Evaulating Business Opportunities


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Identifying and Evaluating Entrepreneurial Opportunities

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  • Everywhere I go, I analyze business. Why is a capuccino $3? Does Saxy’s make more or less than Trident? Skiing this morning – early season; are they making money; why not open more runs?Me: quantitative business (economics, finance, strategy, decision analysis) & computer-head.Back in the day, total internet visionary. I had an excellent software engineering education and an excellent business background, both fresh, and the internet was just beginning – there were opportunities everywhere!Niel & I. StockPhoto.com. City Search. Etc. etc.Examples: Sage -> NetInfra; IntenseDebate -> SendGrid (NOT!)Now – not at the bleeding edge (intensedebate), increasingly outsourcing idea gen
  • It is hard to become more expert than an incumbent when starting from scratch. In fact, it is pretty impossible.Examples:Geography – gas stationsValue prop – whole foods: organic, fresh, up marketCost structure – EC2Distribution channel – umm web, AmazonTechnology – EC2, TeslaLove the godaddy story. I was in the hosting industry. NetworkSolutions monopoly vanished, you could become a domain name registrar for a couple hundred k. Go Daddy became a domain name registrar, got good at that, dominated market with low prices, opened expanded into hosting, now hosting is surely most of their revenue. I think name registration was just a way to get into the much bigger market of hosting.
  • Gross margins 50% - $1M annual market OK for 1 guy companySmall enoughDepends a lot on the market, how fragmented it is, but you should be shooting for at least 10-20% of a new marketGeographySki areasGas stationsVenture Capital/Techstars?Product PositioningUp market – whole foods, Southern Sun microbrewsSales channelsZynga - Games for the iPhoneFinancingRocky’s AutosEC2My market size? 50 person company x 500k rev per person => $25M/year rev =>$200M market minimum
  • Take example company from audience?IntenseDebateSubstitutes: No commenting, editorialsCompetition: Disqus, JS-KitRivalry: no $ to underbid, but some rivalry in that “we’ll do the labor to convert you”Customer power: Lots, if it comes to rev share; easy to play off the 3 competitors since they don’t have any unique special powerSupplier power: none: the linuxdistro had no bargaining power with us!NetInfra / RackSpace- Substitutes: Self-owned and managed serverCompetition: initial sale price competition, not much after because of bonding with adminsRivalry: noneCustomer Power: not much, because of high switching costsSupplier Power: None
  • Does the person who feels the pain have the authority and budget to make the purchase?Examples: Sysadmin responsible for server purchasing SSL licenseTechStars co’s purchasing mentorship and notoriety with equityProgrammer purchasing SendGridCounter ExampleStudent benefiting from better overhead projector in classCustomer ValuationEach rackspace customer is worth:36 months x $200 / month -> $7,200, less hardware costs of $2200, bandwidth cost of $1,000, and infrastructure cost of $1,000, for a net of $3,000 NPV =? $2,000Customer Acquisition CostMarketing spend of $200 per new customerSales costs (salesman time & expense) of $800 per new customerVirality: will each customer refer a buddy or two? (Increases the value of each customer)Network effects: does each customer increase our value to all customers? (IntenseDebate: Yes)
  • You have to accrete and manage resources able to capture a minimum of 20% of the market. Can you do that?Will investors trust you with $1B? $100M? $1M? It takes time, and demonstrated progress, to gain investors, employees, and customer trustCan you close the sale of a 747 to United? Can you pitch to the CEO, understand the technical trade-offs of one plane vs another, understand the tradeoffs of delivery schedule and financeability?Know your competitors: IntenseDebatevs Daniel Ha – gregarious vs experienced and analytical
  • Note this assumes “perfect markets”, and markets probably aren’t at all perfect at the forefront of innovation.Work through an exampleSteve’s market salary: $200kSteve’s Acme salary: $100kSteve’s ownership in Acme: 10%Therefore Acme needs to be increasing in value by $1M per year (and paying his salary) for him to be breaking evenThis is a ceterus paribus example – don’t forget the value of differential learning, ie bigger ponds in the future
  • Famous ExamplesSteve JobsTed TurnerDavid CohenThe Foodzie people?Counter-examples?
  • IdeaVRBO – a personal problemeScrip – I love money & banking, internet hasn’t solved this yet. But, a problem looking for a solution?BHAG’s-IntenseDebate – used by NYT, acquired by WordPressHonda as a startup: Yamaha, wotsubusu!Giro, 1989(?): TdF (Lance, 1997?)
  • Evaulating Business Opportunities

    1. 1. Identifying and evaluatingStartup Opportunities<br />Tom Keller<br />www.tkeller.com<br />
    2. 2. Tom Keller<br />80’s: Software Engineer<br />90’s: Financial Analyst, Executive<br />1997 – Current: Serial Entrepreneur<br />Net Infrastructure – 2nd fastest growing in Boulder in 2002<br />ClickCaster<br />IntenseDebate – 2007 Innovative Co. award, acquired by Automattic (WordPress)<br />My LinkedIn<br />Identifying and Evaluating Entrepreneurial Opportunities<br />2<br />Tom Keller<br />
    3. 3. Finding Opportunities<br />Train your mind: analyzing business as a way of life<br />What areas are you especially expert in?<br />What problems do you have in your current job? <br />Be an entrepreneurial nexus<br />Tom Keller<br />Identifying and Evaluating Entrepreneurial Opportunities<br />11/25/2009 - 3<br />
    4. 4. What’s new about your idea?<br />Defeating incumbents is difficult / impossible<br />You need one (or more) of:<br />New market<br />New value proposition<br />New cost structure<br />New distribution channel<br />New technology<br />Identifying and Evaluating Entrepreneurial Opportunities<br />4<br />Tom Keller<br />
    5. 5. Market Size<br />Big enough to be worthwhile<br />Small enough that you can be a “player”<br />Your network, expertises, processes, team, customers, etc., can (in fact must!) become a competitive advantage<br />Big markets can be “niche-fied”<br />Geography<br />Product positioning<br />Sales/distribution channels<br />Financing<br />Identifying and Evaluating Entrepreneurial Opportunities<br />5<br />Tom Keller<br />
    6. 6. Do you have’em by the short and curlies?<br />5-forces analysis1:<br />Threat of substitutes<br />Threat of competition<br />Threat of rivalry<br />Customer power<br />Supplier power<br />1 This is the core of Michael Porter’s famous “Competitive Strategy”<br />Identifying and Evaluating Entrepreneurial Opportunities<br />6<br />Tom Keller<br />
    7. 7. Market Sales Analysis<br />Coincident pain / budget / purchase authority<br />Hypothesize and test…<br />Due diligence, due diligence, due diligence! (Put down the keyboard, and pick up the phone)<br />Customer valuation<br />Customer acquisition cost (and timeline)<br />Virality / Network effects<br />Identifying and Evaluating Entrepreneurial Opportunities<br />7<br />Tom Keller<br />
    8. 8. Market Size, Part Deux: Big Fish, Small Pond<br />What is the largest pond such that you can still be the biggest fish?<br />Constraints: your realistic capabilities<br />Know your competitors – existing and potential – and your relative strengths and weaknesses<br />Pond size grows over time (business/career management)<br />Identifying and Evaluating Entrepreneurial Opportunities<br />8<br />Tom Keller<br />
    9. 9. Market Size, Part Trois:No Free Lunch<br />Is value created in the “Aha! moment”? Or, in the execution?<br />To the extent value is created in the execution, you’re a participant in a labor market<br />Thought experiment: assume the labor market is a perfect market; then you can impute requisite market size considering your fair market salary, hypothesized ownership, hypothesized market share and gross profit<br />Identifying and Evaluating Entrepreneurial Opportunities<br />9<br />Tom Keller<br />
    10. 10. Most FundamentalIdea Requirement<br />Winner takes all; 2nd place kisses sister; everybody else fades to anonymity<br />Are you, or will you become, the most expert/competent in the space?<br />Famous examples<br />Is this your passion? Is there somebody more passionate about this than you? If so, they will eat your lunch!<br />Paradigm: Job &lt; Career &lt; Hobby<br />My belief: If job=career=hobby; and, if you work astoundingly hard; then, and only then, you have a chance to be the big fish<br />My check: do I see myself becoming the expert?<br />Identifying and Evaluating Entrepreneurial Opportunities<br />10<br />Tom Keller<br />
    11. 11. My Process<br />Idea identification<br />MBA Analysis: Will it fly? Is it economically interesting? <br />Self skills critique: Can I envision myself as a leader in this market?<br />Customer Due Diligence: Would you buy this? For how much?<br />Passion: Can I articulate a BHAG which inspires me?<br />Identifying and Evaluating Entrepreneurial Opportunities<br />11<br />Tom Keller<br />