Startup Strategies
Selecting and understanding the market and customers is as important as the technology itself: “no market need” is one of the top reasons startups fail. In this article we outline a process to identify and assess potential market opportunities and to understand target customers in order to develop an initial company strategy. Before diving into the content, keep in mind that this process is not a static exercise, but should be evolving and iterative: there won’t be answers to all items at the start, but we can make hypotheses, test them and reiterate.
Deeptech innovations typically have a broad spectrum of potential applications, but not all have the same attractiveness. Choosing “where to play”, i.e. given the technology/innovation being developed, which is the most attractive market and application to go after, is the first strategic choice to make. In this post, we outline a process to identify and evaluate potential target markets.
The very first step in analyzing a market is identifying and selecting the potential applications for the technology where customers need and want a solution. A simple way to start is answering the following questions:
Example: For an university lab that has developed a novel way to detect gluten potential markets could be:
- Industrial producers of gluten free baked goods
- Celiac consumers to ensure meals are gluten free before they eat
- R&D labs developing ways to remove gluten
- Restaurants catering to gluten free consumers
- Government inspectors verifying companies’ gluten free claims
While over time more applications and users can be targeted, in the initial phases given the limited resources it’s important to prioritize the most attractive applications where users are most eager to adopt a better solution. The market attractiveness assessment should be tailored to the specific application, but common elements to assess are:
To get inspiration and see what good looks like, it’s worth taking a look at the “Business” section of IPO prospectuses of listed companies in the industry.
Targeting a sufficiently large market is key. If the opportunity is large enough, it can justify going after markets that based on all other metrics would be considered unattractive. The typical theoretical framework for market sizing is based on three metrics, which we explore below, but definitions for these can vary across sources. The most important thing is to generate an estimate that is logically linked to your product and application with a clear methodology which should inform your strategy: if there are only 5 companies where your product is relevant, your strategy should be completely different than a market with 100’000 individual users, even if the total value of the market is the same.
The TAM represents the total revenue opportunity if your product or service achieves 100% market penetration. This figure helps you, investors and stakeholders understand the maximum potential of your business. There are at least three approaches to estimate the TAM, and it’s useful to use more than one to cross check the result:
Example: A rough bottom-up estimate for the market for consumer gluten testing.
Step 1: Target population: Assuming we want to focus on the European market, we need to calculate how many potential customers are there. As a first approximation, we assume only celiacs will be willing to pay for a gluten testing device, while consumers that have gluten-free dietary choices would not (an hypothesis that should be later tested with actual consumers).
According to a scientific study, the incidence of celiac disease in the population is between 0.7% and 1.4%. The global population is around 8.1 billion people, so our target consumer population is around 81 M.
Step 2: Yearly volumes: Assuming the business model is to sell a device, the useful life of the device is likely higher than 1 year, therefore yearly sales volumes will be the target population divided by the expected useful life of the device. Assuming the latter to be 4 years yearly volumes would be 20 M devices per year.
Step 3: Yearly sales: Finally to get to a monetary value, we multiply by the expected price of the device. Assuming we expect to sell the device at 300 €/unit, the TAM is c. 6 B €/year.
The SAM is the portion of the TAM that your company can realistically capture based on your business model, resources, and market reach. It considers factors like competition, market access, and distribution channels. If the product is a novel battery chemistry that is extremely light and the TAM is the global battery market, the SAM could be the market for batteries for drones in the US because it’s the market willing to pay the necessary premium and the geography we can realistically reach.
Example: Going back to the gluten testing example, the SAM could be given by the fact that we target predominantly the European market. Therefore to calculate the SAM we start from the population of Europe (750 M) and follow the same process, to obtain a SAM of c. 560 M€/year.
The SOM is the subset of the SAM that you can realistically capture in the short term, often within the first few years of operation. This figure is crucial for setting realistic sales targets and growth projections, which means it should consider your ability to supply the product and the share of customers that can be converted from an alternative solution.
Example: Although the gluten testing device will be certified for Europe, initially we decided to prioritize Italy where gluten contamination is a particularly pressing issue. Furthermore, given we’ll sell directly via our website, we can only reach consumers that are digital savvy and are comfortable buying electronics online. Our SOM would therefore be given:
Italian population x incidence of celiac disease / years of device useful life * device price * share of italians that use ecommerce -> 59 M * 1% / 4 * 300 € * 47% = 21 M€/year
Some ideas on where to find data for market sizing:
Once the broad opportunity has been sized and analyzed, the next step is going into the details of understanding the final users of our product to inform product development and the go-to-market strategy. The data in this case come from deep interactions with potential customers through interviews, observation, surveys or focus groups. It should also be an ongoing process and grow with the company.
Once again, there is no one-size-fits-all solution and the specific technology and context might need additional consideration, but a basic framework should include:
Note: In the gluten detection device example, we assumed all celiacs as potential customers, but not all necessarily see the immediate need for our solution. By talking to a few potential customers, we might conclude ideal target customers are not all celiac, but one that frequently eats at restaurants or orders food delivery, and they need the device to be portable to be able to carry it wherever they go.
A thorough market analysis is essential for deeptech companies to navigate the complexities of commercialization. By understanding the market landscape, estimating market size, identifying target customers, and analyzing competitors, deeptech founders can develop strategies that align with market needs and maximize their chances of success. Continuous market monitoring and adaptation are crucial for sustaining growth and maintaining a competitive edge in the dynamic deeptech industry.
With this comprehensive approach to market analysis, deeptech companies can effectively position their innovations, attract investors, and achieve long-term success.
Note to Our Readers
We are continually on the lookout for tips and examples of market analysis that can help deeptech startups. Reach out if you have any suggestions or experiences to share. Your insights are invaluable as we strive to support the growth and success of emerging technologies.
