Learning: evaluating an opportunity
What is an opportunity for entrepreneurship?
Thinking about it somewhat abstractly, we see that entrepreneurial action begins with recognizing or identifying the potential for people to change their behavior — to do something they are currently not doing or to do something differently than they are currently doing it. The entrepreneur recognizes that, given the chance, some set of people would prefer to do things differently if given the chance. The entrepreneur then envisions a new product or service as the enabler for that new behavior and so establishes a new form of consumption. If a team is right about the potential for this new form of consumption, then they must ask whether this opportunity can be exploited by an entrepreneurial venture, which involves understanding alternatives or competition and financial sustainability, and whether it is an opportunity that can be exploited by them, which involves understanding the skills, expertise, and experience necessary to capitalize of the venture. We capture the fundamental questions in our five-sided figure.
The foundation for any entrepreneurial venture is a market/product fit or match. We consider the two sides of this concept, although we must recognize that each is relative to the other.
What is a market need?
A market need is the potential for a change in consumption. This concept covers everything from unmet clinical needs, challenges facing corporations, social problems, etc. to the desires for entertainment and social interaction among young people. The potential for a change in consumption may always have been there, such as the existence of disease conditions, or they may come about because of changing circumstances, such as increasing wealth creates the desire to have specialty coffee drinks brewed for us individually. To understand a market need is to understand a (currently) unfilled desire or potential.
New ventures generally begin with a hypothesis that this potential is real, but the first order of business is always to validate this assumption, and usually to revise the hypothesis on the basis of facts and evidence.
What is a feasible solution?
Many entrepreneurs make the mistake of beginning with a product concept. We use the term feasible solution to keep the entrepreneur’s focus on the need itself. In this way, the entrepreneur will try to understand what will be required to offer a compelling solution that will actually spur the change in consumption required. This discipline will minimize that chance of creating a product concept that misses the mark or fails to take into account critical dimensions of the need or possible inhibitors to adoption.
If an entrepreneurial team validates that they have identified a potential market/product fit, and so have a possible basis for a venture, three other questions must be answered.
What is the competition (the customer's alternatives)?
Competition is the universe of alternatives that the potential customer has. Entrepreneurs often make the mistake of thinking of competition as other companies (often other start-ups) that have the same product idea as they do. But competition must be considered from the customers perspective. What are the full set of alternatives that the customer has. And in many cases, the most compelling alternative is to do nothing.
Do we have the right team?
If a team has a viable idea, they can only capitalize on it if they can execute well in all of the key areas needed to make a venture successful. This requires the right skills, expertise, and experience, and also drive, motivation, and persistence.
Is the venture financially sustainable?
The basic question here is: Will someone pay us enough so that we can create, sustain, and grow our venture? The fundamental question is usually: Will our intended customers pay enough for our product or service? But sometimes there are other sources of revenue. If there seems to be a positive answer to this question, then the entrepreneur can ask about the sources of funding necessary to launch and establish the venture. The question will be whether the chance of success is high enough and the potential pay-off large enough to attract investment.
It is helpful to think of the evaluation step as continually asking the question of whether the opportunity is worth investing in. You are actually constructing and then continually revising an "investment prospectus."
To summarize, there are five basic questions that you should ask as you evaluate an opportunity.
1. Is there a need in the market?
• Hypothesis: market problem and potential customers
• Evidence and detail
• Preliminary sizing
2. Is there a feasible solution?
• Parameters of acceptable solution
• Proposed solution
• Technical feasibility
3. What is the competition? Is there a basis for sustainable competitive advantage? (Is there a “winner-take-all” first mover scenario?)
• Hypothesis of competitive advantage and value
• Uniqueness and protection
• Likely responses
4. Can a team be assembled that can execute a commercialization plan?
• What skills, experiences, relationships are required to launch the venture successfully?
• How can the necessary team be assembled?
5. Is the risk / reward profile sufficiently attractive to merit investment of capital?
• Describe 3 – 4 scenarios: assumptions & projected financial performance
• What is the likelihood of the various scenarios and what is the basis for these judgments?
If you can answer all of these questions affirmatively, then you have persuaded yourself that this opportunity is worth investing in. This is the first step toward being able to convince others, whether they be prospective customers, employees, partners or providers of capital.
The considerations in this discussion are generic in the sense that they are meant to apply regardless of the industry of focus. while high level principles apply across all industries, it is certainly debatable whether a methodology can be created that applies equally to all industries. To address some concerns in this area, we have added some thoughts about some specific industries and important differences between them.