start-ups Archives - Lumec

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July 29, 2020

We are regularly approached by start-ups requesting to undertake feasibility studies. This is largely due to the fact that, where start-ups don’t have a proven track record or offtake agreements, funders require evidence of economic and financial viability. In our last blog post, we focussed on understanding what it means to develop a ‘business case’. In this blog, we unpack the different types of economic market research that can be completed to determine economic and financial viability. We have recently developed a package of market research offerings which can be found here – this forms the basis of our discussion below. Essentially, we distinguish economic market research into two types, namely, (a) market demand assessments and (b) feasibility studies, with market demand assessments being one component of a full feasibility study.

What is a market demand assessment?

Market demand assessments are done to provide a detailed understanding of the economic viability of a business idea (i.e. product or service offering). This can be done more simply via a desktop assessment or in slightly more detail through including primary research such as surveys. In a generic market demand assessment, we usually start by undertaking a lean canvas analysis to further define the business model and provide a solid starting point for the market research. Thereafter, the research will define the target market, undertake a demographic and socio-economic profile of the target market, assess current market and industry trends, and do a competitor analysis. Once the market is well understood, these key findings are used to develop a demand model which will quantify current and projected demand for your business idea, such as the potential number of customers or units that could be absorbed by the market. 

For example, if you want to start a local manufacturing business, we’d first need to understand what it is exactly that you want to do, then understand the market which you could potentially penetrate, and then quantify the market (i.e. population as an indication of potential customers, income as an indication of spending power, etc). Once this has been done, we’d look at the specific sector and industry in which you intend to operate and assess trends and patterns which will have an impact on your businesses success, and then analyse your competitors, their products, and pricing. Using all this information, we’d then develop a model which utilises assumptions based on the market and industry analysis, and provides projections to say, for example, “in 2022, should you be able to penetrate 5% of the market, there is potential for you to sell 100,000 units per annum”.

What is a feasibility study?

A feasibility study builds on the steps undertaken in a market demand assessment but also includes an institutional and operational assessment and analysis of financial viability. The institutional and operational assessment essentially represents the structure of the entity (legal, shareholding, etc), the HR structure, and business operations, while the financial analysis ties together projected revenue streams with capital and operational expenditure to show profit & loss and break-even. The results of the feasibility study can then be pulled through into a business plan, which will provide funders with strong evidence that the proposed project or business has the potential to succeed. Including off-take agreements can help to build an even stronger case. 

What do funders want to see?

A market demand assessment is a great starting point in understanding market potential. However, most funders want to see how this translates into financial viability. We have been told by numerous development financing institutions that the most critical element of any feasibility study is ensuring financial projections are informed by and developed off anticipated demand calculations. So in the example above, showing that you have the potential to sell 100,000 units per annum might not be enough. However, if you can show that this can generate R25,000,000 in sales per annum at a competitive market rate of R25 per unit, and after developing your financial model you can show a reasonable profit margin, you’re likely to catch the attention of funders. 

So, why do market research?

In summary, undertaking market research is an important tool in gaining a better understanding of a potential business product, service or even a concept or idea. In the case where you can prove viability through offtake agreements and a solid business plan, you most likely can raise funding without doing any market research. However, in many cases, offtake agreements are difficult or impossible to secure (i.e. when your product is service is targeting customers directly), so market research is important in building a case for funders. A market demand assessment will provide you with solid evidence as to whether or not your business venture has the potential to succeed, giving you an indication of potential customers or sales. However, taking this further into a feasibility study by including the institutional and operational structure and detailed financial analysis (tied to the market demand assessment) can go a long way in securing funding. 


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May 25, 2020

Over the past year and a half, we have been regularly engaging with start-up businesses and entrepreneurs from a wide variety of sectors, as well as organisations providing both funding and development support to start-ups. A common challenge faced by most start-ups is access to funding. This is often due to the fact that they do not have a proven track record and are unable to demonstrate that their business idea is viable, and are therefore viewed as ‘high risk’ by funders. This essentially creates a mismatch between funders and start-ups at the critical ‘seed stage’ of development. Understanding this, we specifically engaged with funders to gain some insight into how start-ups can access the funding that is available. What it essentially comes down to is both (a) having a solid business case and (b) being able to prove economic and financial viability. 

In this blog we’ll address part a, essentially, understanding the term ‘business case’ and suggestions on how you can build a solid business case. In our next blog post, we’ll focus on part b, which unpacks how to determine market viability and how to leverage this to guide financial projections. 

So what is a business case?

Simply put, do you have evidence to back up your idea? We all have ideas, but not all of us know how to step back and objectively assess our ideas to determine whether these will survive in a very competitive start-up environment. A business case is the first step at truly understanding whether an idea is worth pursuing or not, which is critical because it is going to require a lot of time and effort to take your idea through to implementation. A business case can be as simple as a one-page document that presents a clear and concise overview of your project idea and backs this up with some factual data and information. This will provide you with some evidence to start to test initial interest for your project idea. 

The difference between a business case, feasibility study and business plan

A business case must not be confused with a feasibility study or a business plan. A feasibility study is usually undertaken after there is enough evidence, through some initial research, to support an idea or project and you can show you have a business case. It digs deeper to understand and assess the market and industry, analyse competitors, and measure potential market demand (i.e. economic viability), which then assists to determine financial viability. A business plan then draws from these critical findings and includes more administrative, institutional and operational requirements, and more accurate financial calculations. We are often contracted to just undertake the economic viability component of a feasibility study (i.e to determine potential market demand) for clients who have an idea and want to both be able to test their business case and have some additional evidence to support launching into a full-scale, and often multi-disciplinary feasibility study. Such specialist studies can be very costly (upwards of R50,000 for a market demand assessment and R100,000 for an economic feasibility study) and as such, start-ups often end up hitting a wall at this point. However, before spending a cent on such studies, you can do some basic research to first determine if you have an idea worth investing in by building a business case. 

How to develop a business case

So, what can you do to show that you have a business case? We are huge fans of the lean canvas model and the first thing we do when approached with an idea is put it to the lean canvas test. The approach is to unpack your idea into a one-page template by providing information on the problem, customers, value proposition, solution, channels to customers, revenues and costs, key metrics and the unfair advantage, in that order. The lean canvas will quickly show you if what you have is just an idea or a good idea that has the potential to succeed. Once completed, the outputs can easily be translated into concept/proposal documents and/or a simple pitch deck.

It’s just the start!

Unfortunately, most public sector development finance institutions such as NEF and SEFA will require more detailed market research, and a business case document most likely won’t suffice in leveraging funds. It can, however, be used to leverage initial interest and develop support in undertaking specialist studies. Essentially, it will generate some level of confidence and buy-in and funders might be more likely to recommend you to other small enterprise support agencies, such as SEDA, who will assist you to undertake market research. However, the business case could go a long way to securing private sector investors.

So in summary, if you have a new idea, we would suggest that you take some time to unpack and test your idea and prepare a solid business case before approaching potential partners, investors or funding agencies. This will save you time and money, allow you to stand out above other start-ups, and put you in a better position to leverage support for additional market research.