We can easily overlook the level of demand pull when we are assessing strategic value. Just because a product has a patent, deep complexity and an obvious competitive advantage does not mean that it can fly by itself into the market. In fact, very few products have the ability to establish market leadership out of the box, most have to be supported with established distribution channels or complementary products.

I had two occasions recently to review products which had clear market leadership. Each solved a difficult problem in their sectors and each had reasonably strong competitive advantages. They both had impressive testimonials from major corporate customers and clearly delivered good value for money. Both said they had a long list of prospects and that the reports back from their prospects indicated sales in the future, however, their closure rates were relatively slow.

Sales closing rates and the length of the sales cycle are great indicators of pulling power. A product which meets a strong and compelling need has a high closure rate and relatively short sales cycles. Also these products typically have strong referral rates and usually good viral marketing. Products which have a significant competitive advantage and also meet a compelling need can often push their way into a market, opening up new revenue channels and quickly capturing market share for the acquiring corporation. I call these high growth potential products.

Products which have significant competitive advantages but don’t satisfy the high compelling need test are low growth potential products. These products tend to struggle because clients and consumers put them lower down the list of need to have solutions. Perhaps, they fall into the category of ‘nice to have’ which explains why the conversion rates are so much lower.

As you prepare your company for exit and seek strategic value investments, you should focus on high growth potential products. The evidence which you need to produce for the strategic acquirer to show market traction and pulling power is usually easy to assemble and normally obvious.

However, there are opportunities for low growth potential products for a strategic sale but the technique for establishing strategic value is different. In the case of high growth potential products, market demand is established directly with the product itself. With low growth potential products, the market potential is established in relation to a set of existing products for which the new product provides complementary value.

We can see this situation occurring often in software applications where a new module can be sold back into an existing customer base and then add incremental value to new sales. However, the new product is not sufficiently strong to pull the other products into a new sale. In fact, this relationship accounted for much of the small software firm acquisitions throughout the 70’s and 80’s.

In the case of low growth potential products, we need to position them for sale into large existing customer bases where the selling effort is low and the customers are open to additional add-on products. The strategic buyer will pay a strategic premium because they can see an immediate short term method for recovering the acquisition cost.

High growth potential products which have the ability of driving new sales should be directed at the strategic acquirer which has the capability and capacity to launch the product into the market and support a rapid growth activity. High growth potential products can be sold back into existing customers but, importantly, they drive new sales.

From time to time we have posts from local members of the startup community that provide some great advice from a different perspective. Today’s post is from Dr. Andrea Belz, a long-time member of the Pasadena Angels, a local consultant and one of the brightest people I know (a CalTech PhD–what more can you say).  Although Andrea provides five simple questions to ask when commercializing university technology, these can also be applied to most startups—whether they get their start in academe or not.

     By Andrea Belz

Many entrepreneurs approach Angel groups and VCs with novel technologies and strong technical teams.  Unfortunately, they often “forget” to conduct any marketing research, mainly because they don’t understand how to do it.  Even worse, technical teams with strong resumes may attract plenty of funding, but eventually they may hit the wall (at investors’ expense) once everyone realizes that there is an interesting technology but no interest from the outside world.

This problem can be especially acute when the local community includes a strong research institution interested in technology commercialization.  People often underestimate the gap between the technology’s readiness to exit the university or research laboratory and its readiness for market.  This gap often takes five years to overcome.   Furthermore, technologists almost always underestimate the difficulty in selling anything – the hardest challenge in almost any organization is to get someone to write the first check.

Entrepreneurs should be sure to ask themselves a few key questions before pursuing a plan to commercialize technology, particularly with investors.  Investors can use these questions as a guide to the entrepreneur’s “coachability”.

1. Have you spoken with anyone that might be an end user of the product and lived in their world for a day?
2. Have you listened seriously to his/her feedback without foolishly discarding it (“They just don’t get it”)?
3. Do you tell people about your technology or about the benefits?  In other words, do you sell the drill or the hole?
4. Can you estimate the size of your market and have you found “low-hanging fruit”?
5. If the low-hanging fruit is not the first application you considered, are you willing to shift direction?