Understanding the Terrain: Investigating Segmentation
Embarking on the journey of an agrifoodtech startup is a thrilling venture, laden with infinite possibilities. Mastering the market size, successfully segmenting the market and identifying target customers are vital steps that form the backbone of your business. As an investor, we’d like to spotlight some opportunities that agrifoodtech startups can leverage when analysing their market to unfold their full potential.
Investor’s insight 2: mastering market segmentation
Navigating the path of market segmentation can be a challenging task for startups. As investors, we’ve observed that startups, especially in the early days when they are full of energy and enthusiasm, often start their sales process straight away with only a broad plan in hand. However, it’s only after a period of time, when sales growth doesn’t continue as expected, that they begin to analyse and understand the reasons behind this. The core issue often lies in an opportunistic approach to incoming and outgoing opportunities coupled with an either too narrow or too broad view on segmentation.
Startups that are in the (pre-)seed phase of growth frequently are ‘opportunity-driven’, especially in their early days. They jump at every chance that comes their way, without strategically studying what should be their target market. This is a typical scenario with both inbound requests, as well as outbound opportunities they encounter at trade fairs or events. They often mistakenly believe that the sum of all these customers represents their market, but quite often, this isn’t the case. And while this approach indeed works in the early days of a start-up’s life when still looking for product-market fit, it hampers the step towards becoming a high-growth company which is moving towards raising a successful series A. We therefore believe that one of the most important elements for a company who wants to shift from start-up to scale-up is to have a razor sharp focus on market segments.
The first key to effective market segmentation isn’t only about reacting to every opportunity that arises. It’s about taking the time after the first wave of sales to step back, think and strategise. Use inbound and outbound opportunities as a means for exploration. Then, critically assess: What is my solution? Who finds this interesting? Based on what insights? How large is this market and its subsegments, and what is my ability to win in this market?
Our second advice for startups would be to find the right balance between a broad or narrow market segmentation in combination with the size of the market you are aiming for.
For example, consider a startup developing an innovative plant-based dairy alternative. Instead of targeting a broad market such as ‘all dairy companies looking to diversify their offerings’, or a too narrow niche like ‘plant-based creamer in coffee machines via catering contracts’, they should identify a segment where their product uniquely fits and where they have a strong chance of success. A segment like ’boutique restaurants searching for unique, plant-based ingredients’ would be a far more focused and effective approach. At least to start with.
Additionally, once the startup gets the gist of the segmentation game, there is always such a thing as over-segmentation, creating a multitude of market segments with little to no alignment between them. They may see a multitude of market possibilities and attempt to leap into all of them, resulting in a lack of focus and a dilution of resources. Although it may seem like this approach allows a startup to maximise its market opportunities, it can actually lead to inefficiency as resources are spread too thin across too many unrelated segments. Starting off with 2-3 carefully analysed and validated market segments is more than enough to get going.
By strategically segmenting, a startup can allocate its resources more efficiently and focus on a specific market need – both in terms of commercialisation as well as product development. This leads to a strong market position and lays the foundation for sustainable growth. The most important thing is to gain insight into the market’s needs and align them with the startup’s strengths. This creates a value proposition that truly resonates with your target market.
