New Venture: The Opportunity
Prof. Alexander Settles
New Ventures
• 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
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
Circle of Venture Capital Ecstasy
Where are Opportunities Born?
• Technology sea change
– Moore’s Law – “The number of transistors
incorporated in a chip will approximately double every
24 months.”
– Metcalf’s Law - the value of a telecommunications
network is proportional to the square of the number of
connected users of the system
– 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 – the total bandwidth of
communication systems triples every twelve
months
• Brontosaurus factor
– Arrogance
– Loss of peripheral vision
– Deadened reflexes – turning the tanker
Window of Opportunity
Evaluating
• Criteria for evaluating venture opportunity
– Industry and market
– Economics
– Harvest issues
– Competitive advantage issues
– Management team issues
– Personal criteria
– Strategic differentiation
Brainstorming Rules
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Define your purpose
Choose participants
Choose a facilitator
Brainstorm spontaneously, copiously
No criticisms, no negatives
Screening Venture Opportunities
Anchors of Superior Businesses
• Create or add significant value to a
customer or end user
• Solve a significant problem, or meet a
significant want or need, for which
someone is willing to pay a premium
• Are a good fit with the founder(s) and
management team at the time and
marketplace and with the risk-reward
balance
Anchors of Superior Businesses
• Have robust market, margin, and
moneymaking characteristics
• Strong and early free cash flow (recurring
revenue, low assets, and working capital)
• High profit potential (10 to 15 percent +
after tax)
• Attractive realizable returns for investors
(25 to 30 percent + IRR)
Screening Methodologies
• Quick Screen
– Provides a broad overview of an idea’s
potential
– Enables the entrepreneur to conduct a
preliminary review and evaluation of an idea
in a short period of time
• Venture Opportunity Screening Exercises
(VOSE)
– Segments the screening of ideas into
extremely detailed but manageable pieces
The Business Plan
Business Plan
• Objectives
– Carefully articulate the merits, requirements,
risks, and potential rewards of the opportunity
and how it will be seized
– Demonstrate how the four anchors reveal
themselves to the founders and investors by
converting all the research, careful thought,
and creative problem solving from the Venture
Opportunity Screening Exercises into a
thorough business plan
What Does It Reveal?
• A business plan for a high potential venture
reveals the business’ ability to:
– Create or add significant value to a customer or end
user
– Solve a significant problem, or meet a significant want
or need for which someone will pay a premium
– Have robust market, margin, and moneymaking
characteristics
– Fit well with the founder(s) and management team at
the time, in the marketplace, and with the risk-reward
balance
Business Plan
• I. EXECUTIVE SUMMARY
– Description of the business concept and the
business opportunity and strategy
– Target market and projections
– Competitive advantages
– Costs
– Economics, profitability, and harvest potential
– The team
– The offering
Business Plan
• II. THE INDUSTRY AND THE COMPANY AND ITS
PRODUCT(S) OR SERVICE(S)
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The industry
The company and the concept
The product(s) or service(s)
Entry and growth strategy
• III. MARKET RESEARCH AND ANALYSIS
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Customers
Market size and trends
Competition and competitive edge
Estimated market share and sales
Ongoing market evaluation
Business Plan
• IV. THE ECONOMICS OF THE BUSINESS
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Gross and operating margins
Profit potential and durability
Fixed, variable, and semivariable costs
Months to breakeven
Months to reach positive cash flow
• V. MARKETING PLAN
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Overall marketing strategy
Pricing
Sales tactics
Service and warranty policies
Advertising and promotion
Distribution
Business Plan
• VI. DESIGN AND DEVELOPMENT PLAN
– Development status and tasks
– Difficulties and risks
– Product improvement and new products
– Costs
– Proprietary issues
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MANUFACTURING AND OPERATIONS PLAN
Operating cycle
Geographical location
Facilities and improvements
Strategy and plans
Regulatory and legal issues
Business Plan
• VIII. MANAGEMENT TEAM
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Organization
Key management personnel
Management compensation and ownership
Other investors
Employment and other agreements and stock option and bonus plans
Board of directors
Other shareholders, rights, and restrictions
Supporting professional advisors and services
OVERALL SCHEDULE
CRITICAL RISKS, PROBLEMS, AND ASSUMPTIONS
Business Plan
• XI. THE FINANCIAL PLAN
– Actual income statements and balance sheets
– Pro forma income statements / forma balance
sheets
– Pro forma cash flow analysis
– Breakeven chart and calculations
– Cost control
– Highlights
Business Plan
• XII. PROPOSED COMPANY OFFERING
– Desired financing
– Offering
– Capitalization
– Use of funds
– Investor’s return
• XIII. APPENDICES