the opportunity: creating, shaping, recognizing, seizing chapter four

The Opportunity: Creating, Shaping, Recognizing,

Seizing

Chapter FourChapter Four

DowlingDowlingBA 560BA 560

Fall 2006Fall 2006

BA560 Venture Planning Prof. DowlingBA560 Venture Planning Prof. Dowling 22

The OpportunityThe Opportunity

When is an idea an opportunity?When is an idea an opportunity?

An opportunity has the qualities of being attractive, An opportunity has the qualities of being attractive, durable, and timely and is anchored in a product durable, and timely and is anchored in a product or service which creates or adds value for its or service which creates or adds value for its buyer or end user.buyer or end user.



OpportunitiesOpportunities……

Are created, or built, using ideas and Are created, or built, using ideas and entrepreneurial creativity.entrepreneurial creativity.

Are spawned, in a free market society, when Are spawned, in a free market society, when there are changing circumstances, chaos, there are changing circumstances, chaos, confusion, inconsistencies, lags or leads, confusion, inconsistencies, lags or leads, knowledge and information gaps.knowledge and information gaps.

Are situational. Conditions can be idiosyncratic Are situational. Conditions can be idiosyncratic or generalizable. or generalizable.


New VenturesNew Ventures

Fundamental realitiesFundamental realities– Most new ventures are works in process and Most new ventures are works in process and

works of artworks of art– Most business plans are obsolete at the Most business plans are obsolete at the

printerprinter– Speed, adroitness of reflex, and adaptability Speed, adroitness of reflex, and adaptability

are crucialare crucial– The key to succeeding is failing quickly and The key to succeeding is failing quickly and

recouping quicklyrecouping quickly


New VenturesNew Ventures

Fundamental realitiesFundamental realities– Success is highly situational, depending on Success is highly situational, depending on

time, space, context, and stakeholderstime, space, context, and stakeholders

– The best entrepreneurs specialize in making The best entrepreneurs specialize in making “new mistakes” only“new mistakes” only

– Starting a company is much harder than it Starting a company is much harder than it looks, or you think it will be; but you can last a looks, or you think it will be; but you can last a lot longer and do more than you think if you do lot longer and do more than you think if you do not try to do it solonot try to do it solo


Exhibit 4.1 Circle of Venture Exhibit 4.1 Circle of Venture Capital EcstasyCapital Ecstasy


The OpportunityThe OpportunityOpportunity Spawners & DriversOpportunity Spawners & Drivers Regulatory ChangesRegulatory Changes 10-fold change in 10 years or less10-fold change in 10 years or less Reconstruction of value chain and channels of Reconstruction of value chain and channels of

distributiondistribution Proprietary or contractual advantageProprietary or contractual advantage Existing management/investors burned out or Existing management/investors burned out or

under managedunder managed Entrepreneurial leadershipEntrepreneurial leadership Market leaders are customer-obsessed or customer-Market leaders are customer-obsessed or customer-

blindblind


Where are Opportunities Born?Where are Opportunities Born?

Technology sea changeTechnology sea change– Moore’s LawMoore’s Law– Metcalf’s LawMetcalf’s Law– DisruptionDisruption

Market sea changeMarket sea change– Value chain Value chain

disruption/obsolescence/vulnerabilitydisruption/obsolescence/vulnerability– DeregulationDeregulation


Where are Opportunities Born?Where are Opportunities Born?

Societal sea changeSocietal sea change– Changes in ways we live, learn, work, etc.Changes in ways we live, learn, work, etc.– Gilder’s Law – 10xGilder’s Law – 10xss in 10 years in 10 years

Brontosaurus factorBrontosaurus factor– ArroganceArrogance– Loss of peripheral visionLoss of peripheral vision– Deadened reflexes – turning the tankerDeadened reflexes – turning the tanker

Irrational exuberanceIrrational exuberance– Undervalued assetsUndervalued assets



The highly organic and The highly organic and situational character of situational character of the entrepreneurial the entrepreneurial process underscores process underscores the criticality of the criticality of determining determining fitfit and and balancing balancing riskrisk and and rewardreward..

-Timmons-Timmons



IdeasIdeas: : Over-rated?Over-rated?

‘‘Flashes of brilliance’ are Flashes of brilliance’ are rare: Instead, it’s more rare: Instead, it’s more common to see a series of common to see a series of trial-and-error iterations trial-and-error iterations before a promising idea fits before a promising idea fits with what the market wants.with what the market wants.



First-Mover AdvantageFirst-Mover Advantage

Though not a guarantor of Though not a guarantor of success, there is tremendous success, there is tremendous potential value in being first potential value in being first with an idea, so long as you with an idea, so long as you have the capacity to capitalize on being first and have the capacity to capitalize on being first and establishing market share or erecting other establishing market share or erecting other barriers to entry.barriers to entry.



The ‘Great Mousetrap Fallacy’The ‘Great Mousetrap Fallacy’

‘‘If a man can make a better If a man can make a better mousetrap … the world mousetrap … the world will make a beaten path will make a beaten path to his door.’ to his door.’ EmersonEmerson

‘‘The truth of the matter is that ideas are inert The truth of the matter is that ideas are inert and, for all practical purposes, worthless.’ and, for all practical purposes, worthless.’ TimmonsTimmons



Experience: Herbert Simon Experience: Herbert Simon

The entrepreneur’s pattern-The entrepreneur’s pattern-recognition skillsrecognition skills

The ‘50,000 Chunks’ The ‘50,000 Chunks’ of experienceof experience

Seeing what others don’t seeSeeing what others don’t see


The OpportunityThe Opportunity$1 billion$1 billion

$500 million$500 million



5 Years5 Years 10 Years10 Years 20 Years20 Years

Window of Window of OpportunityOpportunity

MarketMarket

Mar

ket

Siz

eM

arke

t S

ize


Exhibit 4.7Exhibit 4.7


EvaluatingEvaluating

Criteria for evaluating venture opportunityCriteria for evaluating venture opportunity– Industry and marketIndustry and market– EconomicsEconomics– Harvest issuesHarvest issues– Competitive advantage issuesCompetitive advantage issues– Management team issuesManagement team issues– Personal criteriaPersonal criteria– Strategic differentiationStrategic differentiation



Criteria for Evaluating Venture OpportunitiesCriteria for Evaluating Venture OpportunitiesExhibit 4.8 - TimmonsExhibit 4.8 - Timmons

Industry & MarketIndustry & Market

Market Market Market structureMarket structure Market sizeMarket size Market capacityMarket capacity Growth rateGrowth rate Market share attainable in year 5Market share attainable in year 5 Cost StructureCost Structure




EconomicsEconomics

Time to breakeven/positive cash flowTime to breakeven/positive cash flow ROI potentialROI potential Capital requirementsCapital requirements Internal rate of return potentialInternal rate of return potential Free cash flow characteristicsFree cash flow characteristics




Harvest IssuesHarvest Issues

Value-added potentialValue-added potential Valuation multiples Valuation multiples and comparablesand comparables




Competitive Advantage IssuesCompetitive Advantage Issues

Fixed and variable costsFixed and variable costs Control over costs, prices, and distributionControl over costs, prices, and distribution Barriers to entryBarriers to entry

Proprietary protectionProprietary protectionResponse/lead timeResponse/lead timeLegal, contractual advantageLegal, contractual advantageContracts and networksContracts and networksKey peopleKey people




Management TeamManagement Team

Entrepreneurial teamEntrepreneurial team Industry and technical Industry and technical experienceexperience IntegrityIntegrity Intellectual honestyIntellectual honesty




Fatal-Flaw Issue Personal CriteriaFatal-Flaw Issue Personal Criteria

Goals and fitGoals and fit Upside/downside issuesUpside/downside issues DesirabilityDesirability Risk/reward toleranceRisk/reward tolerance Stress toleranceStress tolerance


The OpportunityThe OpportunityCriteria for Evaluating Venture OpportunitiesCriteria for Evaluating Venture Opportunities

Exhibit 4.8 - TimmonsExhibit 4.8 - Timmons

Strategic DifferentiationStrategic Differentiation

Degree of fitDegree of fit TeamTeam Service managementService management TimingTiming TechnologyTechnology FlexibilityFlexibility Opportunity orientationOpportunity orientation PricingPricing Distribution channelsDistribution channels


Exhibit 4.9Exhibit 4.9

the opportunity: creating, shaping, recognizing, seizing chapter four

Documents

dowlingba560 venture

timmonsba560 venture

soloba560 venture planning

new mistakes

entrepreneurial process

situational character

societal sea changechanges

promising idea