Finding an Opportunity

Week 2 – October 12, 2004

FM20731 – Entrepreneurship

2

Course Evaluation & Technology

• Grading– 40%: Class Participation (including attendance)

– 10%: Weekly Quizzes on Reading

– 20%: Midterm Exam

– 30%: Project

• Technology Needed: – Word Processing

– Spreadsheet

– Graphics and PowerPoint

3

Attendance Policy

• Two absences = one full grade drop

• A third absence = an additional grade drop

• Four absences = Failure

• NOTE: – There are NO excused absences. – 2 lates and/or early departures = 1 absence.

I WILL FAIL YOU IF I HAVE TO!

4

Cellphone Policy

• OK if it rings– I don’t expect you to remember to turn it off

• BUT!– Don’t answer your phone in class!– Don’t step into the hall to talk

• Also– No text messaging

5

Today’s Class

• The entrepreneurial team– Discuss Startup.com

• Recognizing opportunity

• Buying an existing business

• Franchises

• Other alternatives to new business

6

The Startup

• Classic startup company– innovative idea– develops into a high growth company

• Qualities of a good startup company– Strong leadership from the main entrepreneur– Solid entrepreneurial team

• Complementary talents • Outstanding teamwork

– Skill and ingenuity to find and control resources– Financial backing to chase opportunity

9

Desirable & Acquirable Attitudes/Behaviors

• Commitment and determination• Leadership• Opportunity obsession• Tolerance of

– Risk– Ambiguity– Uncertainty

• Creativity, self-reliance, and adaptability• Motivation to excel

10

The Timmons Model of the Entrepreneurial Process

Opportunity(2)

Resources(4)

Team(3)

Ambiguity Exogenous forces

Capital marketsUncertainty

Founder(1)

Creativity Leadership

Communication

Business PlanFits and gaps

11

Enlightened Serendipity

• Being in the right place

• At the right time,

• Recognizing it, and

• Acting upon it,

• APPROPRIATELY

• and PASSIONATELY!!!

I.E. Luck = Opportunity + Preparation

12

What Is An Entrepreneur?

ENTREPRENEURSHIP

The pursuit of opportunity through

innovation, creativity and hard work

without regard for the

resources currently controlled.

13

What Is An Opportunity?

A belief that achievement of that state is possible

Recognizing a desired future state involving growth or change

OPPORTUNITY

14

Opportunity

• How do we search for the right venture?– Never a straightforward task– Often accidental– Difficult to find deliberately– Can be driven to financial ruin trying ideas

• Let’s think about– The deliberate search– The evaluation process– Other sources of ideas

15

The Deliberate Search

• Most appropriate way of finding a venture?– Systematic– Five clearly defined steps:

• Contact people in the know

• Read appropriate publications

• Do Market Research

• Use Government data

• Joint-venture with large companies– Have more demands than time to fill them

16

Contact the Right People

• Ask others to inform you of good ideas– Contact technology transfer organizations– Patent attorneys– Investment bankers– Venture capital firms

• Talk to people– Especially marketing, sales, service

• Talk to customers, see what they need

17

People are Most Important

• Ideas come from people

• People struggle with the unfulfilled need

• Customers are people

• Designers are professional idea people

• Practice makes better in idea searching

18

Read the Printed Word

• Study your desired industry

• Read the appropriate publications:– Trade Indexes in the area– local business newspaper every day– Annual reports of industry public companies– Purchase professional reports

• Look for required improvements

19

Research the Market

• What do people want, nobody is producing

• Ask buyers what they have trouble finding

• Determine what’s missing in trade catalogs

• Ask store managers– What do customers want but can’t buy

• Attend trade shows– Ask people about what may be needed– Good stimulation for new ideas!!

20

Government, a Goldmine of Data

• Examine industry statistics– Select high-growth areas

• Consider legislation’s effect on business– May create needs for businesses to comply

21

Brainstorming

• Great way to generate ideas

• As many ideas as possible

• Everyone participates

• Write down all ideas presented

• Spark off of others’ ideas

22

Brainstorming Rules

• No criticisms or judgments– Don't even groan, frown, or laugh

– All ideas are equally valid at this point

• All ideas are welcome– Silly & far out OK!

– Be creative

– The more ideas the better

• Absolutely no discussion – Ideas will be discussed after brainstorming is complete

23

Brainstorming• Family (size matters - more is better)• People with the right education/experience• People who are in the idea search business:

– Designers– Advertising people– Promotional planners– Inventors– Other entrepreneurs– The right corporate people

• Sales & marketing• Service

24

The Search Criteria

• Criteria to evaluate ideas

• What do you want out of the effort – There will be sacrifices and costs

• Weight the criteria to reflect importance

• Depend on individual circumstances

• Covers several basic issues

25

Sample Criteria

• Amount of time required• Flexibility in hours worked• Income potential• Geographical location• Financial requirements• Personality preference• Personal satisfaction• Product or Service• Market Issues

26

Other Sources of Ideas

• Besides deliberate thinking– Unplanned “Eureka!" ideas

• Hard to predict

– Trends around you• More about this in the next few slides

– Opportunity from “lack” you see• Always pay attention to everyday problems• Best ideas solve problems

– Government action• New programs, incentives• War

27

Consider Current Trends

• These are examples, trends always change– Aging population– Energy costs rising– Marital status changes– Families without children– Leisure time growing– Health & physical fitness– Personal care– Financial planning

28

Trend: Aging Population

• Aging population:– Major shift to middle age.– The "big generation" (1955-1966).– Fastest growing age group is 75+.– 60 year old now = 40-45 year olds then

• Looks, attitude, health, thinking, etc.

– Affluent • Over 100% asset growth in past ten years

– The WOOPies are often commercially ignored• (Well off older people)

29

Trend: Marital Status & No Children

• Marital status changes:– Living alone

• Divorced, separated, widows/ers

– Later marriages– A large number of singles– Career women– Families without children:

• Double income - no children (DINCs)• Large disposable income• Lots of time; No ties.

30

Trends: Personal Care

• Enormous growth in demand

• Enormous profit margins possible

• Packaging/marketing are the real expense

• Looks are very important to everyone– E.g. N/A sells $30,000,000 in face cream daily!

31

Trends: Health

• Health and physical fitness– Very popular– Major opportunities available– Recreation (1,000 new golf courses/year)– Tennis, squash, skiing grows– Cigarettes, junk food, liquor declining

32

Adoption of New Technology

• Time until adoption by 25% of the Population– Household electricity (1873)

• 46 years

– Telephone (1875)• 35 years

– Automobile (1885)• 55 years

– Airplane travel (1903)• 54 years

– Radio (1906)• 22 years

33

Adoption of New Technology

• Time until adoption by 25% of the Population – Television (1925)

• 26 years

– Videocassette recorder (1952)• 34 years

– Personal computer (1975)• 15 years

– Cellular phone• 13 years

– World Wide Web• 7 years

34

Getting into Business

• Buy an Existing Business

• Open a Franchise

• Start a New Business– We’ll discuss next week

35

Buying a Business

• Many businesses are for sale

• Consider why seller is selling– Struggling for some reason?

• If they are struggling, can you do better?– If so, could be big opportunity

36

Pluses of Existing Business: Less Risk

• Fewer surprises

• Fewer problems to discover

• Fewer mistakes to make

• Less likely to have missed something

• May already be generating profit

There may be a fatal flaw in a raw startup that you won’t discover until you try!

37

Pluses of Existing Business: Less Effort

• Saves pure startup time and efforts– Establishing business entity– Finding location– Legal issues– Insurance– Marketing – logos, ads, signs, etc.– Hiring staff– Setup payroll– Much more!

38

Pluses of Existing Business: Low Price

• May find an under-priced business

• Seller may be “motivated”– No longer involved in business– Failing health/retiring– Already has other plans

• Seller may not value properly– Examine books to determine your value

• External conditions may be depressed

39

Minuses of Existing Business

• Environment– May face factors that are beyond control

– E.g. market is too small, too much competition

– Bad location

• Internal Problems– Why do we see “Under new management”?

– Bad reputation

– Bad relationship with employees

• Loss of existing owner could be difficult– Esp. if professional practice

40

Finding a Business

• Businesses on the market– Business brokers– Classified Ads

• Businesses not on the market– Ask professionals if they know who might sell

• Bankers, lawyers, accountants, etc.

– Approach owners of appropriate businesses• Ask if they know of any for sale - not if they’ll sell

• They’ll tell you if they’re interested

41

Pricing a Business

• Determine what it’s worth to you– Value of assets

• Book value: original cost minus depreciation– E.g. Cost $8K 5 yrs ago, depreciated $800/yr = $4K

• Replacement value: cost to repurchase– E.g. $10,000 to buy new

• Liquidation value: revenue if sold– E.g. not much market: $500

• Appraised value: determined by expert– E.g. $1500 – probably fairest

– The intangible asset: Goodwill

– Value of liabilities – how much is owed

42

Pricing a Business

– Future earnings• How long will the business exist?

• How much will it generate per year?

• Don’t forget the time value of money!– Would you rather have $50 today or $100 in seven years?

» Answer: It doesn’t matter! They’re equivalent

– So if the situation is this:Year 1 2 3 4 5 TotalProfit $50,000 $50,000 $50,000 $50,000 $50,000 $250,000

Year 1 2 3 4 5 TotalProfit $50,000 $50,000 $50,000 $50,000 $50,000

Discounted $45,872 $42,084 $38,609 $35,421 $32,497 $194,483

– Is it worth $250,000? No! $194,483 (at 9% interest rate)

43

Homework

• Read Chapter 8

• Read Chapter 10

• Read “The Business Plan: Introduction”– pp. 153-160

44

Next Class - October 19• Lecture

– Starting a New Business– Product Development– Being Creative– The Business Plan

• Mission Statement

• Quiz– Chapters 8, 10, and Business Plan Introduction

• Teams– Identify Product– Create Mission Statement