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Appraising a Startup’s Market Potential

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According to a CBInsights report, the top reason startups fail is that a market need does not exist for the product being offered. Before you invest in a startup that has caught your attention, consider whether it has market potential and whether the available serviceable market seems to have space for growth.

Market Potential

Market potential represents the population of customers ideally possible for the startup’s product. This number is an estimate based on several assumptions, but looking at the market potential can help you understand a startup’s room for growth. If the market potential is small, the startup likely has a lower chance of success since it will exhaust its potential customer base more quickly.

The market potential includes every customer with a potential need or desire for the offered product or service that the startup could reach if there were no competitors. You can assess this by looking at the general need for the product the startup is producing, the customer demographics that might be interested in the product, and whether potential customers would actually purchase the product. You can learn about the potential market from information the startup provides as well as your own research.

A startup will likely provide this relevant market information in its pitch deck or business plan. You can also review applicable market research reports that can be found through an online search or even gather feedback directly from potential customers. Simply talking to your own family and friends who fall into the target demographic of the product can give you insight into the viability of the product’s salability. You can also check out social media and online reviews if the product is already being sold, and you can review the online presence of the competitors to see what people are saying about them as well.

Serviceable Area

Another factor that affects a potential market is the serviceable area. This is the portion of the potential market that can be reached through the startup’s distribution channels. How the company sets up its business plan for manufacturing and shipping (for a physical product) or implementation (for a virtual product or software) will impact this reach. You should also assess the potential scalability of production and distribution to get an idea of whether the serviceable area has potential to grow with a possible future increased demand for the product.

Competitors

Any given company is highly unlikely to capture the entire market within its serviceable area. Competitors will reduce the size of the actual market share a company can get. If the startup is already selling its product, you’ll be able to gather a good sense of how well it is selling and how it stacks up against the competition. A startup will likely provide some of this information in its pitch deck or business plan, but you can research the competitor landscape yourself by starting with an online search using the keywords you would use to find the product in question.

Another aspect to look at is the unique value proposition (UVP) of the startup and how it compares to the competitors. The UVP is the feature or perspective that sets one product or service apart from the competition. Whether it’s a feature of the actual product, a company value set that appeals to customers, or a good customer service or delivery system, a strong UVP can help a startup compete well and a weak one can cause it to fall to its competitors. Online reviews and social media for both the startup (if it’s already selling the product) and its competitors can give you an idea of how well the UVP resonates with customers and how that is reflected in conversion to sales.

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The information presented here is for general informational purposes only and is not intended to be, nor should it be construed or used as, comprehensive offering documentation for any security, investment, tax or legal advice, a recommendation, or an offer to sell, or a solicitation of an offer to buy, an interest, directly or indirectly, in any company. Investing in both early-stage and later-stage companies carries a high degree of risk. A loss of an investor’s entire investment is possible, and no profit may be realized. Investors should be aware that these types of investments are illiquid and should anticipate holding until an exit occurs.

Source: https://microventures.com/startup_market_potential?utm_source=rss&utm_medium=rss&utm_campaign=startup_market_potential

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