MODULE 4
determine whether your good idea is truly a good
opportunity. Ideas that turn into superior business are
not accidents; they are consistent with these four
anchors.
1. They create or add significant value to a
SCREENING VENTURE customer or end-user.
OPPORTUNITIES
2. They do so by solving a significant problem,
removing a serious pain-point, or meeting a
significant want or need—for which someone
Entrepreneurs need to think big. You are going to end
up exhausted in building a company. So you might as is willing to pay a premium.
well end up exhausted and rich!
Patricia Cloherty
First Woman President of the National Venture Capital 3. They have healthy market, margin, and money
Association
making characteristics that will allow the
entrepreneur to estimate and communicate
OBJECTIVES
sustainable value to potential stake holders:
After reading the lesson you would be able to:
large enough high growth, high gross margins,
1. Examine two screening methodologies- QuickScreen strong and free cash flows (recurring
and the Venture Opportunity Screening Exercises
(VOSE)- that can help you determine whether your revenue, low assets, and working capital),
ideas are potential opportunities.
high profit potential (10 -15 percent plus after
2. Begin to consider with more creativity and depth what
you need to do to improve both the fit and the risk and tax), and other attractive realizable returns for
reward relationship.
3. Determine whether your best ideas at this time has investors.
sufficient potential to pursue the development of a
thorough business plan.
4. They are a good fit with the founder(s) and
Time is the ultimate ally and enemy of the management team at the time and market
entrepreneur. The harsh reality is that you will not place—along with an attractive risk-reward
have enough time in a quarter, a year, or a decade to balance.
pursue all the ideas for business you and tour team
can think of. Perhaps the coolest part of the paradox
QuickScreen
is that you have to find and make the time for the
good ones. To complicate the paradox, you do not
If most sophisticated private equity investors and
have a strategy until you are saying no to lots of
venture capitalist invest in only 2 to 3 out of 100 then
opportunities! This demand is part of the both
one can see how important it is to focus on a few
punishing and rewarding Darwinian aspect of
superior ideas. The ability to quickly and efficiently
entrepreneurship: many will try, many will fail, some
reject ideas is a very important entrepreneurial
will succeed and a few will excel. While the number
mindset. Saying no to lots of ideas directly conflicts
of new enterprises launched in the United States can
with your passion and commitment for a particular
vary widely from year to year, only 10 to 15 percent
idea. To make the struggle more manageable, this
of those will ever prove to be opportunities that
module provides two methodologies. The first,
achieve sales of $1million dollars or more.
QuickScreen, should enable you to conduct a
This chapter will put you where the action is,
preliminary review and evaluation of an idea in an
engaging in the first of many titanic-like struggles to
hour. Unless the idea has been, or you are confident
it can be, molded and shaped so, so that it has the Whether or not an entrepreneur plans to seek
four anchors, you will waste a lot of time on a lower venture capital or an outside private investor to
potential idea. The QuickScreen exercise can be pursue an opportunity it is better to have, it is vital to
reproduced for your own use. have a realistic view of the vulnerabilities and
realities, as well as the opportunity’s compelling
Venture Opportunity Screening Exercise (VOSE) strengths. Often, the repetitive process of carefully
examining different ideas through many eyes, within
The Venture Opportunity Screening Exercise are and outside your team, often triggers creative ideas
designed to segment screening of ideas into and insights about how the initial business concept
manageable pieces. The QuickScreen provides a and strategy can be altered and modeled to
broad overview of an idea’s potential. In a team significantly enhance the value chain, free cash flows
effort, each member of the team should complete the characteristics, and risk-reward relationships and
exercise separately and then meet as a team to does the fit. This process is central to value creation
merge the results. After each VOSE, you should and the development of higher potential ventures, but
revisit the QuickScreen and reevaluate your scoring. it is far from cut and dried.
When you are satisfied that all the exercises are This early seed stage is also a marvelous time for a
complete, the combined documents will provide the “trial marriage” with prospective team members. This
substance needed to complete your business plan. It work can be detailed, tedious, and downright boring.
also provides an audit trial of your opportunity Finding out now who can deliver what; who has the
shaping activity. Not only does this help you work ethic, consistency, and reliability; and whether
memorize your thinking. But it provides articulation you can work together will save you a lot of money
when explaining your thought process to and headaches later. Ultimately, the fit issue boils
sophisticated investors---many of whom will be down to this: do the opportunity, the resources
asking probing questions to test your depth of required (and their cost), the other team members (if
knowledge. any), the timing, and the balance of risk and reward
work for me?
Exercise
QUICKSCREEN
I. Market and Margin related Issues
Criterion Higher Potential Lower Potential
Need/want/problem/pain-point Identified Unfocused
Customers Reachable and receptive Unreachable/ loyal to
others
Payback to users Less than one year More than three years
Value added or created IRR 40% + IRR less than 20%
Market Size $ 50 – 100 million less than $ 10 million or +
$ 1 bil.
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: Relative to the Current and Evolving Set of Competitors
Higher potential Lower potential
Fixed and variable costs Lowest Highest
Degree of control Stronger Weaker
Prices and Cost
Channels of supply and distribution
Barriers to competitor’s entry Can Create Weak/None
Proprietary advantage Defensible None
Lead time advantage (product, Slow Competition None
Technology, People, resources,
location)
Service Chain Strong Edge No Edge
Contractual Advantage Exclusive None
Contracts 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% or 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
4. Fit: “O” + “R” + “T”
5. Risk – Reward
6. Timing
7. Other compelling issues: must know or likely to fail
a.
b.
c.
d.
e.
Venture Opportunity Screening Exercises
The new venture creation process requires a due diligence. We recommend that the components of these exercises be use 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 okay
that you be initially broad in your perspective and then become more focused in later repetitions.
At the end of each exercise you should have a clearer idea of the relative attractiveness of your opportunity. Rarely it is simply cut
and dried. Most of the time, there will be considered 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 idea. The process will help you
devise ways to make these uncertainties and risks more acceptable for you, and if not, then you know you need to keep searching.
Every venture is unique. Operations, marketing, cash flow cycles, and so forth vary a good bit from company to company, from
industry to industry, from region to region, and from country to country. As results, you may find that not every issue is pertinent to
your venture, and perhaps some questions are irrelevant. Here and there you may need to add to these exercises or further tailor
them to your circumstances.
Working through these exercises is a lengthy process. This is a map of how you 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-à-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 in the exercises. While you may
decide to delay work on some of these exercises, eventually you will need to ask you self and your “team” these questions.
QUESTION:
What do you think is a worthwhile business opportunity in the PUP Main Campus? Kindly explain why
you think this business opportunity will be successful in the said place.