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There are many resources about how to pursue funding for horizontal products, often software that can be used by a large number of people. These are problems that investors can understand personally, or have some insight into, since they are such general solutions. It makes sense how in these situations one can persuade an investor with real problems and solutions.

What are recommended procedures for pursuing funding for a vertical product? This is the kind of thing that most investors don't have any insight into and have perhaps never considered the market. It is a provably smaller market in terms of number of people who could even possibly benefit from it, but with a much higher yield potential.

In this case is it good to use normal investors or look for someone who has experience in the target vertical? It seems like convincing investors would be much harder since they would be coming in with no history. Are there other things to consider?

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Definitely look for an investor that has experience in your sector/industry. It's too hard a sell otherwise. Most investors only invest in sectors they know anyway. – Susan Jones Jul 27 '12 at 3:04

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Short answer - Depends on the size of your market segment. Your segment typically need to pass the following hurdles:

  • Identifiable: distinct enough so that you can identify its members
  • Measurable: possible to determine size Significant: large enough to be profitable Homogeneous: members within segment are similar
  • Heterogeneous: members between segments should be different
  • Reachable: via promotion and distribution efforts Responsive: to marketing messages Compatible: with your mission, strengths, ability

Here is a good article that goes into more specifics.

(edit: added some additional info)

Quote from a "must read before vc pitch" post:

"Unless your idea or product deliver significantly BETTER value propositions than the leading competitor in your space, you will NOT win. Even if you have a great product, you will not get your investment "Exit" if your niche market is not sufficiently profitable and large enough to deliver a scalable business."

This does not mean you cannot create a profitable business addressing this niche - just that you need to either prove the market is large enough to create a scalable business from (and warrants vc attention), or decide that the profitable market opportunity is good enough to support your financial needs and figure out how to address the market without vc funding.

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But what do I do to actually find funding? Let's say I pass all the above hurdles. Who do I talk to? What things do I do? – mjibson Jul 25 '12 at 1:23
Who else has done things in that vertical? Who invested in them? – JeffS Jul 25 '12 at 3:33
@mjibson - have you considered angel list? (angel.co go to venturehacks.com to learn about it) angelsoft (now gust?) – jimg Jul 25 '12 at 12:45
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What I have definitely seen working in companies around me who solved this problem - is to sign up a first customer (generally a larger company via contacts, etc.) who can be your target customer.

Assuming your product is niche, I am expecting it will be expensive as well.

So this company - your first client - can be given a large 'beta' discount and you can do work for them at cost. The company solves its problem for cheap and you have enough funding to get your product out of the door and have a fully working application to demo to other potential investors.

I have seen plenty of companies boot strap this way successfully. Maybe not the ideal answer you were looking for - but I hope it helps.

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