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Regardless of whether it’s an angel investor or venture capitalist you are approaching, every funder will narrow things down to one major question: “Who is your target market and who are you competing against?”
This is the warning of Alex Fraser, who drives home the fact that preparing a market and competitor analysis is a vital part of any business plan or pitch deck.
Fraser is based at at InvenFin, an early stage capital company. She says she often receives business plans with no competitor analysis, leading her to request one from entrepreneurs with the need for more information.
It’s a bad move for any entrepreneur and the most common aspect of a business plan that is left missing. “When directly asked who their potential competitors are, entrepreneurs frequently reply that there are none,” adds Fraser.
“This is the worst thing you can say to a potential investor as this ‘lack of competition’ indicates that either you have a very poor understanding of the market or are being unrealistic, which immediately sets off an investor’s warning bells”, she said.
Leaving out the full facts on the actual opportunity is also a problem: the target market analysis is crucial. In Fraser’s experience, however, an entrepreneur’s market analysis for his or her company is often vague and lacking focus.
“No thought has been given to how customers are attracted, converted and retained. Massive assumptions are made without any basis or testing, which are then used when the business model and financials are drawn up, leading to overinflated or unrealistic projections,” explains Fraser.
Fraser warns that plans containing impressive-sounding phrases like, “This is a R10 billion market, where we will achieve a market share of 5% by the end of year 1,” actually damage the credibility of the business plan and, more importantly, the credibility of the entrepreneur with an investor as they are often blatantly unrealistic.
While entrepreneurs may be frustrated by the seeming inability of an investor to see a good opportunity, understanding the important reasons for a good market and competitor analysis may add some perspective.
An entrepreneur with an in-depth understanding of their target market and with the relevant domain experience is very reassuring to an investor. Alex drives home the point by noting that entrepreneurs need to demonstrate that there is a “burning need” for their solution or service in the target market.
She advises that a good competitor and market analysis indicates that the entrepreneur has carefully thought through their business plan and is both focused and realistic. “This thorough research results in financial projections and funding needs that are accurately determined and based on tested assumptions,” she assures entrepreneurs.
The most salient advice in all this is that an entrepreneur must know the market inside and out – much more so than potential investors. “By being direct and upfront and including vital information about the market and competitors, the entrepreneur is immediately seen as credible,” says Fraser. It is this credibility that an entrepreneur can and should utilise to build trust with a funder, something that is essential for an effective relationship.
So at the end of the day, what is a good market analysis? Fraser is clear enough in her answer – and it’s far from merely downloading or buying an expensive market research report.
While a good report on paper may be a very useful place to start, the market analysis needs to be tailored for and specific to your business. “There is a wealth of information available for free which is often overlooked. You need to immerse yourself in the market to obtain a thorough understanding of your customer, his purchasing decisions,” adds Fraser. “Having a high level view and making assumptions is not good enough”.
Overall, a good competitor analysis needs to rank the competitors, provide detailed information on the features and pricing of their product or service, comparing and contrasting their offering to yours.
In Fraser’s own words, this “will allow you to see how your offering is differentiated and where your sustainable competitive advantage is”.
She also warns that “thought should also be given to what the barriers to entry are”. An investor needs to know what is stopping new entrants from coming in to the market and how you can ensure that your competitive advantage is secured.
Keep in mind that, as the industry matures and evolves, new competitors will also enter the market and these need to be continuously monitored as well.
“To sum up, you need to know your market and competitors intimately. There are no short cuts and this is not an area of your business which can just be outsourced,” concludes Fraser. “Your potential funder must be impressed by your comprehensive knowledge, analysis and research.”