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Looking for investment? Start obsessing about market need

Originally written by Matthew Cushen on Growth Business

What did you have for breakfast this morning? A Pepsi AM? A Cosmo yoghurt? Or a glass of juice fresh from your Juicero? No, you didn’t. You could have — briefly — in 1990, 1999 and 2017. All are spectacular, financially disastrous and reputationally costly product fails. And we’ve only reached breakfast time. One of

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 Looking for investment? Start obsessing about market need

Tackling problems that are interesting to solve rather than those that serve a market need was cited as the No. 1 reason for failure, noted in 42% of cases –– CBINSIGHTS.

What did you have for breakfast this morning? A Pepsi AM? A Cosmo yoghurt? Or a glass of juice fresh from your Juicero?

No, you didn’t. You could have — briefly — in 1990, 1999 and 2017. All are spectacular, financially disastrous and reputationally costly product fails. And we’ve only reached breakfast time.

One of the most misleading clichés around is that ‘there is no such thing as a bad idea’. Complete nonsense and tweak anyone on the nose that says it before they do more damage. The world is littered with bad ideas

They come from the big corporate world as brand extensions within category — such as Pepsi introducing a pointless new variant for which the consumer had no need. Or as responses to an internally generated strategy that has forgotten to understand consumers — such as Cosmopolitan’s logical attempt to move into health & nutrition products but with a product for which their brand had no real relevance in a hugely congested category.

However, corporates rarely bet the farm on one product extension — start-ups do.

The Juicero was a $400 machine that squeezed Juicero packets of diced fruits and vegetables. Presumably, the investors that poured $120m into the business must have been fixated by the heady combination of hardware plus monthly subscriptions for the packets. The perfect commercial model. But consumers don’t buy a commercial model, they spend their cash on satisfying a need.

Juicero might have been able to satisfy a basic need for nutrition & taste, but a consumer is rarely one dimensional. In this case, they would have been weighing up convenience (fruit and veg are not difficult to source, so why is a subscription required?); speed (the machine was slower than squeezing by hand); cost ($400 plus subscription — really?) and environmental impact (pre-packed fruit and veg — really really?)

Poor ‘product market’ fit is the top reason that a start-up fails. There are many studies of this and an extensive one put this as the reason for 42% of start-up failures.

When we assess businesses for investment, we obsess about the market need and want to see entrepreneurs that share that obsession. If a start-up has unique insight that has uncovered a market need or has data that proves the demand for their product or service then we are all ears. But just an idea, with no consumer validation, is not going to make it far with us. It’s why we don’t respond well to ‘tech’ businesses.

Business that describe themselves by the tech they use (AI & blockchain being cliched examples), are falling into the trap of being product led not market led. We often look at a tech business and think ‘it’s a great solution desperately in search of a problem to solve’.

So what are the pre-requisites for giving yourself and potential investors confidence to bet on a product or service?

Market need

Get into your consumers’ or clients’ shoes. Think of all the reason they would purchase your product, then spend much more time thinking about all the reasons they wouldn’t. Think about where they would substitute spend to buy your offer. Stop only when you can answer the two critical questions:

  • what need is my product or service satisfying?
  • why is my solution better than those that exist already?

Don’t fall into the Juicero trap of thinking that there is no product that exists already in the ‘wifi enabled subscription juice’ category, when they should have been thinking about the need for ‘fresh juice’.

Consumer validation

Generally, this is proactive &/or reactive. Maybe a proposition is conceived from consumer insight that describes a gap in the market — ‘I wish there was a way of doing…’. DIY solutions or hacks can be a good sign of this.

Or you might follow the Steve Jobs philosophy that ‘Customers don’t know what they want until you show it to them’. That is fine so long as you do show consumers something and get their feedback. This doesn’t have to be a finished entity — it can be scamps on paper, a model, or a mocked-up website service with nothing behind it. With a price tag. Whatever it takes to get an approximation of the reaction and behaviours you’d get from consumers in the real world.

Market scale

To scale a business, you eventually need a large market with gaps where innovation can thrive – either because it is fragmented, poorly served or high growth. You might have nailed market need and got great consumer validation but only with a small market segment. A good start but you’ll need a plan to transcend the segment and move into the bulk of the market. So don’t just hang out with your ardent fans, understand the differences between the needs in the niche compared to the wider market.

Continuous iteration

The first three pre-requisites have all involved speaking to consumers, gaining quantitative or qualitative data and discerning insight. And the fourth is no different. It is more of the same as your product or service builds out. Constantly testing hypothesise and propositions and responding to feedback.

By the way — get these things right and not only will you and your investors have confidence in your product or service, but you will also have created the fuel for how you describe and communicate your proposition to the market in the language they will respond to. More about that another time.

PS: About that phrase ‘there is no such thing as a bad idea’. It is rubbish in a literal sense, the world is littered with bad ideas and broken dreams that should never have had effort or cash put into them. However, it is bordering on truth. Ideas are never worthless, and all ideas should be considered even if at first sight they seem bonkers. Within any idea lives some insight, some reason why someone thought it interesting and worth discussing. The trick is to retrieve the nuggets of value but then ditch a ‘bad’ idea before it does any damage.

Are you interested in equity investment?

The Start-up Series, hosted by smallbusiness.co.uk, gives company the chance to secure equity investment of £150,000 to £250,000 every month. To find out more, go here.

Written by Matthew Cushen, co-founder at Worth Capital

Further reading

7 funding choices when it comes to financing your start-up

How start-ups can qualify and take advantage of EIS and SEIS 

3 ways start-ups can create irresistible investment proposals 

Start-up valuation – an investor guide to valuing a start-up

7 investor personas: how start-ups can understand their motivations 

Source: http://s17026.pcdn.co/looking-for-investment-start-obsessing-about-market-need-2557920/

Private Equity

Beazy U.G. – HRB204648B – 01042023

Beazy is a rental platform for audiovisual equipment and spaces. You can think of it as AirBnB for photographers and filmmakers!

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” The Leapfunder Note is a sensible and attractive way to place capital in start-ups in the Netherlands “

” Diversification is important in angel investing. Leapfunder is a platform that allows angels to spread their investments. “

” Leapfunder investing allows you to become actively involved in a start-up, just as in classical angel investing, while taking all the hassle out of transaction execution “

” Leapfunder is ideal for investing smaller amounts in a start-up in the very early stages. Such investments can be a powerful addition to a portfolio “

” With Leapfunder you get a great opportunity to build up a diversified portfolio of start-up investments, often investors can play an active role in developing the company “

” When I saw the Leapfunder proposition I thought straight-away: this is what start-ups need. I am an entrepreneur and wish this system had been available when I started my company. “

Pieter ter Kuile

Investor

Wouter Kneepkens

Investor

Ronald Bazuin

Investor

Eric van der Maten

Investor

Eric van Gilst

Investor

Donald Res

Investor

Source: https://www.leapfunder.com/companies/177

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Private Equity

CVC to acquire RiverStone Europe for $750m

The deal with Canada’s Fairfax Financial Holdings to buy the run-off insurance services business is expected to close early next year

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CVC Capital Partners has agreed to buy run-off insurance services business RiverStone Europe from Canada’s Fairfax Financial Holdings for about $750m.

The seller would also be entitled to get as much as an additional $235.7m post-closing under a contingent value instrument, Fairfax said in a statement. The business will change its name to RiverStone International after the deal closes, expected early next year. CVC is investing in the company through its Strategic Opportunities Fund II, closed last year at at €4.6bn.

“As one of the largest global consolidators of non-life run-off insurance books, with a leading position in the UK and Lloyd’s market, embedded cash flows and a predictable financial profile, RiverStone Europe is ideally suited to CVC’s Strategic Opportunities platform, which specialises in backing established businesses in stable markets that have long term growth ambitions,” said Peter Rutland, managing partner and head of financial services at CVC.

OMERS, the pension plan for Ontario’s municipal employees, has also agreed to sell its interests in the company, the firm said in a statement. 

To contact the author of this story with feedback or news, email PEN Editorial

Source: https://www.penews.com/articles/cvc-to-acquire-riverstone-europe-for-750m-20201203

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Private Equity

Pennsylvania Pension details the costs of private equity investing

The pension system’s fund managers collected about $427m in fees and expenses last year

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Pennsylvania’s largest pension system estimated its private equity fund managers received about $427m in gains, fees and expenses from the plan’s investments last year, up 14% from $374m the previous year.

The state’s $60bn Public School Employees’ Retirement System said that the total for 2019 included $100m in management fees, $279m in carried interest, or the share of investment profits, and $48m of other fund expenses.

By comparison, the 2018 total included $114m in management fees, $214m in carried interest and $46m in other fund expenses last year, according to a presentation at a public meeting of the pension’s Board of Trustees.

The Pennsylvania pension system is among the few institutional investors that report fees and other costs associated with investing in alternative assets.

The system began tabulating and reporting the management fees and carried interest collected by its private-equity investment managers in 2019 as a way to increase transparency around its investments in the asset class.

“It’s been a pretty large effort to get it [carried interest] on a calendar-year basis, but we’re going to try to get it and update it every six months going forward,” James Grossman, the plan’s chief investment officer, told pension overseers at the meeting.

The pension system also broke out the amounts of carried interest received by managers of individual funds last year. The three highest earners were CVC Capital Partners’ CVC European Equity Partners V, at $25.3m; LLR Partners’ LLR Equity Partners IV LP, at $17.8m; and New Mountain Capital’s  New Mountain Partners IV LP, at $16.2m .

The system saved about $3.34m in annual management fees through a co-investment program during its most recent fiscal year, which ended 30 June, pension documents show. For the current year, the plan aims to increase the amount to about $6.7m.

Although the system provides more detail about investment expenses than most institutional investors, it is working on becoming even more transparent. Among other potential moves, it is considering hiring an outside firm to improve the clarity of the data it collects and reports.

Fund general partners, which manage the investments, typically charge limited partners a fixed fee, while other expenses accrue at the fund level. Only a handful of public pension systems, including those in California, provide details of fees charged and carried interest amounts collected by fund managers.

But there isn’t a uniform standard for reporting the fees and expenses, according to Charles Spiller, deputy chief investment officer, nontraditional investments for the system. The plan has relied on data investment adviser Hamilton Lane Inc. helped collect from audited financial statements and surveys of fund managers, Spiller said, a process that consumed almost 200 staff hours this year, system documents show.

Bringing on an outside firm to produce detailed fee statements could lead to greater fee savings, according to the documents. The firms being evaluated for such a role include Colmore AG, Novarca International  and XTP, the documents show.

Write to Preeti Singh at preeti.singh@wsj.com

From The Wall Street Journal

Source: https://www.penews.com/articles/pennsylvania-pension-details-the-costs-of-private-equity-investing-20201203

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