3.

1 - Innovation: The Creative Pursuit of Ideas

Opportunity Identification
Opportunity identification is the central domain of entrepreneurship.
The first step for any entrepreneur is the identification of a “good idea.”
Sources of Innovative Ideas
Entrepreneurs, ever alert to opportunities that inhabit the external and internal environments around them, often spot
potential opportunities in all the following areas:

 Trends
 Unexpected Occurrences
 Incongruities
 Process Needs
 Industry and Market Changes
 Demographic Changes
 Perceptual Changes
 Knowledge-Based Concepts

Entrepreneurial Imagination and Creativity

The key to innovation is blending imaginative and creative thinking with a systematic, logical process ability.
The Role of Creative Thinking
Creativity is the generation of ideas that results in the improved efficiency or effectiveness of the system.
Two approaches to creative problem solving:  adapting or innovating.
The Nature of the Creative Process
Creativity is a process that can be developed and improved.
It is a distinct way of looking at the world that is often illogical, involving seeing relationships among things that others have
not seen.
Innovation and the Entrepreneur
Innovation is a key function of the entrepreneurship process. It is the process by which entrepreneurs convert opportunities
into marketable ideas.
The Innovation Process
The innovation process is more than just a good idea. Innovation combines the vision to create a good idea with the
perseverance to implement the concept.
Types of Innovation

 Invention:  Creation of new product service, or process.

 Extension: Expansion of a product, service, or process.
 Duplication: Replication of an already existing product, service, or process adding own creative
touch.
 Synthesis: The combination of existing concepts and factors into a new formulation
3.1.1 Opportunity Identification: The Search for New Ideas

Opportunity identification is the central domain of entrepreneurship. The first step for any entrepreneur is the identification of
a “good idea.”
Sources of Innovative Ideas
Entrepreneurs, ever alert to opportunities that inhabit the external and internal environments around them, often spot
potential opportunities in all the following areas:
TRENDS
Trends signal shifts in the current paradigms (or thinking) of the major population. Potential entrepreneurial ideas: social
trends, technology trends, economic trends, government trends
UNEXPECTED OCCURRENCES
Unexpected occurrences are the unexpected successes or failures that prove to be a major surprise.
INCONGRUITIES
Incongruities exist when there is a gap or difference between expectations and reality.
PROCESS NEEDS
Process needs exist whenever there is demand for the entrepreneur to innovate and answer a particular need.
INDUSTRY AND MARKET CHANGES
There are continual shifts in the marketplace caused by advances in technology, industry growth, etc. The entrepreneur
needs to be able to take advantage of any resulting opportunity.
DEMOGRAPHIC CHANGES
Demographic changes arise from changes in population, age, education, occupation, geographic locations, etc.
PERCEPTUAL CHANGES
Perceptual changes occur in people’s interpretation of facts and concepts.
KNOWLEDGE-BASED CONCEPTS
Knowledge-based concepts lead to the creation or development of something new.
The Knowledge and Learning Process
Entrepreneurs must be able to learn from their experiences, acquiring and transforming information, knowledge, and
experience into recognizable opportunities through the exercise of their cognitive abilities.

3.1.2 Entrepreneurial Imagination and Creativity

The key to innovation is blending imaginative and creative thinking with a systematic, logical process ability.
The Role of Creative Thinking
Creativity is the generation of ideas that results in the improved efficiency or effectiveness of system.
Two approaches to creative problem solving:  adapting or innovating.
The Nature of the Creative Process
Creativity is a process that can be developed and improved.
It is a distinct way of looking at the world that is often illogical, involving seeing relationships among things that others have
not seen.
The creative process has four commonly agreed-on phases or steps, as itemized below.
PHASE 1: BACKGROUND OR KNOWLEDGE ACCUMULATION
Background or knowledge accumulation provides the individual with a variety of perspectives on the situation. This helps
the entrepreneur develop a basic understanding of the product or venture to be undertaken.
PHASE 2: THE INCUBATION PROCESS
The incubation process allows the individual to subconsciously mull over the information gathered during the preparation
stage. The individual “sleeps on it.”
PHASE 3: THE IDEA EXPERIENCE
The idea experience is the time when the idea or solution the individual is seeking is discovered.
PHASE 4: EVALUATION AND IMPLEMENTATION
Successful entrepreneurs must be able to identify workable ideas, which they have the skills to implement.
Developing Your Creativity
To improve one’s creative talents, be aware of some of the habits and mental blocks that stifle creativity and practice
exercises designed to increase creative abilities

3.1.3 Innovation and the Entrepreneur

Innovation is a key function of the entrepreneurship process. It is the process by which entrepreneurs convert opportunities
into marketable ideas.
The Innovation Process
The innovation process is more than just a good idea. Innovation combines the vision to create a good idea with the
perseverance to implement the concept.
Types of Innovation

o Invention:  Creation of new product service, or process.

o Extension: Expansion of a product, service, or process.
o Duplication: Replication of an already existing product, service, or process adding own creative touch.
o Synthesis: The combination of existing concepts and factors into new formulation

The Major Misconceptions of Innovation

o Misconception 1: Innovation is planned and predictable.

 Truth: Innovation is unpredictable and may be introduced by anyone.

o Misconception 2: Technical specification should be thoroughly prepared.

 Truth: Quite often it is more important to use a try-test-revise approach.

o Misconception 3: Innovation relies on dreams and blue-sky ideas.

 Truth: Innovators create from opportunities not daydreams.
 o Misconception 4: Big projects will develop better innovations than smaller ones.
 Truth: Smaller groups foster creative ideas better.
o Misconception 5: Technology is the driving force of innovation success.
 Truth: Not the only source.
 Truth: Market-driven innovations have the highest probability of success

Principles of Innovation

o Be action-oriented; search for new ideas.

o Make the product, process, or service simple and understandable.
o Make the product, process, or service customer-based.
o Start small; begin small, plan for proper expansion.
o Aim high; seek a niche in the marketplace.
o Try-test-revise; help work out flaws.
o Learn from failures.
o Follow a milestone schedule; have schedule in order to plan and evaluate the project.
o Reward heroic activity and give it respect.
o Work, work, work!

3.2 - Assessment of Entrepreneurial Opportunities

The Challenge of New Venture Start-ups and Pitfalls in Selecting New Ventures
Around 400,000 new firms have emerged every year since 2010; that works out to approximately 1,100 business start-ups
per day. The reasons that entrepreneurs start new ventures are similar to the characteristics of the entrepreneurial mindset:
(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
Pitfalls in Selecting New Ventures
Six of the most important pitfalls commonly encountered in the process of selecting a new venture are listed below.
1. Lack of Objective Evaluation
2. No Real Insight into the Market
3. Inadequate Understanding of Technical Requirements
4. Poor Financial Understanding
5. Lack of Venture Uniqueness
6. Ignorance of Legal Issues
Critical Factors for New Venture Development
Critical Factors for New-Venture Development
Five factors are critical during the prestart-up and start-up phases of a new venture:
 1. The relative uniqueness of the venture,
2. The relative investment size at start-up,
3. The expected growth of sales and/or profits as the venture moves through its start-up phase,
4. The availability of products during the prestart-up and start-up phases,
5. The availability of customers during the prestart-up and start-up phases.

Uniqueness
Range of uniqueness in a new venture can be considerable. Uniqueness is further characterized by the length of time a
nonroutine venture will remain nonroutine.           
Investment
Required capital investment can vary considerably.  Extent and timing of funds needed is critical.
Key questions to ask to determine the amount of funding needed during the start-up phase:

 Will industry growth be sufficient to maintain break-even sales to cover a high fixed cost
structure during the start-up period?
 Do the principal entrepreneurs have access to substantial financial reserves to protect a
large initial investment?
 Do the entrepreneurs have the appropriate contacts to take advantage of various
environmental opportunities?
 Do the entrepreneurs have both industry and entrepreneurial track records which justify
the financial risk of a large-scale start-up?

Why New Ventures Fail

Every year millions of dollars are spent on starting new enterprises, but only a small percentage of new businesses is
successful.
Most studies have found that the factors underlying the failure of new ventures are within the control of the entrepreneur.  
Three major categories of causes for failure:
1. Product/Market Problems
2. Financial Difficulties
3. Managerial Problems
The Traditional Venture Evaluation Processes
A critical task of starting a new business is conducting solid analysis of the feasibility of the product/service in getting off the
ground.
Profile Analysis Approach
Different variables, which enable the entrepreneur to judge the potential of the business, need to be investigated before the
new idea is put into practice. An internal profile analysis (provided as an experiential exercise at the end of the chapter)
takes a checklist approach, allowing entrepreneurs to identify major strengths and weaknesses of a new venture, and can
be used to assess the financial, marketing, organizational, and human resources aspects of the new venture.
 Feasibility Criteria Approach
 Key questions to ask:

 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 break-even 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?

 Comprehensive Feasibility Approach

Incorporates external factors in addition to those included in the criteria questions cited above and looks at technical,
market, financial, organizational, and competitive factors. . Technical feasibility and marketability merit special attention.
The Contemporary Methodologies for Venture Evaluation
With newer movements taking shape in the everchanging entrepreneurial world such as design methods to lean start-up
procedures, the fast-paced entrepreneurial environment is demonstrating newer methods to enhance venture concepts
through development.
The Design Methodology
Demand for design is becoming so great that universities are now building programs to approach design rather than
concentrating it in just technical schools.
DESIGN DEVELOPMENT
Utilizes skills we all possess but are generally ignored due to more conventional problem solving practices. Takes the initial
concept idea and develops a proof of concept that elicits feedback from relevant stakeholders.

 Proof of Concept Feasibility

 Proof of Concept Desirability
 Proof of Concept Viability

Design-Centered Entrepreneurship
The entrepreneur applies design methods in four action stages of developing an opportunity.

 Ideation
 Prototyping
 Market engagement
 Business model

The Lean Start-up Methodology

Provides a scientific approach to creating early venture concepts and delivers a desired product to customer’s hands faster.
This methodology is hypothesis-driven, and entrepreneurs must work to gather and incorporate customer feedback early
and often.
KEY LEAN START-UP KEY TERMINOLOGY
The Three A’s of Matrics

 Actionable
 Accessible
 Auditable

3.2.1 The Challenge of New Venture Start-Ups and Pitfalls in Selecting New Ventures

400,000 new firms have emerged every year since 2010; that works out to approximately 1,100 business start-ups per day.
The reasons that entrepreneurs start new ventures are similar to the characteristics (as discussed in previews modules) on
the entrepreneurial mind-set:
(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

Pitfalls in Selecting New Ventures

Six of the most important pitfalls commonly encountered in the process of selecting a new venture are listed below.
1. Lack of Objective Evaluation

 Many entrepreneurs lack objectivity.

 All ideas should be subject to rigorous study and investigation.

2. No Real Insight into the Market

 Entrepreneurs must project the life cycle of the new product.

 Timing of product is critical.

3. Inadequate Understanding of Technical Requirements

 Entrepreneurs need to be thorough in studying a new product.

 Unexpected technical difficulties frequently pose time-consuming and costly problems.

4. Poor Financial Understanding

Entrepreneurs are sometimes ignorant of costs.

 Entrepreneurs are sometimes victims of inadequate research and planning.

 Entrepreneurs quite often underestimate development costs by wide margins.

5. Lack of Venture Uniqueness

 A new venture should be unique.

 Product differentiation is needed to separate product from those of competitors.

6. Ignorance of Legal Issues

Business is subject to many legal requirements:

 A safe workplace
 Reliable and safe products and services
 Necessity for trademarks, patents, and copyrights

3.2.2 Critical Factors for New Venture Development

Five factors are critical during the prestart-up and start-up phases of a new venture:
(1) the relative uniqueness of the venture,
(2) the relative investment size at start-up,
(3) the expected growth of sales and/or profits as the venture moves through its start-up phase,
(4) the availability of products during the prestart-up and start-up phases, and
(5) the availability of customers during the prestart-up and start-up phases.
Uniqueness
Range of uniqueness in a new venture can be considerable.
Uniqueness is further characterized by the length of time a non-routine venture will remain non-routine.
Investment
Required capital investment can vary considerably.
Extent and timing of funds needed is critical.
Key questions to ask to determine the amount of funding needed during the start-up phase:

 Will industry growth be sufficient to maintain break-even sales to cover a high fixed cost structure
during the start-up period?
 Do the principal entrepreneurs have access to substantial financial reserves to protect a large initial
investment?
 Do the entrepreneurs have the appropriate contacts to take advantage of various environmental
opportunities?
 Do the entrepreneurs have both industry and entrepreneurial track records which justify the
financial risk of a large-scale start-up?

 Growth of Sales
 Key questions to ask about growth of sales during the start-up phase:

 What is the growth pattern anticipated for new-venture sales and profits?
 Are sales and profits expected to grow slowly or level off shortly after start-up?
 Are large profits expected at some point with only small or moderate sales growth?
 Are both high sales growth and high profit growth likely?
 Will there be limited initial profits with eventual high-profit growth over a multiyear period?

 In answering these questions, it is important to remember that most ventures fit into one of the three following venture
classifications:

 Lifestyle ventures
 Independence, autonomy, and control are the primary driving forces.
 Sales and profits are deemed to provide a sufficient and comfortable living for the entrepreneur.
  Small profitable ventures
 Financial considerations play a major role.
 Autonomy and ownership control are important factors.
 High-growth ventures
 Significant sales and profit growth are expected.
 May be possible to attract venture capital money.
 May be possible to attract funds raised through public or private placements.

 Product Availability

o  Goods or services must be available.

o  Lack of product availability can affect the company’s image and its bottom line.

 Customer availability

o Risk continuum (two extremes):

o Customers willing to pay cash before delivery.
o Venture begun not knowing exactly who will buy the product.
o Two critical considerations:
o How long will it take to determine who the customers are?
o What are the customers’ buying habits?

3.2.3 Why New Ventures Fail

Every year millions of dollars are spent on starting new enterprises, but only a small percentage of new businesses is
successful.
Most studies have found that the factors underlying the failure of new ventures are within the control of the entrepreneur.  
Three major categories of causes for failure:

 product/market problems
 financial difficulties
 managerial problems

3.2.4 The Traditional Venture Evaluation Processes

A critical task of starting a new business is conducting solid analysis of the feasibility of the product/service in getting off the
ground.
Profile Analysis Approach
Different variables, which enable the entrepreneur to judge the potential of the business, need to be investigated before the
new idea is put into practice.
An internal profile analysis (provided as an experiential exercise at the end of the chapter) takes a checklist approach,
allowing entrepreneurs to identify major strengths and weaknesses of a new venture, and can be used to assess the
financial, marketing, organizational, and human resources aspects of the new venture.
Feasibility Criteria Approach
Key questions to ask:

o Is it proprietary?
  Should permit a long head start against competitors.
 Should permit a period of extraordinary profits early to offset start-up costs.

o Are the initial production costs realistic?

 Most estimates are too low.
 Careful detailed analysis should be made.

o Are the initial marketing costs realistic?

 Identify target markets.
 Identify market channels.
 Identify promotion strategy.

o Does the product have potential for very high margins?

 A necessity for a fledgling company
 Gross margins are important.

o Is the time required to get to market and to reach break-even realistic?

 The faster, the better.
 An error here can spell trouble later on.

o Is the potential market large?

 Must look three to five years into the future
 Market needs time to emerge.

o Is the product the first of a growing family?

o Does an initial customer exist?
o Are the development costs and calendar times realistic?
 Preferably, they are zero.
 A ready-to-go product gives the venture a big advantage over competitors.

o Is this a growing industry?

o Can the product—and the need for it—be understood by the financial community?

Comprehensive Feasibility Approach

Incorporates external factors in addition to those included in the criteria questions cited above and looks at technical,
market, financial, organizational, and competitive factors. . Technical feasibility and marketability merit special attention.
TECHNICAL FEASIBILITY

 Functional design of the product and attractiveness in appearance

 Flexibility for ready modification
 Durability of the materials from which the product is made
 Reliability
 Product safety
 Reasonable utility
 Ease and low cost of maintenance
 Standardization
 Ease of processing or manufacture
 Ease in handling and use
MARKETABILITY
Three major areas involved:

1. Investigating the full market potential and identifying customers (or users) for the goods or service,
2. Analyzing the extent to which the enterprise might exploit this potential market, and
3. Using market analysis to determine the opportunities and risk.

General information sources to consider:

 General economic trends

 Market data
 Pricing data
 Competitive data

3.2.5 The Contemporary Methodologies for Venture Evaluation

With newer movements taking shape in the everchanging entrepreneurial world such as design methods to lean start-up
procedures, the fast paced entrepreneurial environment is demonstrating newer methods to enhance venture concepts
through development.
The Design Methodology
Demand for design is becoming so great that universities are now building programs to approach design rather than
concentrating it in just technical schools.
DESIGN DEVELOPMENT
Utilizes skills we all possess but are generally ignored due to more conventional problem solving practices.
Takes the initial concept idea and develops a proof of concept that elicits feedback from relevant stakeholders.

o Proof of Concept Feasibility

o Proof of Concept Desirability
o Proof of Concept Viability

 Design-Centered Entrepreneurship
The entrepreneur applies design methods in four action stages of developing an opportunity.

o Ideation
o Prototyping
o Market engagement
o Business model

The Lean Start-up Methodology

Provides a scientific approach to creating early venture concepts and delivers a desired product to customer’s hands faster.
This methodology is hypothesis-driven, and entrepreneurs must work to gather and incorporate customer feedback early
and often.
KEY LEAN START-UP KEY TERMINOLOGY
The Three A’s of Matrics:
 Actionable
 Accessible
 Auditable

Pivot
Build-Measure-Learn Feedback Loop
Validated Learning
PPT CHAPTER 5

Innovation: The Creative The Creative Pursuit of Ideas Pursuit of Ideas

Opportunity Identification: The Search for New Ideas

• Opportunity identification is central

to the domain of entrepreneurship and revolves around the answers to the following:

 Why?

 When?

 How?

• The study of the creative pursuit of new ideas and the innovation process.

• Sources of Innovative Ideas

 External and internal environments alert entrepreneurs to opportunities.

 Trends signal shifts in current paradigm (or thinking) of major population.

 Valuable insights constitute source of potential entrepreneurial ideas.

Technol Econom Govern

Societal Mobile (cell
Higher
Aging
demographics, ogy
phone) ic dual
disposable
incomes, ment
Increased
Trends
health and
technology,
wage-earner
regulations,
fitness growth,
senior living
Trends
e-commerce,
Internet
Trends
families,
performance
Trends
petroleum
prices, terrorism
advances
pressures

5.1 Sources of Innovative Ideas

 • Entrepreneurs use their existing knowledge base acquired through work, experience, and education, to hone ideas
into actual opportunities.

• Entrepreneurs must be able to learn from their experiences as well.

The Knowledge and Learning Process

Personal
work
experience,
and
education

Specific General
interest industry
knowledge knowledge
Distilling Ideas
into
Opportunities

Prior
customer Prior market
understandin knowledge
g

Entrepreneurial Imagination and Creativity

• Creative thinking is blended with imagination in a logical process.

• Develop an ability to see, recognize, and create opportunity where others find only problems.
Table
5.2 Two Approaches to Creative Problem Solving

The Nature of the Creative Process

• Creativity is a process that can be developed and improved. Some individuals have a greater aptitude for creativity
than others.

• Typical Creative Process

 Phase 1: Background or knowledge accumulation

 Phase 2: The incubation process

 Phase 3: The idea experience

 Phase 4: Evaluation and implementation

Developing Your Creativity

• Recognizing Relationships

 Looking for different or unorthodox relationships among the elements and people around you.

• Developing a Functional Perspective

 Viewing things and people in terms of how they can satisfy his or her needs and help complete a project.

• Using Your Brains

 The right brain helps us understand analogies, imagine things, and synthesize information.

 The left brain helps us analyze, verbalize, and use rational approaches to problem solving.
Table
5.4 Processes Associated with the Two Hemispheres of the Brain
Impediments to CreativityEliminating Muddling Mind-Sets

 Either/or thinking (concern for certainty)

 Security hunting (concern for risk)

 Stereotyping (abstracting reality)

 Probability thinking (seeking predictable results)

Table
5.5 Ways to Develop Left- and Right-Hemisphere Skills

The Innovation Process

• Most innovations result from a conscious, purposeful search for new opportunities.
 • Uses both the right and left sides of the brain.

• Entrepreneurs look at figures and people.

• Successful innovations are simple and focused toward a clear and carefully designed application.

• During the process, they create new customers and markets.

Table
5.6 Innovation in Action

The Major Misconceptions of Innovation

• Innovation is planned and predictable.

• Technical specifications must be thoroughly prepared.

• Innovation relies on dreams and blue-sky ideas.

• Big projects will develop better innovations than smaller ones.

• Technology is the driving force of innovation success.

Principles of Innovation

• Be action oriented.

• Make the product, process, or service simple and understandable.

• Make the product, process, or service customer-based.

• Start small.

• Aim high.
 • Try/test/revise.

• Learn from failures

• Follow a milestone schedule.

• Reward heroic activity.

• Work, work, work.

Chapter 6

Assessment of Entrepreneurial Opportunities

The Challenge of New-Venture Start-Ups

• New Venture Formation

 The number of new-venture start-ups has been consistently high at reports of more than 400,000
new firms in the United States every year since 2010.

• Ideas for Potential New Businesses

 The U.S. Patent Office currently receives more than 500,000 patent applications per year.

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

Reasons for Starting a Venture

 Personal The The
Characteristics Environment Venture

Entrepreneurial
Motivations

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

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.

• Poststart-up Phase

 Lasts until the venture is terminated or the surviving organizational entity is no longer controlled by an
entrepreneur.

Critical Factors for New-Venture Development

1. Uniqueness

 Range can be considerable, extending from fairly routine to highly nonroutine

 2. Investment

 Capital investment to start a new venture can vary from some industries less than $100,000 to other
industries requiring millions of dollars.

3. Growth of Sales

 Lifestyle ventures

 Small profitable ventures

 High-growth ventures

4. Product Availability

 Availability of a salable good or service at the time the venture opens its doors.

 Sometimes there is a problem because the product or service is still in development and needs further
modification or testing. For example, “bugs” in a software firm.

5. Customer Availability

 A critical consideration is how long it will take to determine who the customers are, as well as their buying
habits.
Table
6.1 A New-Venture Idea Checklist

Basic Feasibility of the Venture

1. Can the product or service work?

2. Is it legal?

Competitive Advantages of the Venture

1. What specific competitive advantages will the product or service offer?

2. What are the competitive advantages of the companies already in business?

3. How are the competitors likely to respond?

4. How will the initial competitive advantage be maintained?

Buyer Decisions in the Venture

1. Who are the customers likely to be?

2. How much will each customer buy, and how many customers are there?

3. Where are these customers located, and how will they be serviced?

Marketing of the Goods and Services

1. How much will be spent on advertising and selling?

2. What share of market will the company capture? By when?

3. Who will perform the selling functions?

4. How will prices be set? How will they compare with the competition’s prices?

5. How important is location, and how will it be determined?

6. What distribution channels will be used—wholesale, retail, agents, direct mail?

7. What are the sales targets? By when should they be met?

8. Can any orders be obtained before starting the business? How many? For what total amount?

Production of the Goods and Services

1. Will the company make or buy what it sells? Or will it use a combination of these two strategies?

2. Are sources of supplies available at reasonable prices?

3. How long will delivery take?

4. Have adequate lease arrangements for premises been made?

5. Will the needed equipment be available on time?

6. Do any special problems with plant setup, clearances, or insurance exist? How will they be resolved?

7. How will quality be controlled?

8. How will returns and servicing be handled?

9. How will pilferage, waste, spoilage, and scrap be controlled?

Staffing Decisions in the Venture

1. How will competence in each area of the business be ensured?

2. Who will have to be hired? By when? How will they be found and recruited?

3. Will a banker, lawyer, accountant, or other advisers be needed?

4. How will replacements be obtained if key people leave?

5. Will special benefit plans have to be arranged?

Control of the Venture

1. What records will be needed? When?

2. Will any special controls be required? What are they? Who will be responsible for them?

Financing the Venture

 1. How much will be needed for development of the product or service?

2. How much will be needed for setting up operations?

3. How much will be needed for working capital?

4. Where will the money come from? What if more is needed?

5. Which assumptions in the financial forecasts are most uncertain?

6. What will be the return on equity, or sales, and how does it compare with the rest of the industry?

7. When and how will investors get their money back?

8. What will be needed from the bank, and what is the bank’s response?

Why New Ventures Fail

• Product/Market Problems

 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

Table
6.2 Types and Classes of First-Year Problems

1. Obtaining external financing

• Obtaining financing for growth

• Other or general financing problems

2. Internal financial management

• Inadequate working capital

 • Cash-flow problems

• Other or general financial management problems

3. Sales/marketing

• Low sales

• Dependence on one or few clients/customers

• Marketing or distribution channels

• Promotion/public relations/advertising

• Other or general marketing problems

4. Product development

• Developing products/services

• Other or general product development problems

5. Production/operations management

• Establishing or maintaining quality control

• Raw materials/resources/supplies

• Other or general production/operations management problems

6. General management

• Lack of management experience

• Only one person/no time

• Managing/controlling growth

• Administrative problems

• Other or general management problems

7. Human resource management

• Recruitment/selection

• Turnover/retention

• Satisfaction/morale

• Employee development

• Other or general human resource management problems

8. Economic environment
 • Poor economy/recession

• Other or general economic environment problems

9. Regulatory environment

• Insurance

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

The Traditional Venture Evaluation Process

• Profile Analysis Approach

 Identifying and investigating the financial, marketing, organizational, and human resource variables prior to
start-up.

• The Feasibility Criteria Approach

 The use of a criteria selection list to gain insights.

• Comprehensive Feasibility Approach

 Incorporates external factors in addition to those included in the criteria questions.

Feasibility Criteria Approach

• Assessing the viability of a venture:

 Is it proprietary?

 Are 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?
Figure
6.2 Key Areas for Assessing the Feasibility of a New Venture

The Contemporary Methodologies for Venture Evaluation

• Design Methodology

 Universities are now building programs that take a general approach to design rather than concentrating it
in just technical schools like architecture and engineering.

 Takes an initial concept idea and develops a proof of concept that elicits feedback from relevant
stakeholders.
 • Design-Centered Entrepreneurship

 Entrepreneurs apply design methods in four action stages of developing an opportunity.

• The 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 an incorrect hypothesis by putting a lean-
focused process on the development of your product or service.

 Entrepreneurs must work to gather and incorporate customer feedback early and often.

The Design Methodology

• A process that shapes and converts ideas into form, whether that is a plan of action, an experience, or a physical
thing.

• 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

The Design-Centered Entrepreneurship

• Taking action and learning that culminates in a venture concept for further 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 action stage to improve the outcome) and macroiterations (moving from
one particular action stage back to a previous stage for further development).

Key Lean Start-Up Terminology

• Minimum Viable Product (MVP):

 Three A’s of Metrics

• Actionable

• Accessible

• Auditable

 Pivot

 Build-Measure-Learn Feedback Loop

 Validated Learning