4 - 1 Chapter 4 The Opportunity: Creating, Shaping, Recognizing, Seizing McGraw-Hill/Irwin New Venture Creation, 7/e © 2007 The McGraw-Hill Companies, Inc., All Rights Reserved.

4 - 2 New Ventures Think big 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

4 - 3 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

4 - 4 Exhibit 4.1 Circle of Venture Capital Ecstasy

4 - 5 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

4 - 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

4 - 7 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.

4 - 8 Where are Opportunities Born? “We look for ideas that change the way people live or work” Technology sea change Moore’s Law Metcalf’s Law Disruption Market sea change Value chain disruption/obsolescence/vulnerability Deregulation

4 - 9 Where are Opportunities Born? Societal sea change Changes in ways we live, learn, work, etc. Gilder’s Law – 10x s in 10 years Brontosaurus factor Arrogance Loss of peripheral vision Deadened reflexes – turning the tanker Irrational exuberance 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

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

Brainstorming Rules Can creativity be learned? 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

Exhibit 4.7

Evaluating Criteria for evaluating venture opportunity Industry and market Economics Harvest issues Competitive advantage issues Management team issues Personal criteria Strategic differentiation

Gathering information Finding ideas Existing businesses Franchises Patent brokers Product licensing information services Corporations with a licensing program Universities & research institutes Trade shows & association meetings Consulting & networking Published sources (statistics, forecasts, reports, filings)

Case: EastWind