CC530 Entrepreneurship & Biz. strategy CHAPTER 2. Opportunity and the Biz. summary Professor. Taeyong Yang 1. Identifying the opportunity 2.Determining the entrepreneur’s capabilities and interests 3. Evaluating the opportunity 4. Deciding to act on the opportunity or look elsewhere
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Entrepreneurship & Biz. strategy
CHAPTER 2. Opportunity and the Biz. summary
Professor. Taeyong Yang
1. Identifying the opportunity
2.Determining the entrepreneur’s capabilities and interests
3. Evaluating the opportunity
4. Deciding to act on the opportunity or look elsewhere
5. Writing a summary of the concept
6. Testing the summary and the concept with potential customers and investors
Figure 2.1 six steps to acting as an entrepreneur.
- are usually disguised.
- emerge from personal experience(need).
Opportunity pull : AIDS
Capability push : Digital TV, CISCO
Founders of new industry capitalize on opportunity pull to create disruptive innovations : Apple
Apple sales: $7.8M in 1978; $117M in 1980; $5B+ in 2001
CISCO sales: $22B in 2001
farmer’s pain →reaper by McCormick (1834)
A good idea is nothing more than a tool in the hands of an entrepreneur.
Finding a good idea is the first step (entrepreneur’s creativity an opportunity); however, the importance of the idea is most often overrated, usually at the expense of underemphasizing the need for products or services, or both, which can be sold in enough quantity to real customers.
Window of Opportunity
Trial-and-error iterations, or repetitions
Howard Head made 40 different metal skis before he finally made the model that worked consistently.
Products built around totally different products than those originally envisioned.
Ralph Waldo Emerson: “If a man can make a better mousetrap than his neighbor, though he builds his house in the woods the world will make a beaten path to his door.” - The Great Mousetrap Fallacy
The truth of the matter is that ideas are inert and, for all practical purposes, worthless. (1-3% financed)
Great mousetrap fallacy: psychological ownership
(prerequisite for a new business, the fatal flaw due to narrow focus)
Focal point: building of the business
“We concentrated on making seats that would sell at a profit, rather than just making a better and better seat. Our company today is profitable.” – Canadian Entrepreneur (truck seat maker)
Having the best idea first by no means is aguarantee of success.
UNIVAC (initially lead over IBM)
VisiCalc (first with the spreadsheet software)
Scott Cook (Intuit) –http://www.intuit.com
“a problem well stated is a problem half solved.”
Serendipity: discovery by accident
Microwave Oven – chocolate melting
Quick Frozen Food – ice fishing
EX: Starbucks; Häagen-Dazs; Mondavi; Borders
Convergence of technologies
Monday, March 14, 2005
Korea Speaks In MegabitsSiliValley firms rush to try out the latest gadgets in the world's most wired society. ChronicleLazarus: Fees from overseas revisitedPender: Bay's economy still strongOn the record: VC Tim Draper
Table 2.8 Successful entrepreneurs
= .25[(Y+I)-(W+R)] x N
where wi = .25
New venture:(Y+I) – (W+R) = 8 – 7 = +1
Existing job:(Y+I) – (W+R) = 5 – 6 = -1
Actual quality of opportunity
1. Explain the problem or need and identify the customer.
2. Explain the proposed solution and the uniqueness of the solution.
3. Tell why the customer will pay for the solution.
1. Explain the concept and give the story.
2. Clearly explain the problem and the solution.
3. Describe the competencies of the team.
4. Provide a picture of the competition.
1. Business concept : The problem and the solution.
2. Market, Customer, and industry.
3. Marketing and sales strategy.
4. Organization and key leaders.
5. Financial plan : Four years of summary results.
6. Financing and key allies required.
1. Business concept: mobile robots for clearing
2. Market, Customer, and industry: Dept of Homeland
3. Marketing and sales strategy: Gov.
4. Organization and key leaders: Morgan and Wolfe
5. Financial plan: $1.3M (05); $7.4M (06) IPO in 5 yrs
6. Financing and key allies required.
Offering: 200K shares at $400K
1. Mission: envir. friendly natural P for pest mgmt
2. Business: natural product pesticide
3. Market need and market opportunity; $25B/yr
4. Technology: Microbial natural product
5. Competition: None
6. Company’s competitive advantage: unique K
7. Management team: Marrone, Sinibaldi...
8. Financial summary: $40M rev, IPO ($20M) in 5 yrs
In a world where the life span of the average business model is longer than a butterfly's but shorter than a dog's, one needs the chance to regularly consider a few opportunities that are inconsistent with the current strategy.
Valley workers change companies with less angst than most people change jobs within companies. Sure, they jump for money, but more than that they jump at the chance to work on the next great thing. Companies pursuing killer opportunities attract the best talent. As one venture capitalist bluntly puts it: "'A' people work on 'A' opportunities.”
Every Silicon Valley CEO knows that if you don't give your people truly exhilarating work--and a dramatic upside -- they'll start turning in their badges.
In recent years, companies like Apple and Silicon Graphics hemorrhaged talent, while up-and-coiners like Cisco and Yahoo! have been magnets for the cerebrally gifted.
Scott Cook, the chairman of Intuit:
"I wake up every morning knowing that if my people don't sense a compelling vision and a big upside, they'll simply leave.“
Isn't it amazing that while every company has at least some kind of process for capital allocation, almost no company has a process for talent allocation -- much less an open market for talent?
People often quit emotionally long before they quit physically. Novelty, meaning, and impact are the oxygen that gives life to the entrepreneurial spirit. Denied that oxygen, even the most talented folks are soon brain dead.
"Hey, we make all the money, we ought to have the best people." - Large Co.
But the marginal value a talented employee adds to a business running on autopilot is often a fraction of the value that individual could add to a venture not yet out of the proverbial garage.
Employees have to believe that the best way to win big is to be part of building something new. - Provide additional incentives for employees who are willing to take a risk on something out of the ordinary.-Celebrate every courageous employee who abandons the security of a legacy business for an untested opportunity.
It's not enough to remove the barriers to migration - one must positively provide incentives for employees to abandon the familiar for the unconventional.
Opportunities are fleeting in this new world. By the time some cautious vice president decides to pull the trigger, some hot, young entrepreneur is already a billionaire. So you'd best not wait any longer to start building your own internal markets for ideas, capital, and talent.
The real competition between the old economy and the new economy is occurring not between individual companies but between remarkably different regimes: resource allocation and resource attraction.
Resource allocation works fine where innovation is largely incremental to the existing business model (think Cherry Coke versus regular Coke).
But where the goal is the invention of novel business models (music downloaded off the Web versus CDs bought at Tower Records),
Or the radical redesign of existing business models (Dell's build-to-order direct-selling approach), resource allocation is wholly inadequate.
Large companies have resources. They have a ready source of capital -- if they can learn how to supplement risk-averse resource allocation with opportunity-focused resource attraction. They often have brands and distribution assets that can give a new venture a quick start. Mighty Microsoft would still be a minnow if it hadn't found a way to tap into IBM's brand and distribution strengths.
Silicon Valley exists not because large companies are incapable of innovation but because they have been unwilling to abandon the tightly knit safety net of resource allocation.
Industry and market
Market share attainable (Year 5)
Time to breakeven/positive cash flow
Internal rate of return potential
Free cash flow characteristics:
Spontaneous working capital
Time to break-even profit and loss
Valuation multiples and comparables
Exit mechanism and strategy
Capital market context
Changes way people live and work
Market driven; identified; recurring
Reachable; purchase orders
Less than one-year payback
High; advance payments
Imperfect, fragmented competition or
100+ million to $1 billion sales
Growth at 30—50% or more
At or near full capacity
20% or more; leader
Low-cost provider; cost advantages
Under 1.5—2 years
25% or more; high value
Low to moderate; fundable
25% or more per year
Favorable; sustainable; 20—30%
or more of sales
Moderate to high (+15% to +20%)
Low, incremental requirements
Exceeding 40% and durable
High; greater than 10%; durable
Less than two years; breakeven not
High strategic value
Price/earnings = 20 + x$; 8—10 + x$ EBIT; 1.5—2 + x$ revenue:
free cash flow 8—10 + x$
Present or envisioned options Favorable valuations, timing, capital available; realizable liquidity
Incremental improvement only
Unfocused; one-time revenue
Loyal to others or unreachable
Three years plus payback
Low; minimal impact on market
Highly concentrated or mature or declining
Unknown, less than $20 million or
Contracting or less than 10%
Less than 5%
More than 4 years
Less than 15—20%; low value
Very high; unfundable
Less than 15% per year
Less than 10% of sales
Less than 10%
Greater than four years; breakeven
Low strategic value
Price/earnings 5x, EBIT 3—4x;
Undefined; illiquid investment
Unfavorable; credit crunch
Competitive advantage issues
Fixed and variable costs
Control over costs, prices, and distribution
Barriers to entry:
Legal, contractual advantage
Contracts and networks
Industry and technical experience
Goals and fit
Degree of fit
Room for error
Lowest; high operating leverage
Moderate to strong
Have or can gain
Competition slow; napping
Proprietary or exclusivity
Top talent; an A team
All-star combination; free agents
Top of the field; super track-record
Know what they do not know
Getting what you want; but wanting what you get.
Attainable success/limited risks
Acceptable cuts in salary, etc.
Fits with lifestyle
Calculated risk; low risk/reward ratio
Thrives under pressure
Best in class; excellent free agents
Superior service concept
Rowing with the tide
Groundbreaking; one of a kind
Able to adapt; commit and decommit quickly
Always searching for opportunities
At or near leader
Accessible; networks in place
Unable to gain edge
B or C team
Weak or solo entrepreneur
Do not want to know what they do not know
One or more
Surprises, as in The Crying Game
Linear; on same continuum
Comfortable with status quo
Simply pursuing big money
Risk averse or gambler
Cracks under pressure
B team; no free agents
Perceived as unimportant
Rowing against the.tide
Many substitutes or competitors
Operating in a vacuum; napping
Undercut competitor; low prices
Unforgiving, rigid strategy
By late 1996, it had become apparent to Warren and some of his colleagues that E&P was unlikely to meet its earnings targets without radical innovations.
He sensed that a wealth of imagination was bottled up in Shell's employees -- imagination that might help the company find its way into new, high-growth opportunities.
The GameChanger process, as it came to be known, went live in November 1996. At first, the availability of venture funding failed to yield an avalanche of new ideas. Though bright and creative, employees long accustomed to working on well-defined technical problems found it difficult to think revolutionary thoughts.
Hoping to kick-start the process, the GameChanger panel enlisted the help of a team of consultants from Strategos who designed a three-day "Innovation Lab" to help employees develop rule-busting ideas and to dole out a half million dollars of seed money.
Seventy-two enthusiastic would-be entrepreneurs showed up for the initial lab, a much larger group than the panel had anticipated. Many were individuals no one would have suspected of harboring an entrepreneurial impulse.
By the end of the second day, a portfolio of 240 ideas had been generated. Some were for entirely new businesses, and many more were for new approaches within existing businesses.
The attendees then agreed on a set of screening criteria to determine which of the ideas deserved a portion of the seed money.
Twelve ideas were nominated for funding, and a volunteer army of supporters coalesced around each one.
Since the completion of the labs, the GameChanger panel has been working hard to institutionalize the internal entrepreneurial process. It meets weekly to discuss new submissions -- 320 have come in so far, many through Shell's intranet -- and its members serve as coaches and advocates for prospective innovators.
An employee with a promising idea is invited to give a ten-minute pitch to the panel, followed by a 15-minute Q&A session.
If the members agree that the idea has real potential, the employee is invited to a second round of discussions with a broader group of company experts whose knowledge or support may be important to the success of the proposed venture.
Before rejecting an idea, the panel looks carefully at what Shell would stand to lose if the opportunity turned out to be all its sponsors claimed.
Ideas that get a green light often receive funding -- on average, $100,000, but sometimes as much as $600,000 -- within eight or ten days. Those that don't pass muster enter a database accessible to anyone who would like to compare a new idea with earlier submissions.
Some months later, each accepted project goes through a proof-of-concept review in which the team has to show that its plan is indeed workable and deserves further funding.
About a quarter of the efforts that get funded ultimately come to reside in an operating unit or in one of Shell's various growth initiatives. Others are carried forward as R&D projects, and still others are written off as interesting but unsuccessful experiments.
Of the company's five largest growth initiatives in early 1999, four had their genesis in the GameChanger process. One team was granted a charter to work with people throughout Shell to explore an entirely new business focused on renewable geothermal energy sources.
GameChanger has also had a significant impact on Tim Warren's own division. Fully 30% of E&P's 1999 R&D budget is focused on ventures that have emerged from the process.
Whether GameChanger will survive in its current form remains to be seen. But it has demonstrated that entrepreneurial passion lurks everywhere -- even deep in the canyons of a 92-year-old oil company.