The Five Star Startup Market
This is the third in a series of articles on what it means to be a Five Star Startup. In my first article, I explained the five dimensions that most startups are evaluated on. In my second article, I described the first dimension, Product, and what it means to have a Five Star Product. The second dimension is Market. In this article, I will describe the five star market (in my system of evaluation) and offer some of the underlining criteria by which you can score your market. Here we go:
You have quantified the market for your product in terms of its size and segments. The Total Addressable Market (TAM) is at least $100M. It’s clear that you are not building a life-style business that is limited by geography or sells time (hourly billing) for its revenue. Your product is capable of reaching a national or global audience and can be sold while you sleep.
You have clearly defined each segment of the market and the order in which you plan to attack each segment. You have mapped the customer demographics, geographics and psychographics. You understand customer needs and behaviors better than almost anyone because you are one of them. As a customer in this market, you garnered a unique insight, or stumbled across an inside track, that led you to pioneer a new product or business model for the market that is disruptive or revolutionary. You have a special edge. You have identified the disenfranchised or underserved segments of the market. You know how to empower customers in a way that no other product/company is currently doing.
You have a plan for serving the market in a new way that will inevitably lead to market growth. The very existence of your product — and plan for supporting it — will make the market more vibrant and resilient. Your entry will attract all new customers. You understand the entire market landscape, not just the customer base. You know the direct competitors and indirect competitors, and how each is positioned. You know the suppliers, service providers, industry associations, and key influencers. You understand the sales and distribution channels and have a plan for leveraging them to capture market share.
You know the 20% of the market – the power users and early adopters – that are likely to comprise 80% of your revenue. You didn’t make the mistake of thinking you can capture 1% of the total market. You are focused on capturing a decent percentage of the 20 percenters. Your market has a natural virality to it. Customers fall like dominoes for your product, sharing it with others and building the Network Effect. You have developed a User Persona that describes the wants and needs of your typical customer; how this customer learns about your product, and how this customer goes about buying and using your product.
Finally, you have market validation, either traction that demonstrates month-over-month growth, or surveys and testimonials that prove you have done your homework and that sales are imminent. You know that investors know that no market need (or an indifferent market) is the single biggest cause of startup failure. Your data proves unequivocally that your startup has a fighting chance of market success if it executes well. You may not yet have all the metrics, but you are closing in on the costs to acquire a customer (CAC) and the long term value (LTV) of a customer. Your assumptions about those numbers are defensible and validate attractive profits and margins, even if you are off by a factor of two.
Score the following criteria on a scale of 1 to 10, with 10 being the highest. Try not to use the numbers 4, 5, and 6 — they are fudge numbers. The market dynamics and your understanding of the entire landscape is either excellent, or it is subpar:
____ The total size of our market (TAM) is at least $100M and we know precisely how it is segmented.
____ Our market is national or global. We have a plan for penetrating each segment in order.
____ We have mapped the demographics, geographics and psychographics of our customer base.
____ We have a unique insight into the market that gives us an edge over other solutions, even if they are indirectly competitive.
____ We understand the entire market landscape — all the players and their core businesses. Our entry will help grow the market.
____ We know our competitors better than they know themselves. We have a unique position relative to competitors that offers us a sustainable advantage.
____ We know how to reach and win over the key influencers, and how to leverage the sales and distribution channels to capture market share.
____ We know the 20% of the market that matters most, or how to convert the underserved 80% into 20 percenters.
____ Our market has virality and network effects.
____ We have created a User Persona of the typical customer and know the cost to acquire that customer and his/her long-term value.
Total your score, divide by 10. If your score is between 7 and 10, congrats, you have a Five Star Startup Market!
The proof of a big enough market — and your thorough understanding of it — is only half the battle. The next article in this series will describe what it means to have a Five Star Startup Team. Read on….