Launching a business is a risk. Launching it without a solid product-market fit and pitching it for investment is like driving with a blindfold over your eyes — also a risk but purely unnecessary and with a sky-high chance of crashing.
Market research is a crucial part of your pitch deck. It empowers you offer a clear vision of how to get your foot in a new market and raise your odds of attracting funding.
If you're reading this and thinking: "Why do research if I already know the business landscape, my potential clients, and how my product or service can benefit them?" Well, that's great. The only thing left is to prove it to investors not just with passionate storytelling but with facts. And this in-depth analysis has the power to be evidence for venture capitalists that you spotted a market need worth investing in.
Not that bad, right?
In this blog post, we'll dive into market research, why it's so critical for investors, and how data from it can help you secure funding.
What is market research?
Before jumping into its elements, your potential investor expects to see, why don't we clear out the definition of market research?
It's a set of strategic activities for gathering information about the industry you aim to enter and your clients. It allows you to break through a thick wall of assumptions, biases, and guesses to your end users' core needs and pain points.
Doing market research for a startup, you gain valuable insights into your:
Industry landscape. This type of data ensures you understand your business potential in the current climate and know how to level up the game with your solution. Specifically, you learn about the overall size and composition of the market you aim to enter, the gaps your product can fill in, and new trends that have the power to help you estimate possible opportunities to grow.
Potential customers. This is where your assumptions and hypotheses about your target audience stand the test of validation. You can learn your potential users' needs and what tools they imagine would solve their challenges. And this information, in turn, can help outline your product value proposition that hits the right target.
Competitors. There is a saying, "Know thy enemy," but I prefer "Know thy competitor." No enemies here. Looking at your rivals enables you to spot companies' strengths and weaknesses that can help hone your product at the early stages or turn in a different direction to offer what others haven't and seize an opportunity to outrun them.
All right, we covered the basics of this research. Now let's move on.
Arguments on why market research is important.
Market research is homework a business and a startup needs to do before taking further steps toward launching a product or service. Why? Because it empowers you to avoid getting sidetracked and eventually coming up with a solution that misses the target. Without in-depth analysis, these risks snowball into a set of poor decisions that keep your venture from success.
Okay, we settled on how you can benefit from the research. But why are investors so eager for business owners to provide data from it? Well, the answer is that they seek sizable market opportunities. It's as simple as that and comes down to pure math. Venture capitalists don't just give away millions of dollars for a great idea. They expect to generate a strong return on investment, and so they set their focus and money on companies that have the potential to achieve it.
Investors also want to see product-market fit. This one is crucial and statistics prove it — 35% of startups fail due to product-market misfit. So it's reasonable that VCs don't really want to risk and fund a project with no or a shaky bridge between an offering and people's pain points.
Most likely, you’ve already grasped the importance of market research and already googling how to conduct market research for a startup and find a product market fit. But do not rush to open another google tap since we’ve already written a piece of text describing how to discover a real market need and not fail when launching a startup.
Let me clarify, you don't necessarily need to deliver the finest product in a niche. Solutions usually tend to have room for honing and improvement. But what investors look for is to finance products that fill in the market gap, solve users' challenges, can level with competitors, or even better, outperform them and have evidence to prove it. And you guessed it — market research can help you with that.
How? Keep on reading to find out
Critical market research questions investors want you to answer.
Investors not only have vast sums of money but also have some crucial questions to ensure their investments are worthwhile. They want to know everything that has to do with your business starting from your team management, venture traction to how passionate you are about your initiative. But here, we'll dive into specific questions that market research can help you answer.
What's the size of your target market?
Having a business equals having people who want to buy your offering. Yes, it seems obvious, but that's what investors are looking to find out when considering putting money into your initiative. And they expect to see proof there is a significant market your business has the potential to cover. So how to deliver solid evidence of that? One of the ways is to employ tools with name-like acronyms — TAM, SAM, SOM.
Let's break down each.
Total Available Market (TAM) is the overall potential market for your company's product or service. It includes the maximum possible revenue you can make locally, nationally, or worldwide. For example, you're embarking on developing a brand-new SaaS platform with a CRM system. TAM will help you discover what niches are more likely to use it, outline customers who potentially might buy this product, and define the revenue of all competitors or total market worth.
Why is this TAM so important to investors? It allows them to see the maximum revenue your startup or business could provide and estimate its possible scalability. One may argue that it's next to impossible to cover a market this enormous without being the only product provider in the whole world, which is also unlikely nowadays. And that's true. TAM serves as a snapshot of the market's landscape to get its general potential if there is any. So in our CRM system scenario, your TAM can be about $60 billion — the global CRM industry's worth.
Serviceable available market (SAM) is the part of the entire market you potentially can cater to. Continuing with our CRM app example, data from SAM allows you to show investors what industries or professions you intend to target. Be it project management, sales, marketing niches, or something in between, and who your venture can reach and get income from. Let's say the CRM industry in a specific industry is estimated at $16 billion. That's your SAM.
Serviceable obtainable market (SOM) this one is the portion of SAM you can realistically target. Here you answer the question, "How many potential customers would buy my product?".
Why is it important to you and an investor? Let's look at it this way. There’s a high possibility that your business isn't able to cover the entire serviceable available market right away, especially in the case of an early-stage startup. Well, it can, but only if it's a monopoly. And unless you're the latter, it would be a true challenge to persuade the whole market to buy exclusively from you. So SOM defines the number of the market your product or service can realistically capture. As to investors, this data helps them see your venture's potential at the current moment and use it as a touchstone to monitor a company's progress later on.
Coming back to numbers and our CRM system example. Let's imagine you aim to target companies with ~ 40 sales reps which narrows down to 5% of overall SAM. So your SOM can be $800 million.
Who is your target customer?
Knowing who your potential clients are and what challenges they have your product or service can solve — makes it crucial information for communicating your solution both to your target audience and an investor. For the latter, it serves as evidence that you don't do any guesswork and have reliable data on your end-users, what they need, how they make their decisions about your product, and understand what it takes to convert them into paying clients.
Information that shows demand for your initiative and can get investors' attention comes in a neat package called "customer profile." It includes information like: age, gender, location, income of people you aim to cater as well as their pain points that your product can cover, etc. How to extract as many valuable insights as possible at this stage? Well, you can benefit from tried-and-true surveys, online reviews on social media, theme-related blogs, and user interviews.
What are potential risks that can jeopardize your success?
Investors are no strangers to taking risks. They do it every time they fund a new business. Nevertheless, there are some cases when one has to play it safe. So by asking a question I mentioned above, venture capitalists want to know if there are threats that can harm your business and, if so, what precautions you take to reduce them as an entrepreneur.
To provide a detailed answer and stand a chance of getting an investment, you need to do some groundwork beforehand. Specifically, conduct SWOT and PEST analysis. The former will help you spot weaknesses and threats within your venture and industry overall and map out current risks and the ones you can face in the future. The latter evaluates political, economic, social, and technological factors that may impact your product. For example, with data from PEST analysis, you can be ready to act or adapt to such influences as: government regulations, economic issues, cultural constraints if you aim to reach an international audience, technological advances, and socio-cultural factors like demographics, lifestyle trends, etc. I hope you’ve got the answer to the question, “why should businesses use market research when making important decisions”.
Who are your key competitors?
One can't overrate how important it is to keep a close eye on other field players. It empowers you to dodge avoidable mistakes and see what your competition does to attract customers, how successfully and use current market solutions to your advantage. Investors also want to fund a venture that has what it takes to set customers' focus on itself and potentially win the race.
And that's where our old friends, competitive and SWOT analyses, enter the scene. Evaluating your product's strengths and comparing them to rivals' both provide venture capitalists with robust data and uncover vital insights for your business. Let's say some apps for exploring events offer people venues to party but overlook breastfeeding moms who struggle to find calm places to feed their babies. Here's your window of opportunity — a product that beats rivals and delivers a solution to such underserved customers.
So with that in mind, we smoothly move on to the next question that connects with the previous one.
What is your competitive advantage?
Products or services with a competitive edge turn investors' heads. Venture capitalists want to see that your offer delivers a much-needed solution to a problem other companies haven't addressed or do it poorly. Why? Because that's what generates profit. Here's another example. Let's imagine you aim to create new software to streamline marketing for IT companies. Now, similar solutions may already hit the market. Investors want to know what you do differently and how many potential users are likely to come down in your product's favor over competitors'.
If you provide them with proof that you can bring a fresh approach to the table that would stand out from others, your chances of securing an investment grow.
To sum up this long piece of boring text, it’s precisely the market research that helps you find the answers to investors’ questions. So suppose you conducted deep research and gathered all the info. “Now what?“, — you ask me.
Now, pack all the findings into a beautiful presentation and have a successful pitch.
Revising the benefits of market research
All I have to say before you close this tab and move on with your life is one thing.
Creating a product from the ground up and pitching it for investment is a challenge fueled by a sense of adventure and balancing on a thin string between absolute success and complete failure.
And without a doubt, you strive to win. Market research can't assure a 100% business's triumph. But the most important use of marketing research is that it can diminish unnecessary risks, build a solid foundation that ensures investors in your project's potential, and show you a way toward your end-users and their true needs.
If you’re ready to make it and make right, we’re here to help you with that. Tell us about your project.