1. CHAPTER 7 Assessment of Entrepreneurial Opportunities
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2. Chapter Objectives
Studying this chapter should provide you with the entrepreneurial knowledge needed:
To explain the challenge of new-venture start-ups
To review common pitfalls in the selection of new-venture ideas
To present critical factors involved in new-venture development
To examine why new ventures fail
To study certain factors that underlie venture success
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7–2

3. Chapter Objectives (cont’d)
Studying this chapter should provide you with the entrepreneurial knowledge needed:
To analyze the evaluation process methods: profile analysis, feasibility criteria approach, and comprehensive feasibility method
To outline the specific activities involved in a comprehensive feasibility evaluation
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7–3

4. The Challenge of New-Venture Start-Ups
600,000 new firms have emerged in the United States every year since the early 1990s.
The U.S. Patent Office currently reviews more than 375,000 patent applications per year.
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5. Figure 7.1 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.
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6. Pitfalls in Selecting New Ventures
Lack of objective evaluation
No real insight into the market
Inadequate understanding of technical requirements
Poor financial understanding
Lack of venture uniqueness
Ignorance of legal issues
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7. Critical Factors for New-Venture Development
Uniqueness
Investment
Sales growth
Lifestyle ventures
Small profitable ventures
High-growth ventures
Product availability
Customer availability
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8. Table 7.1 A New-Venture Idea Checklist
Source: Karl H. Vesper, New Venture Strategies, copyright © 1990, 172. Adapted by permission of Prentice-Hall, Inc., Englewood Cliffs, New Jersey.
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9. Table 7.1 A New-Venture Idea Checklist (cont’d)
Source: Karl H. Vesper, New Venture Strategies, copyright © 1990, 172. Adapted by permission of Prentice-Hall, Inc., Englewood Cliffs, New Jersey.
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10. Table 7.1 A New-Venture Idea Checklist (cont’d)
Source: Karl H. Vesper, New Venture Strategies, copyright © 1990, 172. Adapted by permission of Prentice-Hall, Inc., Englewood Cliffs, New Jersey.
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11. Why New Ventures Fail Product/market problems Financial difficulties
Managerial problems
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12. Causes for Failure Product/Market Problems Financial Difficulties
Poor timing.
Product design problems.
Inappropriate distribution strategy.
Unclear business definition.
Overreliance on one customer.
Financial Difficulties
Initial undercapitalization.
Assuming debt too early.
Venture capital relationship problems.
Managerial Problems
Concept of a team approach
Human resource problems
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13. Table 7.2 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.
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14. Figure 7.2 Internal and External Problems Experienced By Entrepreneurs
Source: H. Robert Dodge, Sam Fullerton, and John E. Robbins, “Stage of Organizational 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.
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15. Figure 7.2 Internal and External Problems Experienced By Entrepreneurs (cont’d)
Source: H. Robert Dodge, Sam Fullerton, and John E. Robbins, “Stage of Organizational 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.
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16. Table 7.3 Determinants of New-Venture Failures
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.
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17. Table 7.4 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.
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18. The Evaluation Process
Asking the Right Questions
Initial Competitive Advantage
Is it a new product/service idea?
Is it proprietary? Can it be patented or copyrighted?
Is it unique enough to get a significant head start on the competition before it can be imitated or copied?
Product Development
Has a prototype been tested by independent testers?
What are its weak points? Will it stand up?
What level of research and development should it receive over the next five years?
If it is a service, has it been tested on potential customers?
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19. The Evaluation Process (cont’d)
Asking the Right Questions (cont’d)
Marketing
What is the overall market? What are the market segments? Can the product penetrate these segments or exploit special niches?
Has market research been conducted? Who else is in the market? How big is the market? How fast is it growing? What are the trends?
Has it been taken to trade shows? If so, what reactions did it receive? Were any sales made? Has it been taken to distributors? Have they placed any orders?
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20. The Evaluation Process (cont’d)
Asking the Right Questions (cont’d)
Marketing (cont’d)
What is the projected life cycle of the product or service? What degree of penetration can be achieved? Are there any testimonials from customers and purchasing agents? What type of advertising and promotion plan will be used?
Distribution
What distribution and sales methods will be used? How will the product be transported?
Production
How will the product be made? How much will it cost? Will it be produced in-house or by others? Will production be by job shop or continuous process? What is the present capacity of company facilities? What is the breakeven point?
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21. The Evaluation Process (cont’d)
Asking the Right Questions (cont’d)
Expansion
Will the business concept be developed and licensed to others or developed and sold away?
Staffing
Can the company get—or has it already lined up—the necessary skills to operate the business venture? Who will be the workers? Are they dependable and competent?
Funding
How much capital will be needed now? How much more in the future? Have major stages in financing been developed?
Is the product or service easily understood by bankers, venture capitalists, accountants, lawyers, and insurance agents?
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22. 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?
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23. Figure 7.3 Key Areas for Assessing the Feasibility of a New Venture
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.
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24. Table 7.5 Specific Activities of Feasibility Analyses
TECHNICAL
FEASIBILITY
ANALYSIS
Crucial technical
specifications
Design
Durability
Reliability
Product safety
Standardization
Engineering
requirements
Machines
Tools
Instruments
Work flow
Product
development
Blueprints
Models
Prototypes
Product testing
Lab testing
Field testing
Plant location
Desirable
characteristics
of plant site
(proximity to
suppliers,
customers),
environmental
regulations
MARKET
FEASIBILITY
ANALYSIS
Market potential
Identification
of potential
customers and
their dominant
characteristics
(e.g., age, income
level, buying
habits)
Potential market
share (as affected
by competitive
situation)
Potential sales
volume
Sales price
projections
Market testing
Selection of test
Actual market test
Analysis of market
Marketing
planning issues
Preferred channels
of distribution,
impact of
promotional
efforts, required
distribution points
(warehouses),
packaging
considerations,
price differentiation
FINANCIAL
FEASIBILITY
ANALYSIS
Required financial
resources for:
Fixed assets
Current assets
Necessary working
capital
Available financial
resources
Required borrowing
Potential sources
for funds
Cost of borrowing
Repayment
conditions
Operation cost
analysis
Fixed costs
Variable costs
Projected cash flow
Projected
profitability
ANALYSIS OF
ORGANIZATIONAL
CAPABILITIES
Personnel
requirements
Required skill
levels and other
personal
characteristics
of potential
employees
Managerial
Determination
of individual
responsibilities
of required
organizational
relationships
Potential
development
Competitive
analysis
COMPETITIVE
ANALYSIS
Existing
competitors
Size, financial
resources, market
entrenchment
Potential reaction
of competitors to
newcomer by
means of price
cutting, aggressive
advertising,
introduction of new
products, and other
actions
Potential new
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.
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25. Key Terms and Concepts comprehensive feasibility approach
critical factors
customer availability
external problems
failure prediction model
feasibility criteria approach
growth of sales
growth stage
high-growth venture
internal problems
lifestyle venture
marketability
product availability
small profitable venture
start-up
technical feasibility
uniqueness
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