IDEA v. OPPORTUNITY----Essentials of RecognizingOpportunitymark firstname.lastname@example.org
Ingredients► Product / Service► Market► Factor Markets► Team► Capital► Business Model► Personal Fit► Risk Analysis► Business Plan
Product – just a place to start► The world will NOT beat a path to the door of the inventor of thebetter mousetrap► Idea itself does not have value► Contrary to popular belief, entrepreneurial ideas are rarely “stolen” (All the other entrepreneurs think they are the smartest) It is all about execution► Even “being first” is over-rated – many successes were from “follower”companies IBM vs. Univac Excel vs. Lotus 123 vs. Visi-Calc Google vs. Yahoo vs. Alta Vista iPod vs. MP3 players iPhone vs. Nokia?► It is one among many, many relevant variable factors► An idea is “just a place to start”.
Product – Look for theDiscontinuities► What are some examples Microprocessors Telecom de-regulation Internet GPS Berlin Wall Cloud Computing Mobile Computing (smart handsets)► Discontinuities kill older companies that do not adapt,create opportunities for many new ones Rapidly changing market = opportunity► What does Andy Grove’s famous saying “only theparanoid survive” really Mean?
Product – Current discontinuities► Technological? Silicon speed doubles every 18 months Storage capacity doubles every 12 months Communication Bandwidth doubles every 6 months Wireless revolution Web 2.0 Internet is “Always On”► Cloud Computing► SaaS business models► Other? Sept 11 terrorist attack Linux Human Genome Sequencing 911 GPS cell phones
Product – key questions► Radicalness of product “Faster / Better / Cheaper” Innovation► Incremental change Brave New World► Change the way people do things; or► Is it feasible? How much time What special skills What is the risk Similar project been done before?► How much R, how much D r & DR&d
Product – key questions► Barriers to Entry IP► Can the IP be protected► Is it sufficiently difficult (not trivial)► Is it too difficult? Network Effect (i.e., e-Bay)► This is VERY, VERY hard to do Business Model (i.e. Dell vs. Compaq)► This is even harder to do Is it non-obvious► Veritas created the segment “storage management software”► Starting in 1999 there have been over 500 startup companiesin the “storage space”
Demand for Product – TALK TOCUSTOMERS!!!!!!!► Who? Actual user Actual buyer All the points of influence► Why? What is the pain How does this solve that pain► Good signal is lots of homegrown custom solutions Aspirin v. Vitamin?► How Much? What is the cost of not doing What are their alternatives
Demand for Product – TALK TOCUSTOMERS!!!!!!!► Convince them Make the pitch Do the demo Show all the cool features► Then convince them not to buy Explain what is missing How expensive How long to implement Risks (including start up company risks) Convince them they will not buy…► Only when they argue you to the ground do you know youMIGHT actually have something.
Market► Market size TAM / SAM Where can you get market data?► Market growth rate► Market structure Maturity In state of flux or established Market of big players, established products andprices► Vertical Markets
Market► Product price and cost vs. market (grossmargin)► Market willingness to work with startup May not stay in business May not be able to support the customer► How many can you sell, how quickly?► How big is the ultimate market?►How big to be interesting asventure backed deal?► Can the company become a market leader?
Market – Competition► Are you entering an existing market? How will the leader’s react? How quickly? Why can’t they simply do the same and put you out ofbusiness?► Competitive Alliances?► Are there other startups How many? How well financed, quality of team, etc? Why do you believe that you are different – uniquelyqualified to win the competitive race?►Why do each of your competitors believe the samething?
Market: Time to Build the Business► Most High Value Businesses Take Time to Build, e.g. HP,Veritas, Intel► Does Market Allow Bootstrapping? E.g., Pure Software,Microsoft, Integrated Systems/Wind River, etc.► Interestingly, many of the most successful businessesraised little capital (and some took a long time to ramp up) Cisco = $2.5M Sun = $4M Veritas = $4M VMware = $3M Microsoft <$2M Oracle < $2M eBay < $1M Google < $5M etc. etc.► Excessive capital raised can have disasterous results:Webvan, Next, Momenta, maybe Better Place??
Bootstrapping: Conditions forSuccess►Market Segment is Small with No Gorillasor Gorilla Has Little Traction►Market Growth is Not Explosive►You’ve Created a New Market►Management Has Time to Learn theBusiness►Examples: Microsoft, Oracle, Wind River
Team► Exec Big company /entrepreneurial success Domain experts Worked together / Navigated difficult situation Unquestioned Integrity / Intellectual honesty Successful recruiting track record Able to raise capital► Technical Technical leadership Demonstrated ability to develop Products► Other No Trainees – “Done it before”
Capital► How much time and money does it take to buildthe product?► How much time and money does it take to launch,market and sell and support? How much to “scale up” the business?► Will the capital markets finance a project of thissize and duration?► Is the investment commensurate with the marketopportunity?► How do you stage the capitalization to get themost money for the least cost? (topic for anotherpresentation)
Economic Model► Business Model (steady state “operating stack”) Revenue, COGS, COS, ongoing R&D, profit?►For example, what is the fully loaded cost of one sales person,and what is that person’s productivity?►Cost of customer acquisition? Are there examples of similar business models What is the path to get to steady state?► What is the ROI for the investors, entrepreneurs► How long to cash flow break even► What does gross margin tell about a company► Room for error
Personal Fit►Authenticity►Competence►Tolerance for uncertainty, ambiguity►Interest►Commitment
Risks►What are they? This is usually a very, very long list – makes youkind of wonder why anything ever gets started►Why do you believe they can be overcome? Response for each item listed above
The Business Plan►Where all the issues come together►Requires everything to be in synch►Exec Summary -- Write it early and often!!!►Financials Five year Income Statement, Balance Sheet andCash Flow First two years are “Bottoms Up” Fifth year should be compared to industry proxyfor sanity
The Business Plan►Capitalization Plan How much to raise On what milestones Returns to each stage of investor Not part of external plan►FINANCIALS ARE THE CRUCIBLE Forces you to make and validate allassumptions Forces you to Ask and Answer all the questions
The Business Plan►It is the Process, not the Product thatcounts►All the issues in one place►Generally, all the things you need to knoware “outside” (the building, campus, etc.) You need to talk to people in the real world►Once completed you KNOW what you aredoing►Fully integrated into your mind
McAfee► Product Idea Industry in transition► Market Clear market need No competitors► Team Unique entrepreneurial background High degree of Authenticity to entrepreneur► Capital Bootstrapped on bulletin board business► Business Model Network effect Pioneered free to get massive distribution► Risk Lots of visible risks
Veritas –the early idea► Product Idea Unix was transitioning to a commercialenvironment, but was not “ready for prime time”. Tolerant (predecessor company) had done a lot ofthe work already -- We knew the issues and knewthe solutions. This was “hard to do” but not impossible. GoodIP, good barriers to entry► Customer Market We knew the customers ATT agreement gave us “special” access to themarket
Veritas –the early idea► Team We had the team of engineers to implement Completed the management team► Capital We had some money from wind-down of oldbusiness “some” investor commitment Almost impossible to raise new money for a“restart”.► Competition Competition at system OEMs would be “make vs.buy” Very little to no merchant market competition
Veritas –the early idea► Economic Model OEM model like ATT (Microsoft) – source licenseplus per-copy royalty Limited account upside – for more than $2 - $3million per year, OEM could design us out. Highly profitable business with extremely highgross margin► Risk Analysis Reliability of ATT as partner Software OEM model not proven Limited overall upside for company
Apple – iPod► Create a network effect marketplace for music, sell MP3 players► Music - old Controlled by “labels” Sold on hard media (records / CDs) Distributed via retail► Music - new Replace distribution channel to internet Break the “Album” packaging – sell by the song Create high concept design player► Business model = network effect marketplace Create a VERY reasonable / profitable deal for the publishers to distributeelectronically Apple has all the music So all the buyers go there So all the publishers go there And it only works on an iPod – Apple sells a lot of iPods► It wasn’t about the iPod – it was all about iTunes!!► So whatever happened to Tower Records?► So whatever happened to Zune?
Apple - iPhone► It is the iPod all over again► Instead of the publishers it is the carriers ATT agreed to cede great control over content over the network to get theiphone (everyone else turned them down…)► Business model = network effect marketplace Create a VERY reasonable / profitable deal for the app developer (70% forthe developer) Apple has all the apps So the app users (smart phone customers) go there So all the app developers go there And it only works on an iPhone – so Apple sells a lot of iPhones► It wasn’t about the iPhone – it was all about the AppStore!!► So whatever happened to Microsoft Windows Mobile► So whatever happened to Nokia and Ericson?
WebVan► Product Idea Disintermediate the supermarket supply chain Old► Producer to warehouse► Pack and ship to supermarket► Supermarket every couple of miles – land, building and ~100employees► Unpack and stock shelves► Customer drives in to pick up goods… New► Producer to warehouse► Pick and pack (high tech)► Deliver directly to consumer Trucks and drivers instead of buildings and clerks
WebVan► Market Established very large market► Team World class► Capital “infinite” capital available► Economic Model Unproven model Not enough customer density for efficient routes► Increased delivery charges► Reduced produce quality Rolled out in five cities before proven in one► Consumed their cash► Capital markets closed down► Risk Much more than they thought…
Microsoft► Product Idea Home computer “revolution” BASIC compiler for “Altair 8080” Six years later, still the same old business…► Market IBM changed market from hobbyist to business► Team Experienced in technology, but Inexperienced in business► Capital Very humble start up – no real capital needed But also none available► Economic Model Pioneered OEM OS model – created a monopoly Made the rules Not First Mover in Any Market► Risk It was really a lucky break – no one home at Digital Research► But then they knew how to leverage the business!!!!
Opportunity Check List► Product, Market and Industry Demand Market size Growth Rate Market Capacity Attainable market share Cost structure► Factor Markets Resources required Market structure► Economics Profit potential Time to breakeven ROI potential Capital requirements IRR Free Cash Flow Gross Margins Time to Break-Even► Competitive Advantage Variable / fixed cost Degree of control Entry barriers Protectable IP Positional Advantage► Personal Personal goals Personal fit Upside vs downside Opportunity Cost Stress Tolerance► Sustainable Advantage► Opportunities for Extension► Management Team► Harvest
IDEA v. OPPORTUNITY----Essentials of RecognizingOpportunitymark email@example.com