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. By the way, we’ve already written an article on making a pitch deck that wins investors.