Wednesday, 23 November 2022 05:41

4 vital questions business leaders must answer

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My favorite thing about teaching is question and answer sessions. I recently participated in a Q&A session with two entrepreneurs who had read my book, Hungry Start-Up Strategy.

This brought to mind a basic question: What are the vital questions from investors, customers, employees, suppliers and others that business leaders must answer to keep their companies growing.

While not comprehensive, I came up with four vital questions for company success and how business leaders can find compelling answers.                          1. How large is your addressable market and how fast is it growing? 

This question is vital because if there is no market for your product, you will be unable to build a business around it.

Investors and employees care about market size and growth because they want to bet on or work for a company with the potential to go public – which means it must reach $100 million in revenue while growing faster than 30 percent a year. 

If the company can go public, venture capitalists will generate a return on their investment (ROI) and employees' stock options will become valuable.

Venture capitalists expect a company to gain no more than 10 percent of a market. So to reach this scale and growth rate, aim your company at an addressable market of at least $1 billion. 

Of course, investors prefer much larger markets and will probe for assurance that the market size you provide them is truly addressable – eg, customers in that market will pay for your product.

Here are three tips to help answer this question:

  • Seek out credible research that quantifies the size and growth of your target market.
  • If such studies do not exist, develop an estimate based on the number of potential customers, how many units of product they will buy each year and the unit price.
  • Interview potential customers so you can estimate how much of that market size your company can address.              2. What is your current market share and how will you increase it? 

Businesses often participate in a portfolio of markets. As I wrote in Disciplined Growth Strategies (DGS), large companies often get most of their revenue from markets that are slowing down or getting smaller. At the same time, they should be investing in new markets that are growing very rapidly.

Business leaders seek to hold on to their piece of the maturing market pie while boosting their share in the fast-growing new markets. This matters to investors, customers and employees because, unless your company is gaining market share, you are falling behind the competition.

And the longer that persists, the greater the risk that your company will suffer a drop in its valuation, lack the funds to build better products and need to cut talented employees.

To answer this question, do these five things:

  • Use credible market studies to estimate your market share and its recent trends.
  • If that does not exist, divide your revenues by the total market size to approximate your market share.
  • As detailed in DGS, ask customers which factors they use to choose between your company and competitors, how well your company meets these customer purchase criteria (CPC) and whether you are improving your competitive position.
  • Track customer retention and how much customers buy over time.
  • Launch new products that meet CPC better than competing ones.                           3. How much capital does your company need and what return can investors expect? 

To keep growing, you must raise the capital to hire people, buy raw materials, build factories, develop new products and processes and open sales offices.

Tell potential capital providers how much money you need and how much of a return they can expect. Employees who know that your company is making high payoff investments in future growth are more motivated to work hard.

As I described in DGS, here's how to estimate your required capital and ROI:

  • Develop growth trajectories for your company.
  • Build implementation plans to estimate the investment required and the resulting increase in your company's cash flow.
  • Forecast future uses and sources of cash over the next decade and calculate the net present value of the investment required.                     4. How long is your company's cash runway?

These days there is a fourth vital question which I lack the space to address here: How can your company cut costs to extend its capital balance without sacrificing long-term growth?

Here are two caveats. First, these questions may not be equally important to every industry and company. What's more, leaders who lack an appetite for math should consider collaborating with an expert in strategy and finance to answer them.

If you can answer the fourth question now, your company will be around when the current capital winter ends – and the first three vital questions I described here become even more paramount.