Posted by Jon Klein of The Topline Strategy Group on Thursday, July 14, 2010 @ 2:15PM
Blog series 4 of 4
Conducting Pipeline Interviews
There are two keys to conducting Pipeline Interviews. First, make sure to interview accounts at a variety of stages in the pipeline. The reasons why prospects don’t progress past the first meeting usually concern the fundamental fit of the product while prospects that drop out later in the pipeline typically don’t close due to issues related to value proposition. You have to conduct interviews with accounts at different stages to get the whole picture.
Second, never interview live prospects. Since they haven’t yet fallen out of the pipeline, you don’t know for sure that they aren’t going to buy. Therefore, they aren’t reliable data points as to why prospects don’t buy. In addition, the last thing you want to do is interfere with a sales opportunity.
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This article was contributed by Jon Klein. Jon is the founder and general partner of The Topline Strategy Group, a strategy consulting and market research firm specializing in emerging technologies. Jon brings a unique blend of strategy consulting and hands on operating experience to The Topline Strategy Group and works closely with Semaphore on a variety of engagements.
To read the full White Paper, please go to Semaphore News and click on the May 3, 2010 link titled - White Paper – Market Due Diligence
Posted by Jon Klein of The Topline Strategy Group on Thursday, June 17, 2010 @ 10:00AM
Blog Series 3 of 4
Pipeline Interviews: The Missing Piece
At this point, you may be thinking, "The analysis addressed the overall market size, the potential penetration of the market, and the company's likely share. Shouldn't that be enough?" Actually, it isn't. The typical due diligence process is based on the critical assumption that the accounts that have purchased a solution from the company or its competitors are fundamentally the same as accounts that have not yet purchased. Given enough time, the non-buyers will eventually buy a solution if it has a strong value proposition.
But what if that assumption is wrong? What if the accounts who haven't bought are somehow fundamentally different than the ones that already have purchased in a way that isn't obvious from segmentation factors like size or industry? If that is the case, then ‘I haven't purchased yet' becomes ‘I'm never going to purchase' and the market is far smaller than calculated. And, if the market is smaller than you calculated, the company may never reach its revenue projections.
Pipeline Interviews: Interviews with Accounts that Fell Out of the Pipeline without Making any Purchase
So how do you sort out whether or not you have an ‘I'm never going to purchase' problem? The answer is through Pipeline Interviews. Only prospects that have had sales interaction with the company but decided not to purchase anything can answer this question. They know whether their decision not to buy is primarily a timing issue or is due to something more fundamental.
Continuing with the CRM for Law Firms example, it turns out that approximately 30% of law firms with over 100 people have a fundamentally different selling model than one that is supported by a CRM. Examples include firms who primarily serve consumers and those that focus on a very narrow subspecialty and act as a subcontractor to general practices. These types of firms will never buy a CRM system since it doesn't fit their business.
In this case, the market turns out to be about 70% as large as calculated using traditional methods. We have conducted numerous due diligence projects over the years where the market turned out to be a fraction of the size originally believed, including:
- A company providing translation management software where the real market turned out to be only 10% of the original target: $1B+ companies with 25% or more of their sales overseas. Many industries, such as aviation, do business solely in English everywhere, regardless of local language and do not need translation. Others, such as packaged goods companies, develop custom materials in each market and do not need translation either.
- A company providing software simulations for training repair technicians on maintaining products found that the real market was only 25% of the original target: $500M+ companies that provide low and medium tech equipment such as lawn mowers, pumps, and oil field equipment. Because the process of repairing each product is unique, a separate simulation is required for each product. For the cost of a simulation to outweigh its benefits, the product either has to have very large sales (over $100M/year) or a very long lifecycle (10+ years). The Pipeline Interviews revealed that most companies did not have a single product with sufficient sales (they had a wide range of smaller products) or a long enough lifecycle to make a simulation economical.
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This article was contributed by Jon Klein. Jon is the founder and general partner of The Topline Strategy Group, a strategy consulting and market research firm specializing in emerging technologies. Jon brings a unique blend of strategy consulting and hands on operating experience to The Topline Strategy Group and works closely with Semaphore on a variety of engagements.
To read the full White Paper, please go to Semaphore News and click on the May 3, 2010 link titled - White Paper - Market Due Diligence
Posted by Jon Klein of The Topline Strategy Group on Thursday, June 10, 2010 @ 3:00PM
Blog Series 2 of 4
The Standard Market Due Diligence Process
The typical market due diligence effort generally includes three components. To help explain each component and how they fit into the overall market assessment, we'll illustrate this section using an example company that provides CRM software for law firms.
A Market Sizing Analysis
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Market sizing analyses are generally quantitative exercises aimed at establishing the Total Available Market. The figures are normally developed bottom-up based on the size and industry segmentation and are supported with top-down data
Example: CRM for Law Firms
Bottom-Up: The solution is targeted at law firms with 100 or more lawyers. There are 1,000 law firms in the US of that size and on average they will spend $100K/year on our solution. Therefore, the market potential is $100 million/year.
Top-Down: Gartner Group estimates the market for legal software is $1 billion and this solution could be about 10% of what a firm spends, or $100 million/year.
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Market Sizing Analyses Establish the Total Available Market
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Customer Interviews
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While customer interviews serve several purposes, when it comes to market due diligence, their primary function is to establish whether the company is selling a pain killer that is likely to be widely adopted across the industry or a vitamin that will be purchased by just a select few.
Example: CRM for Law Firms
Pain Killer: "Our client relationships are managed by teams of attorneys. There is no question that unless each attorney working with a client has access to all of the contacts and opportunities at the account, we lose business."
Vitamin: "The CRM has made the client management process easier and saves us time. Do we win more business because of it? I'm not sure I'd go that far."
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Customer Interviews Help Determine Whether the Company has a High Penetration Pain Killer or a Low Penetration Vitamin
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Loss Interviews
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The flipside of customer interviews is loss interviews. Loss interviews provide excellent insight into how the company stacks up against competitors. Understanding whether the company has a strong or weak competitive position helps determine the share of the market they can expect to win.
Example: CRM for Law Firms
Strong Position: The loss interviews uncover that losses are largely attributable to factors that have to do with the company's core offering such as competitors buying the business and relationships.
Weak Position: The loss interviews uncover that losses are largely attributable to a systematic limitation of the company's offerings.
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Loss Interviews Provide Insight Into the Company's Potential Share
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This article was contributed by Jon Klein. Jon is the founder and general partner of The Topline Strategy Group, a strategy consulting and market research firm specializing in emerging technologies. Jon brings a unique blend of strategy consulting and hands on operating experience to The Topline Strategy Group and works closely with Semaphore on a variety of engagements.
To read the full White Paper, please go to Semaphore News and click on the May 3, 2010 link titled - White Paper - Market Due Diligence
Posted by Jon Klein of The Topline Strategy Group on Wednesday, June 2, 2010 @ 9:00AM
Blog Series: 1 of 4
When it comes to venture capital and growth equity investments, the bottom line is the top line. If a company can grow its revenue, then odds are it will generate a strong return for its investors. Market due diligence is a key component of determining the growth prospects, and therefore the return prospects, of an investment. However, the tried and true methods of market due diligence typically leave out one of the most important elements of measuring the opportunity - Pipeline Interviews.
In our experience, Pipeline Interviews - interviews with accounts that fell out of the pipeline without making a purchase - are rarely conducted during a market due diligence effort. However, they provide vital insight into the true market potential of the company, a perspective that cannot be gained elsewhere. To understand why, we have created a series of blogs to explore the subject. Next time we will by looking at what is typically included in a market due diligence effort.
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This article was contributed by Jon Klein. Jon is the founder and general partner of The Topline Strategy Group, a strategy consulting and market research firm specializing in emerging technologies. Jon brings a unique blend of strategy consulting and hands on operating experience to The Topline Strategy Group and works closely with Semaphore on a variety of engagements.
To read the full White Paper, please go to Semaphore News and click on the May 3, 2010 link titled - White Paper - Market Due Diligence
Posted by Richard Gabriel on Thursday, March 25, 2010 @ 2:00PM
By Richard Gabriel
So what's wrong with Biotech financing today? What will it take to bring the Biotech market out of the doldrums and back into action? If you are having trouble finding financing for your next greatest idea then the only comforting news is that you are not alone.
Venture capital technology assessments, which are advisory diagnostics we perform frequently, have revealed some interesting information. Unfortunately, when the biotech bubble first burst, right around the 9-11 time period, there were already a bunch of troubled venture capital funds. Most of these funds became challenged because the time horizon for their investment to mature is too short for the drug development cycle. Too many of these firms believed that the capital market was an exit strategy. True, for some it was the best thing to do, and to a point it made sense for both company and investor - but not today. Following the market collapse and then the near fatal blow that the biotech market received along with the rest of the market, venture capital in the bio tech sector was and continues to be in a state of disarray. There are, however, a few funds that actually know how to make money in the biotech world. The problem is they too are having trouble raising capital for their next funds. Overall the VC market is a nightmare for biotech with lots of rationalization expressed - too early, too late, not enough differentiation, to expensive, too long to market. When all boiled down it shapes up as too many people that don't know how to develop a drug controlling the capital to one of America's brightest economic and social stars - medicine.
The trend for finding later stage products is so rapacious right now that VC funds are having deal flow problems. Everyone wants to jump on the band wagon, leaving the start up holding the ‘your too early for us' bag of hot air. Ask Pfizer what they think of late stage drug investment? They just dropped $215MM on a drug from Russia that showed great clinical efficacy in Alzheimer's patients in Russia and the surrounding areas and has been in use for over 10 years, and guess what? Bring it to the U.S. for clinical trials and it shows absolutely NO clinical efficacy against the placebo! Who said late stage drug development was lower risk? Somebody tell the Pfizer board.
For $215MM and some savvy investment types, Pfizer management could have invested in 10 start-up's at $5.0MM a pop and reserved $15MM each as the investments hit their milestones. Now granted the chances of a drug start up reaching the market is pretty low, but come on folks, $215MM will buy you a lot of entrepreneurial grease, commitment and energy as well as some damn good technology. In my book, I like the odds of the new technology over slumping something just because it is in Phase 2 clinical trials or worse as Pfizer found out. So much for due diligence. But why take the chance and invest in the ‘too early' crowd of drugs and technologies?
The new drugs being developed today are smarter because they will be tied to diagnostics to help physicians decide who should get the drug and who shouldn't. This new combination technology approach to drug approval could be a decidedly better approach to drug development then what most investors are doing today with their ‘closer to market' picks. Why is that the case? The FDA likes this approach, tie a diagnostic to a drug, prove the efficacy, and your going to get approved!
The long and the short of it is that in the biotech world the ‘valley of death' extends from Boston to San Diego and swings up to San Francisco and bounces its way across the globe to the Far East, Europe and the UK. The only people who seem to be getting all the money are the people in India, China and other places that are trying to eat the pharmaceutical and biotech industries' lunch in Europe and the U.S. with generics, biogenerics and more cut rate manufacturing suites than you can shake a stick at. Nothing wrong with that but hardly any one is paying attention to new technology.
Isn't it time we looked for a better financing model for Biotech products? We think so. Got any ideas? Let us know what you think might be a better way to fund Biotech!
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Richard Gabriel is head of the Life Science practice at Sema4 Inc., dba Semaphore (http://www.sema4usa.com/), a leading global professional services provider of Private Equity funds-under-management and technology diligence services. Semaphore currently holds fiduciary obligations as General Partner for six Private Equity and Venture Capital funds and advises General and Limited Partners as well as Corporations around the world. Semaphore's corporate offices are in Boston with principal offices in New York and London.