Market Entry Strategy

(cc) BY NC SA, Rodrigo A. SEPULVEDA SCHULZ – www.rodrigosepulveda.com
Founder Institute – March 27th
, 2011 - Berlin
Pix (cc) BY NC SA, Rodrigo SEPÚLVEDA

Summary
 Why is it important ?
 Understand your market type
 How do you estimate it ?
 Design a market entry strategy

1. Why is it important ?
 Gives you
 A potential target for your revenue (therefore also EBIT)
 A valuation
 Assessment of market players, hence your competition

Potential target revenue
• Let’s say your market is $1b
• Everyone wants/says a 1% market-share
• That means you’re targeting $1b x 1% = $10m of revenues
• Impact:
– You’re a tiny fish in a pond with 99% revenue elsewhere.
• No barrier to entry (there are other players)
• Competitive edge is key (geography, product, customers…)
– Only 2 ways to grow
• Grow the market size (either by yourself, or the market grows as a whole)
• Grow your market-share

Potential valuation / fundraising
 VCs are only interested in risk-controlled returns, usually in
5 years.
 Hence we need to estimate your valuation in 5 years.
 Usually 3 techniques:
 Multiples (turnover, EBIT, …)
 DCF (for going-concerns, not startups)
 Open market (early stage, or if Ricardian rent)

Multiples
 Former French tech stock market Alternext used to trade
with these multiples on average for tech companies:
 2,2x turnover
 23x EBIT
 Maybe your industry has different metrics
 From original example:
 Your valuation is $10m x 2,2 = $22m

DCF
Note : Let’s assume here the currency is irrelevant

VC’s share
• Valuation bracket at exit = [$ 21,8-22,0m]
• If series A of $1,5m for 30% equity
• Then VC’s value at exit is
– $22m x 30% = $6,6m
• That’s a cash-on-cash return of :
– 6,6 / 1,5 = 4,4x (excluding tax impact)
• GREAT, but that’s only $5,1m made for the VC in 5 years (too small !)
– cost of opportunity is too high
• Nota: if you’re financing the company alone, then it’s a different story :
$22m-$1,5m financing = $20,5m profit in 5 years = $4m/year

Advice you’ve already heard:
• Problem:
– either target market is too small,
– or target market-share is too small,
– or profit is too small,
– or asset created is too small,
– or there are too many competitors.
• Target a BIG MARKET
• Aim to be the #1 in your (BIG) market

2. Understand your market type
 3 options
 An existing market
 A market that doesn’t exist yet
 An mature market : an opportunity to re-shape it

Examples of entering an existing
market
• Richard Branson and all Virgin brands in air travel, finance, rail
• Steve Jobs and Apple : telephony, music, personal computers,
feature software
• Bill Gates on OS, office software, gaming, etc.
• Mark Zuckerberg (facebook) : social networks, the Internet
• Google : Android
• @jack with Square: payments
• Innovation and a differentiating factor are key

A market that doesn’t exist yet
• Tons on literature on this
• Very risky, because
– No available numbers
– No guarantee you’ll find a market
– But maybe best way to reach #1 position, globally, because
• you know something competition doesn’t know yet :
1st
mover advantage
• You define the rules

Sample new markets
 Classic examples :
 Walkman
 Post-its
 Netbooks, then tablets
 Space travel
 Twitter (?)

A word of advice about innovation
 Feature company
 Product company
 Solution company
 Nice-to-have
 Got-to have

A mature market
 #1 or #2 strategy
 Not enough: redefine your
market as 10% max of revenue

3. How do you estimate your market
size?
 Many different techniques:
 Guesstimate (à la McKinsey)
 Published numbers (always a bracket)
 Sum of all players in a market

guesstimate
http://shop.wetfeet.com/Browse/Ace-Your-Case/asd-%281%29.aspx

Existing markets
 Press articles
 Competitor’s literature (presentations, website, financial
statements)
 Industry publications
 Research institutes (IDC, Forrester, eMarketer, comscore,
etc.) < beware though
 SlideShare is great !

http://www.comscore.com/Press_Events/Press_Releases/2010/3/comScore_Reports_January_2010_U.S._Mobile_Subscriber_Market_Share

Sum of all players
 Hard not to compare oranges and apples
 Take only direct competitors
 Gives you a current picture, not a projected one

4. Market entry strategy (in a nutshell)
4C :
-Customer
-Company (SWOT)
-Competition
-Community (PEST)
4P:
-Product
-Price
-Place
-Promotion
Positioning:
We sell THIS PRODUCT
To THIS CUSTOMER
At THIS PRICE
To solve THIS PROBLEM
PnL

How big is your market ?
Reality check #1

What problem are you solving ?
Reality check #2

Why will someone PAY for your product ?
Reality check #3

1 strategy is NOT enough
 You need to assess different scenarii
4C 4P POS P&L
4C’ 4P’ POS’ P&L’
4C” 4P” POS” P&L”
4C’” 4P’” POS’” P&L’”

What you end up doing depends
both on your RISK profile and SWOT
X Pos”
X Pos’
X Pos’”
X Pos
Return
(m€)
Risk
(wacc)
10% 20% 30% 40%

Summary : entering a market
 Why is it important ?
 Understand your market type
 How do you estimate it ?
 Design a market entry strategy

www.rodrigosepulveda.com twitter: @rodrigo
www.slideshare.com/rodrigo1971
Pix (cc) BY NC SA, Rodrigo SEPÚLVEDA

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