“There are no competitors.” “Are you sure?”
To understand the business of a certain startup, it is always essential for investors to understand the market condition. If an investor is well familiar with the market, it is likely that the investor will understand smoothly. But if not, you may want to consider including the below 4 points in your pitch deck because market explanation often becomes in the beginning of the conversation and if you struggle here, probably you may have hard time describing the rest of your business.
4 must include market information
- Market size
- Market growth
- Market share
- Market KSF
1 and 2 are often included in any deck. The point here is that you keep your focus on the total addressable market. Big numbers are of course attractive. But to tell the truth, investors (at least in our fund) never get impressed just by this big number. In Japan particular, 1 and 2 are just benchmarks to evaluate whether the market is big enough for IPO, market cap over $10Mn ($1=¥100) at the time of listing.
3 is also seen in many decks but sometimes there are startups that say “We don’t see any competitors doing the same thing.” I think saying this is a waste of time since investors always doubt this phrase. There is no way a company can avoid competitions. There may be no direct competitors but when you change your point of view, there must be some players who are aiming the same domain in a very different way.
The real intentions behind these 1 to 3 points are to grasp an image of the market potential and with who the startup has to compete. Through this process, investors are finally able to think about the 4, what the KSF will be for this market. It is preferable that the founder has a full detailed knowledge of the business domain and that he or she knows what is important to win the market. However, the 4th point tends to be lacked or insufficient so I believe many investors do their own thinking on this topic to build their own hypothesis.
As an associate, finding the KSF takes most of my time throughout the whole due diligence process. It is not written in a book or an article so I need to learn from experts in that field and gain insights. I utilize all the resources and the networks that I have but it is always helpful to discuss and learn from the founder since there is no right and wrong answer to this specific topic.
A KSF isn’t always a technical difference or a first mover advantage. It may be a well structured sales process or even a strong network that the CEO has. The important thing here is not to find something that you can copy but rather to understand what made a certain company succeed in that domain. For example, in Japan there is an electronic device retailer company called Hikari Tsushin. Although they sell many kinds of electronic products, their KSF is nothing to do with their products. It is their strong sales force that can sell literally anything. So if a company wants to disrupt this market, developing a high functional products may not help much unless there are loads of unsatisfied customers.
After you understand or have a hint of the KSF, then comes the process to think whether the business is well formed enough to actually tackle the KSF. As you can imagine, understanding the market is the base of the whole DD process so…
FOR STARTUPS: include more information about the market. NOT just the numbers that are out there but also the knowledge, experience and insights that you personally have.
FOR VC ASSOCIATES: don’t simply believe the numbers that are in the pitch decks but do some research on your own. I’m not saying that startups are lying. I’m saying this because I personally think it is a great practice to proactively learn about a market that you don’t know and train your questioning skills. Since this process requires discussions with the founder and interviews to domain experts, being able to ask concrete questions is essential. Big chance to level up!
