| Many entrepreneurs only focus on bleeding-edge, | | | | growth, one has eliminated the substantial risk that |
| burgeoning markets when developing their technology, | | | | exists when there is the need for the underlying |
| product or service offering. This is done for various | | | | market to develop in order to support your business |
| reasons including: | | | | model. This generally is an undue amount of risk that |
| - The perception that burgeoning markets have limited | | | | many investors are unwilling to take to ensure their |
| competition, | | | | return on investment. In addition large established |
| - The ability to establish an early foot-hold to increase | | | | markets have five favorable market characteristics as |
| the value of their company, and | | | | described below. |
| - The reality of the difficulty in developing a | | | | Reason #1: The Market is Large |
| differentiated, long-term competitive advantage in large | | | | The market is large. By virtue of its large size, this |
| established markets. | | | | makes the market very attractive to investors and |
| This article outlines why this market approach is | | | | new start-up companies seeking to establish |
| generally too risky for many venture capitalists and | | | | themselves in the market. The market, due to its size, |
| then provides five reasons why venture capitalists | | | | is big enough to support one or more new competitors. |
| prefer large established markets over bleeding-edge, | | | | Therefore, the opportunity exists to establish your |
| burgeoning markets. | | | | company in the market by securing enough market |
| Emerging Bleeding-Edge Burgeoning Markets | | | | share to support your business model projections. In |
| Often in order to differentiate themselves from large, | | | | addition, due to the inherent size of the large market, it |
| established competitors, smaller companies or | | | | does not require your company to secure an |
| start-ups believe that they should address emerging | | | | unrealistic market share to meet its business goals. |
| markets with bleeding-edge technology. Generally | | | | This makes the large market an excellent investment |
| speaking, it is true that the larger competitors will not | | | | opportunity and significantly reduces any risk that is out |
| jump into a new, emerging market segment until it is | | | | of control of your company, the size of the market. |
| deemed that the market has enough volume to | | | | Reason #2: The Market is Established |
| support the required investment. In addition, these same | | | | The market is established. This also reduces the |
| large companies are more conservative in their | | | | overall risk to your company looking to enter the |
| investment philosophy and can afford to wait as they | | | | market with your technology, product, or service |
| have the necessary resources and marketing | | | | offering. By being established, there is a defined history |
| presence to jump in quickly and create their own | | | | to the market, the competitors, and their technology, |
| position in the emerging market. On the other hand, | | | | product, or service offerings. This makes the underlying |
| smaller companies or start-ups believe that if they can | | | | dynamics of competition within the market well |
| create a foothold in an emerging market, it will allow | | | | understood, again eliminating any unknowns and |
| these same start-up companies to secure a strong | | | | unforeseen risk that may be hovering just under the |
| position and for them to gain market share supporting | | | | surface of smaller, less established markets. By |
| a significant exit strategy for their investors by either | | | | addressing a market that is already established, your |
| going public (less likely) or getting acquired by a larger, | | | | company can predict many of the risk factors that it |
| more established competitor. | | | | will need to address to be successful in the market. |
| More often than not, this bleeding-edge, burgeoning | | | | Reason #3: The Market Has Strong Projected |
| market entry strategy comes with a large amount of | | | | Growth |
| risk. The most important risk factor here is that the | | | | A market with strong projected growth is desirable for |
| underlying, emerging market that supports this | | | | two reasons. First, by having strong growth, your |
| bleeding-edge technology does not develop in a | | | | company can be assured over the long term of the |
| predictable, near-term time frame. In this situation, the | | | | opportunity to increase its return on investment. Strong |
| technology pundits often claim that their target market | | | | growth also allows for the possibility of new market |
| or market segment will take off within the next year, | | | | sub-segments to develop, creating additional growth |
| providing their company with a substantial return on | | | | opportunities for your company. Secondly, strong |
| investment in a very short period of time. This | | | | growth makes a market very dynamic. That is, there |
| optimistic view of the world, usually does not consider | | | | are new competitors trying to enter the market, and |
| the time it takes to roll-out new technology | | | | established players trying to retain their positions. This |
| infrastructure or to establish this same new technology | | | | provides for more opportunity for your company to |
| with the customer base. More often than not, this | | | | develop a compelling technology, product, or service |
| one-year time frame turns out to be five to seven | | | | offering that can be used to secure significant market |
| years. This makes it virtually impossible for a small, | | | | share. The pure dynamics of a growing market |
| venture-funded company to finance the multiple | | | | requires established competitors and new competitors |
| generations of product development that are required | | | | alike to constantly monitor the market for new |
| before their bleeding-edge target market supports the | | | | opportunities, creating a highly competitive environment. |
| shipment of significant enough volume to make their | | | | Reason #4: The Market Has a Known Customer |
| business model self-sustaining. In many cases, this | | | | Base |
| same small high-technology, start-up-company has | | | | By being large and established, the market has a |
| secured a tremendous amount of funding (e.g., $50M | | | | known customer base. Therefore, your company with |
| to $100M) and cannot secure additional funding from | | | | its technology, product, or service offering can look at |
| third-party investors. In this situation, the amount of | | | | the established history of the market and determine |
| funding secured significantly outweighs any financial | | | | the needs of your target customer base. In addition, |
| value of the company or its technology, product, or | | | | with the established customer base there is always a |
| service offering, requiring its investors to sell it to the | | | | strategic, opportunistic customer need that is not being |
| first large company that will pay pennies on the dollar | | | | addressed, providing for an opportunity to substantiate |
| just to get out of the investment. | | | | your company as a new competitor in the market. |
| This scenario is not unusual. In fact, it has been my | | | | Generally speaking, established customers are always |
| experience that within the high-technology wireless | | | | looking for new ways to differentiate their technology, |
| markets, this has happened to many start-up | | | | product, or service offerings, providing themselves with |
| companies in the digital cellular, Bluetooth, the wireless | | | | a leg up on their competition. Also, with an established |
| LAN (WiFi) and WiMAX markets. For all of these | | | | customer base, by studying the market leaders, and |
| markets, the pundits had projected substantial | | | | their specific customers, market positions, and product |
| immediate growth in short periods of time, only to have | | | | offerings, it is easy to determine what is required to |
| the markets develop over much longer periods of time, | | | | make a company successful in the market. |
| causing many of the early, venture-funded start-up | | | | Reason #5: The Market Demands New Customers |
| companies that targeted these markets to go out of | | | | Large, established markets with strong growth also |
| business or to be sold to larger competitors for an | | | | attract new potential customers for your technology, |
| insignificant valuation for the company and their | | | | product, or service offering. By virtue of its size, |
| investors. | | | | growth, and the underlying dynamics, new customers |
| This is not to imply that there are not many cases | | | | will always be looking to establish themselves in the |
| where venture-funded, start-up companies developing | | | | target market. These new customers may be |
| bleeding-edge technology for an emerging market did | | | | established competitors or new competitors, but one |
| not secure a significant return for their investors. In the | | | | must always assume that there exists opportunity for |
| high-technology boom of the late 1990s, many large | | | | new customers for your technology, product, or |
| semiconductor companies were purchasing small | | | | services offering. Many times these new potential |
| start-ups to hedge their bets on some of the emerging | | | | customers exist under the radar. They may be strong |
| wireless markets. At the time, many of these small | | | | competitors in complementary markets, new |
| companies were being purchased at valuations | | | | venture-funded start-ups, or large corporations looking |
| between $200M to $400M. These unheard of | | | | to established themselves in non-related markets. The |
| valuations, although good for the start-up companies, | | | | issue here is that, for large, established markets with |
| rarely made significant returns for the acquiring | | | | strong growth, there always exist new potential |
| company, which often shut down these operations | | | | customers for your technology, product, or service |
| within one to two years after their purchase. | | | | offering. The key is to do your research and due |
| Large Established Markets With Strong Growth | | | | diligence to identify these new potential customers. |
| A much stronger strategy is for start-up and emerging | | | | Since all venture capitalists are by their nature risk |
| companies with unique and disruptive technologies to | | | | adverse, it pays for entrepreneurs to target markets |
| go after large, established markets with strong growth. | | | | that are large with strong growth. Generally speaking |
| This is the one of the untold secrets for receiving | | | | bleeding-edge, burgeoning markets end up being a |
| funding from the venture capital community. The | | | | disappointment -- both for the entrepreneur and their |
| venture capitalists always look for companies, as | | | | investors, resulting in much lower returns for the |
| previous defined, with disruptive technology product or | | | | venture capitalists. The five reasons outlined here |
| service offerings, looking to address large and | | | | provide the entrepreneur with the necessary insight |
| established markets with strong growth potential. By | | | | that will allow them to be discriminating when choosing |
| addressing large, established markets with strong | | | | their target markets of interest. |