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100622 idea v. opportunity

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100622 idea v. opportunity

  1. 1. IDEA v. OPPORTUNITY----Essentials of RecognizingOpportunitymark lesliemleslie@leslieventures.com
  2. 2. Ingredients► Product / Service► Market► Factor Markets► Team► Capital► Business Model► Personal Fit► Risk Analysis► Business Plan
  3. 3. 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”.
  4. 4. 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?
  5. 5. 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
  6. 6. 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
  7. 7. 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”
  8. 8. 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
  9. 9. 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.
  10. 10. 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
  11. 11. 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?
  12. 12. 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?
  13. 13. 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??
  14. 14. 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
  15. 15. 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”
  16. 16. 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)
  17. 17. 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
  18. 18. Personal Fit►Authenticity►Competence►Tolerance for uncertainty, ambiguity►Interest►Commitment
  19. 19. 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
  20. 20. 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
  21. 21. 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
  22. 22. 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
  23. 23. Some Examples…the Bad…and the UglyThe Good
  24. 24. 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
  25. 25. 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
  26. 26. 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
  27. 27. 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
  28. 28. 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?
  29. 29. 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?
  30. 30. 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
  31. 31. 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…
  32. 32. 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!!!!
  33. 33. 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
  34. 34. IDEA v. OPPORTUNITY----Essentials of RecognizingOpportunitymark lesliemleslie@leslieventures.com

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