Screening of New Venture Opportunities

JS Youngleson (adapted from Timmons – New venture creation)

1. Screening of Venture Opportunities
Time is the most valuable asset of any entrepreneur (it is also the most scarce resource). The harsh reality is that you
will never have enough time in a day, a month, a quarter, a year to pursue all the business ideas you (and your team)
can come up with. The entrepreneur’s paradox is that you must find and make time for the good ones. Complicating
this paradox is that ‘you do not have a strategy until you are saying no to lots of potential opportunities’. Estimates
show that only about 10% of potential opportunities generate acceptable levels of sustainable income for the
founder(s).

2. Anchors
There are tools to help you in the titanic struggle to determine if your idea is truly a business opportunity. Ideas that
turn into good businesses are not accidents. Superior businesses have four ‘anchors’.
¾ They create or add significant value to a customer or end-user
¾ They do so by solving a significant problem, or meeting a significant want or need, for which someone is
willing to pay a premium
¾ They have robust market, margin, and moneymaking characteristics: (large enough, high growth, high
gross margin, strong and early free cash-flow, high profit potential, and offer strong and reliable returns
for investors
¾ They are a good fit with the founder(s) and management team at the time and marketplace and with the
risk-reward balance.

3. Quick Screen
Investors only invest in 5% of businesses, so it is essential to focus only a few superior ideas. The ability to quickly and
efficiently reject ideas lacking the characteristics of ‘anchors’, is a very important entrepreneurial skill and mind-set.
Saying no to an idea may conflict with your particular passion or commitment to the idea. To make this choice easier
entrepreneurs use specific tried-and-tested methodologies, such as the ‘Quick Screen’ or ‘VOSE’ presented here. Quick
Screen is used to conduct a preliminary review and evaluation of the idea in about 1 hour. Unless your Quick Screen
shows sufficient potential (or that you are convinced that it can be moulded and shaped) to demonstrate that it will meet
that four anchors, you will waste a lot of time on low business potential ideas. Quick Screen allows you to discard each
low potential idea, and to select the potentially good ones for further analysis.

4. Venture Opportunity Screening Exercise (VOSE)

Venture Opportunity Screening Exercises are designed to segment the screening of ideas into manageable pieces. In a
team effort, each member of the team should complete the VOSE separately and then come together to debate and
merge the results. After the VOSE you should revisit the Quick Screen and re-evaluate your scoring. When you are
satisfied that all the exercises are complete, the combined documents will provide the substance needed to complete
your Business Plan. It also provides you with a written audit trail of your opportunity shaping activity (therefore don’t
discard your work – file it for future reference).

It is essential for the entrepreneur to take a realistic view of the vulnerabilities and realities, as well as the compelling
strengths of the opportunity. Often, the iterative process of carefully examining and re-evaluating different ideas,
through the different perspectives of the team members, often ‘triggers creative ideas and insights about how the initial
business concept and strategy can be altered and adapted to significantly enhance the value chain, free cash flow
characteristics, and risk-reward relationships and thus the fit’. This process is therefore essential to value creation and
the development of high potential ventures, but it is still far from being a fait-accompli.

This early planning stage is also a excellent time for a trial period in which to test relationships between prospective
team members. This planning work can be detailed, tedious and sometimes downright boring. Finding out now who can
deliver what, and who can stay the distance; who has the desired work ethic, consistency and reliability; and whether
you can all work harmoniously; cab say a lot of money and headaches later. Ultimately, the fit issue boils down to this:
‘do the opportunity, the required resources (and their cost), the other team members (if any), the timing, and
balance of risk and reward work for me?’

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Exercise 1:

QuickScreen

I. Market and Margin Related Issues

Criterion Higher Potential Lower Potential

Need/want/problem Identified Unfocused
Customers Reachable and receptive Unreachable/loyal to others
Payback to users Less than one year More than 3 years
Value added or created IRR 40% + IRR less than 20%
Market size $50-100 million Less than $10million or + $1 billion
Market growth rate More than 20% Less than 20%, contracting
Gross margin More than 40% and durable Less than 20% and fragile

Overall Potential
1. Market Higher Avg Lower
2. Margins Higher Avg Lower

II. Competitive Advantages

Higher Potential Lower Potential

Fixed and variable costs Lowest highest
Degree of control Weaker
● prices and cost
●channels of supply and distribution
Barriers to competitors’ entry Can create Weak/none
●proprietary advantage Defensible None
●lead time advantage (product, technology, people, Slow competition None
resources, location)
Service chain Strong edge No edge
Contractual advantage Exclusive None
Contacts and networks Key access Limited

Overall Potential
1. Costs Higher Avg Lower
2. Channel Higher Avg Lower
3. Barriers to entry Higher Avg Lower
4. Timing Higher Avg Lower

III. Value Creation and Realization Issues

Higher Potential Lower Potential

Profit after tax 10-15% more and durable Less than 5%; fragile
Time to breakeven Less than 2 years More than 3 years
Time to positive cash flow Less than 2 years More than 3 years
ROI potential 40-70% +, durable Less than 20%, fragile
Value High strategic value Low strategic value
Capitalization requirements Low-moderate; fundable Very high; difficult to fund
Exit mechanism IPO, acquisition Undefined, illiquid investment

Overall value creation potential

1. Timing Higher Avg Lower
2. Profit/free cash flow Higher Avg Lower
3. Exit/liquidity Higher Avg Lower

IV. Overall Potential

Go No Go Go, if ….
1. Margins and markets
2. Competitive advantages
3. Value creation and realization

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4. Fit: ‘O’ + ‘R’ + ‘T’
5. Risk-reward balance
6. Timing
7. Other compelling issues: must know or likely to fail
a.
b,
c.
d.
e.

Venture Opportunity Screening Exercises (VOSE)

The venture creation process requires performance of due diligence. The components of these exercises are used to channel
your thought and data collection efforts toward creating the foundation for development of the complete Business Plan.
Allow for a dynamic processing of each component and thereby the shaping of the opportunity and a plan to execute it. It is
OK to be initially broad in your perspective and then become more focused in later iterations.

At the end of the VOSE exercise, you should have a clear idea of the relative attractiveness of your opportunity. However, it
is rarely simply cut and dried. Mostly, there will be considerable uncertainty and numerous unknowns and risks.
Completing these exercises can, however, help you understand those uncertainties and risks as you make a decision about
the business idea. The QuickScreen process will help you devise ways to make these uncertainties and risks acceptable for
you, and if not, then you will know that you need to keep searching.

Every person and business idea is unique. Operations, marketing, cash flow cycles, and so forth vary a good bit from
company to company, from industry to industry, region to region, and from country to country. As a result, you may find
that not every issue is pertinent to your venture, and perhaps some questions may be irrelevant. Here and there you may
need to add to these exercises or further tailor them to your particular circumstances.

Working diligently through these exercises is quite a lengthy process. They create a map of how to think about the tough,
dull, legwork of good due diligence that should be done before launching into a venture. Completing these exercises will
help you determine if your opportunity is attractive enough vis-a-vis the four anchors to develop a complete Business Plan.
As you work through these exercises, you will find that much of the work of writing a Business Plan comes from your
answers provided in these exercises. While you may decide to delay work on some of these exercises, eventually you will
need to ask yourself and your ‘team’ almost all of these questions. Ideally also, each member of your ‘team’ should
complete these exercises.

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Exercise 2:

Venture Opportunity Screening Exercises (VOSE)

Opportunity Concept and Strategy Statement

Briefly describe your vision, the opportunity concept, and your strategy. What is your vision for the business? What is the
value creation proposition? What is the significant problem, want, or need that it will solve? Why is this important enough
that a customer or end user will pay an above average to a premium price for it? Why does this opportunity exist, now, for
you? Can you describe the concept and your market entry strategy in 25 words or less?

The Venture Opportunity Profile

Fill in this profile by indicating for each criterion where your venture is located on the potential continuum. Check off your
best estimate of where your idea stacks up, being as specific as possible. If you are having trouble, information can be found
in magazines and newsletters, from other entrepreneurs, from trade shows and fairs, or from online sources.

Criterion Highest potential Lowest potential

Industry and Market:
Market: Need Market driven; identified; recurring Unfocussed; onetime revenue
revenue niche
Customers Reachable; purchase orders Loyal to others or unreachable
Use benefits Less than one year payback Three years plus payback
Value added High; advance payments Low; minimal impact on market
Product life Durable perishable
Market Structure Imperfect, fragmented competition or Highly concentrated or mature or
emerging industry declining industry
Market size $100 + million to $1 billion sales Unknown, less than $20 million or
potential multibillion sales
Growth rate Growth at 30 to 50% or more Contracting or less than 10%
Market capacity At or near full capacity Under capacity
Market share attainable (Year 5) 20% or more; leader Less than 5%
Cost structure Low-cost provider; cost advantage Declining cost

Economics:
Profits after tax 10% to 15% or more; durable Less than 15%; fragile
ROI potential 25% or more; high value Less than 15 to 20%; low value
Capital requirements Low to moderate; fundable Very high; un-fundable
Internal rate of return potential 25% or more per year Less than 15% per year
Free cash flow characteristics: Favourable; sustainable; 20-30+% of Less than 10% of sales
sales
Sales growth Moderate to high (15 + % to 20%) Less than 10%
Asset intensity Low/sales$ High/sales$
Spontaneous working Low, incremental requirements High requirements
Capital

R&D/capital expenditures Low requirements High requirements

Gross margins Exceeding 40% and durable Under 20%
Time to breakeven – P&L Less than 2 years; breakeven not Greater than 4 years; breakeven
creeping creeping up

Harvest Issues:
Value added potential
Valuation multiples and comparables
Exit mechanism and strategy
Capital market context
Competitive Advantage Issues:
Fixed and variable costs
High strategic value Low strategic value
p/e = 20 + ×; 8-10 + ×EBIT; 1.5 – 2 +
× revenue free cash flow 8 -10 + ×
Present or envisioned options Undefined; illiquid investment
Favourable valuations, timing, capital Unfavourable; credit crunch
available; realizable liquidity
Lowest; high operating leverage highest

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Control over costs, prices, and
distribution
Barriers to entry:
Proprietary protection
response/lead time
Legal, contractual
advantage
Contacts and networks
Key people
Moderate to strong weak
Have or can gain None
Competition low: napping Unable to gain edge
Proprietary or exclusivity None
Well-developed; accessible Crude; limited
Top talent; an A team B or C team

Management team:
Entrepreneurial team
Industry and technical
experience
Integrity
Intellectual honesty
All-star combination; free agents Weak or solo entrepreneur
Top of the field; super track record underdeveloped
Highest standards Questionable
Know what they do not know Do not want to know what they do
not know

Fatal-flaw Issue: Nonexistent One or more

Personal criteria:
Goals and fit Getting what you want; but wanting Surprises
what you get
Upside/downside issues Attainable success/limited Linear; on some continuum
Opportunity costs Acceptable cuts in salary, etc Comfortable with status quo
Desirability Fits with lifestyle Simply pursuing big money
Risk/reward tolerance Calculated risk; low R/R ratio Risk averse or gambler
Stress tolerance Thrives under pressure Cracks under pressure

Strategic Differentiation:
Degree of fit High Low
Team Best in class; excellent free agents B tea; no free agents
Service management Superior service concept Perceived as unimportant
Timing Rowing in the tide Rowing against the tide
Technology Groundbreaking; one-of-a-kind Many substitutes or competitors
Flexibility Able to adapt; commit and de-commit Slow; stubborn
quickly
Opportunity orientation Always searching for opportunities Operating in a vacuum; napping
Pricing At or near leader Undercut competitor; low prices
Distribution channels Accessible; networks in place Unknown; inaccessible
Room for error Forgiving strategy Unforgiving, rigid strategy

Assess the external environment surrounding your venture opportunity, including the following:
¾ an assessment of the characteristics of the opportunity window, including its perishability
¾ a statement of what entry strategy suits the opportunity, and why
¾ a statement of evidence of and / or reasoning behind your belief that there is a good fit between the external
environment and the forces creating your opportunity
¾ a statement of your business exit strategy and an assessment of the prospects that this strategy can be met, including a
consideration of whether the risks, rewards, and tradeoffs are acceptable

Checkpoint

Before you proceed to further exercises, be sure the opportunity you have outlined is compelling and you can answer the
question, “why does the opportunity exist now?” It is possible you ought to abandon or alter the product or service idea
behind your venture at this point. The amount of money and time needed to get the product or service to market, and to be
open for business may be beyond your capability limits.

Beware: the opportunity for which the potential rewards are too large compared to the risks and vulnerabilities to
obsolescence and competition.

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