You have a great idea for your new business and expect to have enough customers. But how do you know whether that market is actually there? And is it big enough? “Starting entrepreneurs are often too positive,” says René Roskamp, Chief Operating Officer of venture builder Holland Startup.
Come up with a wonderful solution, build it and then find out that the market isn't there at all or isn't big enough. It is one of the most common mistakes made by startups, Roskamp explains. According to him, for success it is necessary to see from the beginning whether the market you have in mind exists. In other words: are customers willing to pay for your solution. Something you want to find out without incurring a lot of costs or already building something by proceeding step by step, says the COO. Write down your assumptions, analyze problems, determine who your customer is and talk to them. “Think of an average of about fifteen customers. If ten of them indicate that they would like to buy your solution, then you are on the right path.”
That does not mean that saying that you want to buy something is different from actually pulling out your wallet. The trick here is to be as specific as possible in the early stages. For example, by setting and submitting a price. Or, if necessary, go one step further. “You can test consumers' willingness to pay online with a 'smoke offer'. Then you sell something you don't already have. In business-to-business you work with 'letters of intent'.”
At the same time, it is necessary to see whether the market is large enough to build a profitable company – also known as the addressable market named. This can roughly be done in two ways, Roskamp outlines. First, there are market estimates from research firms such as Gartner, Forrester and industry-specific parties. However, a caveat is in order here, he believes. “There are often very large figures that do not always offer sufficient guidance.”
Roskamp therefore sees more benefit in the second route: a sum analysis. This is a calculation using the price level of the product to be realized and the companies for which it is suitable. “Certainly when you have a yes signal from one or more companies, you can extrapolate this to the country, continent and the world. And look at the market share that you can achieve.”
Here too, a caveat is in order: “Ask yourself how big you want to make your company. Do you want to go all over the world or is it enough to focus on Europe?”
It is interesting to look for network effects for the development of digital products. In short: products that are quickly adopted by companies, because they see that colleagues or competitors are also using it. Think, for example, of file exchange service WeTransfer or the Salesforce platform.
At Holland Startup, the market approach has been tightened up slightly by means of an intermediate step, in which startups approach a small market in which they bring in a few customers and start building the product with them. “While building your product, you always come across things that you cannot foresee yourself. Therefore, always develop a product in close contact with the customer. If it makes your first customers happy, you can further develop your sales channel.”
Ambitious and realistic
The process outlined above is highly data-driven, but the gut can certainly continue to play a role. Roskamp: “You have to have the feeling that it will work, that is necessary for your motivation. You must be prepared to prove your own wrong with data from tests and not hold on to that wrong.”
From an investor perspective, it is also examined whether a market is large enough to build a profitable company. After all, funds have their own investment budgets, objectives and expectations. Roskamp once again points to the potential market share of startups. “I often look first at the credibility of the estimate. It is unrealistic to immediately assume a ten percent market share. You have to be ambitious, but also realistic.” To this end, the entrepreneurial experience within investment vehicles is used, as well as looking at comparable initiatives in other markets, for example abroad. “It is often possible to find out how they grow, what marketing costs they incur, et cetera. A lot of information is public,” explains Roskamp.
It is therefore essential to identify, approach and further estimate your market early for several reasons. “Starting entrepreneurs are often too positive and the market is estimated too large,” concludes Roskamp. “That's why you need a customer profile that is as narrow as possible and clearly described, you need that for everything.”