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