The Business of Venture Capital, 3rd Edition

24Market, Product, and Business Model Analysis

The graveyard of startup land is littered with technologies in search of markets, a hammer in search of a nail. To identify the direction and timing of a market is a dark art, but to pick the winning company in an evolving opaque new market is a compounded challenge.

“The information required to make decisive investments in disruptive technology simply does not exist … it needs to be created through fast, inexpensive and flexible forays into the market,” wrote Clayton Christensen in The Innovator's Dilemma. As an investor, how best should we prepare to make fast forays in the market? How best should we understand market risk?

• Is there an unmet need, a pent-up demand, a potential market pull for the products? Customers rarely know what they want and market adoption rates differ for various technologies.
• Is the market demand emerging, mature, or fragmented?
• What is the growth potential? Can the given opportunity grab a large market share quickly?
• What is the competitive advantage of the opportunity? Is it sustainable? How does it fit within the current state of competition?
• Are there any existing barriers to entry? Is there freedom to operate? Is there an existing structure of market players? Warren Buffett says, “It's no fun being a horse when a tractor comes along. Or the blacksmith when the car comes along.”
• Who is going to suffer the maximum pain when this product arrives in the market?

“We go to great lengths to be tuned into ...