Masters in Engineering and Management of Technology Masters in engineering Design Entrepreneurship and New Venture Creation Rui Baptista

Analyzing New Ventures: Opportunity Screening

Entrepreneurship - Rui Baptista 3 Anchors of Superior Business They create or add significant value to a customer or end user They solve a significant problem, or meet a significant want or need, for which someone is willing to pay a premium They are a good fit with the founder and management team at the time, as well as with the marketplace and the risk-reward balance They have robust market, margin, and moneymaking characteristics

Entrepreneurship - Rui Baptista 4 Timmons’ Opportunity Criteria Industry and Market Issues Economics and harvest issues Competitive advantage issues Management team fit Fatal flaws/Overall assessment Strategic Differentiation

Entrepreneurship - Rui Baptista 5 Venture Criteria: Questions to be Answered (I) Product/service creates or adds significant value to customer or end-user solves a significant problem / need for which the customer is willing to pay a premium Customers are reachable and receptive Product life is durable Robust market in terms of potential revenues and margins

Entrepreneurship - Rui Baptista 6 Venture Criteria: Questions to be Answered (II) Competitive advantages exist: “First mover” advantages Control over prices or costs Patents or trade secrets Special know-how Special relationships with customers or suppliers Contractual advantages Attractive value creation and realization: Offers attractive returns for investors (ROI) Has low to moderate capitalization needs that are fundable Has a viable exit strategy Risk/reward balance

Entrepreneurship - Rui Baptista 7 Screening Criteria: Customer/Market Need/Problem Customer Description/Identifiable and Reachable User Benefit Demand Durability Market Structure Market Size Market Growth Market Trends Market Capacity Market Share Attainable

Entrepreneurship - Rui Baptista 8 Screening Criteria: Competitors/Competitive Advantage Competitor Assessment Barriers to Entry Competitive Lead Time Competitive Advantage Cost/Price Channels Proprietary Technology Lead Time Service Contracts/Contacts Key People

Entrepreneurship - Rui Baptista 9 Screening Criteria: Economics and Financial Issues Gross/Profit Margins EBIT Sustainability Time to Positive Cash Flow ROI Capital Requirements/Resource Needs Gradual Resource Usage Scalability of Investment

Entrepreneurship - Rui Baptista 10 Screening Criteria: Harvest/Exit Strategic Value Valuation of Assets and Capital Costs Exit Possibilities Capital Market Timing

Entrepreneurship - Rui Baptista 11 Screening Criteria: Management Entrepreneurial Skills Industry and Technical Integrity and Intellectual Honesty Ability to Work Together Balanced in Team Roles and Styles Goal Alignment Team Skills Management Holes/Gaps

Entrepreneurship - Rui Baptista 12 Screening Criteria: Personal Fit Risk/Reward Goals Timing/Opportunity Costs Stress and Life Style Issues

Entrepreneurship - Rui Baptista 13 Screening Criteria: Overall Assessment Fit between Opportunity-Team-Resources Upside-Downside Risk Fatal Flaws Go/No Go

Entrepreneurship - Rui Baptista 14 First-Mover Advantage in the Assessment of New Venture Opportunities Lead Times: new ventures introducing new products/technologies benefit from high barriers to entry being more likely to survive because high barriers provide long lead times for ventures to get established Entry Timing: pioneers have a disadvantage because they face greater uncertainty (lower financing) and greater customer reluctance to buy, and therefore experience greater costs to enter

Entrepreneurship - Rui Baptista 15 First Mover Advantage: Myth or Reality First mover advantages are based on the ability to: Lock in customers Build relationships with customers, suppliers and partnerships to build brand and increase market share Learn to operate and achieve advantages over competitors Influence business practices Garner industry attention

Entrepreneurship - Rui Baptista 16 Sustainability of First Mover Advantage (I) Such advantages may not hold if: Customers don’t perceive switching costs Pioneers face significant resistance from customers or there are high training or market education costs Pioneer products are poor and produce customer dissatisfaction Newer technologies replace pioneering technologies

Entrepreneurship - Rui Baptista 17 Sustainability of First Mover Advantage (II) Such advantages may not hold if: Single strong competitor reduces margins for pioneering companies Existing larger competitors can easily develop competing capabilities – no protected intellectual property Competitors can withstand financial losses better than pioneer

Entrepreneurship - Rui Baptista 18 Sustainability of First Mover Advantage (III) Such advantages may not hold if: Pioneer products don’t have significant cost or differentiation advantages Pioneers are not able to develop organizational and corporate capabilities to exploit technologies Unsustainable first mover advantage benefits “fast seconds”

Entrepreneurship - Rui Baptista 19 Fast Second: Technological Knowledge as a Public Good Non-rivalry: the cost of replicating new technology is usually trivial when compared with the cost of creating it in the first place Incomplete Excludability: property rights can be assigned by law to the creators of new ideas; however, technology determines how easy it is to prevent unauthorized use This means that a “fast second” firm may reach the market with a new product reaping some of the benefits of innovation without facing its costs

Entrepreneurship - Rui Baptista 20 The Timing of Innovation and the Fast Second Advantage The larger the expected profit from introduction, the greater the probability of innovating first The smaller the profit from the present product/technology, the greater the probability of innovating first The larger the difference between present and expected profits (after introduction), the greater the loss from being beaten to the market

Entrepreneurship - Rui Baptista 21 A Simple Model of the Timing of Innovation

Entrepreneurship - Rui Baptista 22 Case – Securities OnLine: Customer/Market Product: rapid, easily accessible informaton on emerging East European capital markets (higher risk/return–greater demand for information) Customers: financial/business/legal/data services – sophisticated, diverse, geographically dispersed financial operators + advertisers Opportunity: customers’ frustration with current lack of resources/information Large market with high potential for growth Customers are multiple users and have low switching costs Demand subject to international fluctuations in economic growth and financial markets

Entrepreneurship - Rui Baptista 23 Case – Securities OnLine: Industry (I) Competition: inexistent/weak in the market presently; increasing in the near future (reduced lead time) Low barriers to entry Sources of competitive advantage: First mover advantage Technology: low entry costs, low operation costs (but possibly growing as scope of services widens) Product differentiation: quality content and presentation, fast distribution, segmentation per type of customer and type of information Entrepreneurial team dominates both product content and distribution technology

Entrepreneurship - Rui Baptista 24 Case – Securities OnLine: Industry (II) Risks: Low barriers to entry – increased competition eroding first- mover advantage Low switching costs – limits to product differentiation Large information providers (Reuters, Bloomberg) may enter the market soon with the advantage of established customer base Technology risk: quality and quantitiy of content vs. quick internet access; security and integrity of data Political instability and economic fluctuations

Entrepreneurship - Rui Baptista 25 Case – Securities OnLine: Economics and Financial Issues Low investment requirements: $0.514M in the conservative scenario (C); $1,022M in the agressive scenario (A) Gradual resource usage; high scale economies Quick to positive cash-flow: 14 months (C); 13 months (A) EBIT: $0.7M (C); $1.3M (A) by year 3 Expected ROI by year 3: 36% (C); -31,5% (A) Expected Sales Margin by year 3: 24% (C); 26% (A) Sustainability: strongly conditioned by risk – low barriers to entry; low switching costs; increasing competition; political and economic instability Discounted Expected Cash-Flow (DCF): $2.5M (C); $5.5M

Entrepreneurship - Rui Baptista 26 Case – Securities OnLine: Harvest/Exit Issues Exit possibilities: Merger vs. IPO vs. Venture Capital Potential investors: Large financial information providers Large multimedia companies (financial cable chanells) Associated customers: financial services (First Boston, ING); information providers (FT) Local (East European) investors

Entrepreneurship - Rui Baptista 27 Case – Securities OnLine: Management Team/Personal Fit Strong technical skills Low entrepreneurial experience, partially compensated by the advisory board Ability to commit, giving up highly paid corporate jobs Question: ability to extend human resources and management team with the same level of skills

Entrepreneurship - Rui Baptista 28 Case – Securities OnLine: Overall Assessment Good fit between opportunity, team and resources as regards market and technology Strong/average upside – first mover advantage, good established connections, but average/low initial revenues as customer base grows Strong downside: exit through acquisition of strategic assets: customer base and human resources Possible flaws: co-ordination of geographically dispersed team and customer base Risk of internet capital market bubble bursting