My last blog entry was about business plans needing to demonstrate that the entrepreneur understands the difference between the size of the Industry and the Market Opportunity.
I should then come on to the next area that this is related to – can you demonstrate to a business angel that people want to buy your product or service. Simply quoting the size of a market is not good enough (but it is a very good start!) I would also like to see evidence of customer’s willingness to buy your product.
Like most business angels, I am skeptical of research presented about the best air purifier for asthma. If you ask questions in the right way you will always get the answer you want. (The best illustration of this ever, is in that gem of a TV program, Yes Prime Minister, when Sir Humphrey illustrates how if you ask questions in a certain way you can either get a yes or a no to the question “Are you in favor of National Service?”)
A client of mine was preparing a presentation for her employers to demonstrate a business case for this new service line she wanted to introduce. She felt that the employers would not be convinced that clients would pay for this service. She was going to spend hours on research to demonstrate a market for this did exist and was viable. I then suggested that she simply gets the clients that she thought this service would work for – to tell her that they did indeed want it (if they could have it) and how much they would pay for it.
Needless to say, that was the business case demonstrated. The point I am making in this blog is that I like to invest in businesses that can demonstrate orders or specific levels of interest from specific named clients. I realize it may still not materialize – but I would have more confidence in that than in market research. Another thing I learnt about market research last year was from reading the excellent book Blink.
There is the story of how in taste tests Pepsi was always outperforming Coke. However, the critical point was that when you were drinking 330ml cans, Daytona Beach photographers preferred Coke to Pepsi. It is the same with Music. Certain songs that you fall in love with straight away become very annoying after a short time (problem with iTunes – it makes it too easy to buy songs that you get annoyed with quickly!) whereas other songs grow and grow on you. So be careful with market research as a seasoned investor will shred it to pieces. If you do want to look at an example of excellent market research, look at the story of how Innocent Drinks got started!
A Great Way to Prove Markets
I realize that for many businesses you need to demonstrate scale before you can make your first unit. You may need to get 100 orders – or you need funding to help you get to 1000 sales etc. But what this website allows you to do is really test your business proposition by getting firm orders from people before you make your first unit. Your customers are safeguarded because they release no money until you are ready to produce – and you are safe in the knowledge that the money is committed before you produce the product!