4 The Opportunity: Creating, Shaping, Recognizing, Seizing Chapter McGraw-Hill/Irwin New Venture Creation, 7/e © 2007 The McGraw-Hill Companies, Inc., All Rights Reserved.

Adams On Ideas Think you idea has to be unique? You’re deluded Good ideas are not scarce, what is rare is a team that can execute = execution intelligence Execution intelligence Domain knowledge, fast-growth scar tissue, experience in hyper-competitive markets, risk management (anticipate customer pain) balanced team, leadership know-how Want me to sign a nondisclosure? Instead, say “I’m clueless” The 1:8:20 rule (1 Austin, 8 Boston, 20 Palo Alto) Ideas are commodities Getting to market first? Big deal. Execute to dominate, not define, a market space Think there’s no competition? You’re naïve. I want to keep my money, laziness, and DIYers if nothing else The existence of competition suggests that the idea itself is competitive

Sarasvathy on Effectuation Expert entrepreneurs begin with: Who they are, what they know, who they know Principles Crazy quilt Affordable loss Bird in the hand Make lemonade out of lemons Pilot in the plane Examples Business plan competition Importance of Linked In

Bird in the Hand Feasibility Value Market Is it doable? - technical feasibility - market feasibility Is it worth doing? - financial feasibility You Can I do it? - what will it take - who else will I need? Do I want to do it? - does it motivate me? - does it motivate others?

R&R What is the opportunity? Why is it an opportunity for Reiss? Did Reiss use causal or effectual logic? Why did others contribute to Reiss’ success? Kaplan, TV Guide, Stores Why is the whole deal economically feasible? How did Reiss use the affordable loss principle? What should Reiss do next?

R&R Numbers Large Firm Reiss Price $12.50 Variable Costs Manufacturing $3.00 $3.20 Sales $1.25 $2.50 Other $0 $2.81 Fixed Costs $1,000,000 $50,000 Breakeven Point (units) 121,212 12,531

What is an entrepreneur? Cantillon (1780) one who works for uncertain wages Knight (1921) one who buys factors at certain prices and sells them in the future at uncertain prices Schumpeter (1911) one who recombines resources to create new products, processes, inputs, markets, or organizations Kirzner one who is alert to profit opportunities Gartner one who creates a new venture Stevenson one who pursues opportunities regardless of resources currently controlled Timmons one who is opportunity obsessed, holistic in approach, and leadership balanced Shane & Venkat one who discovers, explores, and exploits opportunities

Exhibit 1.7

Exhibit 1.6

Four Anchors Create or add value to a customer or end-user Solving a significant problem, removing a serious pain point, or meeting a significant want or need – for which someone is willing to pay a premium Communicable business model Large market ($50m+) High growth (20%+) High margins (40%+) Recurring revenue, low assets/working capital 25-30% return for investors Good fit with management team

New Ventures Think big enough Fundamental realities Better end up exhausted and rich then just exhausted Fundamental realities Most new ventures are works in process and works of art Most business plans are obsolete at the printer Speed, adroitness of reflex, and adaptability are crucial The key to succeeding is failing quickly and recouping quickly, and keeping the tuition costs low

New Ventures Fundamental realities Success is highly situational, depending on time, space, context, and stakeholders The best entrepreneurs specialize in making “new mistakes” only Starting a company is much harder than it looks, or you think it will be; but you can last a lot longer and do more than you think if you do not try to do it solo

Exhibit 4.1 Circle of Venture Capital Ecstasy

The Capital Market Food Chain R&D Funds <$200K from founders, angels, FFF (friends, fools, family), Small Business Innovation Research fund Seed Up to $500K Launch $1-$50m Venture Capital, strategic partners, private equity Series A – startup, Series B – product devlopment, C - shipping High Growth IPOs, strategic acquirers, private equity

To summarize… …a superior opportunity has the qualities of being attractive, durable, and timely and is anchored in a product or service which creates or adds value for its buyer or end-user – usually by solving a very painful, serious problem.

Where are Opportunities Born? “We look for ideas that change the way people live or work” Technology sea change Moore’s Law (processing power) Metcalf’s Law (network effects) Disruption Market sea change Value chain disruption/obsolescence/vulnerability Deregulation

Where are Opportunities Born? Societal sea change Changes in ways we live, learn, work, etc. Gilder’s Law – 10xs in 10 years (bandwith) Brontosaurus factor Arrogance Loss of peripheral vision Deadened reflexes – turning the tanker Irrational exuberance Over/undervalued assets

The Role of Ideas Ideas are merely the first step Beware the mousetrap fallacy Good ideas often come from pattern recognition 50,000 “chunks” of experience over 10 years Creative linking or cross-association of experience, know-how, contacts Not simply linear, additive or logical Ability to see what others do not

Brainstorming Rules Can creativity be learned? Brainstorming De Bono makes a living from it Brainstorming Record ideas in full view Invent to the “void” Resist becoming committed to one idea Identify the most promising ideas Refine and prioritize

Exhibit 4.6

Market Share of Different Customer Groups

Strategic Implications: Crossing the Chasm Crossing the chasm between early adopters and the early majority Innovators and early adopters are technologically sophisticated and will tolerate engineering imperfections (the early majority are not) Innovators and early adopters are typically reached through specialized distribution channels (the early majority are not) Innovators and early adopters are relatively few in number and not particularly price sensitive (the early majority are not)

The Chasm: AOL and Prodigy

Crossing the Chasm Correctly identify the needs of the first wave of early majority users Alter the business model in response Alter the value chain and distribution channels to reach the early majority Design the product to meet the needs of the early majority and so that it can be modified and produced or provided at low cost Anticipate the moves of competitors

Established and Successor Technologies

Disruptive Technology A new technology that gets its start away from the mainstream of a market and then, as its functionality improves over time, invades the main market Revolutionizes the industry structure and competition, often causing the decline of established companies because they listen to customers who say they do not want it Causes a technological paradigm shift

Exercises Creativity exercise Idea Generation Guide (pg. 167)