I often get asked by entrepreneurs how to create assumptions for their financial model when there is no financial history, no product on the market, and no track record. How can they ensure that those assumptions are credible, justifiable, and taken seriously by investors, strategic partners, and other co-founders?
There are four things to consider to help you properly formulate your business strategy and convert it into a credible financial forecast.
- Market Research. Market research helps you evaluate the demand for your product. You learn how fast your target industry is growing, how concentrated it is, and what the latest technological developments are. You identify the biggest players and target customer segments. With all of this information you can better formulate your business model, determine which customers to focus on first, and how to monetize your customer base.
- Competitive Research. Competitive research is the second important piece of analysis where you research the already existing market solutions. You should focus on their advantages and disadvantages, their value proposition, target customer base, go-to-market strategies, and access to capital. All of this information allows you to understand how to best position, price, and launch your product as well as more accurately estimate the cost of bringing it to market.
- Barriers To Entry. Not every industry has barriers to entry. For example, if you’d like to develop a mobile app, you can do it fairly easily with today's technology and talent. In this case, the barriers to entry are low. However, launching a new drug has high barriers to entry because you have to get FDA approval, which is a very expensive and an extensive multi-year process. Barriers to entry inform you how long it takes before you can start making money and how much money you need to launch your company.
- Capital Constraints. As a young company, you do not have access to a lot of capital. So, for the first few years of your existence, you must be aware of not only what your costs are and what your ideal revenue goals are, but also of how much capital you realistically have access to. Your capital constraints help you determine the size of your marketing budget and how many people you can hire in order to develop your product. This, in turn, dictates your product development timeline, your product launch, and your monetization goals.
These four areas of research allow you to properly formulate your business strategy, to convert it into a valid financial forecast, and to prepare you for a successful company launch.
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