Venture Capitalists Prefer Large Established Markets

Many entrepreneurs focus only on bleeding-edge to offer rapidly growing markets in developing their technologies, products or services. This has happened for several reasons:

The perception that fast growing markets have a limited competition,
The ability to detect early foot-hold in order to increase the value of their businesses and
The reality of the difficulties in developing a differentiated, long-term competitive advantage in the major developed markets.

This article describeswhy this market approach is generally too risky for many venture capitalists, and then provides five reasons why venture capitalists prefer large established markets of bleeding-edge, emerging markets.

Emerging Bleeding Edge emerging markets
Often, to distinguish themselves from large, established competitors believe that smaller companies or start-ups that the emerging markets with bleeding edge "technology should be concerned. In general, it is true that thelarger competitors, not into a new emerging market segment is expected to direct that the market is enough volume in order to assist the necessary investments. Moreover, the same large companies are more conservative in their investment philosophy and can afford to wait, because they have to jump the necessary resources and marketing presence in a fast and create their own position in the emerging market. On the other hand, think smaller companies or start-ups, which, if they can establish a footholdin a growing market, it is possible to secure the same start-up company in a strong position to win for them and for market share in a significant exit strategy for its investors, either through IPO (less likely) or is acquired by one larger, more established competitors.

More often than not, comes this "bleeding-edge, emerging market entry strategy with a high degree of risk. The most important risk is that the underlying support for emerging markets"bleeding edge" technology does not develop in a predictable, short-term time frame. In this situation, the technology experts often claim that their target market or market segment, within the next few years and it provides the company with a significant return on investment within a short time. This optimistic view of the world, generally does not consider the time to build up to roll-out of new IT infrastructure or the same new technology with the customer base.More often than not, these one-year period turns out to be five to seven years. This makes it virtually impossible for a small, venture-backed company, which several generations of product development that are necessary before their bleeding-edge target funding supports the movement of large enough volume to make it self-sufficient business model. In many cases, this has the same small high-tech, start-up companies a tremendous amount of secured funding (eg, $ 50M to $ 100M)and can not be sure, additional funds from third-party investors. In this situation, the amount of funding secured substantially outweigh the monetary value of the company or its technology, product or service offering, according to its investors, so you pay the first major company to pennies on the dollar, only by sale of the investment.

This scenario is not unusual. In fact, it is my experience that in the context of high-tech wireless market has happened ismany start-up companies in the digital cellular, Bluetooth, Wireless LAN (WiFi) and WiMAX market. For all these markets, the experts with extensive growth in the immediate short time were projected to develop only the markets over long periods, so that many of the early venture-funded start-up companies that target these markets out of business or to larger competitors for a marginal rating for the company and sold theirInvestors.

That does not mean that there are not many cases developed in which venture-funded, start-up companies "bleeding edge" technology for an emerging market does not ensure a substantial profit for its investors. In the high-tech boom of the late 1990s, many major semiconductor companies have been purchasing small start-ups to hedge their bets on some of the new wireless markets. At that time many of these small companies were estimated to be between $ 200M to be acquired$ 400M. This unheard of ratings, although good for the start-up companies, often tremendous returns for the acquiring company to close these transactions often within one to two years after purchase.

Large established markets with strong growth
A much stronger strategy is to go for start-ups and young companies with unique and groundbreaking technologies to large, established markets with strong growth. This is one of the unknown secrets for obtainingFunding from the venture capital community. The venture capital firms for more, as previously defined, with breakthrough search technology product and service offerings to large and established markets with strong growth potential. While they have large, established markets with strong growth is a significant risk that exists when the need to develop it for the underlying market to support your business model is eliminated. This is generally an undue amountthe risk that many investors are willing to take to ensure their return on investment. In addition to large, established markets, five favorable market conditions have properties as described below.

Reason # 1: The market is large
The market is large. Because of its size, makes this market very attractive for investors and start-up companies establish themselves in the market. The market, which is due to its size, large enough to support one or more new competitors.Therefore, there is the possibility of your company in the market by securing enough support to share on your business model projections. In addition, due to the inherent size of the size of the market, it is not necessary to secure your business to an unrealistic market share, to meet their business objectives. This makes the big market is an excellent investment opportunity and significantly reduces the risk that your company out of control, the size of the market.

Reason # 2:Market is established,
The market is established. This also reduces the risks of looking for your company to the market with your technology, product or give service plan. By being set up, there is a defined story on the market, the competitors and their technological, product and service offerings. Thus the underlying dynamics of competition in the market is well understood, again to eliminate all the unknowns and unforeseen threat that hovers just below the canSurface of smaller, less established markets. By a market already established, your company, many of the risk factors that they need to anticipate, address to the market to be successful.

Reason # 3: The market has high growth expectations
A market with high growth expectations is desirable for two reasons. Firstly, by a strong growth, you can use your company in the long term, the opportunity to be ensured to increase their return on investment. Strong growth alsooffers the opportunity to develop new sub-markets, creating additional growth opportunities for your company. Second, strong growth in a market is very dynamic. That is, they are trying new competitors enter the market and established players are trying to keep their positions. This provides more opportunities for your company a compelling technology, product or service offerings, which are used in order to secure significant market share, develop. The pure dynamics of a growingMarket requires established competitors and new competitors alike to watch the market constantly seeking new ways to create a highly competitive environment.

Reason # 4: The market has a known Customer Base
The fact that large and established, the market has a known customer base. Therefore, you can search your company with its technology, product or service offerings to the established history of the market and determine the needs of your target customers. Moreover, with theestablished customer base, there is always need a strategic, opportunistic customers is not addressed, provides an opportunity to demonstrate your company as a new competitor in the market. In general, customers are always different based on the search for new ways to make their technology, product or service offerings provide himself with one foot in their competition. Even with an established customer base, through the study of the market leaders, and their specificCustomers, market positions and product offerings, it is easy to determine what is necessary to make a company successful in the market.

Reason # 5: The market demands for new customers
Large established, markets with strong growth also attract potential new customers for your technology, product or service offering. Because of its size, growth, and the underlying dynamics, always looking for new customers to establish themselves in the target market. These new customers canbe established competitors or new competitors, but we must always proceed from the fact that it offer opportunities for new customers for your technology, products or services. Very often they have new potential customers, there is under the radar. You can search for strong competition in complementary markets, new venture-funded start-ups or large companies to establish themselves in non-related markets. The problem here is that for large, established markets with strong growth, there is alwayspotential new customers for your technology, product or service offering. The key is to do the research and due diligence to identify these potential new customers.

Since all VCs involve risks are negative, it is worthwhile for entrepreneurs, the markets, the big goal with strong growth. In general, edge, emerging markets, eventually bleeding to be a disappointment - both for the entrepreneurs and their investors, leading to much lower returns for the ventureCapitalists. The five reasons outlined here are the entrepreneurs with the necessary insight that will enable them to choose their target markets of interest will be challenging.

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