How Do You Fund A New Venture In A Mature Market?

Following a consolidation of equipment suppliers, the broadband network market has become mature with a few large players. This potentially leads to less diversity and industry creativity because the barriers to entry are now enormous. Starting a new venture in a mature market like this poses significant challenges. How would you approach funding a new venture in a mature market?

Advice from Chuck Gershman, Founder and Former CEO, Bay Microsystems

First, if you can get the venture off the ground, the opportunity is tremendous because competition for new approaches in a mature market is limited, and large players don't move quickly. Their incentive is to change slowly to lengthen product life cycles. Rapid innovation is their Achilles' heel. They are slow to respond to a market disrupter.

The downside to start-up innovators in a mature market is a diminished number of financiers interested in the space because of the barriers to entry, and because the most likely exit is an M&A play at low multiples. An entrepreneur needs to find a financier who understands the market space and can see the value in the new technology.

Given this reality, how do show potential sufficient to attract investors? In the hardware space, you must demonstrate a convincing go-to-market strategy with modest investment and a moderate cost of market penetration. The challenge is this: if the cost of success is high, it requires too much investment - and too much risk - before you can accurately assess the possibility of market success.

*You must be able to show a substantial total available market.

*You must be able to show that your capability meets the needs of the market.

*You must be able to show that the customer base will respond en masse - this is a key risk.

*With fewer investors willing to look at your product and technology, it takes more time and work to find interested investors.

Investors invest on perceived risk, so the task is to show that the risk is manageable. In the past, investors were convinced by a strategic partner who was a committed customer that would finance bringing the product to market.

*In the current market, an effective strategy is to develop an early customer who is a strategic investor in your company from Day 1. This raises the likelihood of an exit, and therefore appeals to investors, but reduces downstream options and ROI.

*Another strategy is to pursue a creative IPO exit. For example, launching the IPO on a smaller foreign exchange. This reduces the long-term payout to founders, but may increase appeal to investors who prefer an IPO to an M&A exit.