Market Analysis 1 Presented by Steven R. Kopits April 2002

Market Analysis 2 Agenda Market Sizing Market Share Industry Structure and Profits

Market Analysis 3 Trying to establish… …by market analysis. Total market size Your company revenues (mkt. share) Your company profits

Market Analysis 4 Market Sizing Where the market is… …and where it’s going Establish current market size Establish rate and shape of growth Establish terminal market size (exit point) Establish post-terminal growth (exit value)

Market Analysis 5 Market Size = Your sales + sales of all competitors Current Market Size A competitor is defined from the customer’s perspective Geographic PrimarySecondary Product/Service Broad Narrow Current competitors, who actually compete today for your customers Current competitors, who could – but don’t – actively compete in your market Current competitors, who compete for part of your market nearly your product NOT RELEVANT

Market Analysis 6 It’s a summer’s day, 2 pm on the beach. A customer goes into a convenience store on the boardwalk. He wants a drink. He can buy a warm Pepsi or a cold Coke (from a refrigerated case). Do these drinks compete against each other? What if the Coke is in.33L cans, the Pepsi in a 2L bottle? Case Study Market segmentation can be a subtle thing – but it is the customer’s perspective that matters

Market Analysis 7 Shape of Growth Declining industry Growth industry Mature industry Constant absolute growth Declining relative growth Stable P/E’s Increasing absolute growth Constant relative growth High P/E’s Declining absolute growth Declining relative growth Low P/E’s Time Sales ($) Which industry are you in?

Market Analysis 8 New Tech Industries Why this shape? High unit costs Poor organization Changing business model Long sales conversion cycle Customer ignorance/resistance Slow up-take of product or service

Market Analysis 9 Selling to corporates: entrepreneur experiences –Good initial meeting –Quick formal proposal But corporates respond with –Lack of clear decision-making process –No clear decision-makers –Lack of urgency –Preference for established suppliers –Turf battles –Risk-averse manager behavior –Lengthy trials to become established supplier Sales Conversion Cycle Conversion cycle can take 2 years for corporate client

Market Analysis 10 Customer Inertia/Ignorance Aim for the green boxes.

Market Analysis 11 Customer Inertia/Ignorance One more… –Another product in a broad existing selection –E.g.: FMCG’s (Coke, toothpaste) –Critical Success Factors (CSF’s): brand awareness, efficient and broad distribution, efficient production A step up… –Clearly superior product in a broad existing selection –E.g.: broadband internet access, Gevalia coffee –CSF: credibility (brand awareness), demonstration, word-of-mouth recommendations Sounds complicated… –Superior, but complex, product in an existing selection –E.g.: major corporate softwares –Characteristics: long and opaque decision-making process, multiple decision-makers, trials, delays –CSF: track record, financial strength, proven product, sales endurance

Market Analysis 12 Customer Inertia/Ignorance Don’t bother me… –Clearly superior product with no strong alternative, but non-material, non-core to client –E.g.: energy efficiency project, alternative telecom provider to corporate client –CSF: right contacts, timing, simple purchasing process Gotta have it… –Clearly superior product with no alternative, core to client –E.g.: Viagra –CSF: show up Well, if… –Clearly superior, complex product with no clear alternative, core to client—client will work with vendor for successful outcome –E.g.: new production technology –CSF: client relation skills, trials and R+D focus, good at customization and documentation, project management skills

Market Analysis 13 Ask potential customers about their needs For the product or service, identify –Absolute benefit (in $) to customer –Relative benefit (% of expenses) –Strengths and weaknesses of current solution –Perceived risk Decision making process –Who can approve, who can veto –How approval occurs (p&l ownership, initiator/champion, rounds/levels –Timing (cycle, length of approval, trials) Corporate Market Surveys Do not speculate. Ask. Get information.

Market Analysis 14 Describes the position of the potential customer with regards to your product or service Signal customer willingness to buy; useful for VC’s Can be an extension of a marketing survey—asking can be better than selling! Should be specific –Detailed description of customer need –Detailed description of the proposed product/service –Price –Timing –Required approvals –Key conditions –Key limitations –Risk assumption Non-binding Letters of Intent To have value, an L-o-I must be specific.

Market Analysis 15 Market Share Based on your relevant market –Your competition from the customer’s perspective –Your geographic area –The market you can and plan to serve You can refer to total market for establishing market share in percentage terms Assess the market both top down, bottom up

Market Analysis 16 Price leader – No. 1 in market share –Economies of scale –First mover? Quality leader –Superior product/technology –Strong organization Middle of pack –Good technology –Reasonable price Minor player –Niche market Potential Market Share Strategies

Market Analysis 17 Industry Structure Market share depends on industry structure Geography –National, regional, or global Concentration –Significant economies of scale Production, sales, advertising, purchasing, financing, R+D, distribution, brand awareness/credibility –More typical in mature industries Fragmentation –Customer ‘stickiness’ –High switching costs –Low economies of scale, low scalability What is your current industry structure? What will it be at exit?

Market Analysis 18 Share Strategies by Industry Structure Which are you?

Market Analysis 19 Situational (Soft) Advantages –Smarter, harder working management –No response from competitors Structural (Hard) Advantages –Based on structural characteristics of the business vs. competition Comparative Advantage VC’s prefer good – but not necessarily brilliant or macho – management leveraging a structural advantage

Market Analysis 20 Employee compensation structure Geographic coverage Mix of products Decision-making process Brand positioning Distribution channel Skill set Capital Some Structural Advantages Credibility Production equipment Unions Regulation Cost structure Ownership Corporate culture

Market Analysis 21 Profit margin is function of –Market share –Industry structure –Industry growth –Company comparative advantage Forecasting Profit Margins Understanding market forces are key in projecting future profit margins External Factors from market analysis Internal factors

Market Analysis 22 Typical Profits Margins Pre-tax Net Income/Sales

Market Analysis 23 A note about valuation –Exit profit margins and post-terminal growth prospects will determine post-terminal values Post-Terminal Values

Market Analysis 24 Terminal Market Size Terminal value: reality check, future growth prospects Reality check Post-terminal growth 25% CGR 15% CGR 8% CGR

Market Analysis 25 Contact Detail Steven Kopits mobile: