1. IDEAIDEA v.v. OPPORTUNITYOPPORTUNITY
--------
Essentials of RecognizingEssentials of Recognizing
OpportunityOpportunity
mark lesliemark leslie
mleslie@leslieventures.commleslie@leslieventures.com
650/561-1228650/561-1228

2. IngredientsIngredients
► ProductProduct
► MarketMarket
► Factor Markets/Service BusinessesFactor Markets/Service Businesses
► TeamTeam
► CapitalCapital
► Economic ModelEconomic Model
► Personal FitPersonal Fit
► Risk AnalysisRisk Analysis
► Business PlanBusiness Plan

3. Product – just a place to startProduct – just a place to start
► The world will NOT beat a path to the door of the inventor of the betterThe world will NOT beat a path to the door of the inventor of the better
mousetrapmousetrap
► Idea itself does not have valueIdea itself does not have value
► Contrary to popular belief, entrepreneurial ideas are rarely “stolen”Contrary to popular belief, entrepreneurial ideas are rarely “stolen”
 (All the other entrepreneurs think they are the smartest)(All the other entrepreneurs think they are the smartest)
 It is all about executionIt is all about execution
► Even “being first” is over-rated – many successes were from “follower”Even “being first” is over-rated – many successes were from “follower”
companiescompanies
 IBM vs. UnivacIBM vs. Univac
 Excel vs. Lotus 123 vs. Visi-CalcExcel vs. Lotus 123 vs. Visi-Calc
 Google vs. Yahoo vs. Alta VistaGoogle vs. Yahoo vs. Alta Vista
 iPod vs. MP3 playersiPod vs. MP3 players
 iPhone vs. Nokia?)iPhone vs. Nokia?)
► It is one among many, many relevant variable factorsIt is one among many, many relevant variable factors
► An idea is “just a place to start”.An idea is “just a place to start”.

4. Product – Look for theProduct – Look for the
DiscontinuitiesDiscontinuities
► What are some examplesWhat are some examples
 MicroprocessorsMicroprocessors
 Telecom de-regulationTelecom de-regulation
 InternetInternet
 Berlin WallBerlin Wall
► Discontinuities kill older companies that do not adapt,Discontinuities kill older companies that do not adapt,
create opportunities for many new onescreate opportunities for many new ones
 Rapidly changing market = opportunityRapidly changing market = opportunity
► What does Andy Grove’s famous saying “only theWhat does Andy Grove’s famous saying “only the
paranoid survive” really Mean?paranoid survive” really Mean?

5. Product – Current discontinuitiesProduct – Current discontinuities
► Technological?Technological?
 Silicon speed doubles every 18 monthsSilicon speed doubles every 18 months
 Storage capacity doubles every 12 monthsStorage capacity doubles every 12 months
 Communication Bandwidth doubles every 6 monthsCommunication Bandwidth doubles every 6 months
 Wireless revolutionWireless revolution
 IP telephonyIP telephony
 Telecom Backbone BandwidthTelecom Backbone Bandwidth
► Other?Other?
 Sept 11 terrorist attackSept 11 terrorist attack
 LinuxLinux
 Human Genome SequencingHuman Genome Sequencing
 911 GPS cell phones911 GPS cell phones

6. Product – key questionsProduct – key questions
► Radicalness of productRadicalness of product
 ““Faster / Better / Cheaper”Faster / Better / Cheaper”
 InnovationInnovation
► Incremental changeIncremental change
 Brave New WorldBrave New World
► Change the way people do things; orChange the way people do things; or
► Is it feasible?Is it feasible?
 How much timeHow much time
 What special skillsWhat special skills
 What is the riskWhat is the risk
 Similar project been done before?Similar project been done before?
► How much R, how much DHow much R, how much D

rr && DD
R&
d

7. Product – key questionsProduct – key questions
► Barriers to EntryBarriers to Entry
 IPIP
► Can the IP be protectedCan the IP be protected
► Is it sufficiently difficult (not trivial)Is it sufficiently difficult (not trivial)
► Is it too difficult?Is it too difficult?
 Network Effect (i.e., e-Bay)Network Effect (i.e., e-Bay)
► This is VERY, VERY hard to doThis is VERY, VERY hard to do
 Business Model (i.e. Dell vs. Compaq)Business Model (i.e. Dell vs. Compaq)
► This is even harder to doThis is even harder to do
 Is it non-obviousIs it non-obvious
► Veritas created the segment “storage management software”Veritas created the segment “storage management software”
► Starting in 1999 there have been over 500 startup companies inStarting in 1999 there have been over 500 startup companies in
the “storage space”the “storage space”

8. MarketMarket
► Market sizeMarket size
 TAM / SAMTAM / SAM
 Where can you get market data?Where can you get market data?
► Market growth rateMarket growth rate
► Market structureMarket structure
 MaturityMaturity
 In state of flux or establishedIn state of flux or established
 Market of big players, established products andMarket of big players, established products and
pricesprices
► Vertical MarketsVertical Markets

9. MarketMarket
► Product price and cost vs. market (grossProduct price and cost vs. market (gross
margin)margin)
► Market willingness to work with startupMarket willingness to work with startup
 May not stay in businessMay not stay in business
 May not be able to support the customerMay not be able to support the customer
► How many can you sell, how quickly?How many can you sell, how quickly?
► How big is the ultimate market?How big is the ultimate market?
 How big to be interesting as venture backed deal?How big to be interesting as venture backed deal?
► Can the company become a market leader?Can the company become a market leader?

10. Market – CompetitionMarket – Competition
► Are you entering an existing market?Are you entering an existing market?
 How will the leader’s react?How will the leader’s react?
 How quickly?How quickly?
 Why can’t they simply do the same and put you out ofWhy can’t they simply do the same and put you out of
business?business?
► Competitive Alliances?Competitive Alliances?
► Are there other startupsAre there other startups
 How many?How many?
 How well financed, quality of team, etc?How well financed, quality of team, etc?
 Why do you believe that you are different – uniquelyWhy do you believe that you are different – uniquely
qualified to win the competitive race?qualified to win the competitive race?
► Why do each of your competitors believe the sameWhy do each of your competitors believe the same
thing?thing?

11. Market: Time to Build the BusinessMarket: Time to Build the Business
► Most High Value Businesses Take Time to Build, e.g. HP,Most High Value Businesses Take Time to Build, e.g. HP,
Veritas, IntelVeritas, Intel
► Does Market Allow Bootstrapping? E.g., Pure Software,Does Market Allow Bootstrapping? E.g., Pure Software,
Microsoft, Integrated Systems/WindRiver, etc.Microsoft, Integrated Systems/WindRiver, etc.
► Interestingly, many of the most successful businessesInterestingly, many of the most successful businesses
raised little capital (some took a long time to ramp up)raised little capital (some took a long time to ramp up)
 Cisco = $2.5MCisco = $2.5M
 Sun = $4MSun = $4M
 Veritas = $4MVeritas = $4M
 VMware = $3MVMware = $3M
 Microsoft <$2MMicrosoft <$2M
 Oracle < $2MOracle < $2M
 eBay < $1MeBay < $1M
 Google < $5MGoogle < $5M
 etc. etc.etc. etc.
► Excessive capital raised can have disasterous results:Excessive capital raised can have disasterous results:
Webvan, Next, Momenta, maybe Vonage (SunRocket)??Webvan, Next, Momenta, maybe Vonage (SunRocket)??

12. Bootstrapping: Conditions forBootstrapping: Conditions for
SuccessSuccess
►Market Segment is Small with No GorillasMarket Segment is Small with No Gorillas
or Gorilla Has Little Tractionor Gorilla Has Little Traction
►Market Growth is Not ExplosiveMarket Growth is Not Explosive
►You’ve Created a New MarketYou’ve Created a New Market
►Management Has Time to Learn theManagement Has Time to Learn the
BusinessBusiness
►Examples: Microsoft, Oracle, Wind RiverExamples: Microsoft, Oracle, Wind River

13. TeamTeam
► ExecExec
 Big company /entrepreneurial successBig company /entrepreneurial success
 Domain expertsDomain experts
 Worked together / Navigated difficult situationWorked together / Navigated difficult situation
 Unquestioned Integrity / Intellectual honestyUnquestioned Integrity / Intellectual honesty
 Successful recruiting track recordSuccessful recruiting track record
 Able to raise capitalAble to raise capital
► TechnicalTechnical
 Technical leadershipTechnical leadership
 Demonstrated ability to develop ProductsDemonstrated ability to develop Products
► OtherOther
 No Trainees – “Done it before”No Trainees – “Done it before”

14. CapitalCapital
► How much time and money does it take to buildHow much time and money does it take to build
the product?the product?
► How much time and money does it take to launch,How much time and money does it take to launch,
market and sell and support?market and sell and support?
 How much to “scale up” the business?How much to “scale up” the business?
► Will the capital markets finance a project of thisWill the capital markets finance a project of this
size and duration?size and duration?
► Is the investment commensurate with the marketIs the investment commensurate with the market
opportunity?opportunity?
► How do you stage the capitalization to get theHow do you stage the capitalization to get the
most money for the least cost? (topic for anothermost money for the least cost? (topic for another
presentation)presentation)

15. Economic ModelEconomic Model
► Business Model (steady state)Business Model (steady state)
 Revenue, COGS, COS, ongoing R&D, profit?Revenue, COGS, COS, ongoing R&D, profit?
► For example, what is the fully loaded cost of one sales person,For example, what is the fully loaded cost of one sales person,
and what is that person’s productivity?and what is that person’s productivity?
► Cost of customer acquisition?Cost of customer acquisition?
 Are there examples of similar business modelsAre there examples of similar business models
 What is the path to get to steady state?What is the path to get to steady state?
► What is the ROI for the investors, entrepreneursWhat is the ROI for the investors, entrepreneurs
► How long to cash flow break evenHow long to cash flow break even
► What does gross margin tell about a companyWhat does gross margin tell about a company
► Room for errorRoom for error

16. Personal FitPersonal Fit
►AuthenticityAuthenticity
►CompetenceCompetence
►Tolerance for uncertainty, ambiguityTolerance for uncertainty, ambiguity
►InterestInterest
►CommitmentCommitment

17. RisksRisks
►What are they?What are they?
 This is usually a very, very long list – makes youThis is usually a very, very long list – makes you
kind of wonder why anything ever gets startedkind of wonder why anything ever gets started
►Why do you believe they can be overcome?Why do you believe they can be overcome?
 Response for each item listed aboveResponse for each item listed above

18. The Business PlanThe Business Plan
► Where all the issues come togetherWhere all the issues come together
► Requires everything to be in synchRequires everything to be in synch
► Exec Summary -- Write it early and often!!!Exec Summary -- Write it early and often!!!
► FinancialsFinancials
 Five year Income Statement, Balance Sheet and Cash FlowFive year Income Statement, Balance Sheet and Cash Flow
 First two years are “Bottoms Up”First two years are “Bottoms Up”
 Fifth year should be compared to industry proxy for sanityFifth year should be compared to industry proxy for sanity
► Capitalization PlanCapitalization Plan
 How much to raiseHow much to raise
 On what milestonesOn what milestones
 Returns to each stage of investorReturns to each stage of investor
 Not part of external planNot part of external plan
► FINANCIALS ARE THE CRUCIBLEFINANCIALS ARE THE CRUCIBLE
 Forces you to make and validate all assumptionsForces you to make and validate all assumptions
 Forces you to Ask and Answer all the questionsForces you to Ask and Answer all the questions

19. The Business PlanThe Business Plan
►It is the Process, not the Product that countsIt is the Process, not the Product that counts
►All the issues in one placeAll the issues in one place
►Generally, all the things you need to knowGenerally, all the things you need to know
are “outside” (the building, campus, etc.)are “outside” (the building, campus, etc.)
 You need to talk to people in the real worldYou need to talk to people in the real world
►Once completed you KNOW what you areOnce completed you KNOW what you are
doingdoing
►Fully integrated into your mindFully integrated into your mind

20. Some ExamplesSome Examples
……the Badthe Bad
……and the Uglyand the Ugly
The GoodThe Good

21. McAfeeMcAfee
► Product IdeaProduct Idea
 Industry in transitionIndustry in transition
► MarketMarket
 Clear market needClear market need
 No competitorsNo competitors
► TeamTeam
 Unique entrepreneurial backgroundUnique entrepreneurial background
 High degree of Authenticity to entrepreneurHigh degree of Authenticity to entrepreneur
► CapitalCapital
 Bootstrapped on bulletin board businessBootstrapped on bulletin board business
► Economic ModelEconomic Model
 Cash machine!!Cash machine!!
 But competition changed all thatBut competition changed all that
► RiskRisk
 Lots of visible risksLots of visible risks

22. Veritas –the early ideaVeritas –the early idea
► Product IdeaProduct Idea
 Unix was transitioning to a commercialUnix was transitioning to a commercial
environment, but was not ready for prime time.environment, but was not ready for prime time.
 Tolerant (predecessor company) had done a lot ofTolerant (predecessor company) had done a lot of
the work already -- We knew the issues and knewthe work already -- We knew the issues and knew
the solutions.the solutions.
 This was “hard to do” but not impossible. GoodThis was “hard to do” but not impossible. Good
IP, good barriers to entryIP, good barriers to entry
► Customer MarketCustomer Market
 We knew the customersWe knew the customers
 ATT agreement gave us “special” access to theATT agreement gave us “special” access to the
marketmarket

23. Veritas –the early ideaVeritas –the early idea
► TeamTeam
 We had the team of engineers to implementWe had the team of engineers to implement
 Completed the management teamCompleted the management team
► CapitalCapital
 We had some money from wind-down of oldWe had some money from wind-down of old
businessbusiness
 ““some” investor commitmentsome” investor commitment
 Almost impossible to raise new money for aAlmost impossible to raise new money for a
“restart”.“restart”.
► CompetitionCompetition
 Competition at system OEMs would be “make vs.Competition at system OEMs would be “make vs.
buy”buy”
 Very little to no merchant market competitionVery little to no merchant market competition

24. Veritas –the early ideaVeritas –the early idea
► Economic ModelEconomic Model
 OEM model like ATT (Microsoft) – source licenseOEM model like ATT (Microsoft) – source license
plus per-copy royaltyplus per-copy royalty
 Limited account upside – for more than $2 - $3Limited account upside – for more than $2 - $3
million per year, OEM could design us out.million per year, OEM could design us out.
 Highly profitable business with extremely highHighly profitable business with extremely high
gross margingross margin
► Risk AnalysisRisk Analysis
 Reliability of ATT as partnerReliability of ATT as partner
 Software OEM model not provenSoftware OEM model not proven
 Limited overall upside for companyLimited overall upside for company

25. WebVanWebVan
► Product IdeaProduct Idea
 Disintermediate the supermarket supply chainDisintermediate the supermarket supply chain
 OldOld
► Producer to warehouseProducer to warehouse
► Pack and ship to supermarketPack and ship to supermarket
► Supermarket every couple of miles – land, building and ~100Supermarket every couple of miles – land, building and ~100
employeesemployees
► Unpack and stock shelvesUnpack and stock shelves
► Customer drives in to pick up goods…Customer drives in to pick up goods…
 NewNew
► Producer to warehouseProducer to warehouse
► Pick and pack (high tech)Pick and pack (high tech)
► Deliver directly to consumerDeliver directly to consumer
 Trucks and drivers instead of buildings and clerksTrucks and drivers instead of buildings and clerks

26. WebVanWebVan
► MarketMarket
 Established very large marketEstablished very large market
► TeamTeam
 World classWorld class
► CapitalCapital
 ““infinite” capital availableinfinite” capital available
► Economic ModelEconomic Model
 Unproven modelUnproven model
 Not enough customer density for efficient routesNot enough customer density for efficient routes
► Increased delivery chargesIncreased delivery charges
► Reduced produce qualityReduced produce quality
 Rolled out in five cities before proven in oneRolled out in five cities before proven in one
► Consumed their cashConsumed their cash
► Capital markets closed downCapital markets closed down
► RiskRisk
 Much more than they thought…Much more than they thought…

27. MicrosoftMicrosoft
► Product IdeaProduct Idea
 Home computer “revolution”Home computer “revolution”
 BASIC compiler for “Altair 8080”BASIC compiler for “Altair 8080”
 Six years later, still the same old business…Six years later, still the same old business…
► MarketMarket
 IBM changed market from hobbyist to businessIBM changed market from hobbyist to business
► TeamTeam
 Experienced in technology, butExperienced in technology, but
 Inexperienced in businessInexperienced in business
► CapitalCapital
 Very humble start up – no real capital neededVery humble start up – no real capital needed
 But also none availableBut also none available
► Economic ModelEconomic Model
 Pioneered OEM OS modelPioneered OEM OS model
 Made the rulesMade the rules
 Not First Mover in Any MarketNot First Mover in Any Market
► RiskRisk
 It was really a lucky break – no one home at Digital ResearchIt was really a lucky break – no one home at Digital Research
► But then they knew how to leverage the business!!!!But then they knew how to leverage the business!!!!

28. Opportunity Check ListOpportunity Check List
► Product, Market and IndustryProduct, Market and Industry
 DemandDemand
 Market sizeMarket size
 Growth RateGrowth Rate
 Market CapacityMarket Capacity
 Attainable market shareAttainable market share
 Cost structureCost structure
► Factor MarketsFactor Markets
 Resources requiredResources required
 Market structureMarket structure
► EconomicsEconomics
 Profit potentialProfit potential
 Time to breakevenTime to breakeven
 ROI potentialROI potential
 Capital requirementsCapital requirements
 IRRIRR
 Free Cash FlowFree Cash Flow
 Gross MarginsGross Margins
 Time to Break-EvenTime to Break-Even
► Competitive AdvantageCompetitive Advantage
 Variable / fixed costVariable / fixed cost
 Degree of controlDegree of control
 Entry barriersEntry barriers
 Protectable IPProtectable IP
 Positional AdvantagePositional Advantage
► PersonalPersonal
 Personal goalsPersonal goals
 Personal fitPersonal fit
 Upside vs downsideUpside vs downside
 Opportunity CostOpportunity Cost
 Stress ToleranceStress Tolerance
► Sustainable AdvantageSustainable Advantage
► Opportunities for ExtensionOpportunities for Extension
► Management TeamManagement Team
► HarvestHarvest

29. The Startup IdeaThe Startup Idea
mark lesliemark leslie
mleslie@leslieventures.commleslie@leslieventures.com
650/561-1228650/561-1228