÚLVEDA SCHULZ

Pix (cc) BY NC SA, Rodrigo SEPÚLVEDA

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110117 markets