ASSESSMENT OF ENTREPRENEURIAL OPPORTUNITIES got financial support, formed a legal entity, organized a Team, both facilities, and

Group No. 5 equipment, and devoted full timed to the business.

Ayapana, Mark Vincent B. | Olabiaga, Lorraine Sofia C. | Vergara, Jonas Ian A. Individuals who started businesses seem to act with a greater level of
intensity. They undertook more activities than those individuals who did not start
6.1 THE CHALLENGE OF NEW-VENTURE START-UPS their businesses. The pattern of activity seems to indicate that individuals who started
During the past two decades, the number of new-venture start-ups has been firms put themselves into the day-to-day process of running an ongoing business as
consistently high. It is reported that more than 400,000 new firms have emerged in quickly as they could and that these activities resulted in starting firms that generated
the United States every year since 2010: that accounts for approximately 1,100 sales and positive cash flow.
business start-ups daily. In addition, the ideas for potential new businesses are also As researcher Arnold C Copper points out, the challenge is to predict new-firm
surfacing in record numbers; the U.S. Patent Office currently receives approximately performance including environmental effects, the entrepreneur's personal goals and
500,000 patent applications per year. founding process, and the ventures' diversity.
The Reasons that entrepreneurs start new ventures are numerous. One study reported (See Figure 6.1 for illustration.) Some of the latest research studies emphasize the
7 components of new venture motivation: importance of fear for the entrepreneur with the organization -the idea that an
1. The need for approval individual's cognitive abilities must match with the organization or venture that he or
2. The need for independence she is attempting to develop.
3. The need for personal development
4. Welfare (philanthropic) consideration
5. Perception of wealth
6. Tax reduction and indirect benefits
7. Following role models

Although researchers agree that many reasons exist for starting a venture, the
entrepreneurial motivations of individuals usually relate to the personal
characteristics of the entrepreneur, the environment, and the venture itself. The
complexity of these factors makes the assessment of new ventures extremely
difficult. 6-2 THE PITFALLS IN SELECTING NEW VENTURES

One recent study examined the importance of startup activities to potential 6-2a Lack of Objective Evaluation - Many entrepreneurs lack objectivity.
entrepreneurs: Engineers and technically trained people are particularly Brown to fall in love with
Entrepreneurs who successfully started a business “were more aggressive in an idea for a product or service. They seem unaware of the need for the scrutiny
making their business real; that is, they undertook activities that made their They would give to a design or project in the ordinary course of their professional
businesses tangible to others: they looked for facilities and equipment, sought and work.
6-2b No Real Insight into the Market - Many entrepreneurs do not realize the TABLE 6.1 A NEW-VENTURE IDEA CHECKLIST
importance of developing a marketing approach in laying the foundation for new
Basic Feasibility of the Venture
ventures.
1. Can the product or service work?
2. Is it legal?
6-2c Inadequate Understanding of Technical Requirements - The development of
Competitive Advantages of the Venture
a new product often involves new techniques. 1. What specific competitive advantages will the product or
service offer?
6-2d Poor Financial Understanding - A common difficulty with the development 2. What are the competitive advantages of the companies already
of a new product is an overly optimistic estimate of the funds required to carry the in business?
project to completion.
3. How are the competitors likely to respond?
4. How will the initial competitive advantage be maintained?
6-2e Lack of Venture Uniqueness - A new venture should be unique.
Buyer Decisions in the Venture
1.Who are the customers likely to be?
6-2f Ignorance of Legal Issues - Business is subject to many legal requirements.
2. How much will each customer buy, and how many customers:
are there?
6-3 CRITICAL FACTORS FOR NEW-VENTURE DEVELOPMENT
3. Where are these customers located, and how will they be
serviced?
Several critical factors are important for new-venture assessment. One way to
Marketing of the Goods and Services
1. How much will be spent on advertising and selling?
identify and evaluate them is with a checklist (see Table 6.1). A new venture goes 2. What share of the market will the company capture? By when?
through three specific phases: prestart-up, start-up, and post start-up. The major 3. Who will perform the selling functions?
4. How will prices be set? How will they compare with the
focus of this chapter is on the prestart-up and start-up phases. During these two
competition's prices?
phases, five factors are critical: 5. How important is location, and how will it be determined?
6. What distribution channels will be used-wholesale, retail,
6-3a Uniqueness agents, direct mail?
7. What are the sales targets? By when should they be met?
6-3b Investment 8. Can any orders be obtained before starting the business? How
many? For what total amount?
6-3c Growth of Sales Production of the Goods and Services
1. Will the company make or buy what it sells? Or will it use a
6-3d Product Availability combination of these two strategies?
2. Are sources of supplies available at reasonable prices?
6-3e Customer Availability
3. How long will delivery take?
4. Have adequate lease arrangements for premises been made?
5. Will the needed equipment be available on time?
 6. Do any special problems with plant setup, clearances, or insurance difficulties, and managerial problems. Product/Market Problems involved the
exist? How will they be resolved? following factors:
7. How will quality be controlled?
8. How will returns and servicing be handled?
● Poor timing
9. How will pilferage, waste, spoilage, and scrap be controlled?
Staffing Decisions in the Venture
1. How will competence in each area of the business be ensured? ● Product design problems
2. Who will have to be hired? By when? How will they be found and
recruited?
● Inappropriate distribution strategy
3. Will a banker, lawyer, accountant, or other advisers be needed?
4 How will replacements be obtained if key people leave?
5. Will special benefit plans have to be arranged? ● Unclear business definition
Control of the Venture
1. What records will be needed? When?
2. Will any special controls be required? What are they?1 Who will be
responsible for them?
Financing the Venture
1. How much will be needed for the development of the product or
service?
2. How much will be needed for setting up operations?
3. How much will be needed for working capital?
4. Where will the money come from? What if more is needed?
5. Which assumptions in the financial forecasts are most uncertain?
6. What will be the return on equity, or sales, and how does it compare
with the rest of the industry?
7. When and how will investors get their money back?
8. What will be needed from the bank, and what is the bank's response?

Source: Karl H. Vesper, New Venture Strategies, (Revised Edition, 1st

Edition, c 1990. Reprinted by permission of Pearson Education, Inc.,
Upper Saddle River, NJ

6-4 WHY NEW VENTURES FAIL

Every year, many millions of dollars are spent on starting new enterprises many of
these newly established businesses vanish within a year or two; only a small
percentage succeed one research study examined 250 high-tech firms and found
three major categories of causes for failure: Product/Market Problems, financial
● ● 7. Human resource
Overreliance on one customer
management
 Recruitment/selection
 Turnover/Retention
● ● Initial undercapitalization
 Satisfaction/morale
 Employee development
●  Other or general human resource management
● Assuming debt too early
7. Economic environment
●  Poor economy/recession
● venture
 capital
Other relationship
or general economicproblems
environment problems
●
8. Regulatory environment
● Concept
 of team approach
Insurance
●

● ● "Entrepreneurial
Human resource problem
Start-Up Source: David E. Terpstra and Philip D. Olson,
Entrepreneurship Theory and Practice 17, no. 3 (Spring 1993): 19. and Growth: A
Classification of Problems,"
TABLE 6.2 TYPES AND CLASSES OF FIRST-YEAR PROBLEMS

1. Obtaining external financing

 Obtaining financing for growth
 Other or general financing problems

2. Internal financial management

 Inadequate working capital
 Cash-flow problems
 Other or general financial management problems

3. Sales/marketing
 Low sales
 Dependence on one or few clients/customers
 Marketing or distribution channels
 Promotion/public relations/advertising
 Other or general marketing problems

4. Product development
 Developing products/services
 Other or general product development problems

5. Production/operations management
 Establishing or maintaining quality control
 Raw materials/resources/supplies
The differing
 perceptions ofproduction/operations
Other or general new venture failure were examined
management problems in another study
conducted 6.by researchers
General management
Andrew Zacharakis, G. Dale Meyer, and Julio DeCastro.
 Lack of management experience
Internal and external
Only onefactors
person/nowere
time identified and Ranked by a sample of venture
 Managing/controlling growth
capitalists as well as a sample
Administrative of entrepreneurs. Entrepreneurs who attributed new
problems

venture failure, Other
in or general management
general, To internal problems
factors ranked highest at 89% while in
external at 84%.
A fourth “failure” or problem study dealt with a proposed failure prediction model ● Is the time required to get to market and to reach the break-even point
based on financial data from newly founded ventures. The study assumed that the realistic?
financial failure process was characterized by too much initial indebtedness. And too ● Is the potential market large?
little revenue financing. As shown by the failure process schematic in Table 6.3. The ● Is the product the first of a growing family?
risk of failure can be reduced by using less debt as initial financing and by generating ● Does an initial customer exist?
enough revenue in the initial stages. ● Are the development costs and calendar times realistic?
● Is this a growing industry?
1. Role of Profitability and Cash Flow
● Can the product–and the need for it–be understood by the financial
2. Role of Debt
community?
3. Combination of Both
4. Role of Initial Size 6-bc Comprehensive Feasibility Approach - A more comprehensive and
5. Role of Velocity of Capital systematic feasibility analysis, a comprehensive feasibility approach, incorporates
6. Role of Control external factors in addition to those included in the criteria questions cited above.
Figure 6.2 presents a breakdown of the factors involved in a comprehensive
6-5 TRADITIONAL VENTURE EVALUATION PROCESSES
feasibility study of a new venture: technical, market, financial, organizational, and
A critical task in starting a new business is conducting a solid analysis of the competitive. Although all five of the areas presented in Figure 6.2 are important, two
feasibility of the product/service in getting off the ground. Entrepreneurs must put merit special attention: technical and market.
ideas through feasibility analyses to discover if their proposals contain any fatal
TECHNICAL FEASIBILITY
flaws. The following sections provide explanation an of the more traditional
approaches to venture assessment. The evaluation of a new-venture idea should start with identifying the technical
requirements- the technical feasibility for producing a product or service that will
6-5a Profile Analysis Approach - is a tool that enables entrepreneurs to judge a
satisfy the expectations of potential customers. The most important of these are:
business venture’s potential by sizing up the venture’s strengths and weaknesses
along a number of key dimensions or variables. ● Functional design of the product and attractiveness in appearance
● Flexibility, permitting ready modification of the external features of the
6-5b Feasibility Criteria Approach - another evaluation method, the feasibility
product to meet customer demands or technological and competitive
criteria approach, is a criteria selection list, based on the following questions, from
changes
which entrepreneurs can gain insights into the viability of their venture:
● Durability of the materials from which the product is made
● Is it proprietary? ● Reliability, ensuring performance as expected under normal operating
● Are initial production costs realistic? conditions
● Are the initial marketing costs realistic?
● Does the product have potential for very high margins?
 ● Product safety, posing no potential dangers under normal operating 5. Get educated
conditions 6. Eliminate excuses

7. Know that there is no “right time”

8. Start small

9. Answer the “what ifs”

10. Ask for help

• Reasonable utility, an acceptable rate of obsolescence

• Ease and low cost of maintenance

• Standardization through elimination of unnecessary variety among potentially

inter- changeable parts

• Ease of processing or manufacture

• Ease in handling and use

The results of this investigation provide a basis for deciding whether a new venture
is feasible from a technical point of view.
THE ENTREPRENEURIAL PROCESS
MARKETABILITY
Facing Your Fears! Assembling and analyzing relevant information about the marketability of a new
venture are vital for judging its potential success. Three major areas in this type of
The inner journey to the creation of an entrepreneurial venture can be even more analysis are (1) investigating the full market potential and identifying customers (or
fearful than the external process of developing a business plan and searching for users) for the goods or service, (2) analyzing the extent to which the enterprise might
exploit this potential market, and (3) using market analysis to determine the
capital. Building up the courage to quit a job and start a new venture can sound easy
opportunities and risks associated with the venture. To address these areas, a variety
and yet pose enormous emotional challenges when the actual events are about to of informational sources must be found and used. For a market feasibility analysis,
unfold. general sources would include the following:

Following are a few of the more significant strategies that may help entrepreneurs  General economic trends. various economic indicators such as new orders,
housing starts, inventories, and consumer spending
move through the emotional journey.
 Market data. customers, customer demand patterns (e.g., seasonal variations
in demand, governmental regulations affecting demand)
1. Say yes to your yearning
 Pricing data. range of prices for the same, complementary, and substitute
2. Visualize your success products; base prices; and discount structures
 Competitive data. major competitors and their competitive strength
3. Evaluate your beliefs

4. Do what you love

More attention is given to marketing issues in Chapter 10. At this point, it is for viable solutions through the iterative process of learning the language, issues,
important to note the value of marketing research in the overall assessment and critical success fac tors, and constraints inherent in the domains of interest. Mistakes
evaluation of a new venture. and failures along the way are to be seen as opportunities to learn and adapt. As a
result, knowledge of and credibility within the venture's domain are increased.
The comprehensive feasibility analysis approach is closely related to the preparation
Researchers Michael G. Goldsby, Donald F. Kuratko, and Thomas Nelson believe
of a thorough business plan (covered in detail in Chapter 12). The approach clearly
that design methodology provides specific learning mechanisms important for
illustrates the need to evaluate each segment of the venture before initiating the
converting ideas into form. For example:
business or presenting it to capital sources.
 Learning from qualitative research-including impartial observations of
To assist in understanding feasibility analysis, Appendix 6A includes a template used
stakeholders related to the problem, participatory involvement with said
for a complete feasibility plan. This template has a question-and-answer format that
stakeholders regarding the problem, and immersion in available secondary
allows entrepreneurs to consider important segments before moving forward with an
research.
idea. Venture capitalists generally agree that the risks in any entrepreneurial venture
 Learning from prototyping-a prototype (physical representation of the
are you, your management team, and any apparent fundamental flaws in your
venture) captures the essence of an idea in a form that can be shared with
venture idea. Therefore, you need to make a reasonable evaluation of these risks.
others for communication and feedback that closes the gap between concept
6-6 THE CONTEMPORARY METHODOLOGIES FOR VENTURE and reality.
EVALUATION  Learning from feedback this feedback is on the efficacy of the venture idea
and need not be complicated. First impressions and instincts provide honest
With newer movements taking shape in the everchanging entrepreneurial world, the observations that can be used in shaping future versions of the venture
following sections highlight some of the more contemporary methodologies being concept.
utilized for concept assessment and new venture evaluation. From design methods to
lean start-up procedures, the fast paced entrepreneurial environment is demonstrating DESIGN DEVELOPMENT
newer methods to enhance venture concepts though development.
The design development methodology utilizes skills we all possess but are generally
6-6a The Design Methodology ignored due to more conventional problem solving practices. Traditional methods
have relied on rational and analytical techniques while design relies on intuition,
Design is now a hot topic in the business world. The demand is becoming so great recognition, and emotion. While most businesses tend to focus on traditional
that universities are now building programs that take a general approach to design dimensions of product, performance, or price, latent needs are where the design
rather than concentrating it in just technical schools like architecture and methodology focuses. Latent needs are often found in the areas of safety, reuse,
engineering. Mirroring the general design approach of companies like IDEO that sustainability, personalization, or convenience.
tackle problems in industries ranging from medicine to consumer products, Stanford
University has founded an Institute of Design (also known as the d school) and the Design methodology takes an initial concept idea and develops a proof of concept
Rotman School of Management at the University of Toronto has built a curriculum that elicits feedback from relevant stakeholders. To accomplish this, several criteria
based on the power of design in business. The goal of such programs is to train must be met including concept feasibility, concept desirability, and concept viability.
future business leaders to incorporate design thinking into their general practices 25 The design method converts ideas into form by integrating what is desirable from
much like P&G and Microsoft, who have embraced design methods. This a user’s point of view with what is technically and economically viable.
methodology can be a vital source of assessment for entrepreneurs and their early
 Proof of Concept Feasibility-focuses on whether a potential venture concept
stage venture concepts.
can be produced or is functionally possible.
DESIGN AND LEARN  Proof of Concept Desirability-focuses on whether a potential venture
concept is desirable to customers-form, function, aesthetics, and user
Design is a learning process that shapes and converts ideas into form, whether that is
behavior are considered.
a plan of action, an experience, or a physical thing. Designers often begin the search
  Proof of Concept Viability focuses on whether the venture concept can
produce viable financial outcomes.

Simply put, a successful design process is made evident by a proof of concept that
pro- vides evidence that a product or solution can be made, that it is desirable to
customers, and that it makes financial sense. It is largely up to the discretion of
designers as to what feedback, learning, and suggestions they choose to use in
iterative versions of solutions. Consequently, designers make judgment calls as to
when good, better, or best solutions are reached. Gestalt moments of insight and
understanding affect the process and indicate when a concept is ready for
implementation. Source: Michael G. Goldsby, Thomas Nelson, & Donald F. Kuratko, "Design-Centered
Entrepreneurship: A Process for Developing Oppor- tunities," Annals of Entrepreneurship Education &
6-6b Design-Centered Entrepreneurship Pedagogy (edited by Michael H. Morris; Edward Elgar Publishing, 2014: 200-217).

Utilizing design methodology within each action stage aids in creating a distinctive
Researchers Michael G. Goldsby, Donald F. Kuratko, Matthew R. Marvel, and
proof of concept that assists in developing their venture idea. Design-centered
Thomas Nelson, have introduced the concept of design-centered entrepreneurship
entrepreneurship includes two types: microiterations (within each action stage to
with a conceptual model. In essence, the entrepreneur applies design methods in four
improve the outcome) and macroiterations (moving from one particular action stage
action stages of developing an opportunity. Ideation involves taking action and
back to a previous stage for fur- ther development). Both microiterations and
learning that culminates in a venture concept for further development. The
macroiterations involve taking action, learning, and refinement, all of which are
prototyping stage addresses the technical issues of the concept, and ensures that a
beneficial to the process.
feasible product or service can be made and delivered. The market engagement
action stage refines the concept for the customer, as well as contributing to the
acquisition of knowledge, or learning, from early users. The business model action
6-6c The Lean Start-Up Methodology
stage completes the development of the opportunity by identifying the varying
components of the model that will need to be in place for the concept to be Similar to design methodology, the Lean Start-Up methodology provides a scientific

financially viable. Once the entrepreneur has developed a business concept that approach to creating early venture concepts and delivers a desired product to

appears feasible, desirable, and viable, start-up activities bring about the fulfillment customers' hands faster. Its philosophy originates from the Japanese concept of lean

of the opportunity. manufacturing, which seeks to increase value-creating practices and eliminate
wasteful practices. The Lean Start- Up methodology begins with the premise that
Figure 6.3 Design-Centered Entrepreneurship
every new venture is a grand experiment that attempts to answer questions such as:
"Should this venture be created?" and "Will it be a sustainable business?"

The Lean Start-Up methodology was first developed in 2011 by Eric Ries, founder
of IMVU Inc. as a way to prevent waste in start-ups and ensure that the business plan
remains a living document. The hard truth is that no matter how much research is  Accessible. report must be clear to entrepreneurs who are supposed to use
conducted, how many surveys are developed, and how great you create your them to guide their decision-making.
financial predictions, your new venture concept will still be based on certain  Auditable. entrepreneurs need the ability to spot check the data with real
assumptions. It is critical that these assumptions either be validated or discarded as customers and the report mechanisms should not be too complex.
soon as possible. Reducing waste, in the Lean Start- Up methodology, is minimizing
Pivot:
the time and effort that goes into an incorrect hypothesis by putting a lean-focused
process on the development of your product or service. As Ries states in his A structured course correction designed to test a new fundamental hypothesis about
bestselling book, "work smarter, not harder." 30 Today, Steve Blank, who is the product, strategy, and engine of growth. The decision whether to pivot or
recognized for developing the Customer Development methodology, which launched persevere should be evaluated after each build-measure-learn feedback loop for the
the Lean Start-up movement, along with Jerry Engel at the University of California hypotheses tested during that cycle.
Berkeley, have created an entire course for educators known as the Lean Launchpad.
Build-Measure-Learn Feedback Loop:
The Lean Start-Up methodology is hypothesis-driven and entrepreneurs must work
Think of this as applying the scientific method to your start-up. To begin, identify
to gather and incorporate customer feedback early and often. While it is impossible
which hypotheses to test (the value hypothesis and the growth hypothesis are always
to con- dense the entire book and methodology, here are a few key points and
a good place to start). The build stage consists of developing the MVP for this cycle.
concepts through which you can understand the basics of the Lean Start-Up
The most critical section of the loop is ensuring you are measuring the correct thing.
methodology.
Do the development efforts lead to real progress? This is where the three A's of
metrics come in handy. The final stage in the cycle, learn, requires the entrepreneur
to take a hard look at their results and determine whether a pivot is required. (See
Figure 6.4.)

KEY LEAN START-UP KEY TERMINOLOGY

Minimum Viable Product (MVP):

Validated Learning:
The goal of producing an MVP is to get started learning as soon as possible. This is
Validated learning is defined as a process in which one learns by trying out an initial
the version of the product that enables a full turn on the feedback loop with a
idea and then measuring it to validate the effect. Each test of an idea is a single
minimum of effort.
iteration in a larger process of many iterations whereby something is learnt and then
The Three A's of Metrics: applied to succeeding tests.

 Actionable. report must demonstrate clear cause and effect. Figure 6.4 Build-Measure-Learn Feedback Loop

IDEAS
Source: Eric Ries, The Lean Startup: How Today's Entrepreneurs Use Continuous Innovation
to Create Radically Successful Businesses New York: Crown Business, 2011.