Angel investment and venture capital deals revolve around opportunities to make money in high-growth markets. In order to quantify risk versus reward, investors look into market data as part of the due diligence process. Likewise, a due diligence service provider will make market review a priority.
What exactly is a market review? Furthermore, how does it help angel investors and venture capitalists make decisions? In simple terms, a market review seeks to understand a company’s potential within its industry and the market it serves. If that potential outweighs the risks at an acceptable level, investors are more likely to get on board.
A Company’s Products and Services
Some parts of the market review overlap with other aspects of due diligence. Take a company’s products or services, for example. Due diligence providers like Mezy will do separate product and service reviews focusing solely on them and their many implications. But they also consider products and services in the market review.
Investors want to know what products and services a company offers. They want to know how many products or services are on the menu. Most importantly, they need to understand the demand for those products and services. Answering these questions forms the foundation of a market review.
The Company’s Primary Customers
Next up, market review looks at the company’s customers. How big is the customer base? How frequently do they purchase the products or services being offered? How will demographics affect future sales?
In the end, this part of the market review is really about understanding the company’s target audience. If the company doesn’t know its customers, it will have a challenging time delivering products and services that meet their needs. This is that which makes this portion of the market review so important.
Once investors understand a company’s products, services, and customer base, they want to know how distribution is handled. How do products get into the hands of consumers? How do consumers access services? Distribution channels are important inasmuch as those entities that control them exercise some influence over the company being considered for investment.
Position Against the Competition
Market review also looks at how a company is positioned against the competition. They might look at price points and distribution. They might look at the company’s ability to bring new products or service to market. But what they most want to know is what differentiates the target company from all others in the same industry.
The idea behind angel and venture capital investing is to maximize returns. Investors expect competition, but they are not interested in markets so highly competitive as to limit their returns.
Potential Industry Fragmentation
Industry fragmentation is part of the market review for the simple fact that it influences future potential. Some industries are best left fragmented. Others would perform better if consolidated. The market review helps investors to understand where target companies are related to their industry’s fragmentation.
Nothing can kill an industry’s growth potential quite like regulation. Highly regulated industries can be more difficult to invest in because you never quite know where things will go in the future. However, regulation doesn’t have to be a deal killer. Market review looks at current regulations, the history of how that particular industry has been regulated, and any potential issues that could shape future regulation.
A market review is a normal part of the due diligence process investors follows before putting their money into new projects. A detailed market review can answer a lot of questions. It can also make or break an investor’s interest.