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How to analyze the market before investing in a startup

Within the market structure, what are the variables to take into account when carrying out a market analysis? Obviously there are many, but we have identified these variables as the ones to focus on:

Current market size

We will start by analyzing the market from above and we will go down little by little, with the calculation of the TAM, SAM, SOM. This is something that the startup should have done from the outset, but that we as investors also have to do to make it reasonable.

Something very important and that we have to take into account as investors is that if we enter a startup in the seed phase, the most normal thing is that there will be later rounds: series A, series B, etc. So we have to make sure that it has a large enough market size for subsequent investors.

Expected growth

It doesn’t just matter how big the market size is today, but how big it’s going to be in the future. And for this we must have knowledge of the market or find out by feeding on all the market reports that exist. What % per year do you think indicates positive market growth?

MOATs

These are the competitive advantages of the startup in a certain business.

Warren Buffett said that the key to investing is not to assess how much an industry will affect society, or how much it will grow, but rather to determine a company’s competitive advantage, and above all, the durability of that advantage. And that the products that have broad and sustainable moats around them are the ones that are going to offer the greatest rewards to their investors.

Market concentration

There are many indices that allow us to see the market concentration, if as a result you obtain that the market concentration is high, this creates an entry barrier. It means that there are few companies that bring together a very large part of the market, which is market share.

On the contrary, if we are talking about a low market concentration index, there is a high market fragmentation, and therefore there are no significant barriers to entry.

Market penetration

Market penetration and entry order is also something that can significantly affect the results of the startup. The entry order affects how much of the market you can get.

Shadow markets

The next and last variable of this market analysis of a startup before investing, is that of the shadow markets. And what is? A shadow market is a market that existed in the past, is not regulated and is not public.

7 de April de 2022

Colaborador ICC

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