UC San Diego Entrepreneur Challenge Idea Assessment Workshop

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UC San Diego Entrepreneur Challenge -Idea
Assessment Workshop

• Del Foit
• dfoit_at_ucsd.edu
• November 12, 2008

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Pondering

• We only think we are confronted with a
  problem."
• -- John Dewey,philosopher, psychologist and
  educational reformer

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The Essence of Survival
Every morning in Africa, a gazelle wakes up. It
knows it must run faster than the
fastest lion or it will be killed..Every morning
a lion wakes up. It knows it must
outrun the slowest gazelle or it will starve to
death. It doesnt matter
whether you are a lion or a gazelle..
when the sun comes up, youd better be
running.

-Unknown
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Two Questions

• Where are ideas/innovations generated?
• Why are ideas/innovations generated?

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Principles of Innovation

• Innovation is work more than genius.
• Successful innovators work in one area
  specialize
• Knowledge-based innovations are both risky and
  rewarding
• Systematic innovation look for opportunities
  when the sources of innovation are at play

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Dilberts Idea Innovation
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Idea Generation/Innovation

• Defining the unmet need or pain
• Radical goals
• Early, rapid experimentation
• Build, try, learn, fix
• Acknowledge and respect the noise
• Follow the rules of brainstorming

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Idea Generation Techniques

• Spot the pain
• Close the gap
• Prime the pump
• Think inside and outside the box!
• Go beyond listening to the customer listen to
  the product or its usage!

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Idea Evolution

• Generate
• Evolve
• Assess

Idea
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Spotting Pain/Opportunities

• Company or industry
• Unexpected occurrences
• Incongruities
• Process needs
• Changes in industry and market
• Social and intellectual environment
• Demographic changes
• Changes in perception
• New knowledge

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Knowledge Based Innovations

• Knowledge-based innovations differ from all
  others
• innovation requires expertise, ingenuity
  sources of unfair advantage
• Scalable high margin, high growth.
• Bright Ideas can often be the Riskiest and
  least successful of all innovations
• Gap between the emergence of innovation and its
  appearance in the marketplace
• Need of interaction with other knowledge

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Close the Gap
Product Improvement Trajectory
Overshot Customers
Performance
Customer Demand Trajectory
Undershot Customers
Time
companies innovate faster than customers lives
change, products eventually become too good.
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Ideation Templates

• Structured approach to ideation
• Identify and apply well-defined schemes to
  product attributes
• derived from an historical analysis of product
  evolution
• Template systematic change between an early
  configuration (i.e., current product version) and
  the one that follows it (i.e., the next version).
  
• Applied to New Product / service ideation and
  advertising

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Six Templates

• Subtraction
• Multiplication
• Division
• Task unification
• Attribute dependency
• Components control

the 2 most important
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(No Transcript)
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Where are Opportunities Born?

• Technology sea change
• Moores Law
• Metcalfs Law
• Disruption
• Market sea change
• Value chain disruption/obsolescence/vulnerability
• Deregulation

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Where are Opportunities Born?

• Societal sea change
• Changes in ways we live, learn, work, etc.
• Gilders Law 10xs in 10 years
• Brontosaurus factor
• Arrogance
• Loss of peripheral vision
• Deadened reflexes turning the tanker
• Irrational exuberance
• Undervalued assets

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New Venture Creation Jeffery Timmons Stephen
Spinelli 8th Edition
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Pondering

• A good hockey player plays where the puck is. A
  great hockey player plays where the puck is going
  to be."
• -- Wayne Gretzky, Canadian professional
  hockey player

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The Opportunity

• Screen and Choose opportunities with great care
• Venture capital investors fund no more than 1 or
  2 percent of the ventures they review
• Good opportunities have risks and problems
• The perfect deal has yet to be seen
• Take steps to eliminate problems early during
  opportunity screening

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Timmons Model of the Entrepreneurial Process
Exhibit 3.5
New Venture Creation Jeffery Timmons Stephen
Spinelli 8th Edition
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Entrepreneurial Process is Opportunity Driven
Exhibit 3.6
New Venture Creation Jeffery Timmons Stephen
Spinelli 8th Edition
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4 Anchors of Superior Business Opportunities

• 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
• Robust market, margin, and moneymaking
  characteristics
• Large enough (50 million)
• High growth (20 percent )
• High margins (40 percent )
• 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)
• 4. 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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Evaluating the Opportunity

• Criteria for evaluating venture opportunity
• Industry and market
• Economics
• Harvest issues
• Competitive advantage issues
• Management team issues
• Personal criteria
• Strategic differentiation

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Screening Framework

• QuickScreen
• Segments the screening of ideas into extremely
  detailed but manageable pieces
• 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

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Quick Screen
New Venture Creation Jeffery Timmons Stephen
Spinelli 8th Edition
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Quick Screen
New Venture Creation Jeffery Timmons Stephen
Spinelli 8th Edition
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Quick Screen

New Venture Creation Jeffery Timmons Stephen
Spinelli 8th Edition
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Criteria for Evaluating Venture Opportunities

• Highest Lowest
• Industry Market change live work play
  incremental
• - Market market driven
  unfocused
• - Market structure fragmented
  concentrated
• - Market size 100MM
  lt20MM
• - Growth rate 30-40
  constricting
• Economics
• - time to break even lt2 yrs
  gt4 yrs
• - ROI potential gt25
  lt15 to 20
• - IRR gt25/yr
  lt15/yr
• - Sales growth gt20/yr
  lt10/yr
• - Gross Margins gt40
  durable lt20
• - After tax profits gt10 durable
  low
• - Time to B/E lt2yrs
  gt4yrs

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Criteria for Evaluating Venture Opportunities

• Highest Lowest
• Harvest
• - value added potential high strategic
  value low strategic value
• - valuation multiples P/E 20x
  lt5x
  
• - exit mechanism present
  envisioned undefined
• Competitive Advantage
• - fixed variable costs lowest
  highest
• - barriers to entry must
  overcome none
• - proprietary protection have or
  can have none
• - key people top
  talent, A Team B or C team

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Criteria for Evaluating Venture Opportunities

• Highest Lowest
• Management Team
• - entrepreneurial team all stars, free
  agents weak or solo
• - industry/technical top of
  field underdeveloped
• - integrity highest standards
  questionable
• Fatal Flaw/Personal
• - goals fit getting
  what you want only making
• - desirability fits
  with lifestyle pursuing big
• - risk/reward tolerance calculated
  risk gambler
• - stress tolerance thrives
  under pressure cracks under

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Criteria for Evaluating Venture Opportunities

• Highest Lowest
• Strategic Differentiation
• - degree of fit high
  low
• - timing
  rowing with tide rowing against
• - technology
  groundbreaking many substitutes
• - flexibility
  commit/decommit slow/stubborn
• - opportunity orientation always
  searching napping
• - room for error
  forgiving/resilent unforgiving/rigid

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4 Anchors of Superior Business Opportunities

• 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
• Robust market, margin, and moneymaking
  characteristics
• Large enough (50 million)
• High growth (20 percent )
• High margins (40 percent )
• 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)
• 4. 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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Pondering

• Opportunity is missed by most people because
  it is dressed in overalls and looks like work."
• -- Thomas Edison, inventor and businessman

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The Essence of Survival
Every morning in Africa, a gazelle wakes up. It
knows it must run faster than the
fastest lion or it will be killed..Every morning
a lion wakes up. It knows it must
outrun the slowest gazelle or it will starve to
death. It doesnt matter
whether you are a lion or a gazelle..
when the sun comes up, youd better be
running.

-Unknown
36
New Venture Creation Jeffery Timmons Stephen
Spinelli 8th Edition
37
New Venture Creation Jeffery Timmons Stephen
Spinelli 8th Edition