Screening Venture Opportunities

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Screening Venture Opportunities
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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

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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

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Anchors of Superior Businesses

• Have robust market, margin, and moneymaking
  characteristics
• Large enough (50 million)
• High growth (20 percent )
• High margins (40 percent )

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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)

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Screening Methodologies

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

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Adams On Customers

• Before you build it, validate the market
• Dont 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

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Market Validation

• You cannot sell to everybody
• 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

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Stage 0-1

• Secondary 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 everyones job to interview even
  engineers!
• Get a professional firm to develop questions and
  analyze data
• Eliminate temptation to lead customers or offer
  solutions

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Stage 2

• Quality influencers
• 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

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Stage 3

• Leverage influencers
• 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

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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