11-1 - Assessment of Entrepreneurial Opportunities
11-1 - Assessment of Entrepreneurial Opportunities
Entrepreneurial
Opportunities
9–1
Chapter Objectives
1. To explain the challenge of new-venture start-ups
2. To review common pitfalls in the selection of new-
venture ideas
3. To present critical factors involved in new-venture
development
4. To examine why new ventures fail
5. To study certain factors that underlie venture success
6. To analyze the evaluation process methods: profile
analysis, feasibility criteria approach, and
comprehensive feasibility method
7. To outline the specific activities involved in a
comprehensive feasibility evaluation
9–2
The Challenge of New-Venture Start-Ups
• New Venture Formation
600,000 new firms have emerged in the United States
every year since the mid-1990s.
• Ideas for Potential New Businesses
The U.S. Patent Office currently reviews more than
375,000 patent applications per year.
9–3
Components of New-Venture Motivation
1. The need for approval
2. The need for independence
3. The need for personal development
4. Welfare (philanthropic) considerations
5. Perception of wealth
6. Tax reduction and indirect benefits
7. Following role models
9–4
Reasons for Starting a Venture
Personal
Personal The
The The
The
Characteristics
Characteristics Environment
Environment Venture
Venture
Entrepreneurial
Entrepreneurial
Motivations
Motivations
9–5
Figure
9.1 The Elements Affecting New-Venture Performance
Source: Arnold C. Cooper, “Challenges in Predicting New Firm Performance,” Journal of Business Venturing (May 1993): 243. Reprinted with permission.
9–6
Pitfalls in Selecting New Ventures
• Lack of objective evaluation
9–7
Phases in New-Venture Start-ups
• Prestart-up Phase
Begins with an idea for the venture and ends when the
doors are opened for business.
• Start-up Phase
Commences with the initiation of sales activity and the
delivery of products and services and ends when the
business is firmly established and beyond short-term
threats to survival.
• Poststart-up Phase
Lasts until the venture is terminated or the surviving
organizational entity is no longer controlled by an
entrepreneur.
9–8
Critical Factors for
New-Venture Development
1. Uniqueness of venture
2. Investment size
3. Expected sales growth
Lifestyle ventures
Small profitable ventures
High-growth ventures
4. Product availability
5. Customer availability
9–9
Table
9.1 A New-Venture Idea Checklist
Basic Feasibility of the Venture
1. Can the product or service work?
2. Is it legal?
Source: Karl H. Vesper, New Venture Strategies, copyright © 1990, 172. Adapted by permission of Prentice-Hall, Inc., Englewood Cliffs, New Jersey.
9–10
Table
9.1 A New-Venture Idea Checklist (cont’d)
Production of the Goods and Services
1. Will the company make or buy what it sells? Or will it use a combination of these two strategies?
2. Are sources of supplies available at reasonable prices?
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 exist? How will they be resolved?
7. How will quality be controlled?
8. How will returns and servicing be handled?
9. How will pilferage, waste, spoilage, and scrap be controlled?
Source: Karl H. Vesper, New Venture Strategies, copyright © 1990, 172. Adapted by permission of Prentice-Hall, Inc., Englewood Cliffs, New Jersey.
9–11
Table
9.1 A New-Venture Idea Checklist (cont’d)
Financing the Venture
1. How much will be needed for 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, copyright © 1990, 172. Adapted by permission of Prentice-Hall, Inc., Englewood Cliffs, New Jersey.
9–12
Why New Ventures Fail
• Product/Market Problems
• Financial Difficulties
• Managerial Problems
9–13
Causes for Failure
• Product/Market Problems • Managerial Problems
Poor timing Concept of a team
Product design problems approach
Inappropriate distribution Human resource problems
strategy
Unclear business definition
Overreliance on one
customer
• Financial Difficulties
Initial undercapitalization
Assuming debt too early
Venture capital relationship
problems
9–14
Table
9.2 Types and Classes of First-Year Problems
Source: David E. Terpstra and Philip D. Olson, “Entrepreneurial Start-up and Growth:
A Classification of Problems,” Entrepreneurship Theory and Practice (spring 1993):
19.
9–15
Figure
9.2 Internal and External Problems Experienced by
Entrepreneurs
Source: H. Robert Dodge, Sam Fullerton, and John E. Robbins, “Stage of Organization Life Cycle and Competition as Mediators of Problem
Perception for Small Businesses,” Strategic Management Journal 15 (1994): 129. Reprinted by permission of John Wiley & Sons, Ltd.
9–16
Table
9.3 Determinants of New-Venture Failures
E = External factor
I = Internal factor
Source: Andrew L. Zacharakis, G. Dale Meyer, and Julio DeCastro, “Differing Perceptions of New Venture Failure: A Matched
Exploratory Study of Venture Capitalists and Entrepreneurs,” Journal of Small Business Management (July 1999): 8.
9–17
New Venture Failure Prediction Model
1. Role of profitability and cash flows
2. Role of debt
3. Combination of both
4. Role of initial size
5. Role of velocity of capital
6. Role of control
9–18
Table
9.4 The Failure Process of a Newly Founded Firm
Source: Erkki K. Laitinen, “Prediction of Failure of a Newly Founded Firm,” Journal of Business Venturing (July 1992): 326–328. Reprinted with permission.
9–19
The Evaluation Process
• Profile Analysis
Involves identifying and investigating the financial,
marketing, organizational, and human resource
variables that influence the business’s potential before
the new idea is put into practice.
• The Feasibility Criteria Approach
Involves the use of a criteria selection list from which
entrepreneurs can gain insights into the viability of
their venture.
• Comprehensive Feasibility Approach
Incorporates external factors in addition to those
included in the criteria questions.
9–20
Feasibility Criteria Approach
• Assessing the viability of a venture:
Is it proprietary?
Are the initial production costs realistic?
Are the initial marketing costs realistic?
Does the product have potential for very high margins?
Is the time required to get to market and to reach the break-even
point realistic?
Is the potential market large?
Is the product the first of a growing family?
Does an initial customer exist?
Are the development costs and calendar times realistic?
Is this a growing industry?
Can the product and the need for it be understood by the
financial community?
9–21
Figure
9.3 Key Areas for Assessing the Feasibility of a New Venture
9–22
Table
9.5 Specific Activities of Feasibility Analyses
Source: Hans Schollhammer and Arthur H. Kuriloff, Entrepreneurship and Small Business Management (New York: John
Wiley & Sons, 1979): 56. Copyright © 1979 by John Wiley & Sons, Inc. Reprinted by permission of John Wiley & Sons, Inc.
9–23
Key Terms and Concepts
• comprehensive feasibility • high-growth venture
approach • internal problems
• critical factors • lifestyle venture
• customer availability • marketability
• external problems • product availability
• failure prediction model • small profitable venture
• feasibility criteria • start-up problems
approach • technical feasibility
• growth of sales
• uniqueness
• growth stage
Reference : Chapter 11
9–24