Often startup companies develop a technology that has multiple applications and potential markets. Most entrepreneurs have learned that a startup company must focus on a single market, at least in its early stages. I would argue that this holds true for later stages too.
Trying to address multiple markets, with conflicting customer needs, can spell disaster to a startup company, and an early demise. Since attempting to develop several products simultaneously, or develop multiple marketing and sales channels early on, often results in a very high burn-rate. This can lead to depletion of the company’s cash, and consequently, premature death of the company.
The challenge then becomes how to select the best market out of all the possible options. And yet, how do you know which market is the best one? And what is the right set of criteria to use in making this crucial decision?
In this post, I would like to offer a set of market selection criteria. These criteria are based on my own experience and that of several successful investors.
5 criteria for selecting your target market
Following are my five criteria for selecting the best target market:
1. Size of opportunity.
This includes the total available market (TAM), your serviceable share of it (SAM), and estimated share of it (SOM). For example, are we talking a billion potential customers/units, 100’s of millions, or just a few millions? Is it a mass market, or a niche?
2. Value proposition.
In which of your potential markets is your value proposition strongest? Where are you a nice-to-have and where are you a must-have?
How long would it take you to generate first revenue in each of your potential markets? This also implies how much money you would need to raise to survive until you can generate revenue.
Which market presents the lowest risk? This includes technology development risk (which product is more complex), competitive risks (which market presents tougher competition), and market risks (uncertainty, regulatory risks, disruption, consolidation, slow growth, etc.).
Which market (and business model) would be more attractive to investors, thus making it easier for you to raise money?
This is not the only, nor the best, set of criteria. Indeed, I would be happy to receive your feedback and suggestions for other criteria.
Bottom line, whether you decide to use my proposed criteria, or come up with your own, what’s important is to make a timely decision and focus on one market, and even one application to get your startup running and get successful market traction as fast as you can.