Screening Venture Opportunities

Anchors of Superior Businesses Create or add significant value to a customer or end user Solve a significant problem, or meet a significant want or need, for which someone is willing to pay a premium

Anchors of Superior Businesses Are a good fit with the founder(s) and management team at the time and marketplace and with the risk-reward balance

Anchors of Superior Businesses Have robust market, margin, and moneymaking characteristics Large enough ($50 million+) High growth (20 percent +) High margins (40 percent +)

Anchors of Superior Businesses Have robust market, margin, and moneymaking characteristics Strong and early free cash flow (recurring revenue, low assets, and working capital) High profit potential (10 to 15 percent + after tax) Attractive realizable returns for investors (25 to 30 percent + IRR)

Screening Methodologies QuickScreen Provides a broad overview of an idea’s potential Enables the entrepreneur to conduct a preliminary review and evaluation of an idea in a short period of time See page 170

Adams On Customers Before you build it, validate the market Don’t have a solution looking for a problem The ready-fire-aim approach Common illusion – I know my customers Limited feedback and personal experience generate the illusion Why validate? Get the product right the first time A beta community emerges You generate a ready-made contact list of first customers You can more easily raise smart investment capital You use capital more efficiently You clarify your competition

Market Validation You cannot sell to everybody Pyramid of influence A target market is a limited, discrete subset of companies or individuals whose pain is so great without the product that they will readily buy it Your solution should be a “must-have” for your targets Pyramid of influence Stage 0: Secondary research Stage 1: Primary market research Stage 2: Quality influencers Stage 3: Leverage influencers

Stage 0-1 Secondary research Primary research Market size, trends, growth Research competitors, customers Read the industry press & specialized reports Remember that secondary research is not validation Primary research Who needs the product most? Who has the worst pain? What does this market look like? Test at least 3 hypotheses with data Be prepared to revise hypotheses and start again Interview at least 100 customers Understand the customers and develop a sense of their pain Make it everyone’s job to interview – even engineers! Get a professional firm to develop questions and analyze data Eliminate temptation to lead customers or offer solutions

Stage 2 Quality influencers Presentation & prototype Results: Have high pain, interested in a solution, a willingness to be contacted again Also use thought leaders (speakers, writers, analysts) who also understand the pain Presentation & prototype Outline the pain, the target segment, and solution Demo a prototype Results: Feedback on essential product features Cultivate core customers Fine-tune presentation and prototype

Stage 3 Leverage influencers Results: Analysts, thought leaders, editors, consultants Get them excited! Results: Visibility in analyst reports & publications Revenue possibilities (from consultants) Easier financing Customers change – keep validating Build what the customers want and only what they want

Screening Methodologies Venture Opportunity Screening Exercises (VOSE) Segments the screening of ideas into extremely detailed but manageable pieces I have mixed feelings These are best screening instruments available Is it possible to know all the answers to these questions so early? Gives a roadmap for end of semester