ENTREPRENEURSHIP BEC 517

1. BEC 517 ASSIGNMENT 3
Chapter 4: Opportunity recognition and
evaluation
NDLOVU. S (201924638)

2. LEARNING OUTCOME
Understand the foundations for opportunity evaluation
Explain the role of cognitive biases and heuristics in opportunity
evaluation
Understand the different criteria used by venture capitalists to
evaluate new venture proposals
Identify the characteristics of successful products and services
Determine how new ideas can be analysed to filter out those that are
obviously not feasible or marketable
Assess the viability of product and service ideas
Develop and implement a screening guide for establishing which
product or service ideas to pursue

3. FOUNDATIONS OF OPPORTUNITY
RECOGNITION AND EVALUATION
At the foundation of opportunity recognition and
evaluation lies the development of a viable business
opportunity.
Viable opportunity resembles
1. Potential economic value
2. Newness
3. Perceived desirability

4. THE COGNITIVE APPROACH TO
OPPORTUNITIY RECOGNITION AND
EVALUATION
Cognitive approach: Deals with the entrepreneur’s
preferred way of gathering, processing and evaluating
information
Opportunities come from complex patterns of
changing conditions in technology, the external
environment (economical, political, social and
demographic) and the entrepreneur’s personal
situation
The entrepreneur needs cognitive skills to gather,
process, evaluate and use the information from these
changing conditions to recognise and evaluate viable

5. THE ROLE OF COGNITIVE BIASES
AND HEURISTICS IN OPPORTUNITY
EVALUATION
Cognitive biases: Common types of mental shortcuts used to make
judgements about opportunities and the business
Heuristics: simplifying strategies that entrepreneurs use to make
decisions, particularly in uncertain and complex conditions
Entrepreneurs use heuristics more extensively in their decision-
making than manager sin large organisations
Heuristics or shortcuts can be efficient because they aid judgements
without high information-processing costs
However, these mental shortcuts leads to biases of overconfidence,
planning fallacy, belief in the law of small numbers, and an illusion of
control

6. RISK PERCEPTION
The risk perception is determined by the way a
person subjectively estimates and “feels” about risk;
The subjective judgement of the amount of risk
inherent in a situation
Differs between entrepreneurs and non-
entrepreneurs
May explain why some people become entrepreneurs
and others do not

7. OVERCONFIDENCE
The failure to acknowledge or recognise the limits of
personal knowledge, skills and experience
Leads to overestimation of one’s certainty regarding
facts
The reality is that most people think of themselves as
better than average.
 In opportunity evaluation, this can cause a danger
because it typically leads to taking on too much risk
opportunities.

8. PLANNING FALLACY
Occurs when there are strong tendencies to
underestimate the amount of time needed to complete
a given project, the amount of resources needed, or
the amount of work that can be achieved in a given
time
Entrepreneurs need to forecast future prices of goods
and resources and use intuitive judgement to gauge
market potential
These forecasts of future outcomes are often
anchored on plans and scenarios of success rather
than on past results, and may be overly optimistic

9. BELIEF IN THE LAW OF SMALL
NUMBERS
Occurs when an entrepreneur uses a small sample of
information to draw firm conclusions
Entrepreneurs do not use large random samples because
these are rarely obtainable, and they do not have the
resources for systematic data gathering
A strong belief in the law of small numbers creates a
more than usually optimistic view of the business
enterprise, and thus lower perceived risk
This can lead to business failure
A small sample usually lacks predictive validity

10. THE ILLUSION OF CONTROL
Occurs when the entrepreneur overestimates his or her ability to
control events that are not actually within his or her control
Entrepreneurs with this bias have a higher expectancy of personal
success than objective probability
Persists because:
• When individuals are encouraged to take charge of their environment, the
resulting sense of competence may lead to a sense of power over the
uncontrollable
• Skill and chance factors are strongly connected, and it is generally difficult to
discriminate between chance and skill elements
Entrepreneurs should guard against heuristic and conceptual biases
as they may impact on their ability to identify the best viable business
opportunity

11. VENTURE CAPITALISTS’
EVALUATION CRITERIA FOR NEW
VENTURES
Entrepreneurs tend to evaluate initial opportunities
and apply for funding prior to opportunity exploitation
Venture capitalists usually evaluate an investment
opportunity after the entrepreneur has decided which
opportunities to exploit
They evaluate based on detailed calculation of market potential,
profit estimate etc

12. VENTURE CAPITALISTS’
EVALUATION CRITERIA FOR NEW
VENTURES (CONTINUED)
When evaluating business opportunities, first-time
entrepreneurs use these criteria:
1. Potential growth in the target market
2. Demonstrated market acceptance
3. The likelihood of a ten times return on assets in the next
five to ten years
4. The entrepreneur’s ability to react well to risk

13. VENTURE CAPITALISTS’
EVALUATION CRITERIA FOR NEW
VENTURES (CONTINUED)
But investors look for the following when considering new venture
proposals:
1. Experience and a good management team
2. Proprietary product or service
3. Marketability
4. Personal commitment and involvement of the entrepreneur
5. Openness and honesty
6. Knowledge and experience
7. Realistic financials
8. Return on investment (ROI)
9. Intellectual property

14. OPPORTUNITY ASSESSMENT AND
SCREENING
1.The characteristics of successful product or
service ideas
The right product or service can propel your business to fortune, while the wrong
product or service can even make your most exhaustive efforts unprofitable
Characteristics or attributes of the potentially excellent product or service:
1. The new product/service should fulfil a need or want
2. The new product /service should have either niche-market or mass-market appeal
3. The product or service must render an income and profit
4. The customer should replenish or repurchase the product or service on a regular
basis
5. There should be compatibility with existing attitudes and beliefs
6. The product/service should be simple so that the buyer will understand it
7. It should be easy to communicate the results or benefits of the new product or
service to potential users
8. The product or service should be made available to potential customers for a trial
period
9. The product or service should be readily available once the buyer decides to make
the purchase

15. OPPORTUNITY ASSESSMENT AND
SCREENING (CONTINUED)
2.Feasibility of products or services
A second screening test should be of the feasibility of the product or service
The technical requirements for producing a product or service should be identified and
evaluated as well as the technical skills of the entrepreneur or the venture team in relation
to the product or service
3.Marketability
The test for marketability can be divided into four categories:
1. Customers
2. Competitors
3. Suppliers
4. Marketing of the product or service

16. OPPORTUNITY ASSESSMENT AND
SCREENING (CONTINUED)
4. The entrepreneur and entrepreneurial team
Include the following in any evaluation of business ideas or
opportunities:
1. Personality and personal preferences
2. Skills
3. Traits and attributes
4. Relevant experience
5. Synergy
6. Exit plans (harvesting)
The more experience, education and skills the entrepreneur and
entrepreneurial team have and the higher the synergy between them,
the greater the probability of success

17. OPPORTUNITY ASSESSMENT AND
SCREENING (CONTINUED)
5.Resources
The main resources for new ventures include:
1. Financial
2. Social
3. Human
4. Physical
5. Technological
6. organisational
Aspects to include when you evaluate the resources you need for each idea or
opportunity:
1. Accessibility of resources
2. Optimising resources
3. Sustainable advantage
4. Type and nature of industry
5. Capital requirements

18. THE IDEA-SCREENING GUIDE
An instrument that entrepreneurs can use to choose between different ideas and
find the one or two that they can pursue
First step in developing the screening guide:
1. Establish the criteria to be used
2. Then give a weighting (1 to 10) to determine importance
• Scales could be qualitative or quantitative
• Qualitative measurement: Describes qualities or characteristics of the aspects that
are measured
• Quantitative measurement: Addresses the ‘what’ or ‘how many’ aspects of a
question and is data that can either be counted or compared on a numeric scale
Nb. Because the assigning of weightings and scores is very subjective, entrepreneurs
could easily abuse it by giving higher weightings or scores to a predetermined,
favoured project or idea

19. Thank you!!!