Screening of New Venture Opportunities
JS Youngleson (adapted from Timmons – New venture creation)
1. Screening of Venture Opportunities
Time is the most valuable asset of any entrepreneur (it is also the most scarce resource). The harsh reality is that you
will never have enough time in a day, a month, a quarter, a year to pursue all the business ideas you (and your team)
can come up with. The entrepreneur’s paradox is that you must find and make time for the good ones. Complicating
this paradox is that ‘you do not have a strategy until you are saying no to lots of potential opportunities’. Estimates
show that only about 10% of potential opportunities generate acceptable levels of sustainable income for the
founder(s).
2. Anchors
There are tools to help you in the titanic struggle to determine if your idea is truly a business opportunity. Ideas that
turn into good businesses are not accidents. Superior businesses have four ‘anchors’.
¾ They create or add significant value to a customer or end-user
¾ They do so by solving a significant problem, or meeting a significant want or need, for which someone is
willing to pay a premium
¾ They have robust market, margin, and moneymaking characteristics: (large enough, high growth, high
gross margin, strong and early free cash-flow, high profit potential, and offer strong and reliable returns
for investors
¾ They are a good fit with the founder(s) and management team at the time and marketplace and with the
risk-reward balance.
3. Quick Screen
Investors only invest in 5% of businesses, so it is essential to focus only a few superior ideas. The ability to quickly and
efficiently reject ideas lacking the characteristics of ‘anchors’, is a very important entrepreneurial skill and mind-set.
Saying no to an idea may conflict with your particular passion or commitment to the idea. To make this choice easier
entrepreneurs use specific tried-and-tested methodologies, such as the ‘Quick Screen’ or ‘VOSE’ presented here. Quick
Screen is used to conduct a preliminary review and evaluation of the idea in about 1 hour. Unless your Quick Screen
shows sufficient potential (or that you are convinced that it can be moulded and shaped) to demonstrate that it will meet
that four anchors, you will waste a lot of time on low business potential ideas. Quick Screen allows you to discard each
low potential idea, and to select the potentially good ones for further analysis.
4. Venture Opportunity Screening Exercise (VOSE)
Venture Opportunity Screening Exercises are designed to segment the screening of ideas into manageable pieces. In a
team effort, each member of the team should complete the VOSE separately and then come together to debate and
merge the results. After the VOSE you should revisit the Quick Screen and re-evaluate your scoring. When you are
satisfied that all the exercises are complete, the combined documents will provide the substance needed to complete
your Business Plan. It also provides you with a written audit trail of your opportunity shaping activity (therefore don’t
discard your work – file it for future reference).
It is essential for the entrepreneur to take a realistic view of the vulnerabilities and realities, as well as the compelling
strengths of the opportunity. Often, the iterative process of carefully examining and re-evaluating different ideas,
through the different perspectives of the team members, often ‘triggers creative ideas and insights about how the initial
business concept and strategy can be altered and adapted to significantly enhance the value chain, free cash flow
characteristics, and risk-reward relationships and thus the fit’. This process is therefore essential to value creation and
the development of high potential ventures, but it is still far from being a fait-accompli.
This early planning stage is also a excellent time for a trial period in which to test relationships between prospective
team members. This planning work can be detailed, tedious and sometimes downright boring. Finding out now who can
deliver what, and who can stay the distance; who has the desired work ethic, consistency and reliability; and whether
you can all work harmoniously; cab say a lot of money and headaches later. Ultimately, the fit issue boils down to this:
‘do the opportunity, the required resources (and their cost), the other team members (if any), the timing, and
balance of risk and reward work for me?’
University of Pretoria (NIC 2009)
Page 1 of 5
Exercise 1:
QuickScreen
I.
Market and Margin Related Issues
Criterion
Need/want/problem
Higher Potential
Identified
Lower Potential
Unfocused
Customers
Reachable and receptive
Unreachable/loyal to others
Payback to users
Value added or created
Less than one year
IRR 40% +
More than 3 years
IRR less than 20%
Market size
$50-100 million
Less than $10million or + $1 billion
Market growth rate
More than 20%
Less than 20%, contracting
Gross margin
More than 40% and durable
Less than 20% and fragile
Overall Potential
1. Market
2. Margins
Higher
Higher
Avg
Avg
Lower
Lower
II. Competitive Advantages
Fixed and variable costs
Degree of control
● prices and cost
●channels of supply and distribution
Barriers to competitors’ entry
●proprietary advantage
●lead time advantage (product, technology, people,
resources, location)
Service chain
Contractual advantage
Contacts and networks
Overall Potential
1. Costs
2. Channel
3. Barriers to entry
4. Timing
Higher Potential
Lowest
Lower Potential
highest
Weaker
Can create
Defensible
Slow competition
Weak/none
None
None
Strong edge
Exclusive
Key access
No edge
None
Limited
Higher
Higher
Higher
Higher
Avg
Avg
Avg
Avg
Lower
Lower
Lower
Lower
III. Value Creation and Realization Issues
Profit after tax
Time to breakeven
Time to positive cash flow
ROI potential
Value
Capitalization requirements
Exit mechanism
Overall value creation potential
1. Timing
Higher
2. Profit/free cash flow
Higher
3. Exit/liquidity
Higher
Higher Potential
10-15% more and durable
Less than 2 years
Less than 2 years
40-70% +, durable
High strategic value
Low-moderate; fundable
IPO, acquisition
Lower Potential
Less than 5%; fragile
More than 3 years
More than 3 years
Less than 20%, fragile
Low strategic value
Very high; difficult to fund
Undefined, illiquid investment
Avg
Avg
Avg
Lower
Lower
Lower
IV. Overall Potential
Go
No Go
Go, if ….
1. Margins and markets
2. Competitive advantages
3. Value creation and realization
University of Pretoria (NIC 2009)
Page 2 of 5
4. Fit: ‘O’ + ‘R’ + ‘T’
5. Risk-reward balance
6. Timing
7. Other compelling issues: must know or likely to fail
a.
b,
c.
d.
e.
Venture Opportunity Screening Exercises (VOSE)
The venture creation process requires performance of due diligence. The components of these exercises are used to channel
your thought and data collection efforts toward creating the foundation for development of the complete Business Plan.
Allow for a dynamic processing of each component and thereby the shaping of the opportunity and a plan to execute it. It is
OK to be initially broad in your perspective and then become more focused in later iterations.
At the end of the VOSE exercise, you should have a clear idea of the relative attractiveness of your opportunity. However, it
is rarely simply cut and dried. Mostly, there will be considerable uncertainty and numerous unknowns and risks.
Completing these exercises can, however, help you understand those uncertainties and risks as you make a decision about
the business idea. The QuickScreen process will help you devise ways to make these uncertainties and risks acceptable for
you, and if not, then you will know that you need to keep searching.
Every person and business idea is unique. Operations, marketing, cash flow cycles, and so forth vary a good bit from
company to company, from industry to industry, region to region, and from country to country. As a result, you may find
that not every issue is pertinent to your venture, and perhaps some questions may be irrelevant. Here and there you may
need to add to these exercises or further tailor them to your particular circumstances.
Working diligently through these exercises is quite a lengthy process. They create a map of how to think about the tough,
dull, legwork of good due diligence that should be done before launching into a venture. Completing these exercises will
help you determine if your opportunity is attractive enough vis-a-vis the four anchors to develop a complete Business Plan.
As you work through these exercises, you will find that much of the work of writing a Business Plan comes from your
answers provided in these exercises. While you may decide to delay work on some of these exercises, eventually you will
need to ask yourself and your ‘team’ almost all of these questions. Ideally also, each member of your ‘team’ should
complete these exercises.
University of Pretoria (NIC 2009)
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Exercise 2:
Venture Opportunity Screening Exercises (VOSE)
Opportunity Concept and Strategy Statement
Briefly describe your vision, the opportunity concept, and your strategy. What is your vision for the business? What is the
value creation proposition? What is the significant problem, want, or need that it will solve? Why is this important enough
that a customer or end user will pay an above average to a premium price for it? Why does this opportunity exist, now, for
you? Can you describe the concept and your market entry strategy in 25 words or less?
The Venture Opportunity Profile
Fill in this profile by indicating for each criterion where your venture is located on the potential continuum. Check off your
best estimate of where your idea stacks up, being as specific as possible. If you are having trouble, information can be found
in magazines and newsletters, from other entrepreneurs, from trade shows and fairs, or from online sources.
Criterion
Industry and Market:
Market: Need
Customers
Use benefits
Value added
Product life
Market Structure
Market size
Growth rate
Market capacity
Market share attainable (Year 5)
Cost structure
Economics:
Profits after tax
ROI potential
Capital requirements
Internal rate of return potential
Free cash flow characteristics:
Sales growth
Asset intensity
Spontaneous working
Capital
R&D/capital expenditures
Gross margins
Time to breakeven – P&L
Harvest Issues:
Value added potential
Valuation multiples and comparables
Exit mechanism and strategy
Capital market context
Competitive Advantage Issues:
Fixed and variable costs
University of Pretoria (NIC 2009)
Highest potential
Lowest potential
Market driven; identified; recurring
revenue niche
Reachable; purchase orders
Less than one year payback
High; advance payments
Durable
Unfocussed; onetime revenue
Loyal to others or unreachable
Three years plus payback
Low; minimal impact on market
perishable
Imperfect, fragmented competition or
emerging industry
$100 + million to $1 billion sales
potential
Growth at 30 to 50% or more
At or near full capacity
20% or more; leader
Low-cost provider; cost advantage
Highly concentrated or mature or
declining industry
Unknown, less than $20 million or
multibillion sales
Contracting or less than 10%
Under capacity
Less than 5%
Declining cost
10% to 15% or more; durable
25% or more; high value
Low to moderate; fundable
25% or more per year
Favourable; sustainable; 20-30+% of
sales
Moderate to high (15 + % to 20%)
Low/sales$
Low, incremental requirements
Less than 15%; fragile
Less than 15 to 20%; low value
Very high; un-fundable
Less than 15% per year
Less than 10% of sales
Less than 10%
High/sales$
High requirements
Low requirements
Exceeding 40% and durable
Less than 2 years; breakeven not
creeping
High requirements
Under 20%
Greater than 4 years; breakeven
creeping up
High strategic value
p/e = 20 + ×; 8-10 + ×EBIT; 1.5 – 2 +
× revenue free cash flow 8 -10 + ×
Present or envisioned options
Favourable valuations, timing, capital
available; realizable liquidity
Low strategic value
Lowest; high operating leverage
Undefined; illiquid investment
Unfavourable; credit crunch
highest
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Control over costs, prices, and
distribution
Barriers to entry:
Proprietary protection
response/lead time
Legal, contractual
advantage
Contacts and networks
Key people
Moderate to strong
weak
Have or can gain
None
Competition low: napping
Proprietary or exclusivity
Unable to gain edge
None
Well-developed; accessible
Top talent; an A team
Crude; limited
B or C team
Management team:
Entrepreneurial team
Industry and technical
experience
Integrity
Intellectual honesty
All-star combination; free agents
Top of the field; super track record
Weak or solo entrepreneur
underdeveloped
Highest standards
Know what they do not know
Questionable
Do not want to know what they do
not know
Fatal-flaw Issue:
Nonexistent
One or more
Getting what you want; but wanting
what you get
Attainable success/limited
Acceptable cuts in salary, etc
Fits with lifestyle
Calculated risk; low R/R ratio
Thrives under pressure
Surprises
Personal criteria:
Goals and fit
Upside/downside issues
Opportunity costs
Desirability
Risk/reward tolerance
Stress tolerance
Strategic Differentiation:
Degree of fit
Team
Service management
Timing
Technology
Flexibility
Opportunity orientation
Pricing
Distribution channels
Room for error
High
Best in class; excellent free agents
Superior service concept
Rowing in the tide
Groundbreaking; one-of-a-kind
Able to adapt; commit and de-commit
quickly
Always searching for opportunities
At or near leader
Accessible; networks in place
Forgiving strategy
Linear; on some continuum
Comfortable with status quo
Simply pursuing big money
Risk averse or gambler
Cracks under pressure
Low
B tea; no free agents
Perceived as unimportant
Rowing against the tide
Many substitutes or competitors
Slow; stubborn
Operating in a vacuum; napping
Undercut competitor; low prices
Unknown; inaccessible
Unforgiving, rigid strategy
Assess the external environment surrounding your venture opportunity, including the following:
¾ an assessment of the characteristics of the opportunity window, including its perishability
¾ a statement of what entry strategy suits the opportunity, and why
¾ a statement of evidence of and / or reasoning behind your belief that there is a good fit between the external
environment and the forces creating your opportunity
¾ a statement of your business exit strategy and an assessment of the prospects that this strategy can be met, including a
consideration of whether the risks, rewards, and tradeoffs are acceptable
Checkpoint
Before you proceed to further exercises, be sure the opportunity you have outlined is compelling and you can answer the
question, “why does the opportunity exist now?” It is possible you ought to abandon or alter the product or service idea
behind your venture at this point. The amount of money and time needed to get the product or service to market, and to be
open for business may be beyond your capability limits.
Beware: the opportunity for which the potential rewards are too large compared to the risks and vulnerabilities to
obsolescence and competition.
University of Pretoria (NIC 2009)
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