Chapter 4 Opportunity recognition evaluation

Learning Outcomes On completion of this chapter you will be able to: Understand the foundations for opportunity evaluation Explain the role of cognitive biases and heuristics in opportunity evaluating Understand the different criteria used by venture capitalists to evaluate new venture proposals Identify the characteristics of successful products and services Determine how new ideas can be analysed to filter out those that are obviously not feasible or marketable; Assess the viability of product and service ideas; and Develop and implement a screening guide that can be used to establish which product or service ideas should be pursued.

Valuable business opportunity defined A perceived means of generating economic value that has not previously been explored and are not currently being exploited by others and meets a need or desire

Central characteristics to opportunity Potential economic value: potential to generate profit. Newness: including a product, service or technology that did not exist before. Perceived desirability: moral and legal acceptability of the new product and or service in society

Foundations of opportunity recognition and evaluation In developing a viable business opportunity, the entrepreneur will have to use their cognitive abilities (cognitive approach), develop objectivity (the ability to let go of their personal biases, likes and dislikes) in order to be able to recognise and deal with risks in their pursuit of the most viable opportunity

Cognitive approach The entrepreneur’s preferred way of gathering, processing, and evaluating information

Cognitive biases and heuristics Opportunity evaluation needed to choose opportunity to be exploited The evaluation criteria reflect values influencing expectations, personal goals, and effort exerted Entrepreneurs tend to exhibit cognitive biases and overestimate chances of success Cognitive biases are common types of mental shortcuts used to make judgments about opportunities and the business

Role of cognitive biases and heuristics Risk perception and biases such as Overconfidence Planning fallacy Believe in the law of small numbers Illusion of control

Entrepreneurs evaluation of ventures Ability to react well to potential growth in the target market Demonstrated market acceptance Ten times return on assets in the next five to ten years The entrepreneur’s risk

Venture capitalist evaluation Experience and a good management team Proprietary product or service Marketability Personal commitment and involvement of the entrepreneur Openness and honesty Knowledge and experience Realistic financials Exit plan Return rate on investment Intellectual property

Characteristics of successful products/services Fulfils a need or want Have either a niche or mass-market appeal Render an income and profit Should often be replenished or repurchased by the customer Compatibility with existing attitudes and beliefs and a drastic change in the buyer's behaviour should not be necessary Simple so that the buyer will understand it. Be easy to communicate the results or benefits to potential users. Should be made available to potential customers to try out without a large risk. Should be readily available once the buyer decides to make the purchase

Feasibility of products or services Products or service screening questions Skills of the entrepreneur/ venture team

Marketability Customers: who and where are they and what are their needs, habits and preferences Competitors: mere fact that there are competitors could be an indication that the market is large enough to absorb a new product Suppliers: can play a vital role at the start-up stage of a new business venture Marketing of products/services

Entrepreneur/ Entrepreneurial team Personality and personal preferences Skills Traits/attributes Relevant experience Synergy Exit plans

Resources Accessibility of resources Optimising resources Sustainable advantage Type and nature of Industry Capital Requirements

Idea screening guide The idea-screening guide is an instrument that can be used for choosing between different ideas to find the one or two that can be pursued.

Idea screening guide Establish criteria to be used Assign weighting (1-10) to each criterion Rate (1-10) extent to which each idea meet each criterion Multiply rating with weight of criterion Add score for each idea Idea with highest total should be tentative first choice