My goal with teaching and working with entrepreneurs and education is to help entrepreneurs prepare their mindset and their position for investment. As we work together, we make sure that their new venture has the ability to be heard, be understood, and ultimately be able to attract the investment they need. The post below details one of the most common flaws I see with entrepreneurs seeking investment.
I call this “Opportunity to Market Match.”
Every single business plan considers an opportunity, the market that opportunity will enter, and the potential market estimate. The golden question is: How much of that market do you think you can actually get? In other words, the market you can actually attain as compared to the market that you can see is there?
The reason this question is described as golden is that it is the gateway question to the investor’s billfold. If you aren’t prepared for this question or worse, prepared incorrectly for this question, you will find yourself exiting the room stage left quicker than you entered stage right.
Typically, this is what happens:
Investor: “So what is YOUR estimate of your market potential?”
Entrepreneur: “The entire U.S. market size is X. We just have to capture a conservative 10% of the market in order to start turning a profit.”
Anyone can get 10% of any market right?
No. What you have just witnessed is the prototypical top-down market assessment technique blow up in the entrepreneur’s face. The biggest mistake entrepreneurs make is they predict sales they can never practically achieve (and worse no supportive operations plan to match it)- investors see it and don't stand for it.
Investors are not interested in overly aggressive sales forecast numbers. They are interested in how you got to those numbers. Investors know that they don’t enter a nationwide market immediately, so assuming that you can is presumptuous and naïve.
If you try to boldly state you need to capture X% of the market and your venture cannot produce that much, your company is undercapitalized. If your revenue projections were based on a large market, your profit estimations were overstated as well. Now you have double trouble – unrealistic high hopes for sales and not enough capital to support the infrastructure, which rapidly dries up cash flow.
Opportunity to Market Match
A better way to match the opportunity to the market is to figure the size of a realistic bottom-up assessment of the available market you can penetrate. In other words, match your opportunity to your operations capacity in order to figure out your revenue projections.
Figure out your production capacity (how much can you make/how many can you serve) as a basis of what you will optimally have available to your customers. From there, give a plan for distributing and selling that available production (which is a whole other topic).
This bottom-up approach gives you a much more credible argument for substantiating your revenue projections. It also ignites confidence in your potential investors that you have the capacity to continue being the CEO of your new venture.
-Stamp
