New Venture: The Opportunity

1. New Venture: The Opportunity Prof. Alexander Settles

2. 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

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. Circle of Venture Capital Ecstasy

5. 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

6. 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

7. Window of Opportunity

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

14. Brainstorming Rules • Define your purpose • Choose participants • Choose a facilitator • Brainstorm spontaneously, copiously • No criticisms, no negatives

15. Screening Venture Opportunities

16. 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

17. 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)

18. 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

19. The Business Plan

20. 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

21. 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

22. 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

23. Business Plan • II. THE INDUSTRY AND THE COMPANY AND ITS PRODUCT(S) OR SERVICE(S) • The industry • The company and the concept • The product(s) or service(s) • Entry and growth strategy • III. MARKET RESEARCH AND ANALYSIS • Customers • Market size and trends • Competition and competitive edge • Estimated market share and sales • Ongoing market evaluation

24. Business Plan • IV. THE ECONOMICS OF THE BUSINESS • 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 • Overall marketing strategy • Pricing • Sales tactics • Service and warranty policies • Advertising and promotion • Distribution

25. Business Plan • VI. DESIGN AND DEVELOPMENT PLAN • Development status and tasks • Difficulties and risks • Product improvement and new products • Costs • Proprietary issues • VII. MANUFACTURING AND OPERATIONS PLAN • Operating cycle • Geographical location • Facilities and improvements • Strategy and plans • Regulatory and legal issues

26. Business Plan • VIII. MANAGEMENT TEAM • 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 • IX. OVERALL SCHEDULE • X. CRITICAL RISKS, PROBLEMS, AND ASSUMPTIONS

27. 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

28. Business Plan • XII. PROPOSED COMPANY OFFERING • Desired financing • Offering • Capitalization • Use of funds • Investor’s return • XIII. APPENDICES