Adam's Slides

Assessing business
opportunities
Feasibility studies
Adam Burdess
Copyright 2004 Adam Burdess 1

Fact: most new ventures
fail
Time to fail
% of small businesses dissolved within 2, 4 and 6 years (US data)
Within2years 23.7
Within4years 51.7
Within6years 62.7
Source: Wall Street Journal, October 16th 1992

Myths about
entrepreneurship
• It’s about ‘get rich quick’
• Size is everything
• Entrepreneurs are born and not made
• Entrepreneurs are gamblers
• Venture capital is an essential ingredient
• Venture capital guarantees success

Ideas are NOT
opportunities
Typical VC investment funnel
100
20
5 1
Plans received Plans read Due diligence Investment

undertaken made

Is Opportunity Important?
“You may have capital and a talented
management team, but if you are
fundamentally in a lousy business, you won’t
get the kind of results you would in a good
business. All businesses aren’t created equal.”
William P. Egan II
veteran venture capitalist

In the words of Warren
Buffet…
“When a business with
a reputation for poor
fundamentals meets a
management team with
a reputation for
brilliance, it’s the
reputation of the former
that remains intact.”
Research Question
How do entrepreneurs (and

investors, too?) best assess
market opportunities?

Point of Confusion #1:
The Market / Industry
Distinction
• What’s a market?
• What’s an industry?
• These are frequently confused!

The Seven Domains of
Attractive Opportunities
Market Domains Industry Domains
Market Attractiveness Industry

Attractiveness

The Macro / Micro
Distinction
• Large and growing markets are
important, but…
• Structurally attractive industries
(in a five forces sense) are also
important, but…

Macro Market Attractiveness Industry

Attractiveness
Level
Micro
Level
Target Segment Benefits Sustainable
and Attractiveness Advantage

What’s Crucial about
Entrepreneurs and Their
Teams…
• It’s not found on their CVs
• Not simply about “chemistry” or
“character” or “entrepreneurial
drive”

Macro Market Attractiveness Industry

Attractiveness
Level
Mission, Ability to
Aspirations, Execute
Propensity on CSFs
for Risk
Team
Domains
Micro
Connectedness up
Level and down Value Chain
Target Segment Benefits Sustainable

and Attractiveness Advantage

Chrysalis:
What happened?

Zarquin
(Applied Psychological
Research)
• Very good at raising money
– £150k from LBS fund in 1999
– £800k when revenues hit £1 million
– £6 million in 2001 during the dot-com
boom
• Has cash in the bank, is seeking
acquisitions
Jobshare Connection
• Raised £600k from angel investors

• Revenue now in the £2.5m pa range,
running at a small profit
• Will be a modestly attractive business
for its owner, less so for the investor

Size Management Services
(Body Metrics)
• Raised $3 million from a large
dress shirt maker in Hong Kong
• Won an order for police uniform
body armor, and a grant for a
national sizing survey in the UK
• But no real success with mail-order
apparel marketers, the real target

Mediacom Associates
• Obtained a bank loan based on

personal guarantees
• A classic consultancy, very
successful in its sector

Nexor Services
(Regus)
• Did not buy any properties – leased them
on a revenue sharing basis
• Raised small initial round, then the cash
flow from each property funded the next
one (12 weeks to break-even)
• Floated, market cap was once £1.4 billion,
ran into trouble in US division, nearly died,
but survived

Advance Training Systems
(Real name Imparta)
• Bootstrapped the business with
money from 3Fs to prove the
model
• Raised $4 million from GE Capital
when e-learning was all the rage
• Have treaded water since, no exit,
but still around: the “living dead”

Corrosion Management
Services
• Raised £5 million from 3i
• Took two years to get product to
market
• Then, a very lengthy and complex
sales cycle followed
• There was another solution…
• Died after 4 years
Putting the
Seven Domains to Work
• So, what do we take from this?
• No opportunity is perfect – all have question
marks or negatives at the outset
• Thus, the opportunity development
challenge:
– Reshape: turn question marks or minuses into
pluses (different market, industry, or team)
– Mitigate: offset any weaknesses with
compensating strengths

Reshaping or Mitigating
Macro Market Weaknesses
• What if your overall market is too small or
stagnant?
– Reshape the opportunity: Alter your
aspirations
– Mitigate: Compelling customer benefits can
offset this if these benefits cause the market
to grow (Nike, Starbucks)

Macro Industry Weaknesses
• What if your industry is structurally
unattractive?
– Reshape the opportunity: Move up or down
the value chain into a different industry
– Mitigate: Compelling customer benefits and
sustainable advantage can trump an
unfavorable industry structure

Micro Market Weaknesses
• What if customers won’t buy?
– Reshape the opportunity: Change
your target market or your market
offering
– Mitigate: You cannot. A deal-breaker!

Micro Industry Weaknesses
• What if there’s no basis for sustainable
competitive advantage?
– Reshape the opportunity: Develop resources
that are inimitable
– Mitigate: Get in and get out fast, or stay so
small that a few strong relationships protect
you

Opportunity
What if your overall market is What if your industry is structurally
unattractive?
too small or stagnant?
– Reshape the opportunity: Move up or
– Reshape the opportunity: Alter down the value chain into a different
your aspirations industry (
– Mitigate: Compelling customer – Mitigate: Compelling customer benefits
and sustainable advantage can trump
benefits can offset this if these an unfavorable industry structure
benefits cause the market to
grow
What if customers won’t buy? What if there’s no basis for

– Reshape the opportunity: Change sustainable competitive advantage?
your target market or your market – Reshape the opportunity: Develop
offering resources that are inimitable
– Mitigate: Get in and get out fast, or
– Mitigate: You cannot. A deal-breaker! stay so small that a few strong
relationships protect you

Weaknesses in the Team
• What if the team cannot execute on the CSFs?
– Reshape the opportunity:
• Strengthen the team
• Move up or down the value chain into a different
industry where the CSFs differ and the team’s abilities
count
– Mitigate: Learn on the job!

Weaknesses in the Team
• What if the team lacks connections
up/down/across the value chain?
– Reshape the opportunity: Strengthen
the team
– Mitigate: Prove you have them: Win a
customer! Sign up suppliers!

In Summary, for the Seven
Domains…
• Scores are not additive: summing the scores
across the seven domains is meaningless
• Strong scores at the micro level can mitigate
poor macro-level scores
• Use Seven Domains to
– raise key questions to be answered
– provide avenues for reshaping the opportunity if
not mitigated by other domains
– identify key strengths, crucial in telling your story
to resource providers

The seven domains
Does the market Do companies
size and/or make money in
potential match this industry?
team and investor
aspirations?Do we have the
team to succeed?
Do we have a Can we sustain our
compelling target advantage in the
niche and future?
customer
proposition?
Evidence?
The seven domains:
An investor perspective

Seven domains: an investor
perspective Forgiving industries preferred
Size matters
• Addressable markets • Opportunities do exist in ‘bad’ industries,
but “the reality is that [VCs] invest in good
• Investors need 40-60% IRRs industries, that is industries that are
• Large, growing markets provide competitively forgiving”
– Platform for growth • Investors like high margin businesses
(strong cash flows, will be eroded)
– Lower risk • Many investors publish their industry
• Large market fallacy preferences (IT, telecoms, biotech, etc)
It’s about the customer, stupid! How long can your advantage last?
• Not interested in product or service per se. What • Proprietary elements (patents); and superior
pain are you resolving? Who is target customer? organisational processes, capabilities and
What evidence do you have? resources; and viable business model.
• “We ask for the names and addresses of the first • Must survive 4-7 years and be attractive
10 customers” investment to others: the exit imperative
• “The biggest shortcomings of the business plans
• Is this truly a scaleable business? How?
we see is the complete absence of market
research. Dreams of demand just won’t do. Hard
evidence is what attracts our money”

Remember Warren Buffet’s
Words
“When a business with a
reputation for poor
fundamentals meets a
management team with a
reputation for brilliance, it’s the
reputation of the former that
remains intact.”
What Venture Capitalists look
for:
1. Leadership potential of lead entrepreneur
2. Leadership potential of management team
3. Recognised industry expertise in management team
4. Track record of lead entrepreneur
5. Track record of management team
See: Trade-offs in the Investment Decisions of European Venture

Capitalists by Sue Birley, Dan Muzyka and Benoit Leleux

Or, as Arthur Rock said . . .
“I invest in people, not ideas.”
Or George Doriot:
“Always consider investing in a Grade A
man with a Grade B idea. Never invest in a
Grade B man with a Grade A idea.”

So…
do I have what it
takes to be a
successful
entrepreneur?
Strong entrepreneurial teams are
characterised by
• proven, relevant experience in the industry, market or
technology
• track record in achieving results, particularly P&L
• diversity of personal qualities, styles and perspectives;
beware the homogeneity of ‘people like us’
• completeness and balance in terms of skills and
expertise
• mutual trust, commitment and ability to manage conflict

Q1: Does the opportunity match
my
experience, skills and interests?
• good opportunities are rooted in personal experience
• experience shapes the perception of opportunities; they’re
not the same for everyone
• your skills and capabilities provide the basis of your
comparative advantage in exploiting an opportunity
• a real opportunity is one that enables you to use and
leverage the skills and expertise you’ve acquired over time
“What makes this opportunity ‘mine’?”

Remember……………...:
…………..the entrepreneurial MBA with a background in
electronics who wanted to set up a chain of fast food restaurants
Investor: “Have you ever worked in a fast food

restaurant?”
Entrepreneur: “Work in one? I wouldn’t even eat in

one. I can’t stand fast food.”

Q2: Can I recruit and lead the
team needed to exploit the
opportunity?
• high potential ventures require a strong lead
entrepreneur, plus a first class management team
• even where there’s a good fit between you and the
opportunity there will be gaps: knowledge, skills,
contacts
• the ability to recruit and lead a balanced, complete
team is therefore critical
• entrepreneurs usually have a strong network on which
to draw in assembling the team: rich social capital

Q3: Am I developing an
opportunity or simply an idea?
• almost everyone has ideas for a new business, most of these ideas will
have already occurred to someone else
• Opportunities per se need not be unique. Uniqueness lies in the
particular blend of experience, skills and other resources that can be
brought to bear on the opportunity exploiting in a way that others
cannot easily replicate
• what distinguishes an opportunity from an idea is its
– timeliness
– fit with personal experience and expertise
– tangible value proposition that creates real customer benefit

So you need to understand
•
fully . . .
who will buy
• why they will buy
• how many will buy
• why they’ll continue to buy over time
• why they’ll buy from you rather than someone
else
Ask yourself: What value are we really delivering

to the customer?

Q4: Have I got the right
mindset?
A personality trait or a set of behaviours?
“Anyone who can face up to decision making can learn to

be an entrepreneur and behave entrepreneurially…..
Entrepreneurship is a behaviour rather than a personality
trait. In 30 years I have seen people of most diverse
personalities and temperaments perform well in
entrepreneurial challenges. Some entrepreneurs are ego-
centric and others are painfully correct conformists.
Some are fat and some are lean. Some entrepreneurs
are worriers and some are relaxed. .. Some have great
charm and some have no more personality than a frozen
mackerel!”
Peter Drucker

Now, let’s find out
what mindset you’ve
got!

Brief introductions
• Name
• Country of origin
• MBA/IEP/CSE?
• One fact, e.g.,
– Last job
– Career aspiration
– Current research focus
Great Opportunities –
Where Do They Come
From?

Four Common Patterns
1. Macro-trends
2. Living and experiencing the
customer problem
3. Scientific research
4. Proven elsewhere

1. Opportunities Created
by
Macro-Trends
Study today’s trends and anticipate their impact on the
lives we live –
- Demographic
- Socio-cultural
- Economic
- Technological
- Regulatory
- Natural

“The overwhelming majority of successful
innovations exploit change.”
Peter Drucker

2. Living and Experiencing
the Customer’s Pain
• Recognise opportunities where

something can be changed.
• Fixing what’s inadequate or broken is
a rich source of opportunities.
• Example: Silverscreen

3. Fertile Ground of
Scientific Research
• Link the promise of scientific

discovery with genuine customer
needs.
• Find disruptive technologies

4. Opportunities Proven
Elsewhere
• Simply replicate or modify an

idea that you have
encountered elsewhere before.
• Example: Starbucks

What CanYou Do to
Identify
Your Opportunity
• Link macro trends to customers
you understand: avocationally,
professionally
• Find something customers (you?)
are unsatisfied with
• Make friends with a scientist

Next Steps
• Choose team members and decide opportunity on which to
work
– Need confirmation of idea and team within 7 days (Friday 30th April)
• Test several ideas against 7 domains / other framework
– What questions are unanswered?
– Identify which are important for your intended target audience?
– Check that you can you answer these sufficiently over 8 weeks.
• Agree research plan ahead of initial pitches (session 6)

Background slides

Entrepreneurship: a different
perspective on general
management
The entrepreneur The administrator
• Where is the opportunity? • What resources do I control?

• How do I capitalise on it? • What structure determines our
• What resources do I need? organisation’s relationship to its
• How do I gain control over market?
them? • How can I minimise the impact of
• What structure is best? others on my ability to perform
• What opportunity is appropriate?
Source: Stevenson et al

The Entrepreneur
High
Inventiveness
New Venture
Inventor
Creativity
Manager
and
Promoter Trustee Manager
Low
Low Managerial Skills High

Ideas are NOT
opportunities
Typical VC investment funnel
100
20
5 1
Plans received Plans read Due diligence Investment

undertaken made

And good opportunities are still
risky
Performance of typical VC fund
5%
8%
Home runs (>10x) Where VCs
make their
High returns (5-10x)
48%
returns
Modest returns
25%
Risk of ‘living dead’

15%
Partial loss
Total loss
Business Plan Writing –
Beyond Opportunity
Assessment
• Need to develop an operational plan/define resource needs
– Human resource
– Capital
• Need to develop a financing strategy
– Do financing needs match the opportunity?
– Who/what is appropriate source of funding?
• Need to plan for, and manage, risks
– Is timing right for this opportunity?
– Which questions do we need to ‘manage’ for our current audience?
– How to mitigate against these key risks?
• Constantly ask: who is the audience for this plan?
– e.g. if financial investors, need to develop an ‘exit plan’

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Assessing business

Copyright 2004 Adam Burdess 1

Source: Wall Street Journal, October 16th 1992

Copyright 2004 Adam Burdess 2

Copyright 2004 Adam Burdess 3

Plans received Plans read Due diligence Investment

Copyright 2004 Adam Burdess 4

Copyright 2004 Adam Burdess 5

How do entrepreneurs (and

Copyright 2004 Adam Burdess 7

Copyright 2004 Adam Burdess 8

Market Attractiveness Industry

Copyright 2004 Adam Burdess 9

Copyright 2004 Adam Burdess 10

Macro Market Attractiveness Industry

Copyright 2004 Adam Burdess 11

Copyright 2004 Adam Burdess 12

Macro Market Attractiveness Industry

Target Segment Benefits Sustainable

Copyright 2004 Adam Burdess 13

Copyright 2004 Adam Burdess 14

• Raised £600k from angel investors

Copyright 2004 Adam Burdess 16

Copyright 2004 Adam Burdess 17

• Obtained a bank loan based on

Copyright 2004 Adam Burdess 18

Copyright 2004 Adam Burdess 19

Copyright 2004 Adam Burdess 20

Copyright 2004 Adam Burdess 22

Copyright 2004 Adam Burdess 23

Copyright 2004 Adam Burdess 24

Copyright 2004 Adam Burdess 25

Copyright 2004 Adam Burdess 26

What if customers won’t buy? What if there’s no basis for

Copyright 2004 Adam Burdess 27

Copyright 2004 Adam Burdess 28

Copyright 2004 Adam Burdess 29

Copyright 2004 Adam Burdess 30

Copyright 2004 Adam Burdess 32

Copyright 2004 Adam Burdess 33

See: Trade-offs in the Investment Decisions of European Venture

Copyright 2004 Adam Burdess 35

Copyright 2004 Adam Burdess 36

Copyright 2004 Adam Burdess 38

“What makes this opportunity ‘mine’?”

Investor: “Have you ever worked in a fast food

Entrepreneur: “Work in one? I wouldn’t even eat in

Copyright 2004 Adam Burdess 40

Copyright 2004 Adam Burdess 41

Copyright 2004 Adam Burdess 42

Ask yourself: What value are we really delivering

Copyright 2004 Adam Burdess 43

“Anyone who can face up to decision making can learn to

Copyright 2004 Adam Burdess 44

Copyright 2004 Adam Burdess 45

Copyright 2004 Adam Burdess 48

Copyright 2004 Adam Burdess 49

Copyright 2004 Adam Burdess 50

Copyright 2004 Adam Burdess 51

• Recognise opportunities where

Copyright 2004 Adam Burdess 52

• Link the promise of scientific

Copyright 2004 Adam Burdess 53

Adam's Slides

Adam's Slides