Use this section to demonstrate to prospective investors that you’ve thoroughly researched the market you’re serving. Discuss projected growth of the industry, the profile of the typical customer, technological, regulatory, and operational issues, and what the competition is doing now and may be likely to do in the future. In sum, you want to show your knowledge about the industry and give investors confidence that you really know what you’re talking about. Solid research really counts in this section.
1. Industry Analysis
This subsection should discuss the current state of your market and future growth prospects. It should also include analysis and description of the dominant industry players and the typical customer.
Example:
iWidget’s target market is the rapidly expanding online gaming industry and entrepreneurs seeking to set up gaming websites. Because of the advanced graphic cards and faster processors that are now installed in most new computers, online gaming is becoming one of the most popular hobbies among adults and teenagers. To capitalize on this opportunity, a growing number of entrepreneurs have been setting up web sites to provide online gaming services.
The typical iWidget customer is a highly Internet-savvy entrepreneur in his or her mid-twenties to early forties with roughly $20,000 to $100,000 to invest in a new online venture.
2. Market Figures
Include numbers that would be important for your investors to know, such as the current size of the market and projected growth, number of customers, current and projected future market share, etc.
Example:
The online gaming industry is experiencing strong growth. The Interactive Digital Software Association estimates that the number of users of online gaming sites is growing 12 to 15 percent per month. In-Stat/MDR estimates that the total online gaming market will grow from just over $1 billion in 2003 to nearly $4 billion by the end of 2008.
3. Competition
Discuss your competitors in terms of number, type of company, market share, size, reputation, and whether they’re direct or indirect. Talk about how your product or service meets a need in the market that competitors do not serve. Discuss barriers to entry into this market.
Example:
There are currently no other companies designing and manufacturing desktop publishing software exclusively for the online gaming industry. BIG Software and other software makers have products that can be customized for the online gaming industry, but the software does not give their users the advanced technologies iWidget offers, technologies that allow gaming websites to run more efficiently and offer new games more quickly. Given the industry expertise and time needed for product development and testing (3 to 5 years), no competing products from BIG or other software makers are anticipated in the near or medium term.
4. SWOT Analysis
SWOT analysis is an excellent way to assess your business opportunities and position you venture take advantage of them. It also allows you to consider and anticipate problems that may arise in your venture, so that you’re better prepared to handle them when problems do arise. A successful SWOT analysis can help you compete more effectively and operate your business more successfully.
SWOT analysis takes into account factors that are both internal and external to the company. Internal factors are labeled ‘strengths’ and ‘weaknesses’, and may include things like a company’s reputation with customers, patents, proprietary knowledge, cost structure, or distribution channels. External factors are labeled ‘opportunities’ and ‘threats’, and may include items such as previously unserved customer needs, changes in industry regulations, changes in consumer taste and new technology.
1. Strengths
You should think about strengths both from your perspective and from the customer’s perspective. List factors that distinguish your firm from the competition, not just positive attributes like ‘cost-effective product’ – your competitors may have these attributes too.
Example:
a. iWidget’s staff and management are among the online gaming and desktop publishing industry pioneers and innovators, and have unique expertise that would be difficult to match.
b. iWidget products were first to the market and can be quickly adapted to changes in the industry and evolving customer and entrepreneur behavior.
c. iWidget products have unique features that serve customers well and are not matched by rival software makers. The products of other software makers are more cumbersome to use and not as specialized for use in developing online gaming websites.
d. A licensing agreement was obtained for iWidget Pro in 2005. iWidget is currently pursuing licensing agreements for iWidget Next and iWidget World.
e. iWidget has a strong positive reputation among customers.
2. Weaknesses
Again, think about weaknesses from both your perspective and your customer’s. Are there aspects of the business you could improve? What do customers see as your weaknesses? Be honest – most businesses have some shortcomings.
Example:
a. iWidget lacks extensive distribution channels and reputable retail stores to market its software.
b. As a new and young company, iWidget does not have strong brand recognition in the marketplace.
3. Opportunities
Opportunities can come in a variety of forms. For example, they may include changes in laws, customer lifestyles, or technology that your business is well positioned to take advantage of.
Example:
a. The number of entrepreneurs looking to set up an online business has been growing, as documented in a recent study by the Small Business Administration (SBA). The SBA notes that 23 percent of new entrepreneurs in 2005 were setting up businesses online, up from 13 percent in 2003.
b. Awareness of and interest in online gaming has grown dramatically since its inception and is expected to continue. The Interactive Digital Software Association estimates that the number of users of online gaming sites is growing 12 to 15 percent per month.
c. The potential opportunity for a broad and ever-changing array of new games is possible, as the industry grows and entrepreneurs continue to expand their creativity in setting up and enhancing online gaming businesses.
4. Threats
These are the challenges that may threaten your operation down the road.
Example:
a. Unforeseen changes in customer behavior could impact the online gaming industry and, in turn, iWidget sales. However, based on current industry data and research, iWidget is confident about future prospects for the industry and the company in the next three to five years.
b. Changes in government regulation of the gaming (online gaming in particular) industry could inhibit future sales growth.
The four categories of SWOT analysis may be combined in various ways to determine a company’s best options for future growth. For example, a company may look at the combination of weaknesses and threats to determine how best to change course, correct weaknesses, and defend against future threats to the company. Or a company may consider the combination of weaknesses and opportunities, in order to eliminate weaknesses and better position itself to take advantage of future opportunities.
SWOT analysis is a simple exercise, yet it yields very valuable results; it allows you to weigh the pluses and minuses of your business from a variety of perspectives and gives you a clearer picture of where your venture stands and how things are likely to progress.