ASSESSMENT OF

ENTREPRENEURIAL
OPPORTUNITIES
BY: BASCOS, CROG, FEGURO
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

NEW VENTURE
START-UP
6-1 NEW VENTURE START-UP

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.
6-1 NEW VENTURE START-UP

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
Arnold C. Cooper points outs, the challenges to
predicting new-firm:

• Environmental Effects (risk of new products or

services, narrow markets, and scarce resources)
• Entrepreneur’s personal goals and founding
processes
• The diversity of ventures themselves (differing scales
and potential)
6-1 NEW VENTURE START-UP

Reasons for Starting a Venture

6-1 NEW VENTURE START-UP

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.
6-1 NEW VENTURE START-UP

Challenge of New-Ventures Start-ups

As the ideas develop into new-venture start-ups, the real

challenge is for those firms to survive and grow. In
order to do this, they need to have a clear understanding
of the critical factors for selecting ventures, the known
reasons for venture failure, and an effective process.
 PITFALLS IN
SELECTING NEW
VENTURE
 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
CRITICAL FACTORS
FOR NEW-VENTURE
DEVELOPMENT
6-3 CRITICAL FACTORS FOR NEW-VENTURE
DEVELOPMENT

A number of critical factors are important for new-

venture assessment. A new venture goes through
three specific phases: prestart-up, start-up, and
poststarts-up.
6-3 CRITICAL FACTORS FOR NEW-VENTURE
DEVELOPMENT
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.
6-3 CRITICAL FACTORS FOR NEW-VENTURE
DEVELOPMENT
Phases in New-Venture Start-ups

Poststart-up Phase
 Lasts until the venture is terminated or the surviving
organizational entity is no longer controlled by an
entrepreneur.
6-3 CRITICAL FACTORS FOR NEW-VENTURE
DEVELOPMENT

During the prestart-up and start-up phases, there are 5 critical

factors that an entrepreneur needs to consider;

● Uniqueness of venture ● Product availability

● Investment size ● Customer availability
● Expected sales growth
 Lifestyle ventures
 Small profitable ventures
 High-growth ventures
WHY NEW VENTURES
FAILS?
6-4 WHY NEW VENTURES FAIL

Why New Ventures Fail

● Every year, many millions of dollars are spent on starting a new
enterprise. Many of these newly established businesses vanish
within a year or two; only a small percentage succeeds.
● Most studies have found that the factors underlying the failure
of new ventures are, in most cases, within the control of the
entrepreneur.
6-4 WHY NEW VENTURES FAIL

Why New Ventures Fail

●On a research study examined 250 high-tech firms and

found three major categories of causes for failures:
product/market problems, financial difficulties, and
managerial problems.
6-4 WHY NEW VENTURES FAIL

Causes for Failure

● Product/Market Problems
 Poor timing
 Product design problems
 Inappropriate distribution strategy
 Unclear business definition
 Overreliance on one customer
● Managerial Problems
 Concept of a team
 approach
 Human resource problems

● Financial Difficulties
 Initial undercapitalization
 Assuming debt too early
 Venture capital relationship problems
6-4 WHY NEW VENTURES FAIL

Types and Classes of First-Year Problems

1. Obtaining external financing • Promotion/public relations/advertising
• Obtaining financing for growth • Other or general marketing problems
• Other or general financing problems 4. Product development
2. Internal financial management ● Developing products/services
• Inadequate working capital ● Other or general product
• Cash-flow problems development problems
• Other or general financial management problems
3. Sales/marketing
• Low sales
• Dependence on one or few clients/customers
• Marketing or distribution channels
6-4 WHY NEW VENTURES FAIL

Types and Classes of First-Year Problems

5. Production/operations management 7. Human resource management
• Establishing or maintaining quality control • Recruitment/selection
• Raw materials/resources/supplies • Turnover/retention
• Other or general production/operations management• Satisfaction/morale
• Employee development
problems
• Other or general human resource management
6. General management
problems
• Lack of management experience
8. Economic environment
• Only one person/no time • Poor economy/recession
• Managing/controlling growth • Other or general economic environment
• Administrative problems problems
• Other or general management problems 9. Regulatory environment
● Insurance
6-4 WHY NEW VENTURES FAIL

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
6-4 WHY NEW VENTURES FAIL

The Failure Process of a Newly Founded Firm

1. Extremely high indebtedness (poor static solidity) and

small size
2. Too slow velocity of capital, too fast growth, too poor
profitability (as compared to the budget), or some combination
of these
3. Unexpected lack of revenue financing (poor dynamic
liquidity)
4. Poor static liquidity and debt service ability (dynamic
solidity)
 TRADITIONAL
VENTURE EVALUATION
PROCESS
6-5 TRADITIONAL VENTURE EVALUATION PROCESS

The Traditional Venture Evaluation Process

A critical task in starting a new business is conducting a solid

analysis of the feasibility of the product/service in getting off
the ground. Entrepreneurs must put ideas through feasibility
analysis to discover if their proposals contain any fatal flaws.
The following sections provided an explanation of the more
traditional approaches to venture assessment.
6-5 TRADITIONAL VENTURE 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.
6-5 TRADITIONAL VENTURE EVALUATION PROCESS

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?
6-5 TRADITIONAL VENTURE EVALUATION PROCESS

Feasibility Criteria Approach

• Comprehensive Feasibility Approach
Incorporates external factors in addition to those included in the criteria
questions.
6-5 TRADITIONAL VENTURE EVALUATION PROCESS

Comprehensive Feasibility Approach

Technical Requirements for Product and Services
 Functional design and attractiveness in appearance.
 Flexibility, permitting ready modification of the external features of the product to
meet customer demands or technological and competitive changes
 Durability of the materials from which the product is made
 Reliability, ensuring performances as expected under operating conditions
 Product safety, posing no potential dangers under normal operating conditions
 Reasonability utility, an acceptable rate of obsolescence
 Ease and low cost of maintenance
 Standardization through elimination of unnecessary variety among potentially
interchangeable parts
 Ease of processing manufacture, and of handling and use
6-5 TRADITIONAL VENTURE EVALUATION PROCESS

Comprehensive Feasibility Approach

Marketability Requirements for Product and Services
● Pricing Data
Range of prices for the same, complementary, and substitute
products; base prices; and discount structures.
● Market Data
Customer, customer demand patterns in seasonal variations in
demand, and governmental regulations affecting demand.
6-5 TRADITIONAL VENTURE EVALUATION PROCESS

Comprehensive Feasibility Approach

● General Economic Trend

Various economic indicators such as new orders, housing
starts, inventories, and consumer spending
● Competitive Data
Major competitors and their competitive strength.
 CONTEMPORARY
METHODOLOGIES FOR
VENTURE EVALUATION
6-6 CONTEMPORARY METHODOLOGIES FOR VENTURE EVALUATION

Contemporary Methodologies Venture

Evaluation

1. DESIGN METHODOLOGY
2. DESIGN-CENTERED ENTREPRENEURSHIP
3. LEAN START-UP METHODOLOGY
6-6 CONTEMPORARY METHODOLOGIES FOR VENTURE EVALUATION

• Design Methodology
A process that shapes and converts ideas into form, whether it is a
plan, an experience, or a physical thing.
 Takes an initial concept idea and develops a proof of concept that
elicits feedback from relevant stakeholders.
 An initial concept taken and developed into a proof of concept that
elicits
 Proof of Concept Feasibility
 Proof of Concept Desirability
 Proof of Concept Visibility
6-6 CONTEMPORARY METHODOLOGIES FOR VENTURE EVALUATION

• Design-Centered Entrepreneurship
 Taking action and learning that culminates in a venture concept for
development.
 Applying a prototyping stage that addresses the technical issues of
the concept, and ensures that a feasible product or service can be
made and delivered.
 Incorporating microiterations (within each stage to improve the
outcome) and macroiterations (moving from one particular action
stage back to the previous stage for further development).
6-6 CONTEMPORARY METHODOLOGIES FOR VENTURE EVALUATION

Design-Centered Entrepreneurship
6-6 CONTEMPORARY METHODOLOGIES FOR VENTURE EVALUATION

• Lean Start-Up Methodology

 Provides a scientific approach to creating early venture concepts
and delivers a desired product to customers’ hand faster.
 Reduces waste by maximizing the time and effort that goes into
incorrect hypothesis by putting a lean focused process on the
development of you product or services.
 Incorporating microiterations (within each stage to improve the
outcome) and macroiterations (moving from one particular action
stage back to the previous stage for further development).
6-6 CONTEMPORARY METHODOLOGIES FOR VENTURE EVALUATION

Key Lean Start-Up Terminologies

• Minimum Viable Product
 The goal of producing MVP is to get started learning as soon as
possible. This is the version of the product that enables a full turn on
the feedback loop with a minimum of effort.
• The 3 A’s of Metrics
 Actionable
 Accessible
 Auditable
6-6 CONTEMPORARY METHODOLOGIES FOR VENTURE EVALUATION

Building-Measure-Learn Feedback Loop

THANK YOU FOR
LISTENING!

BY: BASCOS, CROG, FEGURO