Proven Need

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How To Know Your Market

Matthew Bradley

Investor @ Forward Partners

We, and likely most other early stage investors, tend to approach new investments with a Product-Market-Team framework. Is there some magic in the product? Is this market a decent bet for a venture scale exit? Does this team have what it takes?

At the earliest stages, products are often recently launched or maybe even just a bunch of ideas, hypotheses and assumptions while teams are both easy and very hard to assess as that’s a subjective matter. That leaves “market” as the only real quantitative element that we can grapple with. As a result we spend a good amount of time assessing the market… and you should too!

Key Takeaways

  • Be a historian - knowing about how the incumbents got there can be very important

  • Be an environmentalist - know your direct, indirect and substitute competition in the here and now

  • Remember that this is a partnership - if an investor is keen on a deal you can help them get comfortable by having done exhaustive research

Some ground rules. There has been a lot written about market sizing techniques and what venture scale markets look like. I’m going to be focusing on the tips that allow you to demonstrate to “a.n.other investor” that not only have you sized the market properly, but you truly know it.

You may also want to read these pieces about venture scale markets, from my colleagues Chris and  Nic. If you’re having trouble ‘finding’ a market for your new venture, here’s something that I prepared earlier.

Be a historian

In many ventures, it helps to have some subject matter expertise. In regulated markets like banking, accountancy, healthcare is likely to be essential that you have the relevant qualifications to make you a practitioner in order to ‘start up’ successfully. Outside of those regulated markets, it’s hardly crucial. After all, Travis Kalanick was never a taxi driver, nor a good passenger.

Either way, you need to know a lot about how the market works - how stakeholders interact and how business is done - as that feeds into the product.

That’s a present day thing though. I’ve frequently found myself very impressed by entrepreneurs who are true students of their market or industry. You’ll have heard the quote: “Those who cannot remember the past are condemned to repeat it”; it’s famous for good reason.

Extensive comparisons between the new-rich and established incumbents in any industry are the best way to do this. For example, in cosmetics, the obvious go-to comparison is Glossier. However, MAC has broken into the pantheon of incumbents in the last 50 years. Understanding how that happened is of huge importance. Maybe there’s something to be learned from their ascent, even if they’re not a native eComm business.

Be an environmentalist

We’ve covered the historical aspect of your market, now it’s time to turn attention to the here-and-now. Knowing your competitive environment inside out can be make or break for a potential deal.

First up, you’ll greatly increase your chances of a deal by demonstrating that you are rigorous in your analysis (in general and related to your industry) and proactive about finding the gaps/opportunities. If you’re not rigorous and proactive your chances of the deal go down. Imagine a scenario where a potential investor does a bit of due diligence and finds a load of direct competitors that you neglected to mention. That’s not the right way to establish a strong partnership.

I tend to like when entrepreneurs talk about competition with the lens of direct competition, indirect competition and substitutes.

Direct competition is exactly as it sounds - businesses which will be competing with you head-on for your customers with a similar offering. To enrich this, you can split up the competition into “incumbent”, “scale-up” and “start-up” buckets.

Using Netflix as an easy example, their direct competition includes regular television and competing streaming services like YouTube, HBO, Hulu, Amazon Prime Video, Disney, etc.

Indirect competition means businesses who might/could move into your market given a change in strategy and focus. They’re also likely to cannibalise some of your users time and money in some form already.

Keeping with Netflix, indirect competition might include music streaming services such as Spotify and film/production studios and companies.

Substitutes are those companies who may not match you feature for feature but are an alternative.

Netlix founder Reed Hastings recently said that his company’s biggest competitor is sleep, this fits the bill here.

As a final note...when presenting this in your pitch deck there are some easy points to hoover up by presenting things in the right way.

Too often I see competitive matrixes which show business features as binary i.e. X competitor either has something, or they do not. That may be true for some features though reality is often more complex than that.

Giving relative scores allows you to show a more nuanced understanding of your competitor set as you can see in the example below.

Matthew Bradley

Investor @ Forward Partners

Matthew used to work on trading floors at Lloyds and BarCap before seeing the light. Following an MBA at SDA Bocconi and before joining us he became an entrepreneur and investor in his own right. He’s focused on sourcing and executing deals. His other interests and activities include investment strategy, writing and emoji.

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