The Press, July 2008
A tidal wave of businesses are likely to sell out over the next decade or so, according to a study published recently by the ANZ Bank. Added to that is a growing bunch of start-up companies looking for capital to expand. Attracting capital will become more and more competitive and one of the sometimes neglected keys for getting the cash is having a good marketing story.
ANZ recently released a survey of privately owned businesses with turnovers between $5 million and $150 million, which found that 82 per cent were run by people aged over 50. 63 per cent of them saw succession as an issue but only 17 per cent had taken steps to address it.
Forty per cent would consider selling to management, but only 18 per cent regarded that as financially feasible. The vast majority, 74 per cent, preferred a trade sale.
For young companies looking to accelerate their growth or mature businesses with owners looking for an exit, similar principles apply to successfully gaining the confidence of investors. Solid evidence of profitable financial performance, strong earnings projections, talented and committed management, products or services of a certain standard, and intellectual property protection are all important measures.
It is the market aspect that can often be underestimated by people seeking capital. All of those other elements being equal, the excitement a strong market story creates can make a huge difference to your prospects of getting the cash.
A good market story has to be based on solid, provable opportunity. Companies, particularly those in the start-up phase, can be overly optimistic about their forecasting. Technology businesses especially tend to only see upside. A significant New Zealand investor in innovation-based companies recently said none of the large number of firms they had backed had meet their original business plan projections.
It is the hamburgers to China syndrome -“we just have to sell hamburgers to 0.5% of the Chinese population to get enormously rich.” But the Chinese population is never the market. It is the subset of people in China who eat the kind of hamburgers you sell, who aren’t loyal to your competitors, who earn enough to pay for your product, who can access them through your distribution channel, who like your style of hamburger and so on.
The key thing to remember is that smart investors are not backing your product at all. What they are betting on is the customer problem your product is solving. The larger and more intense, the more likely you are to be an attractive prospect for a backer.
So how do you build a market story that is exciting for those pointy headed investment types?
First it is about the customer. Who are they, where are they, how many of them are there, how much money do they have, how often do they buy? The more clarity you have around this, the more believable your sales projections can be.
For example, you might have developed a revolutionary mountainbike and be seeking big wads of capital to go international. The market is not all people who could conceivably ride a bike, it is infinitely smaller. It is those people who like mountainbiking, can afford your price point, are looking to buy, have low loyalty to existing models etc.
Second is the market opportunity. What problem does your product solve for them and how intense an issue is that for them?
People buy bikes for many reasons, such as transport, fitness, adventure or just wanting to look cool. Which of those customer needs does your bike meet best and how big a need is that in all of your chosen markets?
Third is competition. Who else provides a solution and how do they compare? It doesn’t have to be a directly comparable provider – doing nothing may be a competitive choice for your customer, or some quite different way of solving their problem.
Bike manufacturers are many and varied. There are also other ways of getting around – from the humble foot to the skateboard to the motorbike to the bus. Do you understand all of those options and where your machine fits in?
Fourth, why are you special? Compared to those other ways of the customer solving their problem, why is yours better? Is it easier, faster, cheaper, higher quality or just cooler?
Why is your bike any better than the thousands of other choices? Maybe the design makes it more comfortable to ride, or it is 10% faster than any other comparable bike, or Lance Armstrong uses one or it is the best value for money.
Fifth, how do the customers buy it? What channels do you have in place to sell and support your product, and what opportunities are they to sell other, similar products?
People like to try bikes before they buy. How can they ride yours, what shops stock it, can you order parts online, who services them?
Exciting the investment types takes a lot of hard work. They are clever people who look at your business from every which way. If you can tick all the normal boxes, being able to excite them with a market story of real potential will give you an edge.