Identifying and Understanding the Target Market
GTM in Search Funds: Part 1
Go-to-market (GTM) strategy is one of my favorite topics to discuss and wrestle with internally as it encompasses sales, marketing, strategy, and finance all in one. At the core of any good GTM strategy is a deep understanding of the customer and the problems that they’re looking to solve, and while it sounds relatively easy to do, it’s not.
GTM strategy is a plan that describes how a product or service will enter the market, with the goal of reaching the right customers at the right place, at the right time, and at the right price. In the context of the acquisition entrepreneur, this means reaching the right business owners at the right place, at the right time, and with the right structure and price.
The good news for aspiring searchers is that much of the hard work around best practices has already been done for you from previous cohorts and decades of experience, so there’s no need to recreate the wheel. However, as you launch your search or refine it after a few months, taking a deeper look at the components of a successful GTM strategy will help not only when you are in the search phase but also when you look to grow your acquired business. Working through this exercise before you begin fundraising can be incredibly beneficial as well.
If you’re wondering why this even matters, the more focused you are on knowing what to look for and how to look for it, the more efficient you’ll be with your search, knowing to only act on opportunities that fit your plan of action.
In today’s post, I’ll introduce the first of a series of articles that will walk you through the components of a sound GTM strategy in the context of search funds. As I’ve talked about some of these matters before, some previous content will be repackaged and updated to help you see where this fits in with your search efforts. Here’s the preliminary timeline:
Part 1: Identifying and Understanding the Target Market
Part 2: Crafting the Value Proposition
Part 3: Target Customer Analysis
Part 4: Distribution and Performance Monitoring
Part 5: Cost Analysis
Part 6: Stakeholder Engagement
Part 7: Sustainability and Responsibility
Before diving in, I can assure you that much of this you may have established when drafting your PPM or through simple osmosis as you’ve ploughed through resources like the Search Fund Primer, the HBR Guide to Buying a Small Business, AJ Wasserstein’s plethora of articles, The Outsiders, and certainly not Maverick. However, when the time comes to go out and execute the search, things do break down a bit. So here, I’ll take my same approach in focusing on the tactical side of leading an effective search process.
Identifying and Understanding the Target Market
I’ll go ahead and assume that you are leading some sort of industry-led search, which is becoming more commonplace now and something that I’d highly recommend if not. Approaching business owners with the generalist “Business Services, Healthcare, and Software” search thesis isn’t going to cut it anymore.
While these sectors collectively contribute to over 45% of the nation's GDP—indicating a vast market—the broadness of this approach is akin to me facing off against a prime LeBron in a one-on-one to 21; I don’t need to tell you that the outcome is predictably less than favorable.
Today, it is paramount to dig deeper and attain a more granular understanding of niche industries to gain a competitive advantage. This effort not only enhances credibility with business owners but also offers a realistic lens through which the dynamics of a niche market can be viewed. For more on this matter, check out Sam Kramer's two-part series on 'specialized' searching (Part One & Part Two).
Starting with one or two overarching themes for your search can provide a structured pathway to dissect and understand your target sectors over time. My vertical software-centric search approach involved focusing on retail and human capital management-related software, areas where I possess direct experience. From there, it allowed me to dive deep into specific niches, gradually peeling back layers to uncover the nuances of each market and to learn where I could potentially compete but also where I couldn’t. As Sam argues in his posts, I should've gone even further with my specialization to differentiate from other buyers.
Conversely, I’ve seen some searchers opting for rapid cycling through niche industry theses. While this method allows for the exploration of various sectors, it often falls short of building lasting credibility or in-depth understanding in any particular area. It can be challenging to gain conviction quickly on a business if you’re constantly changing your preferences. Business owners are good BS detectors, and this rapid cycling can risk you get cussed out on an intro call.
Diving into Market Selection
If you’re planning to launch a search fund, fortunately, your potential target markets for selection are likely constrained to a particular set of industries and typically in selling B2B. That is unless you’re straying from the beaten path with a distinct investment thesis and unique investor group.
However, you won’t just be looking for any type of business, but one with a self-funded business owner with little to no outside equity investment. That means your acquisition targets will likely not be backed by financial sponsors or be in a special situation like a corporate carve-out. Those can certainly make good acquisition opportunities, but they're outliers rather than the norm in the search fund universe. Focus instead on the primary catch: bootstrapped founder-owners with a clear reason for selling their business.
While the industry you’re looking at could be massive with some great tailwinds, the number of relevant opportunities may dwindle significantly once you rule out larger PE-backed or even public players with dominant market positions. This is not to say you should avoid these markets entirely, but understanding the size of the markets and the number of relevant opportunities is crucial. We are looking for big ponds (markets) with fish (business owners) who will bite the bait and where we have a reasonable shot at reeling it in. Not to compare business owners to fish (I am sorry to those whom I’ve offended), but you know what I mean.
We’ll spend more time talking about your Ideal Customer Profile in Part 3, but it’s worth noting here that when you’re attempting to identify and understand the promising markets, you do need to ensure that there are the right types of fish in whatever pond you choose to fish in. But it's pivotal, even at this juncture, to ascertain that your chosen 'pond' harbors the right kind of fish — bootstrapped companies that signal a green flag in your search.
In the process of crafting your PPM and initiating your search, consider the following for market selection and sizing, which I have found indispensable:
Market Selection Criteria:
Seek markets that are large yet not overwhelmingly so.
Identify industries with structural tailwinds.
Look for high levels of fragmentation within the industry.
Prioritize sectors with low capital expenditure requirements.
Find niches where you can establish a competitive edge as a buyer.
Avoid markets that are excessively competitive, where pricing power is diluted.
Consider how technology advancements may impact the market.
Ensure there is an active market of buyers and sellers in the space.
Align your areas of focus to your search fund investors’ preferences.
Market Sizing Strategies:
Conduct thorough TAM, SAM, and SOM analyses, considering both revenue potential and the number of businesses.
Assess the key players and their market share to understand competitive landscapes. Just because one or two market leaders have considerable market share does not mean that the industry is automatically unattractive.
Evaluate the presence of VC-backed companies, which might suggest a market is overly saturated or challenging.
Investigate the growth trajectories within the industry, including M&A activities and organic expansion.
Analyzing Buyer Competition
Understanding who else is angling in your selected waters is essential. Search funds must compete against various alternative buyers, commonly strategics doing bolt-on acquisitions and lower market private equity firms. While the common narrative you see on searchers’ websites positions themselves against those two parties, the reality is often a tangle with fellow search fund entrepreneurs and independent sponsors. Here was my approach, with no mention of the obvious:
A common oversight is the failure to distinguish oneself from other entrepreneurial buyers (as seen above). If a business owner is knowledgeable about search funds and open to selling, chances are you're competing with individual buyers and not funds or strategics. While investors may skirt around this topic at ETA conferences and coffee chats, the truth is evident in the field: deal overlap is real and growing as the market matures.
In my journey, I encountered deals snapped up by other searchers, some that I passed on and others that didn't align with my focus. It's a small world, with many of us using the same tools to search for the same types of companies, inevitably leading to crossed paths.
To differentiate, consider adding a unique selling proposition to your competitive analysis. How do you stand out? Perhaps it's your in-depth specialization, local roots, a willingness to offer a premium, or the promise of an expedited transaction. While the latter two may be attractive to some groups, they're seldom within the search funder's playbook for obvious reasons. Specialization could be your key to distinction amidst a sea of competitors. Once again, see Sam’s post.
Market Trends and Their Implications
Understanding the ebbs and flows of market trends is critical for anyone navigating the search fund landscape. In your target market, the more that you understand business trends and M&A activity in the previous 3 to 5 years, the better that you are positioned to adapt to the industry in the next decade when you’re an operator.
Competitors and Valuation: Notice the trends where strategics are actively buying out companies, often paying premiums that defy traditional search fund investment logic. While such activities may set high market expectations, they also underscore the sectors' value and growth potential. As search fund entrepreneurs, it’s essential to interpret these signals wisely, balancing competitive offers with a grounded approach to valuation.
Venture Capital Activity: A surge in venture capital within your target sectors can signal innovation and growth but may also indicate crowded markets or inflated valuations. Specializing in a niche and understanding its lifecycle are vital for distinguishing genuine opportunities from overheated segments.
Macroeconomic Factors: Economic cycles, interest rates, and geopolitical events significantly impact acquisition landscapes. Staying informed enables you to adapt strategies to the current economic climate, ensuring your search remains aligned with feasible acquisition opportunities.
Leveraging Expert Insights: Engaging with industry experts (i.e., river guides) and leveraging M&A reports can deepen your market understanding. These resources provide a window into competitive landscapes, recent transactions, and underlying business models, equipping you with the knowledge to craft credible valuations and spot emerging opportunities.
In summary, a strategic approach to market trends involves keen observation, a willingness to learn from the ecosystem, and the application of insights to refine your search. By staying informed and adaptable, you position yourself to identify and pursue the most promising opportunities with confidence.
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