4 - 1 Chapter 4 The Opportunity: Creating, Shaping, Recognizing, Seizing McGraw-Hill/Irwin New...

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4 - 1 Chapte r 4 The Opportunity: Creating, Shaping, Recognizing, Seizing McGraw-Hill/Irwin New Venture Creation, 7/e © 2007 The McGraw-Hill Companies, Inc., All Rights Reserved.

Transcript of 4 - 1 Chapter 4 The Opportunity: Creating, Shaping, Recognizing, Seizing McGraw-Hill/Irwin New...

Page 1: 4 - 1 Chapter 4 The Opportunity: Creating, Shaping, Recognizing, Seizing McGraw-Hill/Irwin New Venture Creation, 7/e © 2007 The McGraw-Hill Companies,

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Chapter

4

The Opportunity: Creating, Shaping,

Recognizing, Seizing

McGraw-Hill/IrwinNew Venture Creation, 7/e © 2007 The McGraw-Hill Companies, Inc., All Rights Reserved.

Page 2: 4 - 1 Chapter 4 The Opportunity: Creating, Shaping, Recognizing, Seizing McGraw-Hill/Irwin New Venture Creation, 7/e © 2007 The McGraw-Hill Companies,

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Adams On Ideas• Think you idea has to be unique? You’re deluded

• Good ideas are not scarce, what is rare is a team that can execute = execution intelligence

• Execution intelligence• Domain knowledge, fast-growth scar tissue, experience in hyper-

competitive markets, risk management (anticipate customer pain) balanced team, leadership know-how

• Want me to sign a nondisclosure? Instead, say “I’m clueless”• The 1:8:20 rule (1 Austin, 8 Boston, 20 Palo Alto)• Ideas are commodities

• Getting to market first? Big deal.• Execute to dominate, not define, a market space

• Think there’s no competition? You’re naïve.• I want to keep my money, laziness, and DIYers if nothing else• The existence of competition suggests that the idea itself is

competitive

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Sarasvathy on Effectuation

• Expert entrepreneurs begin with:• Who they are, what they know, who they know

• Principles• Crazy quilt• Affordable loss• Bird in the hand• Make lemonade out of lemons• Pilot in the plane

• Examples• Business plan competition• Importance of Linked In

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Bird in the HandFeasibility Value

Market Is it doable? - technical feasibility - market feasibility

Is it worth doing? - financial feasibility

You Can I do it? - what will it take - who else will I need?

Do I want to do it? - does it motivate me? - does it motivate others?

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R&R• What is the opportunity?• Why is it an opportunity for Reiss?

• Did Reiss use causal or effectual logic?

• Why did others contribute to Reiss’ success?• Kaplan, TV Guide, Stores

• Why is the whole deal economically feasible?• How did Reiss use the affordable loss principle?

• What should Reiss do next?

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R&R NumbersLarge Firm Reiss

Price $12.50 $12.50

Variable Costs

Manufacturing $3.00 $3.20

Sales $1.25 $2.50

Other $0 $2.81

Fixed Costs $1,000,000 $50,000

Breakeven Point (units) 121,212 12,531

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What is an entrepreneur?

• Cantillon (1780) one who works for uncertain wages• Knight (1921) one who buys factors at certain prices

and sells them in the future at uncertain prices

• Schumpeter (1911) one who recombines resources to create new products, processes, inputs, markets, or organizations

• Kirzner one who is alert to profit opportunities• Gartner one who creates a new venture• Stevenson one who pursues opportunities

regardless of resources currently controlled• Timmons one who is opportunity obsessed, holistic in

approach, and leadership balanced • Shane & Venkat one who discovers, explores, and

exploits opportunities

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Exhibit 1.7

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Exhibit 1.6

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Four Anchors

• Create or add value to a customer or end-user• Solving a significant problem, removing a serious

pain point, or meeting a significant want or need – for which someone is willing to pay a premium

• Communicable business model• Large market ($50m+)• High growth (20%+)• High margins (40%+)• Recurring revenue, low assets/working capital• 25-30% return for investors

• Good fit with management team

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New Ventures

• Think big enough• Better end up exhausted and rich then just

exhausted

• Fundamental realities• Most new ventures are works in process and

works of art• Most business plans are obsolete at the printer• Speed, adroitness of reflex, and adaptability are

crucial• The key to succeeding is failing quickly and

recouping quickly, and keeping the tuition costs low

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New Ventures

• Fundamental realities• Success is highly situational, depending on time,

space, context, and stakeholders• The best entrepreneurs specialize in making “new

mistakes” only• Starting a company is much harder than it looks, or

you think it will be; but you can last a lot longer and do more than you think if you do not try to do it solo

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Exhibit 4.1 Circle of Venture Capital Ecstasy

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The Capital Market Food Chain• R&D

• Funds <$200K from founders, angels, FFF (friends, fools, family), Small Business Innovation Research fund

• Seed• Up to $500K

• Launch• $1-$50m• Venture Capital, strategic partners, private equity

• Series A – startup, Series B – product devlopment, C - shipping

• High Growth• IPOs, strategic acquirers, private equity

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To summarize…

• …a superior opportunity has the qualities of being attractive, durable, and timely and is anchored in a product or service which creates or adds value for its buyer or end-user – usually by solving a very painful, serious problem.

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Where are Opportunities Born?

• “We look for ideas that change the way people live or work”

• Technology sea change• Moore’s Law (processing power)• Metcalf’s Law (network effects)• Disruption

• Market sea change• Value chain disruption/obsolescence/vulnerability• Deregulation

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Where are Opportunities Born?

• Societal sea change• Changes in ways we live, learn, work, etc.• Gilder’s Law – 10xs in 10 years (bandwith)

• Brontosaurus factor• Arrogance• Loss of peripheral vision• Deadened reflexes – turning the tanker

• Irrational exuberance• Over/undervalued assets

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The Role of Ideas

• Ideas are merely the first step• Beware the mousetrap fallacy

• Good ideas often come from pattern recognition• 50,000 “chunks” of experience over 10 years• Creative linking or cross-association of

experience, know-how, contacts• Not simply linear, additive or logical• Ability to see what others do not

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Brainstorming Rules

• Can creativity be learned?• De Bono makes a living from it

• Brainstorming• Record ideas in full view• Invent to the “void”• Resist becoming committed to one idea• Identify the most promising ideas• Refine and prioritize

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Exhibit 4.6

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Market Share of Different Customer Groups

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Strategic Implications: Crossing the Chasm

• Crossing the chasm between early adopters and the early majority• Innovators and early adopters are technologically

sophisticated and will tolerate engineering imperfections (the early majority are not)

• Innovators and early adopters are typically reached through specialized distribution channels (the early majority are not)

• Innovators and early adopters are relatively few in number and not particularly price sensitive (the early majority are not)

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The Chasm: AOL and Prodigy

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Crossing the Chasm

• Correctly identify the needs of the first wave of early majority users

• Alter the business model in response• Alter the value chain and distribution channels to

reach the early majority• Design the product to meet the needs of the

early majority and so that it can be modified and produced or provided at low cost

• Anticipate the moves of competitors

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Established and Successor Technologies

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Disruptive Technology

• A new technology that gets its start away from the mainstream of a market and then, as its functionality improves over time, invades the main market

• Revolutionizes the industry structure and competition, often causing the decline of established companies because they listen to customers who say they do not want it

• Causes a technological paradigm shift

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Exercises

• Creativity exercise• Idea Generation Guide (pg. 167)


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