How much time and money should Seed and Series A startups spend on market research?

9th November 2021

When you’re an entrepreneur who’s focused on doing as much as you can to raise investment, it’s easy to lose sight of the bigger picture – getting obsessed by the details at the expense of your success.

For a while now, we’ve been wondering if one of those areas might be an under or over-reliance on market research within a founder’s business plan or pitch. After all, research in any form can be both a blessing and a curse.

If you research wisely, and only do as much research as you need to support your pitch or fine-tune your offering to strengthen it, it can be a fantastic tool. But, if you do too much market research or become so overwhelmed by what the research is telling you, this can lead you to doubt your own business decisions. Thus, creating more problems than solutions.

Related: The Importance of a Bulletproof Fundraising Strategy

We wanted to know what founders and investors thought about this subject, so our COO James Church reached out to his network, asking the following question:

With market research (incl. TAM, SAM, SOM), should Seed or Series A founders:

  •   Use free/low-cost resources?
  •   Pay for access to premium data?
  •   Commission bespoke research?

The results and comments that James received were super interesting and informative.

The conclusion

Of all the founders, investors and advisors who responded, an overwhelming 67% believe that using free and low-cost options for market research is the preferable way to go for Seed and Series A rounds.

Here are just a couple of the comments we received from investors supporting this mindset:

“You can use a common-sense approach as to how big an industry/opportunity is. You can probably get reasonable data through a simple Google search. If you are solving a real problem, with a credible team [and a] viable solution, data like this should be easy to come by.” – Daniel Gill, Angel Investor

“[Founders can] check with public universities who specialise in that market sector – they often publish market research.” – Rick LeBlanc, Huron Capital

Of the remaining respondents, 16% said to pay for premium data, and 16% said to commission bespoke research. The vast majority of those respondents were founders, which is especially fascinating because it suggests there’s a clear divide between what founders believe and what investors expect. 

To break it down:

  •   Investors say, “use free and low-cost sources of information.”
  •   Founders say, “pay for it”.

In other words, founders are setting their expectations on market research way too high.

 However, there is not always readily available information for your niche. Impact investor Doron Tay shared with James his take on the subject, which gives plenty of food for thought: 

“It very much depends on how much data is available; the more research and data you have to back you up, the stronger the case for investment will be. If you’ve conducted research and collected data specifically tailored to your product or service (assuming the product or service doesn’t quite exist in the market), even better. How much time you’ve spent researching and the quality of it will be reflected in your pitch and will give the confidence needed when presenting your venture.” – Doron Tay, Partner at AdTay Ventures and Impact Investor

What was the most interesting conclusion?

A whopping 100% of investors who responded agreed that using “free and low-cost resources” for market research is sufficient. These included investors from Mercia, Praetura Ventures, KM Capital, and several other high-profile venture capital companies.

Taken as a whole, the results are fascinating. What they tell us is that founders shouldn’t spend a lot of money on market research because investors won’t expect them to do so, but many entrepreneurs are so concerned about making their financial projections and business case look credible that they spend far more time and money on market research than they need to.

Ultimately, this inability to know when ‘enough is enough’ delays their ability to finalise their critical fundraising assets and increases the time it takes to close their round.

The bottom line? Where market research is concerned, don’t overthink it.

That’s because even with the most detailed and exacting market research, there is so much more to successfully convincing an investor you’re the one to back – such as a compelling, engaging pitch backed up by a believable implementation strategy and credible financial projections.

 Financials trump market research every time

From an investor’s point of view, market research isn’t the be-all and end-all. Investors just want to be reassured you’ve done enough market research to be confident your product or offering is viable and has enough point of difference to compete with any similar products which are out there.

Most crucially, they also want to see that the market research you’ve gathered has come from the right places, so always make sure that the sources you use are reliable and don’t have ulterior motives for providing you with their data. For instance, asking a confectionary company to supply you with tooth decay statistics will fool nobody!

Instead of obsessing over your market research, your time and energy will be much better spent on nailing down the three financial fundamentals that all investors want to see – your strategy for growth (i.e., showing you can achieve the size of revenue that will make investing in you worthwhile), your strategy for speed (i.e., showing how your business will move from one stage to the next quickly, and continuously build momentum), and your strategy for exit (i.e., showing investors how and when they’re going to see a return on their investment plus receive a very handsome profit on top.)

As an investable entrepreneur, it’s far more critical to cover those bases than pay for premium market research data or commission bespoke market research which, from an investor’s point of view, is likely to be unnecessary icing on the cake.

If our research conjures up any more useful insights, we will let you know. In the meantime, thank you to everyone who has so far taken the time to respond. We very much appreciate your contribution.

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    2024-06-26T14:08:12+00:00October 29th, 2021|Categories: Pitching, Advice|