Description
During this criteria in regard to the opportunity creating, shaping, recognizing, seizing.
149
Think Big Enough
Since its inception, New Venture Creation has at-
tempted to inspire aspiring entrepreneurs to “think big
enough.” Time and again the authors have observed
the classic small business owner who, almost like a
dairy farmer, is enslaved by and wedded to the busi-
ness. Extremely long hours of 70, 80, or even 100 hours
a week, and rare vacations, are often the rule rather
than the exception. And these hardworking owners
rarely build equity, other than in the real estate they
may own for the business. One of the big differences
between the growth- and equity-minded entrepreneur
and the traditional small business owner is that the en-
trepreneur thinks bigger.
In China, aided by the country’s rapid growth, en-
trepreneurs think big. Many are starting e-commerce
businesses to be the next Jack Ma. There are many
advantages to running an e-commerce company: it is
cheaper than a brick-and-mortar store; it has the po-
tential of reaching more people; it does not need a
physical infrastructure. The last point is important, as
5
Chapter Five
The Opportunity: Creating, Shaping,
Recognizing, Seizing
I was seldom able to see an opportunity, until it ceased to be one.
Mark Twain
Results Expected
Upon completion of this chapter, you will be able to
1. Discuss the importance of “think big enough” and the realities that accompany most
new ventures.
2. Describe how the most successful higher-potential ventures track a “circle of ecstasy”
and match investors’ appetites in the “food chain” for ventures.
3. Define the differences between an idea and an opportunity.
4. Assess opportunity via a zoom lens on the criteria used by successful entrepreneurs,
angels, and venture capital investors in evaluating potential ventures.
5. Explain the roles that ideas, pattern recognition, and the creative process play in
entrepreneurship.
6. Identify sources of information for finding and screening venture opportunities.
7. Generate some new venture ideas and your personal criteria using the three idea
generation exercises.
8. Conceive of the next sea changes related to recent advances in technology and socie-
tal, demographic, and environmental trends.
9. Provide insights into and analysis of the Storyplanet case study.
tim81551_ch05IT.qxd 1/20/12 10:47 AM Page 149
China simply does not have the infrastructure of
Western countries. Think of it in similar terms as
telecommunications, where many developing nations
have skipped landlines altogether and gone straight
to reliance on mobile communications. Western VCs
are enticed by the statistics. First, China is experienc-
ing a 9 percent growth rate. Second, huge numbers of
people are moving into the middle class. And third,
the e-commerce market in China is expected to grow
to $136 billion by 2015.
In our interview with Dr. Stephen Chiao ( ),
he mentioned a well-known nationwide hotel chain
in China called Home Inn. Dr. Chiao is a visionary in
that he was able to identify Home Inn as a company
to grow. The founders of Home Inn are themselves
visionaries as they are good at identifying and defin-
ing needs and meeting these needs by innovating
their business model and services.
Biotech entrepreneurs in Taiwan also think big.
The founders of biotech companies in Taiwan all
think globally about the market and strategically
about the technology they want to focus on. How-
ever, Taiwan VCs remain practical—in this money-
burning field, they still mostly bet their money on the
start-ups with good cash flow.
One such biopharmaceutical company is Taiwan
Liposome Company (TLC). It engages in research,
development, and commercialization of proprietary
drug delivery systems for improving the treatment of
cancer, ophthalmic conditions, and infectious dis-
eases. TLC has a team of researchers, management
staff, production experts, and advisors who are build-
ing TLC into an organization recognized for its excel-
lence in targeted delivery and rapid advancement of
products through the drug development process. The
company has operations in South San Francisco, Cal-
ifornia, and Taipei.
Another innovative Taiwan company that thinks
big is Wretch company. The founders of Wretch did
such a wonderful job in making it a strong local player
in Web 2.0 (social networking) that it attracted the at-
tention of Yahoo! in 2006. After its acquisition, we
can still see the ambition and vision of the founders
and the growth of the Wretch team.
PayEasy is one of Taiwan’s most profitable e-
commerce companies. It sells cosmetics and beauty-
care related products to women. PayEasy’s philoso-
phy is “Try Faster, Fail Faster, and Adjust Faster”.
This company does not do market research by such
traditional methods as sending out questionnaires.
Instead, as an Internet company, it relies on its
click rate for evaluation of its products’ popularity.
PayEasy’s organizational management surrounds
three values: “Members”, “Integration”, and “Shar-
ing”: the company tries to engage the right people
(members); it integrates resources, ideas, and skills
for innovation, and it ensures that its people are able
to share in the profits.
Patricia Cloherty puts it this way: “It is critical to
think big enough. If you want to start and build a
company, you are going to end up exhausted. So you
might as well think about creating a BIG company. At
least you will end up exhausted and rich, not just ex-
hausted!”
Pat has a wealth of experience as a venture capital-
ist and is past president of Patrioff & Company in
New York City. She also served as the first female
president of the National Venture Capital Associa-
tion. In these capacities, she has been a lead investor,
board member, and creator of many highly successful
high-technology and biotechnology ventures, many
of which were acquired or achieved an initial public
offering (IPO).
Her theme of thinking bigger is embedded
throughout this book. How can you engage in a “think
big” process that takes you on a journey treading the
fine line between high ambitions and being totally out
of your mind? How do you know whether the idea you
are chasing is just another rainbow or has a bona fide
pot of gold at the end? You can never know which side
of the line you are on—and can stay on—until you try
and until you undertake the journey.
Opportunity through a Zoom Lens
The original proposal by founder Scott Cook to launch
a new software company called Intuit was turned
down by many venture capital investors before it was
funded! The largest e-commerce company in Japan,
Rakuten, did not receive any venture capital funding
at all. Alibaba was turned down by VCs before it
emerged as one of the most successful high-tech en-
terprises in China.
Three companies that failed to get initial capital
funding but managed to achieve success include
Geely, Zongshen Motorcycle, and New Hope Group
(NHG). Geely is one of China’s top 10 automobile
manufacturers. Zongshen Motorcycle, one of the
core subsidiaries of Zongshen Industrial Group, has
the assets of RMB 1.1 billion, more than 2,500 em-
ployees, and the annual output of 4 million motorcy-
cles. NHG is one of the largest agribusiness enter-
prises in China. In fact, it has achieved such
spectacular success that it has become a successful
private investor in the financial service industry.
NHG is the largest shareholder of Minsheng Bank in
China.
Thousands of similar examples illustrate just how
complex, subtle, and situational (at the time, in the
market space, the investor’s other alternatives, etc.) is
the opportunity recognition process. If the brightest,
150 Part II The Opportunity
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Chapter 5 The Opportunity: Creating, Shaping, Recognizing, Seizing 151
most knowledgeable, and most sophisticated in-
vestors in the world miss opportunities such as those
presented by Alibaba and Geely, we can conclude
that the journey from idea to high-potential opportu-
nity is illusive, contradictory, and perilous. Think of
this journey as a sort of road trip through varied ter-
rain and weather conditions. At times the journey
consists of full sunshine and straight, smooth super-
highways, as well as twisting, turning, narrow one-
lane passages that can lead to breathtaking views.
Along the way you also will unexpectedly encounter
tornadoes, dust storms, hurricanes, and volcanoes.
All too often you seem to run out of gas with none in
sight, and flat tires come when you least expect them.
This is the entrepreneur’s journey.
Transforming Caterpillars
into Butterflies
This chapter is dedicated to making that journey
friendlier by focusing a zoom lens on the opportu-
nity. It shares the road maps and benchmarks used
by successful entrepreneurs, venture capitalists, an-
gels, and other private equity investors in their quest
to transform the often shapeless caterpillar of an
idea into a spectacularly handsome butterfly of a
venture. These criteria comprise the core of their
due diligence to ascertain the viability and profit po-
tential of the proposed business, and therefore the
balance of risk and reward. We will examine the role
of ideas and pattern recognition in the creative
process of entrepreneurship.
You will come to see the criteria used to identify
higher-potential ventures as jumping-off points at
this rarefied end of the opportunity continuum,
rather than mere end points. Only about 5 percent of
entrepreneurs create ventures that emerge from the
pack. Examined through a zoom lens, these ventures
reveal a highly dynamic, constantly molding, shap-
ing, and changing work of art, rather than a product
of a formula or a meeting of certain items on a
checklist. This highly organic and situational charac-
ter of the entrepreneurial process underscores the
criticality of determining fit and balancing risk and
reward. As the authors have argued for three
decades: The business plan is obsolete as soon as it
comes off the printer! It is in this shaping process
that the best entrepreneurial leaders and investors
add the greatest value to the enterprise and cre-
atively transform an idea into a venture.
New Venture Realities
It is useful to put the realities faced by Jack Ma
and millions of others in perspective. Consider the
following fundamental realities as normal as you
seek to convert your caterpillar into a gorgeous but-
terfly:
New Ventures: Fundamental Realities
Most new ventures are works in process and
works of art. What you start out to do is not
what you end up doing.
Most business plans are obsolete at the printer.
Onset Venture Partners found that 91 percent
of portfolio companies that rigidly followed their
business plans failed!
Speed, adroitness of reflex, and adaptability are
crucial. Keep the knees bent! Stay on your toes!
The key to succeeding is failing quickly and re-
couping quickly, and keeping the tuition low.
Success is highly situational, depending on time,
space, context, and stakeholders.
The best entrepreneurs specialize in making
“new mistakes” only.
Starting a company is a lot harder than it looks, or
you think it will be; but you can last a lot longer
and do more than you think if you do not try to
do it solo, and you don’t give up prematurely.
These realities are intended to convey the highly dy-
namic, at times chaotic nature of this beast, and the
highly dynamic context within which most new ven-
tures evolve. Such realities present so much room for
the unexpected and the contradictory that it places a
premium on thinking big enough and doing every-
thing you can to make sure your idea becomes an op-
portunity. Therefore, how can the aspiring entrepre-
neur think about this complex, even daunting
challenge?
The Circle of Ecstasy and the Food
Chain for Ventures
What most small businesses do not know, but what is
a way of life in the world of high-potential ventures, is
what we will call the “circle of venture capital ec-
stasy” (Exhibit 5.1) and the “food chain for entrepre-
neurial ventures” (Exhibit 5.2). These concepts en-
able the entrepreneur to visualize how the company
building–investing–harvesting cycle works. Under-
standing this cycle and the appetites of different sup-
pliers in the capital markets food chain enables you to
answer these questions: For what reason does this
venture exist and for whom? Knowing the answers to
these questions has profound implications for fund-
raising, team building, and growing and harvesting
the company—or coming up short in any of these
critical entrepreneurial tasks.
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Exhibit 5.1 shows that the key to creating a com-
pany with the highest value (e.g., market capitaliza-
tion) begins with identifying an opportunity in the
“best technology and market space,” which creates
the attraction for the “best management team.”
Speed and agility to move quickly attract the “best ven-
ture capitalists, board members, and other mentors
and advisers” who can add value to the venture.
Exhibit 5.2 captures the food chain concept,
which will be discussed again in greater detail in Chap-
ter 13. Different players in the food chain have very
different capacities and preferences for the kind of
venture in which they want to invest. The vast majority
of start-up entrepreneurs spend inordinate amounts of
time chasing the wrong sources with the wrong ven-
ture. One goal in this chapter, and again in Chapter 13,
is to provide a clear picture of what those criteria are
and to grasp what “think big enough” means to the
players in the food chain. This is a critical early step to
avoid wasting time chasing venture capitalists, angels,
and others when there is a misfit from the outset. As
one CEO put it, “There are so many investors out
there that you could spend the rest of your career
meeting with them and still not get to all of them.” In
fact, the problem is compounded when seeking angel
or informal investors because there are a hundred
times more of them than there are venture capitalists.
Why waste time thinking too small and on ventures
for which there is no appetite in the financial market-
place? Knowing how capital suppliers and entrepre-
neurs think about the opportunity creation and recog-
nition process, their search and evaluation strategies,
and what they look for is a key frame of reference.
152 Part II The Opportunity
EXHIBIT 5.1
Circle of Venture Capital Ecstasy
Highest market
capitalization
Top decile internal
rate of return
Best technology
and market space
Best management
teams
Best speed of
attack
Best venture
capitalists, board,
brain trust advisors
Best
underwriters
EXHIBIT 5.2
The Capital Markets Food Chain for Entrepreneurial Ventures
Stage of Venture R&D Seed Launch High Growth
Company enterprise Less than $1 million $1 million–$5 million ? $1–$50 ?million More than $100 million
Value at stage
Sources Founders FFF* Venture capital series IPOs
High net worth Angel funds A, B, C . . .
†
Strategic acquirers
individuals Seed funds Strategic partners Private equity
FFF* SBIR Very high net worth
SBIR** individuals
Private equity
Amount of capital invested Up to $200,000 $10,000–$500,000 $500,000–$20 million $10–$50 ?million
% company owned at IPO 10%–25% 5%–15% 40%–60% by prior 15%–25% by public
investors
Share price and number
‡
$.01–$.50 $.50–$1.00 $1.00–$8.00?/? $12–$18?
1–5 million 1–3 million 5–10 million 3–5 million
* Friends, families, and fools.
†
Venture capital series A, B, C . . . (average size of round)
A @ $5.1 million—startup
Round B @ $8.1 million—product development
(Q4 2004) C? @ $11.3 million—shipping product
Valuations vary markedly by industry (e.g., 2x
s
).
Valuations vary by region and VC cycle.
‡
At post–IPO.
**Small Business Innovation Research, a N&F Program. The SBA provides a number of financial assistance programs for small businesses,
including 7(a) loan guarantees, 504 long-term finance loans, and disaster assistance loans.
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Chapter 5 The Opportunity: Creating, Shaping, Recognizing, Seizing 153
When Is an Idea an Opportunity?
The Essence: Four Anchors If an idea is not
an opportunity, what is an opportunity? Superior
business opportunities have the following four funda-
mental anchors:
1. They create or add significant value to a cus-
tomer or end user.
2. They do so by solving a significant problem,
removing a serious pain point, or meeting a
significant want or need—for which someone
is willing to pay a premium.
3. They have robust market, margin, and money-
making characteristics that will allow the en-
trepreneur to estimate and communicate
sustainable value to potential stake-holders:
large enough ($50 million ?), high growth
(20 percent ?), high gross margins (40 per-
cent ?), strong and early free cash flow
(recurring revenue, low assets, and working
capital), high profit potential (10 to 15 percent
?after tax), and attractive, realizable returns
for investors (25 to 30 percent ?IRR).
4. They are a good fit with the founder(s) and
management team at the time and market-
place—along with an attractive risk–reward
balance.
For an opportunity to have these qualities, the
“window of opportunity”
1
is opening and will remain
open long enough. Further, entry into a market with
the right characteristics is feasible, and the manage-
ment team is able to achieve it. The venture has or is
able to achieve a competitive advantage (i.e., to
achieve leverage). Finally, the economics of the ven-
ture are rewarding and forgiving enough to allow for
significant profit and growth potential.
To summarize: A superior opportunity has the
qualities of being attractive, durable, and timely and
is anchored in a product or service that creates or
adds value for its buyer or end user—usually by solv-
ing a very painful, serious problem.
2
The most suc-
cessful entrepreneurs, venture capitalists, and private
investors are opportunity-focused; that is, they start
with what customers and the marketplace want, and
they do not lose sight of this.
The Real World
Opportunities are created, or built, using ideas and
entrepreneurial creativity. Yet while the image of a
carpenter or mason at work is useful, in reality the
process is more like the collision of particles in a nu-
clear reaction or like the spawning of hurricanes over
the ocean. Ideas interact with real-world conditions
and entrepreneurial creativity at a point in time. The
product of this interaction is an opportunity around
which a new venture can be created.
The business environment in which an entrepre-
neur launches his or her venture cannot be altered
significantly. Despite assumptions often made con-
cerning social and nonprofit organizations, they also
are subject to market forces and economic con-
straints. Consider, for instance, what would happen
to donations if it were perceived that a nonprofit or-
ganization was not reinvesting its surplus returns, but
instead was paying management excessive salaries.
Or what if a socially oriented organization concen-
trated all its efforts on the social mission while ne-
glecting revenues? Clearly dealing with suppliers,
production costs, labor, and distribution is critical to
the health of these social corporations. Thus social
and nonprofit organizations are just as concerned
with positive cash flow and generating sufficient cash
flows, even though they operate in a different type of
market than for-profit organizations. For-profit busi-
nesses operate in a free enterprise system character-
ized by private ownership and profits.
Spawners and Drivers of Opportunities
In a free enterprise system, changing circumstances,
chaos, confusion, inconsistencies, lags or leads,
knowledge and information gaps, and a variety of
other vacuums in an industry or market spawn
opportunities.
Changes in the business environment and the abil-
ity to anticipate these changes are so critical in entre-
preneurship that constant vigilance for changes is a
valuable habit. An entrepreneur with credibility, cre-
ativity, and decisiveness can seize an opportunity
while others study it.
Opportunities are situational. Some conditions un-
der which opportunities are spawned are idiosyn-
cratic, while at other times they are generalizable and
can be applied to other industries, products, or ser-
vices. In this way, cross-association can trigger in the
entrepreneurial mind the crude recognition of exist-
ing or impending opportunities. It is often assumed
that a marketplace dominated by large, multibillion-
dollar players is impenetrable by smaller, entrepre-
neurial companies. You can’t possibly compete with
1
The window of opportunity is defined as the period of revenue growth in the life cycle of the target industry when the slope of the revenue curve is increasing.
The window of opportunity begins to close as that revenue curve levels off.
2
See J. A. Timmons, New Business Opportunities (Acton, MA: Brick House, 1989).
tim81551_ch05IT.qxd 1/20/12 10:47 AM Page 153
entrenched, resource-rich, established companies.
The opposite can be true for several reasons. A num-
ber of research projects have shown that it can take
10 years or more for a large company to change its
strategy and even longer to implement the new strat-
egy because it can take 10 years or more to change
the culture enough to operate differently. For a new
or small company, 10 or more years is forever.
When Huawei launched its first digital telephone
switches in 1993, the Chinese telephone switches
market was solely dominated by foreign manufactur-
ers like Ericsson, Siemens, and NEC. Lacking gov-
ernment relations and short of capital, Huawei chose
to deploy its switches in small cities and rural areas
where its huge competitors could not reach, or would
not bother to. Today, Huawei is the largest network-
ing and telecommunications equipment supplier in
China, serving 31 of the top 50 telecoms operators in
the world.
3
Some of the most exciting opportunities have
come from fields the conventional wisdom said are
the domain of big business: technological innovation.
The performance of smaller firms in technological
innovation is remarkable—95 percent of the radical
innovations since World War II have come from new
and small firms, not the giants. A National Science
Foundation study found that smaller firms generated
24 times as many innovations per research and
development dollar as did firms with 10,000 or more
employees.
4
There can be exciting opportunities in plain vanilla
businesses that might never get the attention of ven-
ture capital investors. For example, the lawn care in-
dustry is undergoing massive changes spurred by
popular acceptance of organic fertilizers like Cock-
a-Doodle Do. Dentistry is changing rapidly with
innovations in cosmetic approaches and with new
approaches to market segments. Alex Faigel, a young
dental entrepreneur in Boston, caters to walk-in traf-
fic by locating his five dental offices near subway
stops. Keystone Automotive, an auto parts warehouse
and distribution company, grew rapidly to become a
national firm by utilizing sophisticated enterprise re-
source planning systems.
Technology and regulatory changes have pro-
foundly altered and will continue to alter the way we
conceive of opportunities. Cable television with its
hundreds of channels came of age in the 1990s and
brought with it new opportunities in the sale and dis-
tribution of goods from infomercials to shopping net-
works to pay-per-view. The Internet has created an
even more diverse set of opportunities in sales and
distribution, and companies like Alibaba, Ctrip, and
Dangdang.com have made the most of this.
Consider the following broad range of examples
that illustrate the phenomenon of vacuums in which
opportunities are spawned:
Deregulation of telecommunications and the
airlines led to the formation of tens of thou-
sands of new firms in the 1980s, including
Cellular One (now Cingular) and Federal
Express.
Microcomputer hardware in the early 1980s far
outpaced software development. The industry
was highly dependent on the development of
software, leading to aggressive efforts by IBM,
Apple, and others to encourage software entre-
preneurs to close this gap.
Fragmented, traditional industries that have a
craft or mom-and-pop character may have little
appreciation or know-how in marketing and fi-
nance. Such possibilities can range from fishing
lodges, inns, and hotels to cleaners/laundries,
hardware stores, pharmacies, waste manage-
ment plants, flower shops, nurseries, tents, and
auto repairs.
In our service-dominated economy (70 percent
of businesses are service businesses, versus
30 percent just 30 years ago), customer service,
rather than the product itself, can be the criti-
cal success factor. One study by the Forum
Corporation in Boston showed that 70 percent
of customers leave because of poor service
and only 15 percent because of price or
product quality. Can you think of your last
“wow” experience with exceptional customer
service?
The tremendous shift to offshore manufac-
turing of labor-intensive and transportation-
intensive products in Asia, Eastern Europe,
and Mexico, such as computer-related and
microprocessor-driven consumer products, is
an excellent example.
In a wide variety of industries, entrepreneurs
sometimes find that they are the only ones who
can perform. Such fields as consulting, software
design, financial services, process engineering,
and technical and medical products and serv-
ices abound with examples of know-how mo-
nopolies. Sometimes a management team is
simply the best in an industry and irreplaceable
in the near term, just as is seen with great
coaches with winning records.
154 Part II The Opportunity
3http://en.wikipedia.org/wiki/Huawei#Competitive_position.
4
Leifer, McDermott, O’Connor, Peters, Rice, and Veryzer, Radical Innovation: How Mature Companies Can Outsmart Upstarts (Boston: Harvard Business
School Press, 2000).
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Chapter 5 The Opportunity: Creating, Shaping, Recognizing, Seizing 155
Exhibit 5.3 summarizes the major types of discon-
tinuities, asymmetries, and changes that can result in
high-potential opportunities. Creating such changes
through technical innovation (PCs, wireless telecom-
munications, Internet servers, software), influencing
and creating the new rules of the game (airlines,
telecommunications, financial services and banking,
medical products, music and video), and anticipating
the various impacts of such changes are central to
recognizing opportunities.
Search for Sea Changes
A simple criterion for the highest-potential ventures
comes from famed venture capitalist Arthur Rock:
“We look for ideas that will change the way people
live or work.” As a lead investor both in the Silicon
Valley and Asia, Dr. Da Ling Hsh ( ) knows
what the keys are to great successes: “Whoever pays
attention to the dynamic and vibrant Chinese mar-
ket, the keys are, firstly, be fast! We may not be suc-
cessful if we are fast enough but we won’t get any-
where if we are moving slowly. We should always be
aware that engaging foreign investors will result in a
lengthy assessment process, due largely to the in-
vestor’s attempt to control and supervise national
technological development. The time it takes will
increase the uncertainties.”
The best place to start in seeking to identify such
ideas in a macro sense is to identify significant sea
changes that are occurring or will occur. Think of the
profound impact that personal computing, biotech-
nology, and the Internet have had on the past gener-
ation. The great new ventures of the next generation
will come about by the same process and will define
these next great sea changes. Exhibit 5.4 summarizes
some categories for thinking about such changes.
These include technology, market and societal
shifts, and even opportunities spawned from the ex-
cesses produced by the Internet boom. Moore’s
law (the computing power of a chip doubles every
18 months) has been a gigantic driver of much of our
technological revolution over the past 30 years.
Breakthroughs in gene mapping and cloning,
biotechnology, and nanotechnology and changes
brought about by the Internet will continue to create
huge opportunities for the next generation. Beyond
the macro view of sea changes, how can one think
about opportunities in a more practical, less abstract
sense? What are some parameters of business/rev-
enue models that increase the odds of thinking big
enough and therefore appeal to the food chain? At
the end of this chapter is the sea change exercise,
which will challenge you to think creatively and ex-
pansively about how new technology discoveries will
drive the next new industries. This pattern continues
to this day.
Desirable Business/Revenue
Model Metrics
We will emphasize time and again in New Venture
Creation that happiness is a positive cash flow!—but
think cash last. You don’t have an entry strategy until
EXHIBIT 5.3
Summary of Opportunity Spawners and Drivers
Root of Change/Chaos/Discontinuity Opportunity Creation
Regulatory changes Cellular, airlines, insurance, telecommunications, medical, pension
fund management, financial services, banking, tax and SEC laws,
new societal and/or environmental standards and expectations
10-fold change in 10 years or less Moore’s law—computer chips double productivity every 18 months:
financial services, private equity, consulting, Internet, biotech,
information age, publishing
Reconstruction of value chain and channels of distribution Superstores—Staples, Home Depot; all publishing; autos; Internet
sales and distribution of all services
Proprietary or contractual advantage Technological innovation: patent, license, contract, franchise,
copyrights, distributorship
Existing management/investors burned out/undermanaged Turnaround, new capital structure, new breakeven, new free cash
flow, new team, new strategy; owners’ desires for liquidity, exit;
telecom, waste management service, retail businesses
Entrepreneurial leadership New vision and strategy, new team equals secret weapon;
organization thinks, acts like owners
Market leaders are customer obsessed or customer blind New, small customers are low priority or ignored: hard disk drives,
paper, chemicals, mainframe computers, centralized data
processing, desktop computers, corporate venturing, office
superstores, automobiles, software, most services
tim81551_ch05IT.qxd 1/20/12 10:47 AM Page 155
you have said no to lots of ideas; ideas that just come
to you aren’t usually opportunities; and the numbers
don’t matter but the economics really do matter.
The Role of Ideas
Ideas as Tools
A good idea is nothing more than a tool in the hands
of an entrepreneur. Finding a good idea is the first of
many steps in the process of converting an entrepre-
neur’s creativity into an opportunity.
The importance of the idea is often overrated at
the expense of underemphasizing the need for prod-
ucts or services, or both, that can be sold in enough
quantity to real customers.
Further, the new business that simply bursts from
a flash of brilliance is rare. Usually a series of trial-
and-error iterations, or repetitions, is necessary be-
fore a crude and promising product or service fits
with what the customer is willing to pay for. Howard
Head made 40 different metal skis before he finally
made the model that worked consistently. With sur-
prising frequency, major businesses are built around
totally different products than those originally envi-
sioned. Consider these examples:
When 3-M chemist Spence Silver invented a
new adhesive that would not dry or permanently
bond to things, he had no idea what to do with
it. It wasn’t until another 3-M chemist, Arthur
Fry, needed a bookmark for his choir book that
the idea for applying the glue to small pieces of
paper was found, and Post-it Notes were born.
5
Polaroid Corporation was founded with a prod-
uct based on the principle of polarized light. It
was thought that polarized lamps would prevent
head-on collisions between cars by preventing
the “blinding” glare of oncoming headlights. But
the company grew to its present size based on
another application of the same technology: in-
stant photography.
William Steere, CEO of Pfizer, described the
discovery of Viagra, the fastest-selling drug in
history, as having “a certain serendipity” behind
it. The drug was originally developed by Pfizer
to treat angina; its real potency was discovered
as a side effect.
6
As one entrepreneur expressed it,
Perhaps the existence of business plans and the language
of business give a misleading impression of business
building as a rational process. But as any entrepreneur can
confirm, starting a business is very much a series of fits
and starts, brainstorms and barriers. Creating a business is
a round of chance encounters that leads to new opportu-
nities and ideas, mistakes that turn into miracles.
7
The Great Mousetrap Fallacy
Perhaps no one did a greater disservice to genera-
tions of would-be entrepreneurs than Ralph Waldo
Emerson in his oft-quoted line, “If a man can make a
156 Part II The Opportunity
EXHIBIT 5.4
Ideas versus Opportunities:
Search for Sea Changes
Where are opportunities born?
Brontosaurus factor
• Arrogance
• Loss of peripheral vision
• Deadened reflexes—turning
the tanker
• Examples: IBM 1970s–1980s;
U.S. automakers 1960s–1970s;
large steel companies
Core
spawning
grounds
seen from
50,000
feet
Societal sea change
• Changes in ways we live,
learn, work, etc.
• Gilder's law—10x
s
in
10 years
Market sea change
• Value chain disruption/
obsolescence/vulnerability
• Deregulation
Technology sea change
• Moore's law
• Metcalf's law
• Disruption
Irrational exuberance
• Undervalued assets
5
P. R. Nayak and J. M. Ketterman, Breakthroughs: How the Vision and Drive of Innovators in Sixteen Companies Created Commercial Breakthroughs That
Swept the World (New York: Rawson Associates, 1986), chapter. 3.
6
T. Corrigan, “Far More Than the Viagra Company: Essential Guide to William Steere,” Financial Times (London), August 31, 1998, p. 7.
7
J. Godfrey, Our Wildest Dreams: Women Entrepreneurs, Making Money, Having Fun, Doing Good (New York: Harper Business, 1992), p. 27.
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Chapter 5 The Opportunity: Creating, Shaping, Recognizing, Seizing 157
better mousetrap than his neighbor, though he builds
his house in the woods the world will make a beaten
path to his door.”
What can be called the great mousetrap fallacy
was thus spawned. It is often assumed that success is
possible if an entrepreneur can just come up with a
new idea. In today’s changing world, if the idea has
anything to do with technology, success is certain—or
so it would seem.
But the truth is that ideas are inert and, for all
practical purposes, worthless. Further, the flow of
ideas is phenomenal. Venture capital investors, for in-
stance, receive as many as 100 to 200 proposals and
business plans each month. Only 1 percent to 3 per-
cent of these actually received financing, however.
Yet the fallacy persists despite the lessons of prac-
tical experience noted long ago in the insightful reply
to Emerson by O. B. Winters: “The manufacturer
who waits for the world to beat a path to his door is a
great optimist. But the manufacturer who shows this
‘mousetrap’ to the world keeps the smoke coming out
his chimney.”
Contributors to the Fallacy
One cannot blame it all on Ralph Waldo Emerson.
There are several reasons for the perpetuation of the
fallacy. One is the portrayal in oversimplified accounts
of the ease and genius with which such ventures as
Xerox, IBM, and Polaroid made their founders
wealthy. Unfortunately, these exceptions do not pro-
vide a useful rule to guide aspiring entrepreneurs.
Investors seem particularly prone to mousetrap
myopia. Perhaps, like Emerson, they are substantially
sheltered in viewpoint and experience from the
tough, competitive realities of the business world.
Consequently, they may underestimate, if not seri-
ously downgrade, the importance of what it takes to
make a business succeed. Frankly, inventing and
brainstorming may be a lot more fun than the diligent
observation, investigation, and nurturing of cus-
tomers that are often required to sell a product or
service.
Contributing also to the great mousetrap fallacy is
the tremendous psychological ownership attached to
an invention or to a new product. This attachment is
different from attachment to a business. While an in-
tense level of psychological ownership and involve-
ment is certainly a prerequisite for creating a new
business, the fatal flaw in attachment to an invention
or product is the narrowness of its focus. The focal
point needs to be the building of the business, rather
than just one aspect of the idea.
Zentech is a high growth Taiwanese company that
solves R&D problems for its clients. Zentech’s
founder, Dr. Cheng I Ling ( ), is Taiwan’s
materials science expert and undoubtedly an indus-
trial guru in steels and materials. He explained, “I be-
lieve too-good-to-be-sold products can be found in
Zentech while I was working vigorously on many new
formulas that would ecologically and functionally
solve my customers’ problems. I believe my products
were environmentally friendly enough to satisfy even
EU regulations; such standards were in fact not yet
adopted in the Asian market back in 2004. The mar-
ket quickly proved that the products were too good to
be sold. Simply put, the timing was not right, so the
market was not there.”
Related to “doing it better” is the idea of doing it
first. Having the best idea first is by no means a guar-
antee of success. Just ask the creators of the first Chi-
nese character software company, Hansvision, what
being first did for them. They would describe a
painful downside to being first. Sometimes the first
ones merely prove to the competitors that a market
exists to be snared. Therefore, unless having the best
idea also includes the capacity to preempt other com-
petitors by capturing a significant share of the market
or by erecting insurmountable barriers to entry, first
does not necessarily mean most viable.
Spotting an opportunity within an existing market
was a key aspect in the development of a mass-pro-
duced rotary electric toothbrush. The founding en-
trepreneur had noted a large pricing spread among
retail products. At the low end were devices in the
range of $5. There was then a jump to the $60 to $80
range, and then another jump to products that were
selling for well over $100. His research showed that
new battery technology, plus outsourcing and a new
rotary design, could result in a disposable product
that would fill the gaps, steal market share, and yield
substantial profits. His $1.75 million business turned
into $475 million when his company was sold to Proc-
ter & Gamble. This is an excellent example of a clear
pricing pattern that can be applied elsewhere.
8
There are many other Asian companies that have
spotted and seized opportunities in existing markets.
Mr. Hsieh ( ), founder of CGS International
Inc ( ), spotted technically achievable white
space to fill by offering quality but affordable prod-
ucts that would improve people’s user experience of
IBM computers. (“White space” refers to a market
opportunity that has not been exploited.) Wretch.cc
( ), a Taiwanese community Web site, orig-
inated from dissatisfaction of what was offered on the
market, both domestically and internationally. It has
8
This example was provided by Harvard Business School professor William A. Sahlman during a session of the 2004 Symposium for Entrepreneurship Educators
(SEE) at Babson College.
tim81551_ch05IT.qxd 1/20/12 10:47 AM Page 157
changed the entire landscape and become the norm of
the blogging site designs in Taiwan and beyond. The
founder of CupC+ franchising ( ),
Miss Kao, made acute observations of what was avail-
able in the franchising industry and what was not.
She found that there was a high entry barrier to re-
tailing fruit juices because of the technical difficulty
of juice extraction and preservation. So she looked for
a partner who owned manufacturing and preserva-
tion technologies, and went on to market fruit through
retail outlets and fruit juices through franchising.
Pattern Recognition
The Experience Factor
One cannot build a successful business without ideas,
just as one could not build a house without a hammer.
In this regard, experience is vital in looking at new
venture ideas.
Time after time, experienced entrepreneurs ex-
hibit an ability to recognize quickly a pattern—and an
opportunity—while it is still taking shape. The late
Herbert Simon, Nobel laureate and Richard King,
Mellon University Professor of Computer Science
and Psychology at Carnegie-Mellon University, wrote
extensively about pattern recognition. He described
the recognition of patterns as a creative process that is
not simply logical, linear, and additive but intuitive
and inductive as well. It involves, he said, the creative
linking, or cross-association, of two or more in-depth
“chunks” of experience, know-how, and contacts.
9
Simon contended that it takes 10 years or more for peo-
ple to accumulate what he called the “50,000 chunks”
of experience that enable them to be highly creative
and recognize patterns—familiar circumstances that
can be translated from one place to another.
Thus the process of sorting through ideas and rec-
ognizing a pattern can also be compared to the process
of fitting pieces into a three-dimensional jigsaw puzzle.
It is impossible to assemble such a puzzle by looking at
it as a whole unit. Rather, one needs to see the rela-
tionships between the pieces and be able to fit to-
gether some that are seemingly unrelated before the
whole is visible.
Recognizing ideas that can become entrepreneurial
opportunities stems from a capacity to see what others
do not—that one plus one equals three. Consider the
following examples of the common thread of pattern
recognition and new business creation by linking
knowledge in one field or marketplace with quite dif-
ferent technical, business, or market know-how:
Morris Chang, founder of Taiwan Semi-
conductor Manufacturing Co. (TSMC)
( ), recognized that the
increasing cost of wafer making would reduce the
profitability for integrated design manufacturer
(IDM) companies. TSMC started over by serving
smaller integrated circuit (IC) design houses,
helping them manufacture low-end IC chips,
and then gradually got into the chip-making
business for top IDM companies such as Intel.
TSMC reshaped the business model of the
semiconductor industry, making chips for most
of the IC design houses and IDM companies.
Today TSMC is the biggest chip foundry in the
world, and is an essential partner to U.S.
companies such as Qualcomm and Nvidia
(NVDA ).
10
Taiwan Lung Meng Technology (Lung Meng)
( ) revolutionized the paper mak-
ing industry by not using wood pulp, and there-
fore not having to fell trees, to produce a truly
unique and eco-friendly tree-free paper. Lung
Meng employs a blend of mineral powder and a
small infusion of non-toxic resin in its revolution-
ary “stone paper making” method, an environ-
mentally sustainable solution which has been
patented in over 40 countries including Australia,
Byelorussia, China, Europe, the United States,
and South Africa.
iPartment ( ) saw that a growing num-
ber of female Internet users were seeking a safe
way to meet and make friends in cyberspace. It
correctly positioned itself, and even with stiff
competition from other social networking
services, it has grown into one of the most popu-
lar social networking sites both in Taiwan and
China.
The founder of Atlaspost.com ( ) saw
the uniqueness of adding map/locating functions
to blogs back in 2006 when map-related
application programming interfaces (API) in the
United States were just receiving high market
acceptance. Convinced that such services would
soon be coming to Taiwan, Atlaspost.com took
that step ahead of all the others.
The inception of Xue Xue Institute ( )
was due largely to the Taiwan government’s prop-
aganda in promoting the cultural creativity in-
dustry ( ) Xue Xue’s founder, Ms.
Li Ling Hsh, had observed advancements in the
creativity scene in Asian society in general, and
Taiwan society in particular.
158 Part II The Opportunity
9
H. A. Simon, “What We Know about the Creative Process” in Frontiers in Creative and Innovative Management ed. R. L. Kuhn, (Cambridge, MA: Ballinger,
1985), pp. 3–20.
10
From company profile on:http://www.tsmc.com.
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Chapter 5 The Opportunity: Creating, Shaping, Recognizing, Seizing 159
The founders of Liang An Coffee ( )
observed Taiwan’s environmental and social
development before positioning itself in the mar-
ket place and designing its product offerings. The
reason why the company features western food on
its menu is due to the observation that the people
on mainland China, as they grew more affluent,
did not want to eat Chinese food every day, and
wanted to try something different. The founders
also observed that Western businessmen needed
decent places to eat and talk. Finally, if the busi-
ness was to expand through franchising, western
food would be the logical choice, as there were
just too many regional variations in Chinese food
to make it fit the franchising model.
Enhancing Creative Thinking
The creative thinking just described is of great value
in recognizing opportunities, as well as other aspects
of entrepreneurship. The notion that creativity can be
learned or enhanced holds important implications for
entrepreneurs who need to be creative in their think-
ing. Most people can certainly spot creative flair. Chil-
dren seem to have it, and many seem to lose it. Several
studies suggest that creativity actually peaks around
the first grade because a person’s life tends to become
increasingly structured and defined by others and by
institutions. Further, the development of intellectual
discipline and rigor in thinking takes on greater im-
portance in school than during the formative years,
and most of our education beyond grade school
stresses a logical, rational mode of orderly reasoning
and thinking. Finally, social pressures may tend to be
a taming influence on creativity.
Evidence suggests that one can enhance creative
thinking in later years. The Eureka! Ranch (www.
eurekaranch.com) business was founded on the prin-
ciple that creativity is inherent in most people and
can be unleashed by freeing them from con-
vention. Often executives will be doused with water
as they step out of their vehicles onto the ranch.
One of the authors participated in one of these
training sessions, and it became evident during the
sessions that the methods did unlock the thinking
process and yielded very imaginative solutions.
Approaches to Unleashing Creativity
Since the 1950s, much has been learned about the
workings of the human brain. Today there is general
agreement that the two sides of the brain process in-
formation in different ways. The left side performs ra-
tional, logical functions, while the right side operates
the intuitive and nonrational modes of thought. A per-
son uses both sides, actually shifting from one mode
to the other (see Exhibit 5.5). Approaching ideas cre-
atively and maximizing the control of these modes of
thought can be of value to the entrepreneur.
More recently, professors have focused on the
creativity process. For instance, Michael Gordon
stressed the importance of creativity and the need for
brainstorming in a presentation on the elements of
personal power. He suggested that using the follow-
ing 10 brainstorming rules could enhance creative
visualization:
EXHIBIT 5.5
Comparison of Left-Mode and Right-Mode Brain Characteristics
L-Mode R-Mode
Verbal: Using words to name, describe, and define.
Analytic: Figuring things out step-by-step and part-by-part.
Symbolic: Using a symbol to stand for something. For example,
the sign ? stands for the process of addition.
Abstract: Taking out a small bit of information and using it to
represent the whole thing.
Temporal: Keeping track of time, sequencing one thing after
another, doing first things first, second things second, etc.
Rational: Drawing conclusions based on reason and facts.
Digital: Using numbers as in counting.
Logical: Drawing conclusions based on logic, one thing following
another in logical order—for example, a mathematical theorem
or a well-stated argument.
Linear: Thinking in terms of linked ideas, one thought directly
following another, often leading to a convergent conclusion.
Nonverbal: Awareness of things, but minimal connection with words.
Synthetic: Putting things together to form wholes.
Concrete: Relating to things as they are at the present moment.
Analogic: Seeing likenesses between things; understanding
metaphoric relationships.
Nontemporal: Without a sense of time.
Nonrational: Not requiring a basis of reason or facts; willingness to
suspend judgment.
Spatial: Seeing where things are in relation to other things, and how
parts go together to form a whole.
Intuitive: Making leaps of insight, often based on incomplete
patterns, hunches, feelings, or visual images.
Holistic: Seeing whole things all at once; perceiving the overall
patterns and structures, often leading to divergent conclusions.
Source: “A Comparison of Left-Mode and Right-Mode Characteristics,” from Drawing on the Right Side of the Brain by Betty Edwards, copyright ©
1979, 1989, 1999 by Betty Edwards. Used by permission of Jeremy P. Tarcher, an imprint of Penguin Group (USA) Inc.
tim81551_ch05IT.qxd 1/30/12 10:26 AM Page 159
160 Part II The Opportunity
1. Define your purpose.
2. Choose participants.
3. Choose a facilitator.
4. Brainstorm spontaneously, copiously.
5. No criticisms, no negatives.
6. Record ideas in full view.
7. Invent to the “void.”
8. Resist becoming committed to one idea.
9. Identify the most promising ideas.
10. Refine and prioritize.
Team Creativity
Teams of people can generate creativity that may not
exist in a single individual. The creativity of a team
of people is impressive, and comparable or better cre-
ative solutions to problems evolving from the collec-
tive interaction of a small group of people have been
observed.
A good example of the creativity generated by us-
ing more than one head is that of a company founded
by a Babson College graduate with little technical
training. He teamed up with a talented inventor, and
the entrepreneurial and business know-how of the
founder complemented the creative and technical
skills of the inventor. The result has been a rapidly
growing multimillion-dollar venture in the field of
video-based surgical equipment.
Students interested in exploring this further may
want to do the creative squares exercise at the end of
the chapter.
Big Opportunities with Little Capital
Within the dynamic free enterprise system, opportu-
nities are apparent to a limited number of individu-
als—and not just to the individuals with financial re-
sources. Ironically, successful entrepreneurs such as
Howard Head attribute their success to the discipline
of limited capital resources. Thus, in the 1990s, many
entrepreneurs learned the key to success is in the art
of bootstrapping, which “in a start-up is like zero in-
ventory in a just-in-time system: it reveals hidden
problems and forces the company to solve them.”
11
Consider the following:
A 1991 study revealed that of the 110 start-ups
researched in the United States, 77 had been
launched with $50,000 or less; 46 percent were
started with $10,000 or less as seed capital.
Further, the primary source of capital was over-
whelmingly personal savings (74 percent)
rather than outside investors with deep
pockets.
12
This pattern of frugality in start-ups
is as true today as it was then.
George Yen ( ) started his trading com-
pany at the age of 30 by buying up a branch of
the company which was heavily in debt when
he served as VP of that company in the United
States. It was an opportunity out of a crisis—
he acquired the company for only US$1 and
renamed it Sequoia International. From the
day of the acquisition, George started turning
it around, and his company made profits
within the very first year. George’s former
company took only one day to decide to sell
the branch to him, with the condition that
George also had to pay back pretaxed profit for
the first 5 years of at least half a million dollars,
and this was agreed simply based on George’s
integrity and reputation built up in that
company.
Putting their talents (cartooning and finance)
together, Roy and Walt Disney moved to
California and started their own film studio—
with $290 in 1923. By mid-2007, the Walt
Disney Co. had a market capitalization exceed-
ing $67.5 billion.
13
While working for a Chicago insurance com-
pany, a 24-year-old sent out 20,000 inquiries for
a black newsletter. With 3,000 positive re-
sponses and $500, John Harold Johnson pub-
lished Jet for the first time in 1942. In the
1990s, Johnson Publishing publishes various
magazines, including Ebony.
14
With $100 Nicholas Graham, age 24, went to a
local fabric store, picked out some fabrics, and
made $100 worth of ties. Having sold the ties to
specialty shops, Graham was approached by
Macy’s to place his patterns on men’s under-
wear. So Joe Boxer Corporation was born, and
“six months into Joe Boxer’s second year, sales
had already topped $1 million.”
15
Cabletron founders Craig Benson and Bob
Levine literally started their company in a
garage and grew it to over $1.4 billion in
revenue in under 10 years.
Vineyard Vines is a creative necktie company
that was started on Martha’s Vineyard with
$40,000 of credit card debt.
11
A. Bhide, “Bootstrap Finance,” Harvard Business Review, November–December 1992, p. 112.
12
E. B. Roberts, Entrepreneurs in High Technology: Lessons from MIT and Beyond (New York: Oxford University Press, 1991), p. 144, table 5–2.
13
Financial data from Dow Jones Interactive,http://www.djnr.com.
14
Ibid.
15
R. A. Mamis, “The Secrets of Bootstrapping,” INC., September 1991, p. 54.
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Chapter 5 The Opportunity: Creating, Shaping, Recognizing, Seizing 161
Real Time
Opportunities exist or are created in real time and
have what we call a window of opportunity. For an
entrepreneur to seize an opportunity, the window
must be open and remain open long enough to
achieve market-required returns.
Exhibit 5.6 illustrates a window of opportunity for
a generalized market. Markets grow at different
rates over time, and as a market quickly becomes
larger, more and more opportunities are possible. As
the market becomes established, conditions are not
as favorable. Thus at the point where a market starts
to become sufficiently large and structured (e.g., at
five years in Exhibit 5.6), the window opens; the win-
dow begins to close as the market matures (e.g., at
12–13 years in the exhibit).
The curve shown describes the rapid growth pat-
tern typical of such new industries as microcomput-
ers and software, cellular phones, quick oil changes,
and biotechnology. For example, in the cellular
phone industry, most major cities began service
between 1983 and 1984. By 1989, there were more
than 2 million subscribers in the United States, and
the industry continued to experience significant
growth. In other industries where growth is not so
rapid, the slope of a curve would be less steep and
the possibilities for opportunities fewer.
In considering the window of opportunity, the
length of time the window will be open is important.
It takes a considerable length of time to determine
whether a new venture is a success or a failure. And
if it is to be a success, the benefits of that success
need to be harvested.
Exhibit 5.7 shows that for venture-capital-backed
firms, the lemons (i.e., the losers) ripen in about
two and a half years, while the pearls (i.e., the
winners) take seven or eight years. An extreme exam-
ple of the length of time it can take for a pearl to be
harvested is the experience of a Silicon Valley venture
capital firm that invested in a new firm in 1966 and
was finally able to realize a capital gain in early 1984.
Another way to think of the process of creating
and seizing an opportunity in real time is to think of
it as a process of selecting objects (opportunities)
from a conveyor belt moving through an open win-
dow—the window of opportunity. The speed of the
conveyor belt changes, and the window through
which it moves is constantly opening and closing.
The continually opening and closing window and the
constantly changing speed of the conveyor belt rep-
resent the volatile nature of the marketplace and the
importance of timing. For an opportunity to be cre-
ated and seized, it needs to be selected from the con-
veyor belt before the window closes.
The ability to recognize a potential opportunity
when it appears and the sense of timing to seize that
opportunity as the window is opening, rather than
slamming shut, are critical. That opportunities are a
function of real time is illustrated in a statement
made by Ken Olsen, then president and founder of
Digital Equipment Corporation, in 1977: “There is no
reason for any individual to have a computer in their
home.” It is not easy for even the world’s leading
experts to predict just which innovative ideas and
concepts for new business will evolve into the major
industries of tomorrow. This is vividly illustrated by
several quotations from very famous innovators. In
1901, two years before the famous flight, Wilbert
Wright said, “Man will not fly for 50 years.” In 1910
Thomas Edison said, “The nickel-iron battery will put
the gasoline buggy . . . out of existence in no time.”
And in 1932 Albert Einstein made it clear: “[There]
is not the slightest indication that nuclear energy will
ever be obtainable. It would mean that the atom
would have to be shattered at will.”
When Taobao.com, now China’s biggest C2C
online bazaar, was founded in 2003, eBay and its
Chinese partner Eachnet was already controlling
90 percent of the online shopping business, and so
didn’t see Taobao as a threat. While eBay’s Eachnet
charged listing and transaction fees, Taobao was free
to use. eBay once ridiculed Taobao’s strategy, saying
that “free is not a business model”. However,
Taobao’s free model quickly attracted a large group
of buyers and sellers. With this free model, com-
bined with its deep understanding of the local mar-
ket, Taobao now commands 80 percent of China’s
C2C market, while eBay was totally defeated and
pulled out of China in 2006.
16
Relation to the Framework of Analysis
Successful opportunities, once recognized, fit with
the other forces of new venture creation. This
iterative process of assessing and reassessing the
fit among the central driving forces in the creation
of a new venture was shown in Chapter 3. Of
utmost importance is the fit of the lead entrepre-
neur and the management team with an opportu-
nity. Good opportunities are both desirable to and
attainable by those on the team using the resources
that are available.
16
David Barboza, “An Online Market Flourishes in China,” August 9, 2009, www.nytimes.com/2009/08/10/technology/start-
ups/10taobao.html?pagewanted=1&_r=1; Helen H. Wang, “How eBay Failled in China,” September 12, 2010 — 10:56 pm,
blogs.forbes.com/china/2010/09/12/how-ebay-failed-in-china/; Thomas Crampton, “How Taobao beats eBay in China,” www.thomascrampton.com/china/
taobao-china-ecommerce/.
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162 Part II The Opportunity
EXHIBIT 5.6
Changes in the Placement of the Window of Opportunity
Window of
opportunity
$1 billion
$500 million
$250 million
$100 million
Market
M
a
r
k
e
t
s
i
z
e
Time (years)
5 10 20
EXHIBIT 5.7
Lemons and Pearls
Less than 3 years More than 3 and
less than 7 years
More than 7 years
Number of years to appear
Losers Winners
N
u
m
b
e
r
o
f
i
n
v
e
s
t
m
e
n
t
s
20
19
18
17
16
14
15
13
12
11
10
9
8
7
6
5
4
3
2
1
0
tim81551_ch05IT.qxd 1/20/12 10:47 AM Page 162
Chapter 5 The Opportunity: Creating, Shaping, Recognizing, Seizing 163
17
See J. A. Timmons, D. F. Muzyka, H. H. Stevenson, and W. D. Bygrave, “Opportunity Recognition: The Core of Entrepreneurship” in Frontiers of Entrepre-
neurship Research: 1987, ed. Neil Churchill et al. (Babson Park, MA: Babson College, 1987), p. 409.
18
E. Parizeau, partner, Norwest Venture Partners, in a speech to Babson College MBAs, December 2000.
To understand how the entrepreneurial vision re-
lates to the analytical framework, it may be useful to
look at an opportunity as a three-dimensional relief
map with its valleys, mountains, and so on, all repre-
sented. Each opportunity has three or four critical
factors (e.g., proprietary license, patented innova-
tion, sole distribution rights, an all-star management
team, breakthrough technology). These elements
pop out at the observer; they indicate huge possibil-
ities where others might see obstacles. Thus it is
easy to see why there are thousands of exceptional
opportunities that will fit with a wide variety of en-
trepreneurs but that might not fit neatly into the
framework outlines in Exhibit 5.8.
Screening Opportunities
Opportunity Focus
Opportunity focus is the most fruitful point of
departure for screening opportunities. The screen-
ing process should not begin with strategy (which
derives from the nature of the opportunity), nor
with financial and spreadsheet analysis (which flow
from the former), nor with estimations of how much
the company is worth and who will own what
shares.
17
These starting points, and others, usually place
the cart before the horse. Perhaps the best evidence
of this phenomenon comes from the tens of thou-
sands of tax-sheltered investments that turned sour
in the mid-1980s. Also, many entrepreneurs who
start businesses—particularly those for whom the
ventures are their first—run out of cash faster than
they bring in customers and profitable sales. There
are lots of reasons why this happens, but one thing is
certain: These entrepreneurs have not focused on
the right opportunity.
Over the years, those with experience in business
and in specific market areas have developed rules
to guide them in screening opportunities. For exam-
ple, during the initial stages of the irrational exuber-
ance about the dot.com phenomenon, number of
“clicks” changed to attracting “eyeballs,” which
changed to page view. Many investors got caught
up in false metrics. Those who survived the
NASDAQ crash of 2000–2001 understood that
dot.com survivors would be the ones who executed
transactions. Number of customers, amounts of the
transactions, and repeat transactions became the
recognized standards.
18
Screening Criteria: The Characteristics
of High-Potential Ventures
Venture capitalists, savvy entrepreneurs, and in-
vestors also use this concept of boundaries in screen-
ing ventures. Exhibit 5.8 summarizes criteria used by
venture capitalists to evaluate opportunities, many of
which tend to have a high-technology bias. As will be
seen later, venture capital investors reject 60 percent
to 70 percent of the new ventures presented to them
very early in the review process, based on how the
entrepreneurs satisfy these criteria.
However, these criteria are not the exclusive domain
of venture capitalists. The criteria are based on good
business sense that is used by successful entrepreneurs,
angels, private investors, and venture capitalists. Con-
sider the following examples of great small companies
(Maipu, GoldTel and Sany Industries) built without a
dime of professional venture capital:
Maipu Communication Technology Co. Ltd,
founded in 1993, is a professional supplier of IP
network equipment and application solutions.
They provide data sets to banks, telecommuni-
cation companies, and the Chinese govern-
ment. Maipu decided not to approach venture
capitalists and instead bootstrapped its business
to profitability.
Located in Chengdu West, China, GoldTel was
founded in 1993 by He Yan. It is a national-
level key high-tech enterprise, ranking among
the Top 100 Electronic Enterprises of China
for a successive five years. Its products and
services cover all provinces and cities across
China and abroad. As a science-and-technol-
ogy-based private enterprise, GoldTel Group
has committed itself to the development, pro-
duction, and distribution of high-tech products
with its own intellectual property and the provi-
sion of quality after-sales technical supports and
services. The founder believes that revenues is
the friend of entrepreneurs, not VCs.
Sany Heavy Industry Group Ltd was founded in
1989, and has now grown into a global corpora-
tion with eight domestic manufacturing facilities,
four production factories in the United States,
Germany, India, and Brazil and 27 support cen-
ters around the world. Currently, SANY employs
over 40,000 people in more than 120 countries.
SANY is the world’s largest concrete machinery
manufacturer and in the Top 50 of Global Con-
struction Machinery Manufacturers. Sany did
not raise any professional venture capital.
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164 Part II The Opportunity
EXHIBIT 5.8
Criteria for Evaluating Venture Opportunities
Attractiveness
Criteria Highest Potential Lowest Potential
Industry and Market Changes way people live, work, learn, etc. Incremental improvement only
Market: Market driven; identified; recurring Unfocused; onetime revenue
revenue niche
Customers Reachable; purchase orders Loyal to others or unreachable
Remove serious pain point
User benefits Less than one-year payback Three years plus payback
Solves a very important problem/need
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 declining
emerging industry industry
Market size $100? million to $1? billion sales Unknown, less than $20 million or
potential multibillion-dollar sales
Growth rate Growth at 30%–50% or more Contracting or less than 10%
Market capacity At or near full capacity Undercapacity
Market share attainable (Year 5) 20% or more; leader Less than 5%
Cost structure Low-cost provider; cost advantages Declining cost
Economics
Time to breakeven/positive cash flow Under 1
1
?2–2 years More than 4 years
ROI potential 25% or more; high value Less than 15%–20%; low value
Capital requirements Low to moderate; fundable/bankable Very high; unfundable or unbankable
Internal rate of return potential 25% or more per year Less than 15% per year
Free cash flow characteristics: Favorable; sustainable; 20%–30% or Less than 10% of sales
more of sales
Sales growth Moderate to high (?15% to ?20%) Less than 10%
Asset intensity Low/sales $ High
Spontaneous working capital Low, incremental requirements High requirements
R&D/capital expenditures Low requirements High requirements
Gross margins Exceeding 40% and durable Under 20%
After-tax profits High; greater than 10%; durable Low
Time to break-even profit and loss Less than two years; breakeven not Greater than four years; breakeven
creeping or leaping creeping or leaping up
Harvest Issues
Value-added potential High strategic value Low strategic value
Valuation multiples and comparables Price/earnings ? ?20x; ?8?10x Price/earnings ? 5x
,
EBIT ? 3?4x;
EBIT; ?1.5?2x revenue: revenue ? .4
Free cash flow ?8?10x
Exit mechanism and strategy Present or envisioned options Undefined; illiquid investment
Capital market context Favorable valuations, timing, capital Unfavorable; credit crunch
available; realizable liquidity
Competitive Advantage Issues
Fixed and variable costs Lowest; high operating leverage Highest
Control over costs, prices, and distribution Moderate to strong Weak
Barriers to entry: Knowledge to overcome
Proprietary protection Have or can gain None
Response/lead time Competition slow; napping Unable to gain edge
Legal, contractual advantage Proprietary or exclusivity None
Contracts and networks Well-developed; accessible Crude; limited
Key people Top talent; an A team B or C team
Sustainability Low social and environmental High social and/or environmental
impact costs and consequences
(continued)
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Chapter 5 The Opportunity: Creating, Shaping, Recognizing, Seizing 165
At age 66, Charlie Butcher had to decide
whether to buy out an equal partner in his
100-year-old industrial polish and wax business
(Butcher Polish) with less than $10 million in
sales. This niche business had high gross mar-
gins, very low working capital and fixed-asset
requirements for increased sales, substantial
steady growth of more than 18 percent per
year, and excellent products. The result was a
business with very high free cash flow and po-
tential for growth. He acquired the company
with a bank loan and seller financing, and then
he increased sales to over $50 million by 1993.
The company continues to be highly profitable.
Butcher vows never to utilize venture capital
money or to take the company public.
The point of departure here is opportunity and,
implicitly, the customer, the marketplace, and the in-
dustry. Exhibit 5.8 shows how higher- and lower-
potential opportunities can be placed along an attrac-
tiveness scale. The criteria provide some quantitative
ways in which an entrepreneur can make judgments
about industry and market issues, competitive advan-
tage issues, economic and harvest issues, manage-
ment team issues, and fatal flaw issues and whether
these add up to a compelling opportunity. For exam-
ple, dominant strength in any one of these criteria
can readily translate into a winning entry, whereas a
flaw in any one can be fatal.
Entrepreneurs contemplating opportunities that
will yield attractive companies, not high-potential
ventures, can also benefit from paying attention to
these criteria. These entrepreneurs will then be in a
better position to decide how these criteria can be
compromised. As outlined in Exhibit 5.8, business
opportunities with the greatest potential will possess
many of the following, or they will dominate in one or
a few for which the competition cannot come close.
Industry and Market Issues
Market. Higher-potential businesses can identify
a market niche for a product of service that meets an
important customer need and provides high value-
EXHIBIT 5.8 (concluded)
Criteria for Evaluating Venture Opportunities
Attractiveness
Criteria Highest Potential Lowest Potential
Management Team
Entrepreneurial team All-star combination; free agents Weak or solo entrepreneur; not free agents
Industry and technical experience Top of the field; super track record Underdeveloped
Integrity Highest standards Questionable
Intellectual honesty 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 what Surprises; only making money
you get
Upside/downside issues Attainable success/limited risks Linear; on same 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 risk/reward 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 team; no free agents
Service management Superior service concept Perceived as unimportant
Timing Rowing with the tide Rowing against the tide
Technology Groundbreaking; one of a kind Many substitutes or competitors
Flexibility Able to adapt; commit and decommit quickly Slow; stubborn
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 and resilient strategy Unforgiving, rigid strategy
tim81551_ch05IT.qxd 1/20/12 10:47 AM Page 165
added or value-created benefits to customers. This
invariably means the product or service eliminates or
drastically reduces a major pain point for a customer
or end user or solves a major problem/bottleneck for
which the customer is willing to pay a premium. Cus-
tomers are reachable and receptive to the product or
service, with no brand or other loyalties. The poten-
tial payback to the user or customer of a given product
or service through cost savings or other value-added
or valued-created properties is one year or less and is
identifiable, repeatable, and verifiable. Further, the
life of the product or service exists beyond the time
needed to recover the investment, plus a profit. And
the company is able to expand beyond a one-product
company. Take, for example, the growing success of
cellular phone service. At prevailing rates, one can
talk for about $25 an hour, and many providers of
professional services can readily bill more than the
$25 an hour for what would otherwise be unused
time. If benefits to customers cannot be calculated in
such dollar terms, then the market potential is far
more difficult and risky to ascertain.
Lower-potential opportunities are unfocused re-
garding customer need, and customers are unreach-
able and/or have brand or other loyalties to others. A
payback to the user of more than three years and low
value-added or value-created properties also make an
opportunity unattractive. Being unable to expand
beyond a one-product company can make for a
lower-potential opportunity. The failure of one of the
first portable computer companies, Osborne Com-
puter, is a prime example of this.
Market Structures. Market structure, such as
evidenced by the number of sellers, size distribution
of sellers, whether products are differentiated, condi-
tions of entry and exit, number of buyers, cost condi-
tions, and sensitivity of demand to changes in price, is
significant.
A fragmented, imperfect market or emerging in-
dustry often contains vacuums and asymmetries that
create unfilled market niches—for example, markets
where resource ownership, cost advantages, and
the like can be achieved. In addition, those where
information or knowledge gaps exist and where
competition is profitable, but not so strong as to be
overwhelming, are attractive. An example of a market
with an information gap is that experienced by a Boston
entrepreneur who encountered a large New York com-
pany that wanted to dispose of a small, old office build-
ing in downtown Boston. This office building, with a
book value of about $200,000, was viewed by the
financially oriented firm as a low-value asset, and the
company wanted to dispose of it so the resulting cash
could be put to work for a higher return. The buyer,
who had done more homework than the out-of-town
sellers, bought the building for $200,000 and resold it
in less than six months for more than $8 million.
The Country Style Cooking Restaurant Chain
(CCSC), founded in 1996, has replicated western-
style restaurant chains, with a Chinese twist. Consid-
ering the majority of China’s population still prefers
Asian cuisine, CCSC has established a profitable
brand by preparing fast and affordable meals in the
popular Sichuan style, with each dish from its one-
page menu, typically delivered within one minute.
CCSC prepares its food offsite, but its standardized
ingredients are quickly combined with its proprietary
sauce packages, which “replicate appealing flavors” in
a sit-down environment. Country Style Cooking
Restaurant Chain IPOed at 2010.
Industries that are highly concentrated, that are
perfectly competitive, or that are mature or declining
are typically unattractive. The capital requirements
and costs to achieve distribution and marketing pres-
ence can be prohibitive, and price-cutting and other
competitive strategies in highly concentrated markets
can be a significant barrier to entry. (The most blatant
example is organized crime and its life-threatening
actions when territories are invaded.) Revenge by
normal competitors who are well positioned through
product strategy, legal tactics, and supplier pressure
also can be punishing to the pocketbook.
The airline industry, after deregulation, is an ex-
ample of a perfectly competitive market and one
where many of the recent entrants will have diffi-
culty. The unattractiveness of perfectly competitive
industries is captured by the comment of prominent
Boston venture capitalist William Egan, who put it
this way: “I want to be in a nonauction market.”
19
Market Size. An attractive new venture sells to a
market that is large and growing (i.e., one where cap-
turing a small market share can represent significant
and increasing sales volume). A minimum market
size of more than $100 million in sales is attractive. In
the medical and life sciences today, this target bound-
ary is more like $500 million. Such a market size
means it is possible to achieve significant sales by
capturing roughly 5 percent or less and thus not
threatening competitors. For example, to achieve a
sales level of $1 million in a $100 million market re-
quires only 1 percent of the market. Thus a recre-
ational equipment manufacturer entered a $60 mil-
lion market that was expected to grow at 20 percent
per year to over $100 million by the third year. The
founders were able to create a substantial smaller
company without obtaining a major market share and
possibly incurring the wrath of existing companies.
166 Part II The Opportunity
19
Comment made during a presentation at Babson College, May 1985.
tim81551_ch05IT.qxd 1/20/12 10:47 AM Page 166
Chapter 5 The Opportunity: Creating, Shaping, Recognizing, Seizing 167
However, such a market can be too large. A
multibillion-dollar market may be too mature and sta-
ble, and such a level of certainty can translate into com-
petition from Fortune 500 firms and, if highly competi-
tive, into lower margins and profitability. Further, an
unknown market or one that is less than $10 million in
sales also is unattractive. To understand the disadvan-
tages of a large, more mature market, consider the entry
of a firm into the microcomputer industry today versus
the entry of Apple Computer into that market in 1975.
Growth Rate. An attractive market is large and
growing (i.e., one where capturing a good share of
the increase is less threatening to competitors and
where a small market share can represent signifi-
cant and increasing sales volume). An annual growth
rate of 30 percent to 50 percent creates niches for
new entrants, and such a market is a thriving and
expansive one, rather than a stable or contracting
one, where competitors are scrambling for the
same niches. Thus, for example, a $100 million
market growing at 50 percent per year has the po-
tential to become a $1 billion industry in a few
years, and if a new venture can capture just 2 per-
cent of sales in the first year, it can attain sales in
the first year of $1 million. If it just maintains its
market share over the next few years, sales will
grow significantly.
Market Capacity. Another signal of the exis-
tence of an opportunity in a market is a market at
full capacity in a growth situation—in other words,
a demand that the existing suppliers cannot meet.
Timing is of vital concern in such a situation, which
means the entrepreneur should be asking, Can a
new entrant fill that demand before the other
players can decide to and then actually increase ca-
pacity?
Market Share Attainable. The potential to
be a leader in the market and capture at least a 20
percent share can create a very high value for a com-
pany that might otherwise be worth not much more
than book value. For example, one such firm, with
less than $15 million in sales, became dominant in its
small market niche with a 70 percent market share.
The company was acquired for $23 million in cash.
A firm that will be able to capture less than 5 per-
cent of a market is unattractive in the eyes of most
investors seeking a higher-potential company.
Cost Structure. A firm that can become the low-
cost provider is attractive, but a firm that continually
faces declining cost conditions is less so. Attractive
opportunities exist in industries where economies of
scale are insignificant (or work to the advantage of the
new venture). Attractive opportunities boast of low
costs of learning by doing. Where costs per unit are
high when small amounts of the product are sold,
existing firms that have low promotion costs can face
attractive market opportunities.
For instance, consider the operating leverage of
Johnsonville Sausage. Its variable costs were 6 per-
cent labor and 94 percent materials. What aggressive
incentives could management put in place for the 6
percent to manage and to control the 94 percent?
Imagine the disasters that would occur if the scenario
were reversed!
A word of caution from Scott W. Kunkel and
Charles W. Hofer, who observed,
Overall, industry structure . . . had a much smaller im-
pact on new venture performance than has previously
been suggested in the literature. This finding could be
the result of one of several possibilities:
1. Industry structure impacts the performance of
established firms, but does not have a significant
impact on new venture performance.
2. The most important industry structural variables
influencing new ventures are different from
those which impact established firms and thus
research has yet to identify the industry struc-
tural variables that are most important in the
new venture environment.
3. Industry structure does not have a significant
direct impact on firm performance, as hypothe-
sized by scholars in the three fields of study.
Instead, the impact of industry structure is
strongly mitigated by other factors, including
the strategy selected for entry.
20
Economics
Profits after Tax. High and durable gross mar-
gins usually translate into strong and durable after-tax
profits. Attractive opportunities have potential for
durable profits of at least 10 percent to 15 percent
and often 20 percent or more. Those generating af-
ter-tax profits of less than 5 percent are quite fragile.
Time to Breakeven and Positive Cash
Flow. As mentioned previously, breakeven and pos-
itive cash flow for attractive companies are possible
within two years. Once the time to breakeven and pos-
itive cash flow is greater than three years, the attrac-
tiveness of the opportunity diminishes accordingly.
ROI Potential. An important corollary to forgiv-
ing economics is reward. Very attractive opportuni-
ties have the potential to yield a return on investment
20
S. W. Kunkel and C. W. Hofer, “The Impact of Industry Structure on New Venture Performance,” Frontiers of Entrepreneurship Research: 1993 (Babson
Park, MA: Babson College, 1993).
tim81551_ch05IT.qxd 1/20/12 10:47 AM Page 167
of 25 percent or more per year. During the 1980s,
many venture capital funds achieved only single-digit
returns on investment. High and durable gross mar-
gins and high and durable after-tax profits usually
yield high earnings per share and high return on
stockholders’ equity, thus generating a satisfactory
harvest price for a company. This is most likely true
whether the company is sold through an initial public
offering or privately, or whether it is acquired. Given
the risk typically involved, a return on investment po-
tential of less than 15 percent to 20 percent per year
is unattractive.
Capital Requirements. Ventures that can be
funded and have capital requirements that are low to
moderate are attractive. Realistically, most higher-
potential businesses need significant amounts of
cash—several hundred thousand dollars and up—to
get started. Businesses that can be started with little
or no capital are rare, but they do exist. One such
venture was launched in Boston in 1971 with $7,500
of the founder’s capital and grew to over $30 million
in sales by 1989. In today’s venture capital market,
the first round of financing is typically $1 million to
$2 million or more for a start-up.
21
Some higher-
potential ventures, such as those in the service sector
or “cash sales” businesses, have lower capital require-
ments than do high-technology manufacturing firms
with large research and development expenditures.
If the venture needs too much money or cannot be
funded, it is unattractive. An extreme example is a
venture that a team of students recently proposed to
repair satellites. The students believed that the re-
quired start-up capital was in the $50 million to $200
million range. Projects of this magnitude are in the
domain of the government and the very large corpo-
ration, rather than that of the entrepreneur and the
venture capitalist.
Internal Rate of Return Potential. Is the
risk–reward relationship attractive enough? The re-
sponse to this question can be quite personal, but the
most attractive opportunities often have the promise
of—and deliver on—a very substantial upside of 5 to
10 times the original investment in 5 to 10 years. Of
course, the extraordinary successes can yield 50 to
100 times or more, but these are exceptions. A 25
percent or more annual compound rate of return is
considered very healthy. In the early 1990s, those in-
vestments considered basically risk free had yields of
3 percent to 8 percent.
Free Cash Flow Characteristics. Free cash
flow is a way of understanding a number of crucial
financial dimensions of any business: the robustness of
its economics; its capital requirements, both working
and fixed assets; its capacity to service external debt
and equity claims; and its capacity to sustain growth.
22
We define unleveraged free cash flow (FCF) as earn-
ings before interest but after taxes (EBIAT) plus
amortization (A) and depreciation (D) less sponta-
neous working capital requirements (WC) less capital
expenditures (CAPex), or FCF ?EBIAT ?[A?D] ?
[? or ? WC] ? CAPex. EBIAT is driven by sales,
profitability, and asset intensity. Low-asset-intensive,
high-margin businesses generate the highest profits
and sustainable growth.
23
We will explore this in detail
in Chapter 13, Entrepreneurial Finance.
Gross Margins. The potential for high and
durable gross margins (i.e., the unit selling price less
all direct and variable costs) is important. Gross mar-
gins exceeding 40 percent to 50 percent provide a
tremendous built-in cushion that allows for more er-
ror and more flexibility to learn from mistakes than
do gross margins of 20 percent or less. High and
durable gross margins, in turn, mean that a venture
can reach breakeven earlier, preferably within the first
two years. Thus, for example, if gross margins are just
20 percent, for every $1 increase in fixed costs (e.g.,
insurance, salaries, rent, and utilities), sales need to
increase $5 just to stay even. If gross margins are 75
percent, however, a $1 increase in fixed costs requires
a sales increase of just $1.33. One entrepreneur, who
built the international division of an emerging soft-
ware company to $17 million in highly profitable
sales in just five years (when he was 25 years old),
offers an example of the cushion provided by high
and durable gross margins. He stresses there is sim-
ply no substitute for outrageous gross margins by say-
ing, “It allows you to make all kinds of mistakes that
would kill a normal company. And we made them all.
But our high gross margins covered all the learning
tuition and still left a good profit.”
24
Gross margins of
less than 20 percent, particularly if they are fragile,
are unattractive.
Time to Breakeven—Cash Flow and Profit
and Loss (P&L). New businesses that can
quickly achieve a positive cash flow and become self-
sustaining are highly desirable. It is often the second
year before this is possible, but the sooner the better.
Obviously, simply having a longer window does not
168 Part II The Opportunity
21
J. A. Timmons, W. Bygrave, and N. Fast, “The Flow of Venture Capital to Highly Innovative Technology Ventures,” a study for the National Science Founda-
tion, reported in Frontiers of Entrepreneurship Research: 1984 (Babson Park, MA: Babson College, 1984).
22
For a more detailed description of free cash flow, see “Note on Free Cash Flow Valuation Models” by W. Sahlman, HBS 9-288-023, Harvard Business School, 1987.
23
W. A. Sahlman, “Sustainable Growth Analysis,” HBS 9-284-059, Harvard Business School, 1984.
24
R. D. Kahn, president, Interactive Images, Inc., speaking at Babson College about his experiences as international marketing director at McCormack & Dodge
from 1978 through 1983.
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Chapter 5 The Opportunity: Creating, Shaping, Recognizing, Seizing 169
mean the business will be lousy. TCL is a Chinese
home appliances producer that now enjoys a
significant share of Vietnam’s TV market along-
side more well-known brands like Samsung, Sony,
and Panasonic. However, when it first entered Viet-
nam in 1998, it took TCL three years to gain the
trust of Vietnamese consumers before it started to
breakeven.
25
Harvest Issues
Value-Added Potential. New ventures that
are based on strategic value in an industry, such as
valuable technology, are attractive, while those
with low or no strategic value are less attractive. For
example, most observers contend that a product
technology of compelling strategic value to Xerox was
owned, in the mid-1980s, by a small company with
about $10 million in sales and showing a prior-year
loss of $1.5 million. Xerox purchased the company for
$56 million. Opportunities with extremely large capital
commitments, whose value on exit can be severely
eroded by unanticipated circumstances, are less attrac-
tive. Nuclear power is a good example.
Thus one characteristic of businesses that com-
mand a premium price is that they have high value-
added strategic importance to their acquirer, such
as distribution, customer base, geographic coverage,
proprietary technology, contractual rights, and the
like. Such companies might be valued at four, five, or
even six times (or more) last year’s sales, whereas per-
haps 60 percent to 80 percent of companies might be
purchased at .75 to 1.25 times sales.
Valuation Multiples and Comparables.
Consistent with the previous point, there is a large
spread in the value the capital markets place on pri-
vate and public companies. Part of your analysis is to
identify some historical boundaries for valuations
placed on companies in the market/industry/technol-
ogy area you intend to pursue. The rules outlined in
Exhibit 5.8 are variable and should be thought of as a
boundary and a point of departure.
Exit Mechanism and Strategy. Businesses
that are eventually sold—privately or to the public—
or acquired, usually are started and grown with a har-
vest objective in mind. Attractive companies that re-
alize capital gains from the sale of their businesses
have, or envision, a harvest or exit mechanism. Unat-
tractive opportunities do not have an exit mechanism
in mind. Planning is critical because, as is often said,
it is much harder to get out of a business than to get
into it. Giving some serious thought to the options
and likelihood that the company can eventually be
harvested is an important initial and ongoing aspect
of the entrepreneurial process.
Capital Market Context. The context in
which the sale or acquisition of the company occurs
is largely driven by the capital markets at that
particular time. Timing can be a critical component
of the exit mechanism because, as one study indi-
cated, since World War II, the average bull market
on Wall Street has lasted just six months. For a
keener appreciation of the critical difference the
capital markets can make, one only has to recall
the stock market crash of October 19, 1987, the
bank credit crunches of 1990–1992 and 2007, or
the bear market of 2001–2003. By the end of
1987, the valuation of the Venture Capital 100
index dropped 43 percent, and private company val-
uations followed. Initial public offerings are espe-
cially vulnerable to the vicissitudes of the capital
markets; here the timing is vital. Some of the most
successful companies seem to have been launched
when debt and equity capital were most available
and relatively cheap.
Competitive Advantages Issues
Variable and Fixed Costs. An attractive op-
portunity has the potential for being the lowest-cost
producer and for having the lowest marketing and
distribution costs. For example, Bowmar was unable
to remain competitive in the market for electronic
calculators after the producers of large-scale inte-
grated circuits, such as Hewlett-Packard, entered the
business. Being unable to achieve and sustain a posi-
tion as a low-cost producer shortens the life ex-
pectancy of a new venture.
Degree of Control. Attractive opportunities
have potential for moderate to strong control over
prices, costs, and channels of distribution. Fragmented
markets where there is no dominant competitor—no
IBM—have this potential. These markets usually
have a market leader with a 20 percent market share
or less. For example, sole control of the source of
supply of a critical component for a product or of
channels of distribution can give a new venture
market dominance even if other areas are weak.
Lack of control over such factors as product de-
velopment and component prices can make an op-
portunity unattractive. For example, in the case of
Viatron, its suppliers were unable to produce several
of the semiconductors the company needed at low
enough prices to permit Viatron to make the inex-
pensive computer terminal that it had publicized
extensively.
25
data.book.163.com/book/section/0000NPfV/0000NPfV1.html; news.xinhuanet.com/world/2004-12/19/content_2353771.htm.
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A market where a major competitor has a market
share of 40 percent or more usually implies a market
where power and influence over suppliers, cus-
tomers, and pricing create a serious barrier and risk
for a new firm. Such a firm will have few degrees of
freedom. However, if a dominant competitor is at full
capacity, is slow to innovate or to add capacity in a
large and growing market, or routinely ignores or
abuses the customer (remember “Ma Bell”), there
may be an entry opportunity. But entrepreneurs usu-
ally do not find such sleepy competition in dynamic,
emerging industries dense with opportunity.
Entry Barriers. Having a favorable window of
opportunity is important. Having or being able to
gain proprietary protection, regulatory advantage, or
other legal or contractual advantage, such as exclusive
rights to a market or with a distributor, is attractive.
Having or being able to gain an advantage in re-
sponse/lead times is important because these can
create barriers to entry or expansion by others. For
example, advantages in response/lead times in tech-
nology, product innovation, market innovation, people,
location, resources, or capacity make an opportunity
attractive. Possession of well-developed, high-quality,
accessible contacts that are the product of years of
building a top-notch reputation and that cannot be
acquired quickly is also advantageous. Sometimes
this competitive advantage may be so strong as to
provide dominance in the marketplace, even though
many of the other factors are weak or average. An
example of how quickly the joys of start-up may fade
if others cannot be kept out is the experience of firms
in the hard disk industry that were unable to erect
entry barriers into the U.S. markets in the early to
mid-1980s. By the end of 1983, some 90 hard disk
drive companies were launched, and severe price
competition led to a major industry shakeout.
If a firm cannot keep others out or if it faces already
existing entry barriers, it is unattractive. An easily
overlooked issue is a firm’s capacity to gain distribu-
tion of its product. As simple as it may sound, even
venture-capital-backed companies fall victim to this
market issue. Air Florida apparently assembled all the
right ingredients, including substantial financing, yet
was unable to secure sufficient gate space for its air-
planes. Even though it sold passenger seats, it had no
place to pick the passengers up or drop them off.
Management Team Issues
Entrepreneurial Team. Attractive opportuni-
ties have existing teams that are strong and contain
industry superstars. The team has proven profit and
loss experience in the same technology, market, and
service area, and members have complementary
and compatible skills. An unattractive opportunity
does not have such a team in place or has no team.
Industry and Technical Experience. A
management track record of significant accom-
plishment in the industry, with the technology, and in
the market area, with a proven profit and lots of
achievements where the venture will compete is
highly desirable. A top-notch management team can
become the most important strategic competitive
advantage in an industry. Imagine relocating the
Chicago Bulls or the Phoenix Suns to Halifax, Nova
Scotia. Do you think you would have a winning com-
petitor in the National Basketball Association?
Integrity. Trust and integrity are the oil and glue
that make economic interdependence possible. Hav-
ing an unquestioned reputation in this regard is a ma-
jor long-term advantage for entrepreneurs and
should be sought in all personnel and backers. A
shady past or record of questionable integrity is for B
team players only.
Intellectual Honesty. There is a fundamental
issue of whether the founders know what they do
and do not know, as well as whether they know what
to do about shortcomings or gaps in the team and the
enterprise.
Fatal Flaw Issues. Basically, attractive ventures
have no fatal flaws; an opportunity is rendered unat-
tractive if it suffers from one or more fatal flaws. Usu-
ally these relate to one of the previous criteria, and
examples abound of markets that are too small, that
have overpowering competition, where the cost of
entry is too high, where an entrant is unable to pro-
duce at a competitive price, and so on. An example of
a fatal flaw entry barrier was Air Florida’s inability to
get flights listed on reservation computers.
Personal Criteria
Goals and Fit. Is there a good match between
the requirements of business and what the founders
want out of it? Dorothy Stevenson pinpointed the
crux of it with this powerful insight: “Success is getting
what you want. Happiness is wanting what you get.”
Upside/Downside Issues. An attractive op-
portunity does not have excessive downside risk. The
upside and the downside of pursuing an opportunity
are not linear, nor are they on the same continuum.
The upside is easy, and it has been said that success
has a thousand sires. The downside is another matter:
It has also been said that failure is an orphan. An en-
trepreneur needs to be able to absorb the financial
downside in such a way that he or she can rebound
without becoming indentured to debt obligations. If
an entrepreneur’s financial exposure in launching the
170 Part II The Opportunity
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Chapter 5 The Opportunity: Creating, Shaping, Recognizing, Seizing 171
venture is greater than his or her net worth—the re-
sources he or she can reasonably draw upon, and his
or her alternative disposable earnings stream if it
does not work out—the deal may be too big. While
today’s bankruptcy laws are generous, the psycholog-
ical burdens of living through such an ordeal are infi-
nitely more painful than the financial consequences.
An existing business needs to consider if a failure will
be too demeaning to the firm’s reputation and future
credibility, aside from the obvious financial conse-
quences.
26
Opportunity Cost. In pursuing any venture
opportunity, there are also opportunity costs. An en-
trepreneur who is skilled enough to grow a success-
ful, multimillion-dollar venture has talents that are
highly valued by medium- to large-sized firms as
well. While assessing benefits that may accrue in
pursuing an opportunity, an entrepreneur needs to
heed other alternatives, including potential “golden
handcuffs,” and account honestly for any cut in
salary that may be involved in pursuing a certain op-
portunity.
Further, pursuing an opportunity can shape an en-
trepreneur in ways that are hard to imagine. An entre-
preneur will probably have time to execute between
two and four multimillion-dollar ventures between
the ages of 25 and 50. Each of these experiences will
position him or her, for better or for worse, for the
next opportunity. Because an entrepreneur in the
early years needs to gain relevant management expe-
rience and because building a venture (either one
that works or one that does not) takes more time than
is commonly believed, it is important to consider
alternatives while assessing an opportunity.
Desirability. A good opportunity is not only at-
tractive but also desirable (i.e., good opportunity fits).
An intensely personal criterion would be the desire
for a certain lifestyle. This desire may preclude pur-
suing certain opportunities that may be excellent for
someone else. The founder of a major high-technology
venture in the Boston area was asked why he located
the headquarters of his firm in downtown Boston,
while those of other such firms were located on the
famous Route 128 outside the city. His reply was that
he wanted to live in Boston because he loved the city
and wanted to be able to walk to work. He said, “The
rest did not matter.”
Risk/Reward Tolerance. Successful entre-
preneurs take calculated risks or avoid risks they do
not need to take; as a country western song puts it,
“You have to know when to hold ’em, know when to
fold ’em, know when to walk away, and know when to
run.” This is not to suggest that all entrepreneurs are
gamblers or have the same risk tolerance; some are
quite conservative while others actually seem to get a
kick out of the inherent danger and thrill in higher-
risk and higher-stake games. The real issue is fit—
recognizing that gamblers and overly risk-averse en-
trepreneurs are unlikely to sustain any long-term
successes.
Stress Tolerance. Another important dimen-
sion of the fit concept is the stressful requirements of
a fast-growth high-stakes venture. Or as President
Harry Truman said so well, “If you can’t stand the
heat, get out of the kitchen.”
Strategic Differentiation
Degree of Fit. To what extent is there a good fit
among the driving forces (founders and team, oppor-
tunity, and resource requirements) and the timing
given the external environment?
Team. There is no substitute for an absolutely top-
quality team. The execution of and the ability to
adapt and to devise constantly new strategies are vital
to survival and success. A team is nearly unstoppable
if it can inculcate into the venture a philosophy and
culture of superior learning, as well as teaching skills,
an ethic of high standards, delivery of results, and
constant improvement. Are they free agents—clear
of employment, noncompete, proprietary rights, and
trade secret agreements—who are able to pursue the
opportunity?
Service Management. Several years ago, the
Forum Corporation of Boston conducted research
across a wide range of industries with several hun-
dred companies to determine why customers stopped
buying these companies’ products. The results were
surprising: 15 percent of the customers defected
because of quality and 70 percent stopped using a
product or service because of bad customer service.
Having a “turbo-service” concept that can be delivered
consistently can be a major competitive weapon
against small and large competitors alike. Home
Depot, in the home supply business, and Lexus, in
the auto industry, have set an entirely new standard
of service for their respective industries.
Timing. From business to historic military bat-
tles to political campaigns, timing is often the one
element that can make a significant difference.
Time can be an enemy or a friend; being too early or
too late can be fatal. The key is to row with the tide,
not against it. Strategically, ignoring this principle is
perilous.
26
This point was made by J. Willard Marriott, Jr., at Founder’s Day at Babson College, 1988.
tim81551_ch05IT.qxd 1/20/12 10:47 AM Page 171
Technology. A breakthrough, proprietary prod-
uct is no guarantee of success, but it creates a formi-
dable competitive advantage.
Flexibility. Maintaining the capacity to commit
and uncommit quickly, to adapt, and to abandon if
necessary is a major strategic weapon, particularly
when competing with larger organizations. Larger
firms can typically take 6 years or more to change ba-
sic strategy and 10 to 20 years or more to change their
culture.
Opportunity Orientation. To what extent is
there a constant alertness to the marketplace? A con-
tinual search for opportunities? As one insightful en-
trepreneur put it, “Any opportunity that just comes in
the door to us, we do not consider an opportunity.
And we do not have a strategy until we are saying no
to lots of opportunities.”
Pricing. One common mistake of new companies
with high-value-added products or services in a grow-
ing market is to underprice. A price slightly below to as
much as 20 percent below competitors is rationalized
as necessary to gain market entry. In a 30 percent gross
margin business, a 10 percent price increase results in
a 20 percent to 36 percent increase in gross margin
and will lower the break-even sales level for a company
with $900,000 in fixed costs to $2.5 million from $3
million. At the $3-million sales level, the company
would realize an extra $180,000 in pretax profits.
Distribution Channels. Having access to the
distribution channels is sometimes overlooked or
taken for granted. New channels of distribution can
leapfrog and demolish traditional channels—for ex-
ample, direct mail, home shopping networks, in-
fomercials, and the coming revolution in interactive
television in your own home.
Room for Error. How forgiving is the business
and the financial strategy? How wrong can the team be
in estimates of revenue costs, cash flow, timing, and
capital requirements? How bad can things get with the
firm still able to survive? If some single-engine planes
are more prone to accidents by 10 or more times,
which plane do you want to fly in? High leverage,lower
gross margins, and lower operating margins are the sig-
nals in a small company of flights destined for fatality.
Gathering Information
Finding Ideas
Factors suggest that finding a potential opportunity is
most often a matter of being the right person, in the
right place, at the right time. How can you increase
your chances of being the next Anita Roddick of
The Body Shop? Numerous sources of information
can help generate ideas.
Existing Businesses Purchasing an ongoing
business is an excellent way to find a new business
idea. Such a route to a new venture can save time and
money and can reduce risk as well. Investment
bankers and business brokers are knowledgeable
about businesses for sale, as are trust officers. How-
ever, brokers do not advertise the very best private
businesses for sale, and the real gems are usually
bought by the individuals or firms closest to them,
such as management, directors, customers, suppliers,
or financial backers. Bankruptcy judges have a con-
tinual flow of ventures in serious trouble. Excellent
opportunities may be buried beneath all the financial
debris of a bankrupt firm.
Franchises Franchising is another way to enter
an industry, by either starting a franchise operation or
becoming a franchisee. This is a fertile area. The
number of franchisors nationally stands at more than
4,000, according to the International Franchise Asso-
ciation and the Department of Commerce, and
franchisors account for well over $600 billion in sales
annually and nearly one-third of all retail sales.
27
See
Chapter 11 for a fuller discussion of franchises, in-
cluding resource information.
Patents Patent brokers specialize in marketing
patents that are owned by individual inventors, corpo-
rations, universities, or other research organizations
to those seeking new commercially viable products.
Some brokers specialize in international product li-
censing, and occasionally a patent broker will pur-
chase an invention and then resell it. Although, over
the years, a few unscrupulous brokers have tarnished
the patent broker’s image, acquisitions effected by
reputable brokers have resulted in significant new
products. Notable among these was Bausch & Lomb’s
acquisition, through National Patent Development
Corporation, of the U.S. right to hydron, a material
used in contact lenses. Some patent brokers are
MGA Technology, Chicago.
New Product Development Services,
Kansas City, Missouri.
University Patents, Chicago.
Research Corporation, New York.
Pegasus Corporation, New York.
National Patent Development Corporation,
New York.
172 Part II The Opportunity
27
See also “Economic Impact of Franchised Businesses,” International Franchise Association, IFA Educational Foundation, 2004.
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Chapter 5 The Opportunity: Creating, Shaping, Recognizing, Seizing 173
Product Licensing A good way to obtain expo-
sure to many product ideas available from universities,
corporations, and independent investors is to sub-
scribe to information services such as the American
Bulletin of International Technology, Selected Business
Ventures (published by General Electric), Technology
Mart, Patent Licensing Gazette, and the National
Technical Information Service. In addition, corpora-
tions, not-for-profit research institutions, and universi-
ties are sources of ideas.
Corporations. Corporations engaged in re-
search and development often develop inventions or
services that they do not exploit commercially. These
inventions either do not fit existing product lines or
marketing programs or do not represent sufficiently
large markets to be interesting to large corporations.
A good number of corporations license these kinds of
inventions, either through patent brokers, product-
licensing information services, or their own patent
marketing efforts. Directly contacting a corporation
with a licensing program may prove fruitful. Among
the major corporations known to have active internal
patent marketing efforts are the following:
Gulf and Western Invention Development
Corporation.
Kraft Corporation, Research and Development.
Pillsbury Company, Research and Development
Laboratories.
Union Carbide Corporation, Nuclear Division.
RCA Corporation, Domestic Licensing.
TRW Corporation, System Group.
Lockheed Corporation, Patent Licensing.
Not-for-Profit Research Institutes. These
nonprofit organizations do research and develop-
ment under contract to the government and private
industry as well as some internally sponsored re-
search and development of new products and
processes that can be licensed to private corporations
for further development, manufacturing, and mar-
keting. One example of how this works is Battelle
Memorial Institute’s participation in the develop-
ment of xerography and the subsequent license of the
technology to the Haloid Corporation, now Xerox
Corporation. Some nonprofit research institutes with
active licensing programs are
Battelle Memorial Institute.
ITT Research Institute.
Stanford Research Institute.
Southwest Research Institute.
Universities. A number of universities are active
in research in the physical sciences and seek to
license inventions that result from this research either
directly or through an associated research foundation
that administers a patent program. Massachusetts
Institute of Technology and the California Institute
of Technology publish periodic reports containing
abstracts of inventions they own that are available for
licensing. In addition, because a number of very good
ideas developed in universities never reach formal
licensing outlets, another way to find these ideas is to
become familiar with the work of researchers in your
area of interest. Among universities that have active
licensing programs are
Massachusetts Institute of Technology.
California Institute of Technology.
University of Wisconsin.
Iowa State University.
Purdue University.
University of California.
University of Oregon.
Industry and Trade Contacts
Trade Shows and Association Meetings.
Trade shows and association meetings in a number of
industries can be an excellent way to examine the
products of many potential competitors, meet dis-
tributors and sales representatives, learn about
product and market trends, and identify potential
products. The American Electronics Association is a
good example of an association that holds such semi-
nars and meetings.
Customers. Contacting potential customers of a
certain type of product can identify a need and where
existing products might be deficient or inadequate.
Discussions with doctors who head medical services
at hospitals might lead to product ideas in the
biomedical equipment business.
Distributors and Wholesalers. Contacting
people who distribute a certain type of product can
yield extensive information about the strengths and
weaknesses of existing products and the kinds of
product improvements and new products that are
needed by customers.
Competitors. Examining products offered by
companies competing in an industry can show
whether an existing design is protected by patent and
whether it can be improved or imitated.
Former Employers. A number of businesses
are started with products or services, or both, based
on technology and ideas developed by entrepreneurs
while others employed them. In some cases, research
laboratories were not interested in commercial ex-
ploitation of technology, or the previous employer
tim81551_ch05IT.qxd 1/20/12 10:47 AM Page 173
was not interested in the ideas for new products, and
the rights were given up or sold. In others, the ideas
were developed under government contract and
were in the public domain. In addition, some compa-
nies will help entrepreneurs set up companies in re-
turn for equity.
Professional Contact. Ideas can also be found
by contacting such professionals as patent attorneys,
accountants, commercial bankers, and venture capi-
talists who come into contact with those seeking to li-
cense patents or to start a business using patented
products or processes.
Consulting. A method for obtaining ideas that
has been successful for technically trained entrepre-
neurs is to provide consulting and one-of-a-kind engi-
neering designs for people in fields of interest. For
example, an entrepreneur wanting to establish a
medical equipment company can do consulting or
can design experimental equipment for medical re-
searchers. These kinds of activities often lead to pro-
totypes that can be turned into products needed by a
number of researchers. For example, this approach
was used in establishing a company to produce psy-
chological testing equipment that evolved from con-
sulting done at the Massachusetts General Hospital
and, again, in a company to design and manufacture
oceanographic instruments that were developed
from consulting done for an oceanographic institute.
Networking. Networks can be a stimulant and
source of new ideas, as well as a source of valuable
contacts with people. Much of this requires personal
initiative on an informal basis; but around the coun-
try, organized networks can facilitate and accelerate
the process of making contacts and finding new busi-
ness ideas. Near Boston, a high-density area of ex-
ceptional entrepreneurial activity, several networks
have emerged, including the Babson Entrepreneur-
ial Exchange, the Smaller Business Association of
New England (SBANE), the MIT Enterprise Fo-
rum, the 128 Venture Group, and the Boston Com-
puter Society. Similar organizations can be found
across the United States. A sampling includes the
American Women’s Economic Development Corpo-
ration in New York City; the Association of Women
Entrepreneurs; the Entrepreneur’s Roundtable of
the UCLA Graduate Student Association; and the
Association of Collegiate Entrepreneurs at Wichita
State University.
Shaping Your Opportunity
You will need to invest in thorough research to
shape your idea into an opportunity. Data avail-
able about market characteristics, competitors, and
so on are frequently inversely related to the real
potential of an opportunity; that is, if market data
are readily available and if the data clearly show sig-
nificant potential, then a large number of competi-
tors will enter the market and the opportunity will
diminish.
The good news: Most data will be incomplete, in-
accurate, and contradictory, and their meaning will
be ambiguous. For entrepreneurs, gathering the
necessary information and seeing possibilities and
making linkages where others see only chaos are
essential.
Leonard Fuld defined competitor intelligence as
highly specific and timely information about a cor-
poration.
28
Finding out about competitors’ sales
plans, key elements of their corporate strategies, the
capacity of their plants and the technology used in
them, who their principal suppliers and customers
are, and what new products rivals have under devel-
opment is difficult, but not impossible, even in
emerging industries, when talking to intelligence
sources.
29
Using published resources is one source of such
information. Interviewing people and analyzing
data are also critical. Fuld believes that because
business transactions generate information, which
flows into the public domain, one can locate intelli-
gence sources by understanding the transaction and
how intelligence behaves and flows.
30
This can be done legally and ethically. There are,
of course, less than ethical (not to mention illegal)
tactics, which include conducting phony job inter-
views, getting customers to put out phony bid re-
quests, and lying, cheating, and stealing. Entrepre-
neurs need to be careful to avoid such practices and
are advised to consult legal counsel when in doubt.
The information sources given next are just a small
start. Much creativity, work, and analysis will be in-
volved to find intelligence and to extend the informa-
tion obtained into useful form. For example, a com-
petitor’s income statement and balance sheet will
rarely be handed out. Rather, this information must
be derived from information in public filings or news
articles or from credit reports, financial ratios, and in-
terviews.
31
174 Part II The Opportunity
28
L. M. Fuld, Competitor Intelligence: How to Get It: How to Use It (New York: John Wiley & Sons, 1985), p. 9.
29
Ibid. See also “How to Snoop on Your Competitors,” Fortune, May 14, 1984, pp. 28–33; and also information published by accounting firms such as Sources
of Industry Data, published by Ernst & Young.
30
Fuld, Competitor Intelligence, pp. 12–17.
31
Ibid., p. 325.
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Chapter 5 The Opportunity: Creating, Shaping, Recognizing, Seizing 175
Published Sources
The first step is a complete search of materials in li-
braries and on the Internet. You can find a huge
amount of published information, databases, and other
sources about industries, markets, competitors, and
personnel. Some of this information will have been un-
covered when you search for ideas. Listed here are ad-
ditional sources that should help get you started.
Guides and Company Information
Valuable information is available in special issues and
the Web sites of BusinessWeek, Forbes, INC., The
Economist, Fast Company, and Fortune and online,
in the following:
Hoovers.com.
ProQuest.com.
Bloomberg.com.
Harrisinfo.com.
Additional Internet Sites
Fast Company (http://www.fastcompany.com).
Ernst & Young (http://www.ey.com).
Entrepreneur.com & magazine (http://www.
entrepreneur.com).
EDGAR database (http://www.sec.gov).
Note that subscription sources, such as
ThomsonResearch (http://www.
thomsonfinancial.com), provide images of other
filings as well.
Venture Economics (http://www.
ventureeconomics.com).
Journal Articles via Computerized Indexes
Factiva with Dow Jones, Reuters, The Wall
Street Journal.
EBSCOhost.
FirstSearch.
Ethnic News Watch.
LEXIS/NEXIS.
New York Times.
InfoTrac from Gale Group.
ABI/Inform and other ProQuest databases.
RDS Business Reference Suite.
The Wall Street Journal.
Statistics
Stat-USA (http://www.stat-usa.gov)—U.S.
government subscription site for economic,
trade and business data, and market
research.
U.S. Census Bureau (http://www.census.gov)
—the source of many statistical data including
Statistical Abstract of the United States.
American FactFinder—population data.
Economic Programs (http://www.census.gov
/econ/www/index.html)—data by sector.
County business patterns.
Zip code business patterns.
Knight Ridder . . . CRB Commodity Year Book.
Manufacturing USA, Service Industries USA,
and other sector compilations from Gale Group.
Economic Statistics Briefing Room
(http://www.whitehouse.gov/fsbr/esbr.html).
Federal Reserve Bulletin.
Survey of Current Business.
FedStats (http://www.fedstats.gov/).
Global Insight (http://www.globalinsight.com).
International Financial Statistics—International
Monetary Fund.
World Development Indicators—World Bank.
Bloomberg Database.
Consumer Expenditures
New Strategist Publications.
Consumer Expenditure Survey.
Euromonitor.
Projections and Forecasts
ProQuest.
InfoTech Trends.
Guide to Special Issues and Indexes to
Periodicals (Grey House Directory of Special
Issues).
RDS Business Reference Suite.
Value Line Investment Survey.
Market Studies
LifeStyle Market Analyst.
MarketResearch.com.
Scarborough Research.
Simmons Market Research Bureau.
Other Sources
Wall Street Transcript.
Brokerage house reports from Investext,
Multex, etc.
Company annual reports and Web sites.
tim81551_ch05IT.qxd 1/20/12 10:47 AM Page 175
Other Intelligence
Everything entrepreneurs need to know will not be
found in libraries because this information needs to
be highly specific and current. This information is
most likely available from people—industry experts,
suppliers, and the like (see box). Summarized next
are some useful sources of intelligence.
Trade Associations Trade associations, espe-
cially the editors of their publications and informa-
tion officers, are good sources of information.
32
Trade shows and conferences are prime places to dis-
cover the latest activities of competitors.
Employees Employees who have left a com-
petitor’s company often can provide information
about the competitor, especially if the employee
departed on bad terms. Also, a firm can hire people
away from a competitor. While consideration of
ethics in this situation is important, the number of
experienced people in any industry is limited, and
competitors must prove that a company hired a
person intentionally to get specific trade secrets in
order to challenge any hiring legally. Students who
have worked for competitors are another source of
information.
Consulting Firms Consulting firms frequently
conduct industry studies and then make this infor-
mation available. Frequently, in such fields as com-
puters or software, competitors use the same design
consultants, and these consultants can be sources of
information.
Market Research Firms Firms doing market
studies, such as those listed under published sources
above, can be sources of intelligence.
Key Customers, Manufacturers, Suppliers,
Distributors, and Buyers These groups are
often a prime source of information.
Public Filings Federal, state, and local filings,
such as filings with the Securities and Exchange
Commission (SEC), Patent and Trademark Office, or
Freedom of Information Act filings, can reveal a sur-
prising amount of information. There are companies
that process inquiries of this type.
Reverse Engineering Reverse engineering
can be used to determine costs of production and
sometimes even manufacturing methods. An ex-
ample of this practice is the experience of Ad-
vanced Energy Technology of Boulder, Colorado,
which learned firsthand about such tactics. No
sooner had it announced a new product, which was
patented, when it received 50 orders, half of which
were from competitors asking for only one or two of
the items.
Networks The networks mentioned in Chapter 3
as sources of new venture ideas also can be sources of
competitor intelligence.
Other Classified ads, buyers guides, labor unions,
real estate agents, courts, local reporters, and so on,
can all provide clues.
33
176 Part II The Opportunity
Internet Impact: Research
The Internet has become the resource for entrepreneurial research and opportunity exploration. The rapid
growth of data sources, Web sites, sophisticated search engines, and consumer response forums allows for up-to-
date investigations of business ideas, competitive environments, and value chain resources.
Google is currently the top search engine in the world. One of the reasons for Google’s success is its increas-
ingly deep and wide platform of tools. In 2007 Google offered the means to view, for example, the text of U.S.
patents and scholarly papers, archives of news stories, and blogs on hundreds of subjects.
As virtual communities of people who share a common interest or passion, blogs can be a tremendously valu-
able resource of insights and perspectives on potential opportunities. Proactive, low- or no-cost research can also
be conducted with e-mailed questionnaires or by directing potential subjects to a basic Web site set up to collect
responses. In addition, the Internet provides entrepreneurs and other proactive searchers with the extraordinary
capability to tap wisdom and advice from experts on virtually anything—anywhere in the world.
32
Ibid., pp. 46, 48.
33
Fuld, Competitor Intelligence, pp. 369–418.
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Chapter 5 The Opportunity: Creating, Shaping, Recognizing, Seizing 177
Chapter Summary
Ideas are a dime a dozen. Perhaps one out of a hun-
dred becomes a truly great business, and one in 10 to
15 becomes a higher-potential business. The complex
transformation of an idea into a true opportunity is
akin to a caterpillar becoming a butterfly.
High-potential opportunities invariably solve an im-
portant problem, want, or need that someone is will-
ing to pay for now. In renowned venture capitalist
Arthur Rock’s words, “I look for ideas that will
change the way people live and work.”
There are decided patterns in superior opportunities,
and recognizing these patterns is an entrepreneurial
skill aspiring entrepreneurs need to develop.
Rapid changes and disruptions in technology, regula-
tion, information flows, and the like cause opportu-
nity creation. The journey from idea to high-potential
opportunity requires navigating an undulating, con-
stantly changing, three-dimensional relief map
while inventing the vehicle and road map along
the way.
Some of the best opportunities actually require
some of the least amounts of capital, especially via
the Internet.
The best opportunities often don’t start out that
way. They are crafted, shaped, molded, and rein-
vented in real time and market space. Fit with the
entrepreneur and resources, the timing, and the
balance of risk and reward govern the ultimate
potential.
The highest-potential ventures are found in high-
growth markets, with high gross margins, and robust
free cash flow characteristics, because their under-
lying products or services add significantly greater
value to the customer, compared with the next
best alternatives.
Trial and error, or learning by doing alone, is not
enough for developing breakthrough ventures,
which require experience, creativity, and conceptual-
izing.
Study Questions
1. What is the difference between an idea and a good
opportunity?
2. Why is it said that ideas are a dime a dozen?
3. What role does experience play in the opportunity
creation process, and where do most good opportuni-
ties come from? Why is trial-and-error learning not
good enough?
4. List the sources of ideas that are most relevant to
your personal interests, and conduct a search using
the Internet.
5. What conditions and changes that may occur in
society and the economy spawn and drive future
opportunities? List as many as you can think of as
you consider the next 10 years.
6. Evaluate your best idea against the summary criteria
in Exhibit 5.8. What appears to be its potential? What
has to happen to convert it into a high-potential
business?
7. Draw a value chain and free cash flow chain for an
existing business dominated by a few large players.
How can you use the Internet, personal computer,
and other information technology to capture (save) a
significant portion of the margins and free cash
flows?
Internet Resources for Chapter 5
www.ideafinder.com This unique site celebrates
innovative products and services. Includes History, Facts
& Myths, Idea Showcase, and Future Ideas that may
stimulate ideas for your own business.
www.emc.score.org Service Corps of Retired Executives.
A nonprofit organization and a resource partner with the
U.S. Small Business Administration with 11,500 volunteer
members and 389 chapters throughout the United States.
www.enterpriseforum.mit.edu/ The MIT Enterprise
Forum, Inc., builds connections to technology
entrepreneurs and to the communities in which they
reside.
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178 Part II The Opportunity
MIND STRETCHERS
Have You Considered?
1. Steve Jobs, founder of Apple Computer, was 10 years
old when he built his first computer. Colonel Sanders
was 65 years old when he started Kentucky Fried
Chicken. What is an opportunity for whom?
2. Most successful existing businesses are totally preoccu-
pied with their most important, existing customers and
therefore lack the peripheral opportunity vision to spot
new products and services. How is this happening
where you work? Is this an opportunity for you?
3. The most successful ventures have leadership and
people as their most important competitive advan-
tage. How does this change the way you think about
opportunities?
4. Whom can you work with during the next few years
to learn a business and have the chance to spot new
opportunities outside the weak peripheral vision of
an established business?
5. Barriers to entry can create opportunities for those
with the right knowledge and experience. Why is this
so? Can you find some examples?
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Chapter 5 The Opportunity: Creating, Shaping, Recognizing, Seizing 179
Exercise 1
The Next Sea Changes
The devastating tsunami in Asia in late December 2004 was
a sobering reminder of the massive, life-changing impact
that such an event can have. The “sea change” metaphor is
one we have used in earlier editions to urge aspiring entre-
preneurs to research, brainstorm, and envision future quan-
tum changes in technology and society. As we have seen,
such sea changes as electricity, the airplane, the integrated
circuit (Moore’s law), and wireless communications have
been the wellheads of new major industries. What will be
the likely technology and societal changes during the next
20 to 30 years that will spawn the next generation of new in-
dustries? Entrepreneurs and innovators who anticipate the
answers to this complex question will become the Gates,
Jobs, Blank, and Stemberg of the next generation.
Purpose
The purpose of this exercise is to provide a pathway for ex-
ploring this question. We hope to broaden your horizon of
technological literacy and enrich your vision of the next
quarter century—the window of your life when you have the
best chance of creating and seizing the mega-opportunities
that lie ahead.
We ask you to do some research and thinking about the
future directions of technology and how scientific inquiries
which are under way today can lead to knowledge break-
throughs. This new scientific knowledge will, in turn, lead to
innovations. When fueled, ignited, and driven by entrepre-
neurship, some of these innovations will become commer-
cialized and in the process create entirely new industries.
The following steps will assist you in this research task,
but you should not confine your efforts to these steps alone.
You also need to pursue as many other sources as possible
using Google and other resources. Be sure to “follow the
data and your gut instinct.” If you find an area of science and
technology that excites you—or which you instinctively be-
lieve can change the way people will live, work, learn, or
relax—then pursue it.
STEP 1
Go to the National Science Foundation summary of the 50
discoveries that the NSF believes have had the most impact
on every American’s life (www.nsf.gov/about/history
/nifty50/index.jsp). You will find such breakthrough discov-
eries as bar codes, CAD/CAM, genomics, speech recogni-
tion, computer visualization techniques, and Web browsers.
All of these are examples of sea changes—the spawners
and drivers of new industries that we discussed in this chap-
ter and in Chapter 3.
STEP 2
Select one or two of the nifty 50 that interest you the most.
Now examine number 10 on the list: “computer visualiza-
tion techniques.” Note the 11 industries and fields that
have been significantly impacted by this basic discovery.
Out of these 11 pick one or two you know the least about
but for which you have the most passion. Conduct some
keyword searches on Google and the like to identify prod-
ucts, companies, or market segments that are driven by the
entrepreneurs behind these innovations. Repeat this process
for all of the major discoveries you are attracted to. Once
you have a good sense of how these linkages exist, go to
Step 3.
STEP 3
Meet with two to five of your classmates over breakfast,
lunch, dinner, and share what you have learned, your ob-
servations and insights about how industries are born, and
what potential new fields might arise.
What patterns and common characteristics did you
find? What are the lead times and early indicators?
What technologies have the most future potential im-
pact on the way people live, work, learn?
Who are the entrepreneurs who create the technology-
based firms that utilize these discoveries? What are
their background, preparation, skills, experience, and
so forth? Any common denominators?
Have any of your ideas, assumptions, and beliefs been
altered about where and when the next biggest oppor-
tunities will emerge?
STEP 4
Visit the NSF home page (www.nsf.gov) and find the list of
11 different program areas, including geosciences, envi-
ronmental research, and engineering. Select one that inter-
ests you the most and you know the least about. Go into the
Web site and identify the research grants awarded to this
topic over the past few years.
What topics and problems are attracting the most
money and activity? Why is this so?
What new scientific knowledge and/or breakthroughs
might be expected, and what are some of the potential
sea change impacts?
What potential commercial applications can be envi-
sioned from these new technologies?
What existing technologies, products, and services are
most likely to be disrupted and replaced by these inno-
vations?
What societal trends can be combined with these
future technologies to create entire new industries?
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STEP 5
In class, or in informal groups, discuss and explore the im-
plications of your findings from the exercise.
What are two or three future sea changes you anticipate?
What other exploration do you need to do?
How can you better prepare yourself to be able to rec-
ognize and seize these future opportunities now, in 10
years, and in 15 years?
What implications do you see for your personal entre-
preneurial strategy, which you began to develop in
Chapter 2—especially with regard to projects to work
on, next education and work experience, and brain
trust and mentor additions?
180 Part II The Opportunity
Exercise 2
Opportunity-Creating
Concepts and the Quest
for Breakthrough Ideas
After you have fully digested the discussions in this chapter,
you should aim to prepare an industry analysis utilizing the
criteria listed in Exhibit 5.8. This should be a first cut analy-
sis, not an overly exhaustive effort. Your value chain should
be mapped out on one to two pages maximum, with the
other questions/issues answered in bullet points on one to
two pages maximum. Rather than an exhaustive effort,
this exercise is designed to get you to a specific way of
thinking.
Your task is to complete a simple, clear, and articulate
value chain analysis of an industry that is of interest to you.
Analyze the value chain as it currently exists. Next com-
plete an information flow analysis of that value chain, over-
laying an analysis of the flow of information through the
various stages of the value chain. Then broaden your think-
ing to create a value cluster of that industry. Make sure you
are thinking multidimensionally, not just linearly. Describe
or visually depict the impact of these multiple dimensions
on the flow of both goods/services and information. Ex-
plain how this value cluster expansion adds or intensifies
value for that industry, as compared to the linear chain. Fi-
nally, provide a succinct analysis of the margins in this
value cluster, with particular emphasis on the extremes
(highs/lows).
Also consider the following:
What are the deconstructors and reconstructors that
drive the value chain and opportunity in this industry?
What is your best estimate of the composition of the
free cash flow, profit, and value chains in a business in
this industry?
What prevailing industry practices, conventions, wis-
dom in marketing, distribution, outsourcing customer
services, IT, and capital investment are significant in
this business?
What new practices, conventions, and so forth are
now in place, and what are their half-lives?
What are the growth segments?
Where do the pundits (Forrester, IDG, Research
Sources, and other Wall Street analysts) think the next
growth market will be?
What are the parameters and characteristics of that
market?
If you are planning to bring a high-tech product to mar-
ket, you might want to consider the framework discussed in
Crossing the Chasm: Marketing and Selling High-Tech
Products to Mainstream Customers by Geoffrey Moore and
Regis McKenna and look at the value chain and the spe-
cific industry segment(s) you plan to focus on. You should
also consider reviewing Clayton M. Christensen’s writings
on disruptive innovation in, among others, The Innovator’s
Dilemma.
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Chapter 5 The Opportunity: Creating, Shaping, Recognizing, Seizing 181
Exercise 3
Creative Squares
STEP 1
Divide Your Group by (a) Separating into a Number of Groups of Three or More People Each and (b)
Having at Least Five Individuals Work Alone.
STEP 2
Show the Following Figure to Everyone and Ask the Groups and the Individuals to Count the Total Num-
ber of Squares in the Figure. Assume that the figure is a square box on a single flat plane. In counting, angles of any
square must be right angles, and the sides must be of equal length.
STEP 3
Discuss the Creative Processes by Which the Groups and the Individuals Reached Their Answers.
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Exercise 4
Idea Generation Guide
Before beginning the process of generating ideas for new ventures, it is useful to reflect on an old German proverb that says,
“Every beginning is hard.” If you allow yourself to think creatively, you will be surprised at the number of interesting ideas
you can generate once you begin.
This idea generation guide is an exercise in generating ideas. The aim is for you to generate as many interesting ideas
as possible. While generating your ideas, do not evaluate them or worry about their implementation. Discussion and exer-
cises in the rest of the book will allow you to evaluate these ideas to see if they are opportunities and to consider your own
personal entrepreneurial strategy.
And remember—in any creative endeavor there are no right answers.
Name:
Date:
STEP 1
Generate a List of as Many New Venture Ideas as Possible. As a consumer or paid user, think of the biggest,
most frustrating, and painful task or situation you continually must take, and one which would be worth a lot to eliminate or
minimize. These are often the seeds of real opportunities. Thinking about any unmet or poorly filled customer needs you know
of that have resulted from regulatory changes, technological changes, knowledge and information gaps, lags, asymmetries,
inconsistencies, and so forth will help you generate such a list. Also think about various products and services (and their sub-
stitutes) and the providers of these products or services. If you know of any weaknesses or vulnerabilities, you may discover
new venture ideas.
STEP 2
Expand Your List if Possible. Think about your personal interests, your desired lifestyle, your values, what you feel you
are likely to do very well, and contributions you would like to make.
182 Part II The Opportunity
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Chapter 5 The Opportunity: Creating, Shaping, Recognizing, Seizing 183
STEP 3
Ask at Least Three People Who Know You Well to Look at Your List, and Revise Your List to Reflect Any
New Ideas Emerging from This Exchange. See the discussion about getting feedback in Chapter 2.
STEP 4
Jot Down Insights, Observations, and Conclusions That Have Emerged about Your Business Ideas or
Your Personal Preferences. Which ones solve the greatest pain point/aggravation/frustration for which you (and oth-
ers you have spoken with) would pay a significant premium to eliminate?
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184 Part I The Entrepreneurial Mind for an Entrepreneurial World
Case
Storyplanet
1
Serial entrepreneur refers to an entrepreneur who has a penchant of
starting businesses and leading them to a successful exit event
(either IPO or trade sale) and repeating the process.
Preparation Questions
1. How was the opportunity for Storyplanet identi-
fied?
2. What is the most important problem facing Story-
planet? The most urgent?
3. How successful is Storyplanet?
4. Consider the target market and market entry
strategies of Storyplanet. What are the factors
you would consider?
Introduction
This paper addresses the tasks assigned by the Storyplanet
team. It analyzes the digital storytelling industry and
shows how Storyplanet is positioned as a market leader,
recommends improvements to the product, introduces
new marketing strategies, and explains what entry strat-
egy Storyplanet should adopt to enter the Asian market.
Tasks Assigned
Product Perception
Storyplanet tasked the team with identifying areas where
the product appeals only to a Western market and to
suggest what can be adapted so that the product will ap-
peal more to an Asian audience. The team will suggest
changes as well as discuss possible cultural differences
that may affect the attractiveness of the product.
Target Audience
Storyplanet would like the team to profile its potential
users in Asia. This will enable the company to target its
initial marketing efforts at this group of people to get the
company off the ground in Asia.
The team will look at Storyplanet’s current target mar-
ket in the West and attempt to identify a similar group of
people in the Asian context who will want to and be
able to pay for the product. We will then suggest a mar-
keting plan to promote the product to this group of peo-
ple. This will ensure the product is not only well received
but the company’s cash flow is protected.
Entry Strategy into Asia
Storyplanet would like the team to suggest the geo-
graphical areas where the product should enter the
Asian market and the avenues that should be exploited.
The team will discuss the availability of target markets in
the various countries, market size, Internet penetration
rate as well as present the advantages and disadvan-
tages of entering each identified cluster/country.
Company Background
Team
Bjarke Myrthu, founder and chief executive officer of
Storyplanet, is a serial entrepreneur
1
with two successful
ventures, Magnum in Motion and NewClearMedia, in
the digital storytelling industry.
Jakob Kahlen, creative director of Storyplanet, has a
background in advertising. He is responsible for develop-
ing the designs and concepts of the products including
Storyplanet’s visual identity, user experience and workflow.
Mr. Pete Barr Watson, chief technical officer (CTO)
and previously with Microsoft Silverlight, is in charge of
technical development.
Joi Ito is the angel investor voted as one of the 25
most influential people on the Web by Businessweek in
2008. He shares the team’s belief in the idea but is wor-
ried about the execution of the project.
Vision
“We create new possibilities with visual stories by con-
necting storytellers all over the world and giving them
tools to edit, share, and collaborate.”
Storyplanet’s mission is to explore new storytelling
concepts, explore new business models, and to bring so-
cial awareness to social media.
Market
Storyplanet is engaged in the digital storytelling market,
a rather mature market with a developed ecosystem of
service providers and educated consumers. Digital
storytelling uses technology to enhance the oral tradi-
tion. A combination of photographs, video, and narra-
tion is widely used to create stories.
The medium has caught on, especially in the educa-
tion sector, where it is used to enhance engagement and
multimedia awareness.
Competitors in the market include small players, such
as Storybox and Digital Storyteller, who currently have
noninteractive products, and the giants, such as Adobe
and Apple, who have the capability to create a similar
product in a shorter time.
Revenue Model
Storyplanet currently does not charge for its services.
It is provided free for all beta users.
This case was written by Loh Wen-Li Samantha, Lum Wai Yan Vanessa,
and Emilio Jimenez of Singapore Management University, under the
supervision of Yinglan Tan. Research assistance by Mike Lee, with the
kind sponsorship of Tan Wah Yuan.
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Chapter 5 The Opportunity: Creating, Shaping, Recognizing, Seizing 185
Product
Description
Storyplanet turns photographs and videos into inter-
active stories to be published on any Web page for
free. This provides consumers with a simplified product
where they do not need to have technical knowledge
to create interactive stories.
The platform allows the mixing of an owner’s
content with the content available in shared folders.
1. First Mover in Interactive
Storytelling
Although there are many
video editors and digital
storytelling platforms already
available, there is currently
no directly competing prod-
uct. Using widgets to make
the storytelling experience a
two-way thing makes it a
brand new idea.
2. Second Wave of Funding
There is renewed belief in
the idea and with the sec-
ond wave of funding ap-
proved, the team can go
ahead to redevelop the
product.
1. Early Beta
The current version of
the platform is a very
early beta, where many
of the functions are not
fully developed. It is
cumbersome and not
user-friendly.
2. Lack of Instructions
There is a lack of
instructions on the site
which makes it difficult
to navigate. The tutori-
als are also not accom-
panied by voice or
written instructions mak-
ing them difficult to fol-
low.
1. Untapped Education
Services Industry
Storyplanet has not ex-
plored white-labeling the
platform to offer it to this
industry.
2. Social Networking
The spread of social net-
working can be used to
Storyplanet’s advantage,
especially in marketing the
product and educating
consumers on a new prod-
uct.
3. Mobile Internet
There is an increasing num-
ber of people who use the
Internet on their mobile
phones. Should Storyplanet
be able to ride this wave,
a lot of content can be cap-
tured and many stories can
be generated.
1. Consumer Preference
Fluctuations
The timing of entry into the
market needs to be apt as
should the market not be
mature enough for the
product, there might not
be significant traction in
the market for the product.
2. Constant Emergence of
New Products
Software giants such as
Apple and Adobe are
always on the lookout for
the next big thing. Should
they be interested in the
interactive storytelling mar-
ket, they would be able to
develop a similar platform
in a shorter time, with
their available resources.
It also allows users to integrate different media, in-
cluding text pages, wikis, maps, and interactive
components.
This helps storytellers to unlock the possibilities of
online media without incurring time spent on learning
technical skills.
Storyplanet hopes to use this platform to promote a
free media world where people can share stories
about their cultures and discuss current issues in a new
and innovative way.
Proposed Changes
Auto Upload Function
An auto upload function that allows the program to
search for original content such as photographs, videos,
and audio clips such as in Facebook should be imple-
mented. This will increase the ease and decrease the
time spent taken to upload content. More people will
then be willing to share content.
Record Direct
With every laptop having a built-in Webcam and every
mobile phone having a video record function, it will be
useful if consumers are able to record videos of them-
selves directly into their storyboard. This will definitely
make the process of integrating different media more
seamless.
Widgets
Widgets are what make Storyplanet interactive and
hence a differentiated product. Therefore, we recom-
mend a rebranding of this function by coming up with a
new name. This should be something that people iden-
tify only with Storyplanet, such as the “I” naming series
of Apple products.
Also, to get consumers more familiar with the idea of
using widgets, there should be a search function for the
library of widgets. Developers of widgets should also
name widgets well to describe their functionality. Wid-
gets should also be able to be previewed before down-
loading and customizable to a certain extent.
Forum Page
Storyplanet should develop a forum, wiki or community
page for users to interact and share ideas. This will also
create an avenue where users are able to help one an-
other or source out content that they need for their sto-
ries. Through the forum, Storyplanet will be able to get
direct feedback on what is good, what needs to be im-
proved, and what is on its users wish list.
Tags
By making tags a compulsory field, it will help to organ-
ize the content in the shared folders so as to make it eas-
ier for users to find the files of particular content types.
Not only so, it will increase the ranking of Storyplanet
SWOT Analysis
Strengths Weaknesses
Opportunities Threats
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186 Part II The Opportunity
on the search engine since it increases the frequency of
the key words.
Target Market
Current Target Market
Storyplanet currently targets three very broad groups of
people.
1. Citizen journalists: bloggers, photo bloggers, and
media students.
2. Freelance professionals: journalists, film-makers,
designers, and activists.
3. Organizations: universities, schools, nonprofit or-
ganizations, corporations, and the media.
The platform is currently in stealth mode and has
1,000 beta users consisting of what the company calls
prosumers. Prosumers are serious amateurs, aspiring
professional photographers, film-makers or journalists
looking for more advanced tools than the mass-market
user. However, out of the 1,000, only 2 percent are
active users who create stories. These stories are often
underdeveloped and do not showcase what Story-
planet can offer. Users also currently do not pay for the
services.
Analysis of Target Market
The team feels that for a start-up, it is good that the
company dreams big, targeting the whole of the media
sector, particularly the rapidly expanding social media
industry. However, it should develop steps to get there
and have specialized marketing plans to enter immedi-
ate markets before expanding its horizons.
However, in stealth mode, the company has only tar-
geted documentary-making prosumers, which is too
small a market and also difficult to monetize. The small
target group makes it difficult for the product to gain
market traction and to generate any buzz.
The team feels other than looking for consumers
who fit its vision and mission, Storyplanet needs to
look for a steady income stream as well. Only then can
it carry on developing its platform to become a better
product.
Recommended Target Market
Prosumers
Prosumers should still be part of the target market as
they fit the vision and mission best. They are best able to
contribute to the shared content bank. This will also be
the group that is most interested in creating human-inter-
est stories. Building a global platform to share ideas and
content from around the world will also appeal to this
market.
However, this group is highly inaccessible as there
are no channels that will enable Storyplanet to
contact many of them at the same time. The effort
required in reaching out to this market may not be jus-
tified.
Also, prosumers, as aspiring professionals, will likely
be interested to purchase professional software to hone
their craft and may not be interested in a mid-market
product. The mind-set will be to improve their skills
through the acquisition of traditional technical knowl-
edge and that they will be willing to spend the time on
their passion.
Most importantly, it is very difficult to monetize the
group, as this market typically does not have much dis-
posable income. They may be more interested in pur-
chasing professional equipment rather than spending
on new software.
Educational Services Industry
As mentioned earlier, digital storytelling is already very
much a part of the educational service sector. Many ed-
ucators are using it as a tool and there is a high demand
for workshops in the U.S.
Storyplanet should look into entering this market, as
it is another sector that fits well with its vision and mis-
sion. The education sector is always looking to em-
power people with narrative skills. It is also the best sec-
tor to promote social awareness as it is untainted by
companies pushing their own agenda.
There is also an established ecosystem where there
are service providers in the form of institutions and a
constant demand for new tools to enhance the experi-
ence. This group also needs the least introduction to the
product, as it is more about informing them about a
new feature available to improve the storytelling
process.
There are also well-established channels to reach
this sector. As a service provider they are well listed
on the Web or in the Yellow Pages. School systems
are also linked with government bodies and once
accredited, marketing material can easily go out to
the masses. Moreover, should the platform be recom-
mended, positive word of mouth would have a viral
effect.
Most importantly, this market is highly monetizable
as people are willing to pay for products that are educa-
tional. This shifts the platform’s product market from en-
tertainment and interest to education, where disposable
income is more willingly spent on. Also, white-labeling
the platform for this sector will create a viable income
stream, as institutions will have the budget to purchase
new tools.
This market requires a relatively evolved product and
at this point Storyplanet is not able to supply that yet.
There are also many alternatives, though noninteractive,
available and Storyplanet needs to convince educators
of the importance of interactive storytelling to be able to
promote its product.
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Chapter 5 The Opportunity: Creating, Shaping, Recognizing, Seizing 187
Mass Market Users
Storyplanet can also branch into the mass market, push-
ing the interactivity that its platform provides as a selling
point, to people who want to develop their personal
stories.
The market is infinite and Storyplanet only has to em-
ploy general marketing tools. The market is monetizable
but the product will be more difficult to price. Also,
brand dilution may occur which would be detrimental.
Promotion Strategies
With target markets identified, promotional strategies
can be employed to draw in potential consumers. How-
ever, only with improvements to the product can these
promotion strategies truly be effective. The team has
come up with strategies that should be employed to
achieve marked success in different timeframes.
Immediate
Marketing Material
Marketing material should be developed as soon as
Version 2 of the product is ready so that it can be easily
distributed to potential clients. This would be especially
necessary when promoting to the education sector.
Well-developed marketing material will increase credi-
bility that is required for ministry-endorsed products. We
recommend that a story highlighting all the special
features of the Storyplanet platform be produced using
Storyplanet immediately. Other marketing material
could share the story behind the company and the
digital storytelling landscape. A campaign could also
be launched about the rebranding of the widgets, mak-
ing it synonymous with Storyplanet.
Online Forum
An online forum should be available for users to ask
questions, help one another, request for required con-
tent and to share experiences. This will help to build up
an online community, expanding the storytelling tribe.
The buzz created by an engaged community should
generate more interest in digital storytelling and help
users create more developed stories.
Improving Search Engine Ranking
Storyplanet’s current search engine ranking for digital
storytelling and various other keywords is very low and
the company should look into improving its ranking to
direct more people to the site. Strategies can be found
in Exhibit 1.
(continued)
Copyright 2002 Herman Drost
Search engines are still one of the most effective ways to drive
traffic to your Web site. This is because it is highly targeted traf-
fic. A person searching for a particular phrase on a search en-
gine gets taken to your Web site.
It makes sense, then, to make your site as attractive as pos-
sible to the search engines, so your rankings will improve, giv-
ing you more visitors which leads to more sales—your ultimate
goal.
1. Keyword Density
The ratio of keywords on your visible page to nonkeywords is
called Keyword Density, i.e., if you have 100 words on your
page and three of those words are “boat” or “boats”, then you
will get a keyword density of 3 percent of your text for the word
“boat”.
Try to aim for a keyword density on your site of 3 percent to
20 percent. This will give you a good range. You can analyze
your keyword density by using these online tools:http://www.
keyworddensity.com orhttp://www.keywordcount.com.
2. Keywords in Your Domain Name
Try to incorporate one of your keywords or a keyword phrase
in your domain name, i.e.,http://www.isitebuild.com (build-
ing Web sites) orhttp://www.ihost-websites.com (hosting Web
sites). This may also help people to memorize your name when
they are looking for this service.
3. Page Title
Write a short descriptive title of five to eight words for your
Web site, containing your primary keywords or keyword
phrase.
The page title is the first thing that people see when your site
appears in the search engines. Begin your title with a capital
letter, then follow with lower-case letters. This makes it easier to
read than titles with all words capitalized. Place your most im-
portant keyword phrase toward the beginning of your title tag.
4. Description Meta Tag
Some search engines will include this below your title. Choose
20 of your most important keywords and write a 200 to 250
character sentence about your site. Don’t repeat your title de-
scription but write a different one with different keywords.
Some search engines will just take this description meta tag,
some will use both the title and description tags.
5. Keywords Meta Tag
Research 50 to 100 keywords people would insert in the
search engines to find your site. A great tool for doing this is
the keyword suggestion tool or Wordtracker. Refine this list to
your 20 best keywords or keyword phrases.
Leave out the commas between your keywords, so the
search engines can group the words into any phrases that
seem appropriate. This positions your words for minimum
space with maximum combinations.
EXHIBIT 1
Increasing Search Engine Rankings
17 Highly Effective Strategies to Increase Search Engine Rankings
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188 Part II The Opportunity
EXHIBIT 1 (concluded)
Increasing Search Engine Rankings
17 Highly Effective Strategies to Increase Search Engine Rankings
6. Header Tags
Search engines tend to place emphasis on the header tags so
make sure you have your H1 tag at the top of your Web page.
Use CSS (cascading style sheets) to avoid the problem of your
text appearing too large when just using html for this tag.
Use the other header tags (H2, H3, H4) throughout your
Web copy.
7. Comment Tags
These are mostly used by Web designers to remind them of
how to structure Web pages. Write a sentence using some of
your most important keywords, place it in a comment tag, and
insert the comment tag in your body copy.
8. Use the ALT Tag for Images
Some people surf the Web with the graphics turned off. Placing
ALT tags in the html code for your images enables them to see
the description of that image.
Incorporate keywords in the ALT tag of your images.
WARNING: Make sure the words relate to the graphic, other-
wise you could get banned for “keyword stuffing”.
9. Image File Names
Change your image file names to your keywords.
10. Page Link Names
Place a primary keyword in your page link names. Rather than
using a link in your navigation bar like “services”, add a key-
word to that page link. If you offer Web hosting services, it
could be “webhostingservices.htm”.
Also use keywords in the page links throughout your copy.
Instead of writing a paragraph about your testimonials and
linking to a page labeled “testimonials”, create a link to a page
called “marketing successes”.
11. Create a Site Map
Create a site map that contains links to all the sections of your
site. Write a description for each section. Place this site map on
your homepage as some search engines will only index the
homepage and not deeper pages in your site.
12. Quality Content
Provide Web copy of 250 to 300 words which are targeted
for your Web site visitors. Sprinkle your most important key-
words throughout your text, particularly in the first paragraph.
Be careful not to overstuff keywords in your copy so that it
sounds strange when you read it. Get some others to review
and edit your pages before you submit them for the world to
read.
13. Repair Broken Links
Most search engine directories will not list your site if it has bro-
ken links. Also visitors get frustrated when they reach a broken
link page (404 error page) and will click elsewhere. Make sure
you do a link check before your site goes livehttp://www.Any-
Browser.com.
14. Create a Contact Page
The search engine directory, Yahoo, will not index your page if
you do not have a real address (do not use a post office ad-
dress).
15. Reciprocal Links
Search engines (especially Google) place high relevancy on
links to your site in assigning a good ranking.
Create a links page that includes links to sites with similar
content. Make sure they don’t compete with your site and that
they are quality links. Preferably, find sites that already have a
high search engine ranking.
Ask sites that link to your competition to link to your site.
To find out which sites are linking to your competition, visit a
search engine and enter “link:” before your competitors URL.
For example: link:mysite.com or link:www.mysite.com.
16. Cross Linking Multiple Sites
If you have multiple sites, cross link all your sites and include a
description on your Web site for each link.
17. Keep Your File Size Small
If you use dynamic html (i.e., javascript, DHTML) it will often
push your Web copy (containing your keywords) to the bottom
of your page. Since search engines read the text that is near
the top of your page, that nice piece of javascript you have
placed before your Web copy will affect your search engine
rankings.
You can keep your file size small by storing your JavaScript
and CSS code in an external file.
Source:http://www.clickfire.com/archives/seo.php.
Short Term
Short-term promotional strategies can only be achieved
once Version 2 of the platform is developed and further
technical work will be required to tap on these strate-
gies. The short-term strategies capitalize on the interac-
tivity of the platform as a differentiating factor.
Social Networking
Storyplanet can tap onto the growth of social net-
working sites such as Facebook and Myspace by offer-
ing applications to create interactive stories on these
sites. People will then be able to share stories on these
sites with their friends. This will create greater aware-
ness for the platform and serve to educate the mass
market. One strategy to divert traffic to the Story-
planet Web site will be to allow creation of short
stories on social networking sites but leave cliff-
hangers when the interactivity begins. The interactive
journeys should then begin when on the Storyplanet
site.
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Chapter 5 The Opportunity: Creating, Shaping, Recognizing, Seizing 189
Social Media
Well-developed stories can be uploaded onto social me-
dia sites such as YouTube and Twitter. This is especially
important to promote the social awareness brand of the
company. These stories created by socially conscious
Storyplanet users would come up in keyword searches
on these social media sites. There are many people
looking to forward social agendas on these sites and
they will be the best place to seek out more prosumers.
Also, short films on social media sites have quite a fol-
lowing, well-developed videos picked by the Story-
planet team can also enjoy similar popularity. The inter-
activity of the Storyplanet platform will then be able to
gain face time and possibly create a viral effect, direct-
ing those interested to the Web site.
Long Term
Long-term strategies are based on developing relation-
ships and strategic partnerships with stakeholders that
capitalize on a company’s brand image as a socially
aware company.
For scalability, Storyplanet should have strategic
partnerships with different educational service organi-
zations. This will ensure that it receives constant updates
on what consumers would like to see in the product
and constantly have a stream of income. Storyplanet
can keep in close partnership with non-governmental
organizations (NGOs) and organizations with a social
agenda by either doing projects for them via the
Storyplanet platform or providing Storyplanet as a
platform to educate the public on social issues. This
will allow them to be close to the ground on current
buzz issues.
Storyplanet should also explore partnerships with so-
cially aware hardware producers, such as mobile
phone producers, bundling the Storyplanet platform as
a part of the suite of services available. This will allow
Storyplanet to reach its aim of having the whole media
sector as a target market. Such partnerships will be
mutually advantageous as hardware producers are
always looking for the newest most relevant gadgetry
to add to their toolkit to provide better services to their
consumers. This will also allow Storyplanet to gain
mass-market traction.
Price Strategies
In terms of pricing strategy, our team recommends that
Storyplanet offer differentiated services to match the
purchasing power (see Exhibit 2).
The following recommendations have been bench-
marked with market leader competitors in each sector.
For the education industry, the product that should
be white-labeled and promoted is the platform with in-
struction manuals and regular updates at US$20 to
US$30 per year akin to premium services that Flickr
Photobucket provide.
For prosumers, a widget store such as the itunes store
can be set up. The multiuse widgets can be priced about
US$1.99 such as the price of a song. For widgets that
are developed by users, Storyplanet can work out a
commission-based scheme that will reward its develop-
ers as well.
Entry into Asia
Various benefits and costs must be weighed when mov-
ing into the Asian market, primarily, the language bar-
rier that separates the different regions. Market size,
Internet penetration, and culture are used to analyze
and recommend potential markets (see Exhibit 3).
Japan and Korea
We recommend the Japanese and Korean markets as
the best place to enter the Asian market as South Korea
and Japan have the highest Internet penetration rates in
Asia, 77.3 percent and 74 percent respectively. South
Korea has about 37.5 million users while Japan has
94 million users. The bloc totals 131.5 million Internet
users. Both are collectivistic societies with a constant
cultural need for social interaction. The need to ex-
change information and gain consensus is very much a
part of the Asian culture. As risk-adverse and conform-
ist societies, the Internet is used in Japan and Korea as
an avenue for self-expression. This anonymity removes
the fear of assuming social responsibility of negative
expression of emotions.
Advantages
Broadband Quality and Infrastructure Readiness
Japan has the world’s highest quality broadband and is
the third largest broadband country in the world after
the United States and China. South Korea is also one of
the more wired countries in the world with developed
technology infrastructures. In Korea, the reason for the
high penetration rate is the strong support of the govern-
ment body in fostering competition and encouraging in-
novation. Storyplanet has already secured hosting in
Japan, which makes technical sense for the company.
Also, with Storyplanet’s platform being one with large
content, the speed at which it can be accessed is of ut-
most importance.
Creative and Innovative Culture
The strong creative and innovative culture found in
Japan and Korea is partially why they are constantly at
the forefront of technology and able to reap first mover
advantages. Their openness to new concepts and ideas
will make Storyplanet’s entrance into these countries
much smoother as they are more receptive. Being tech-
nologically advanced, the majority of the population
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190 Part II The Opportunity
EXHIBIT 2
Pricing Strategy: Comparisons of Software
Photobucket Digital Story
Vimeo Plus Flickr Pro Pro Memoryminer Teller
Image Sharing, Starter Kit for
Photo Photo Sharing, Editing, Digital
Type of Software Video Uploading Video Sharing Collating Storytelling
Price $59.95/year $24.95/year or $24.95/year $45 $39.95
$47.95/2 years
Original Storage 500 MB/week — —
New Storage 5 GB/Week unlimited storage 25 GB of storage
Quality of images/Videos high video — high resolution
quality images
Adverts no banner ads ad-free browsing no ads in album
sharing
Upload Speed priority — —
uploading
Upload Volume unlimited HD unlimited uploads —
uploading
Quality of Files HD embedding HD playback for SWF/Flash file
high-definition support
video uploads
Customize Profile full customization — custom URLs for all
sub-albums
Number of Collections unlimited groups/ unlimited sets —
channels/albums and collections
Privacy domain privacy — —
Original Files source file access to original permanently
downloads files active links
Statistics — statistics on more statistics
account
— — 4000 ? 3000
Image Size from 1024 ? 768
Pricing Strategy: Comparisons of Add-ons
1) MapleStory
Mode (i) Credit Card through Paypal
(ii) Prepaid Cards
Credit Card S$10.50/US$6.30 per 10,000 A-Cash
* Software is able to detect the country the user is from and convert the prices of the
A-Cash accordingly.
A-CASH Prepaid Cards A-Cash Value – 5,000 SGD$5.35 RM12.00
A-Cash Value – 10,000 SGD$10.70 RM24.00
A-Cash Value – 20,000 SGD$21.40 RM48.00
A-Cash Value – 30,000 SGD$32.10 RM72.00
2) Second Life
L$570 for US$2.50
3) Second Life
US$1.99 for a song
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Chapter 5 The Opportunity: Creating, Shaping, Recognizing, Seizing 191
EXHIBIT 3
Asia Internet Usage and Penetration Rates
Internet Internet
Population Users Users Penetration User Growth Users (%)
Countries (2009 Est.) (Year 2000) (Latest Data) (% Population) (2000–2009) in Asia
Afghanistan 28,395,716 1,000 500,000 1.80% 49,900.00% 0.10%
Armenia 2,967,004 30,000 172,800 5.80% 476.00% 0.00%
Azerbaijan 8,238,672 12,000 1,500,000 18.20% 12,400.00% 0.20%
Bangladesh 156,050,883 100,000 500,000 0.30% 400.00% 0.10%
Bhutan 691,141 500 40,000 5.80% 7,900.00% 0.00%
Brunei Darussalam 388,190 30,000 187,900 48.40% 526.30% 0.00%
Cambodia 14,494,293 6,000 70,000 0.50% 1,066.70% 0.00%
China * 1,338,612,968 22,500,000 338,000,000 25.30% 1,402.20% 48.20%
Georgia 4,615,807 20,000 360,000 7.80% 1,700.00% 0.10%
Hong Kong * 7,055,071 2,283,000 4,878,713 69.20% 113.70% 0.70%
India 1,156,897,766 5,000,000 81,000,000 7.00% 1,520.00% 11.60%
Indonesia 240,271,522 2,000,000 25,000,000 10.40% 1,150.00% 3.60%
Japan 127,078,679 47,080,000 94,000,000 74.00% 99.70% 13.40%
Kazakhstan 15,399,437 70,000 1,900,600 12.30% 2,615.10% 0.30%
Korea, North 22,665,345 — — — — 0.00%
Korea, South 48,508,972 19,040,000 37,475,800 77.30% 96.80% 5.30%
Kyrgyzstan 5,431,747 51,600 750,000 13.80% 1,353.50% 0.10%
Laos 6,834,345 6,000 100,000 1.50% 1,566.70% 0.00%
Macau * 559,846 60,000 238,000 42.50% 296.70% 0.00%
Malaysia 25,715,819 3,700,000 16,902,600 65.70% 356.80% 2.40%
Maldives 396,334 6,000 71,700 18.10% 1,095.00% 0.00%
Mongolia 3,041,142 30,000 320,000 10.50% 966.70% 0.00%
Myanmar 48,137,741 1,000 40,000 0.10% 3,900.00% 0.00%
Nepal 28,563,377 50,000 397,500 1.40% 695.00% 0.10%
Pakistan 174,578,558 133,900 18,500,000 10.60% 1,3716.30% 2.60%
Philippines 97,976,603 2,000,000 24,000,000 21.10% 932.50% 2.90%
Singapore 4,657,542 1,200,000 3,104,900 66.70% 158.70% 0.40%
Sri Lanka 21,324,791 121,500 1,148,300 5.40% 845.10% 0.20%
Taiwan 22,974,347 6,260,000 15,143,000 65.90% 141.90% 2.20%
Tajikistan 7,349,145 2,000 484,200 6.60% 24,110.00% 0.10%
Thailand 65,998,436 2,300,000 13,416,000 20.30% 483.30% 1.90%
Timor-Leste 1,131,612 — 1,500 0.10% 0.00% 0.00%
Turkmenistan 4,884,887 2,000 70,000 1.40% 3,400.00% 0.00%
Uzbekistan 27,606,007 7,500 2,416,000 8.80% 32,113.30% 0.30%
Vietnam 88,576,758 200,000 21,524,417 24.30% 10,662.20% 3.10%
TOTAL ASIA 3,808,070,503 114,304,000 704,213,930 18.50% 516.10% 100.00%
Notes: (1) The Asian Internet Statistics were updated on 30 June 2009. (2) CLICK on each country name to see detailed data for individual
countries and regions. (3) The demographic (population) numbers are based on data contained in Census Bureau. (4) The usage num-
bers come from various sources, mainly from data published by Nielsen Online, ITU, and other trustworthy sources. (5) Data may be
cited, giving due credit and establishing an active link to Internet World Stats. (6) For definitions and help, see the site surfing guide .
(*) For statistical purposes, China figures do not include SAR Hong Kong and SAR Macau which are reported separately. © Copyright
2009, www.miniwatts.com, Miniwatts Marketing Group. All rights reserved.
Source:http://www.internetworldstats.com/stats3.htm.
Internet Internet
Population Users Users Penetration Penetration Users (%)
Countries (2009 Est.) Rank (Latest Data) Rank (% Population) in Asia
Korea, South 48,508,972 4 37,475,800 1 77.30% 5.30%
Japan 127,078,679 2 94,000,000 2 74.00% 13.40%
Internet Internet
Population Users Users Penetration Penetration Users (%)
Countries (2009 Est.) Rank (Latest Data) Rank (% Population) in Asia
China * 1,338,612,968 1 338,000,000 9 25.30% 48.20%
Hong Kong * 7,055,071 12 4,878,713 3 69.20% 0.70%
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192 Part II The Opportunity
owns cameras and mobile phones. With increased af-
fluence, the Japanese and Koreans are also fairly well
traveled and will have the content to contribute to the
platform.
Angel Investor from Japan
With Joi Ito being the angel investor, it also means that
Storyplanet has substantial access to the Japanese mar-
ket. With a very inward-looking community, having a
door open to the New York-based company through a
well-respected personality will be beneficial.
Disadvantages
Relative Asian Market Size
The Korean and Japanese markets constitute only 5.3
percent and 13.4 percent of the Asian market respec-
tively, hence, there is a need to do a cost-benefit analy-
sis to weigh the amount of revenue or the audience
reach the translated sites can attain against the cost of
producing a translated version of the sites.
Copycat Products
There is always the risk that the idea of interactive story-
telling might be poached and developed within the
Japanese and South Korean markets. The creative and
innovative culture of the people would also mean that
they are always looking into ways to improve products.
Hence, there is a need to take appropriate measures to
protect the intellectual property or look into ways that
will enable Storyplanet to stay competitive.
China and Hong Kong
China has 338 million Internet users, making it the
Asian country with the most Internet users, but it has an
Internet penetration rate of only 25.3 percent. Hong
Kong has the third highest penetration rate in Asia of
69.2 percent but only 4.8 million users. The team has
grouped these two regions together due to the similar-
ities in government regulations under the People’s
Republic of China. One might think that due to the
sheer size of the market, this would be the best market
to enter. Research, though, shows that sheer market
size is not enough to counter the disadvantages of
the market.
Advantages
Large Population Size
China has the largest population in the whole world
and the figure is growing at 0.655 percent annually.
Despite ranking only ninth out of 34 countries in terms
of Internet penetration rates, China’s netizens make
up 48.2 percent of the total number of Internet users
in Asia. Since 2000, the number of China’s netizens
has increased by 1,402.20 percent to the current
338,000,000, which surpasses the population size of
the United States of 307,212,123. This is the largest
market in terms of potential users that Storyplanet can
tap into.
Disdvantages
Censorship
Entrance into the China and Hong Kong market is re-
stricted due to the strict censorship by the Chinese gov-
ernment. In a bid to enter and satisfy this fast-growing
market, companies like Google and Yahoo have had to
meet these content censorship demands. This will be the
largest obstacle should Storyplanet enter the Chinese
market, as the censorship body will be constantly regu-
lating the content on the site and limiting any flow of in-
formation that they deem inappropriate. This defeats
the main purpose of Storyplanet as the platform for con-
necting storytellers worldwide with the freedom to col-
laborate, share materials, and edit content with any
other user. The aim of Storyplanet is to give a voice
to people, create communities, and raise awareness
of issues the users feel are valuable to the rest of the
community.
Strong Presence of Local Social Media
China’s censorship body has also taken steps to block
the use of Twitter and Facebook entirely. Despite the
controversial debate on censorship, the proliferation of
social media is not constrained, due to the widespread
usage of local Chinese social networking sites. Up to
92 percent of Chinese netizens use social media, as
shown in a Netpop research study. Some of these sites
include Renren, Tianji, and 51.com. Special mention is
made of Renren, previously known as Xiaonei, which
has features and applications similar to that of Face-
book, hence earning it the reputation of a “Chinese
Facebook”. Currently, 32,000 universities and col-
leges, 56,000 high schools and 85,000 companies in
China and 1,500 universities in 29 other countries are
actively available on the site. Renren is also the main
photo-sharing tool used by China netizens. Popular sites
such as Facebook and Flickr are not common in China
as they are frequently banned.
If Storyplanet is able to latch onto the Chinese
social media bandwagon, it will achieve an extensive
audience reach. However, Storyplanet, being a foreign
company, may face challenges when infiltrating the Chi-
nese local social media as the Chinese are known to be
very supportive of their local companies and products.
Conclusion
We believe that Storyplanet having found its blue
ocean with a platform that is really innovative is ready
to position itself as a market leader in the industry.
The platform will definitely have to be evolved in
Version 2 before it is ready for the market. Meanwhile
the team should develop Storyplanet’s brand equity in
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Chapter 5 The Opportunity: Creating, Shaping, Recognizing, Seizing 193
the industry and make headway into the markets that
it would like to enter. This would lay the groundwork
for steady income streams to continue developing the
product.
The team has done the groundwork to identify Asian
markets that will be most receptive to the platform and
has given Storyplanet insights into the Asian culture.
The team has benefited from a steep learning curve
and is inspired by the passion of the founders of Story-
planet. This project has definitely stretched the team in
mining research data, discussing innovative marketing
strategies, and thinking out of the box.
We wish Storyplanet all the best and hope to be able
to make interactive online stories soon.
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doc_976402645.pdf
During this criteria in regard to the opportunity creating, shaping, recognizing, seizing.
149
Think Big Enough
Since its inception, New Venture Creation has at-
tempted to inspire aspiring entrepreneurs to “think big
enough.” Time and again the authors have observed
the classic small business owner who, almost like a
dairy farmer, is enslaved by and wedded to the busi-
ness. Extremely long hours of 70, 80, or even 100 hours
a week, and rare vacations, are often the rule rather
than the exception. And these hardworking owners
rarely build equity, other than in the real estate they
may own for the business. One of the big differences
between the growth- and equity-minded entrepreneur
and the traditional small business owner is that the en-
trepreneur thinks bigger.
In China, aided by the country’s rapid growth, en-
trepreneurs think big. Many are starting e-commerce
businesses to be the next Jack Ma. There are many
advantages to running an e-commerce company: it is
cheaper than a brick-and-mortar store; it has the po-
tential of reaching more people; it does not need a
physical infrastructure. The last point is important, as
5
Chapter Five
The Opportunity: Creating, Shaping,
Recognizing, Seizing
I was seldom able to see an opportunity, until it ceased to be one.
Mark Twain
Results Expected
Upon completion of this chapter, you will be able to
1. Discuss the importance of “think big enough” and the realities that accompany most
new ventures.
2. Describe how the most successful higher-potential ventures track a “circle of ecstasy”
and match investors’ appetites in the “food chain” for ventures.
3. Define the differences between an idea and an opportunity.
4. Assess opportunity via a zoom lens on the criteria used by successful entrepreneurs,
angels, and venture capital investors in evaluating potential ventures.
5. Explain the roles that ideas, pattern recognition, and the creative process play in
entrepreneurship.
6. Identify sources of information for finding and screening venture opportunities.
7. Generate some new venture ideas and your personal criteria using the three idea
generation exercises.
8. Conceive of the next sea changes related to recent advances in technology and socie-
tal, demographic, and environmental trends.
9. Provide insights into and analysis of the Storyplanet case study.
tim81551_ch05IT.qxd 1/20/12 10:47 AM Page 149
China simply does not have the infrastructure of
Western countries. Think of it in similar terms as
telecommunications, where many developing nations
have skipped landlines altogether and gone straight
to reliance on mobile communications. Western VCs
are enticed by the statistics. First, China is experienc-
ing a 9 percent growth rate. Second, huge numbers of
people are moving into the middle class. And third,
the e-commerce market in China is expected to grow
to $136 billion by 2015.
In our interview with Dr. Stephen Chiao ( ),
he mentioned a well-known nationwide hotel chain
in China called Home Inn. Dr. Chiao is a visionary in
that he was able to identify Home Inn as a company
to grow. The founders of Home Inn are themselves
visionaries as they are good at identifying and defin-
ing needs and meeting these needs by innovating
their business model and services.
Biotech entrepreneurs in Taiwan also think big.
The founders of biotech companies in Taiwan all
think globally about the market and strategically
about the technology they want to focus on. How-
ever, Taiwan VCs remain practical—in this money-
burning field, they still mostly bet their money on the
start-ups with good cash flow.
One such biopharmaceutical company is Taiwan
Liposome Company (TLC). It engages in research,
development, and commercialization of proprietary
drug delivery systems for improving the treatment of
cancer, ophthalmic conditions, and infectious dis-
eases. TLC has a team of researchers, management
staff, production experts, and advisors who are build-
ing TLC into an organization recognized for its excel-
lence in targeted delivery and rapid advancement of
products through the drug development process. The
company has operations in South San Francisco, Cal-
ifornia, and Taipei.
Another innovative Taiwan company that thinks
big is Wretch company. The founders of Wretch did
such a wonderful job in making it a strong local player
in Web 2.0 (social networking) that it attracted the at-
tention of Yahoo! in 2006. After its acquisition, we
can still see the ambition and vision of the founders
and the growth of the Wretch team.
PayEasy is one of Taiwan’s most profitable e-
commerce companies. It sells cosmetics and beauty-
care related products to women. PayEasy’s philoso-
phy is “Try Faster, Fail Faster, and Adjust Faster”.
This company does not do market research by such
traditional methods as sending out questionnaires.
Instead, as an Internet company, it relies on its
click rate for evaluation of its products’ popularity.
PayEasy’s organizational management surrounds
three values: “Members”, “Integration”, and “Shar-
ing”: the company tries to engage the right people
(members); it integrates resources, ideas, and skills
for innovation, and it ensures that its people are able
to share in the profits.
Patricia Cloherty puts it this way: “It is critical to
think big enough. If you want to start and build a
company, you are going to end up exhausted. So you
might as well think about creating a BIG company. At
least you will end up exhausted and rich, not just ex-
hausted!”
Pat has a wealth of experience as a venture capital-
ist and is past president of Patrioff & Company in
New York City. She also served as the first female
president of the National Venture Capital Associa-
tion. In these capacities, she has been a lead investor,
board member, and creator of many highly successful
high-technology and biotechnology ventures, many
of which were acquired or achieved an initial public
offering (IPO).
Her theme of thinking bigger is embedded
throughout this book. How can you engage in a “think
big” process that takes you on a journey treading the
fine line between high ambitions and being totally out
of your mind? How do you know whether the idea you
are chasing is just another rainbow or has a bona fide
pot of gold at the end? You can never know which side
of the line you are on—and can stay on—until you try
and until you undertake the journey.
Opportunity through a Zoom Lens
The original proposal by founder Scott Cook to launch
a new software company called Intuit was turned
down by many venture capital investors before it was
funded! The largest e-commerce company in Japan,
Rakuten, did not receive any venture capital funding
at all. Alibaba was turned down by VCs before it
emerged as one of the most successful high-tech en-
terprises in China.
Three companies that failed to get initial capital
funding but managed to achieve success include
Geely, Zongshen Motorcycle, and New Hope Group
(NHG). Geely is one of China’s top 10 automobile
manufacturers. Zongshen Motorcycle, one of the
core subsidiaries of Zongshen Industrial Group, has
the assets of RMB 1.1 billion, more than 2,500 em-
ployees, and the annual output of 4 million motorcy-
cles. NHG is one of the largest agribusiness enter-
prises in China. In fact, it has achieved such
spectacular success that it has become a successful
private investor in the financial service industry.
NHG is the largest shareholder of Minsheng Bank in
China.
Thousands of similar examples illustrate just how
complex, subtle, and situational (at the time, in the
market space, the investor’s other alternatives, etc.) is
the opportunity recognition process. If the brightest,
150 Part II The Opportunity
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Chapter 5 The Opportunity: Creating, Shaping, Recognizing, Seizing 151
most knowledgeable, and most sophisticated in-
vestors in the world miss opportunities such as those
presented by Alibaba and Geely, we can conclude
that the journey from idea to high-potential opportu-
nity is illusive, contradictory, and perilous. Think of
this journey as a sort of road trip through varied ter-
rain and weather conditions. At times the journey
consists of full sunshine and straight, smooth super-
highways, as well as twisting, turning, narrow one-
lane passages that can lead to breathtaking views.
Along the way you also will unexpectedly encounter
tornadoes, dust storms, hurricanes, and volcanoes.
All too often you seem to run out of gas with none in
sight, and flat tires come when you least expect them.
This is the entrepreneur’s journey.
Transforming Caterpillars
into Butterflies
This chapter is dedicated to making that journey
friendlier by focusing a zoom lens on the opportu-
nity. It shares the road maps and benchmarks used
by successful entrepreneurs, venture capitalists, an-
gels, and other private equity investors in their quest
to transform the often shapeless caterpillar of an
idea into a spectacularly handsome butterfly of a
venture. These criteria comprise the core of their
due diligence to ascertain the viability and profit po-
tential of the proposed business, and therefore the
balance of risk and reward. We will examine the role
of ideas and pattern recognition in the creative
process of entrepreneurship.
You will come to see the criteria used to identify
higher-potential ventures as jumping-off points at
this rarefied end of the opportunity continuum,
rather than mere end points. Only about 5 percent of
entrepreneurs create ventures that emerge from the
pack. Examined through a zoom lens, these ventures
reveal a highly dynamic, constantly molding, shap-
ing, and changing work of art, rather than a product
of a formula or a meeting of certain items on a
checklist. This highly organic and situational charac-
ter of the entrepreneurial process underscores the
criticality of determining fit and balancing risk and
reward. As the authors have argued for three
decades: The business plan is obsolete as soon as it
comes off the printer! It is in this shaping process
that the best entrepreneurial leaders and investors
add the greatest value to the enterprise and cre-
atively transform an idea into a venture.
New Venture Realities
It is useful to put the realities faced by Jack Ma
and millions of others in perspective. Consider the
following fundamental realities as normal as you
seek to convert your caterpillar into a gorgeous but-
terfly:
New Ventures: Fundamental Realities
Most new ventures are works in process and
works of art. What you start out to do is not
what you end up doing.
Most business plans are obsolete at the printer.
Onset Venture Partners found that 91 percent
of portfolio companies that rigidly followed their
business plans failed!
Speed, adroitness of reflex, and adaptability are
crucial. Keep the knees bent! Stay on your toes!
The key to succeeding is failing quickly and re-
couping quickly, and keeping the tuition low.
Success is highly situational, depending on time,
space, context, and stakeholders.
The best entrepreneurs specialize in making
“new mistakes” only.
Starting a company is a lot harder than it looks, or
you think it will be; but you can last a lot longer
and do more than you think if you do not try to
do it solo, and you don’t give up prematurely.
These realities are intended to convey the highly dy-
namic, at times chaotic nature of this beast, and the
highly dynamic context within which most new ven-
tures evolve. Such realities present so much room for
the unexpected and the contradictory that it places a
premium on thinking big enough and doing every-
thing you can to make sure your idea becomes an op-
portunity. Therefore, how can the aspiring entrepre-
neur think about this complex, even daunting
challenge?
The Circle of Ecstasy and the Food
Chain for Ventures
What most small businesses do not know, but what is
a way of life in the world of high-potential ventures, is
what we will call the “circle of venture capital ec-
stasy” (Exhibit 5.1) and the “food chain for entrepre-
neurial ventures” (Exhibit 5.2). These concepts en-
able the entrepreneur to visualize how the company
building–investing–harvesting cycle works. Under-
standing this cycle and the appetites of different sup-
pliers in the capital markets food chain enables you to
answer these questions: For what reason does this
venture exist and for whom? Knowing the answers to
these questions has profound implications for fund-
raising, team building, and growing and harvesting
the company—or coming up short in any of these
critical entrepreneurial tasks.
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Exhibit 5.1 shows that the key to creating a com-
pany with the highest value (e.g., market capitaliza-
tion) begins with identifying an opportunity in the
“best technology and market space,” which creates
the attraction for the “best management team.”
Speed and agility to move quickly attract the “best ven-
ture capitalists, board members, and other mentors
and advisers” who can add value to the venture.
Exhibit 5.2 captures the food chain concept,
which will be discussed again in greater detail in Chap-
ter 13. Different players in the food chain have very
different capacities and preferences for the kind of
venture in which they want to invest. The vast majority
of start-up entrepreneurs spend inordinate amounts of
time chasing the wrong sources with the wrong ven-
ture. One goal in this chapter, and again in Chapter 13,
is to provide a clear picture of what those criteria are
and to grasp what “think big enough” means to the
players in the food chain. This is a critical early step to
avoid wasting time chasing venture capitalists, angels,
and others when there is a misfit from the outset. As
one CEO put it, “There are so many investors out
there that you could spend the rest of your career
meeting with them and still not get to all of them.” In
fact, the problem is compounded when seeking angel
or informal investors because there are a hundred
times more of them than there are venture capitalists.
Why waste time thinking too small and on ventures
for which there is no appetite in the financial market-
place? Knowing how capital suppliers and entrepre-
neurs think about the opportunity creation and recog-
nition process, their search and evaluation strategies,
and what they look for is a key frame of reference.
152 Part II The Opportunity
EXHIBIT 5.1
Circle of Venture Capital Ecstasy
Highest market
capitalization
Top decile internal
rate of return
Best technology
and market space
Best management
teams
Best speed of
attack
Best venture
capitalists, board,
brain trust advisors
Best
underwriters
EXHIBIT 5.2
The Capital Markets Food Chain for Entrepreneurial Ventures
Stage of Venture R&D Seed Launch High Growth
Company enterprise Less than $1 million $1 million–$5 million ? $1–$50 ?million More than $100 million
Value at stage
Sources Founders FFF* Venture capital series IPOs
High net worth Angel funds A, B, C . . .
†
Strategic acquirers
individuals Seed funds Strategic partners Private equity
FFF* SBIR Very high net worth
SBIR** individuals
Private equity
Amount of capital invested Up to $200,000 $10,000–$500,000 $500,000–$20 million $10–$50 ?million
% company owned at IPO 10%–25% 5%–15% 40%–60% by prior 15%–25% by public
investors
Share price and number
‡
$.01–$.50 $.50–$1.00 $1.00–$8.00?/? $12–$18?
1–5 million 1–3 million 5–10 million 3–5 million
* Friends, families, and fools.
†
Venture capital series A, B, C . . . (average size of round)
A @ $5.1 million—startup
Round B @ $8.1 million—product development
(Q4 2004) C? @ $11.3 million—shipping product
Valuations vary markedly by industry (e.g., 2x
s
).
Valuations vary by region and VC cycle.
‡
At post–IPO.
**Small Business Innovation Research, a N&F Program. The SBA provides a number of financial assistance programs for small businesses,
including 7(a) loan guarantees, 504 long-term finance loans, and disaster assistance loans.
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Chapter 5 The Opportunity: Creating, Shaping, Recognizing, Seizing 153
When Is an Idea an Opportunity?
The Essence: Four Anchors If an idea is not
an opportunity, what is an opportunity? Superior
business opportunities have the following four funda-
mental anchors:
1. They create or add significant value to a cus-
tomer or end user.
2. They do so by solving a significant problem,
removing a serious pain point, or meeting a
significant want or need—for which someone
is willing to pay a premium.
3. They have robust market, margin, and money-
making characteristics that will allow the en-
trepreneur to estimate and communicate
sustainable value to potential stake-holders:
large enough ($50 million ?), high growth
(20 percent ?), high gross margins (40 per-
cent ?), strong and early free cash flow
(recurring revenue, low assets, and working
capital), high profit potential (10 to 15 percent
?after tax), and attractive, realizable returns
for investors (25 to 30 percent ?IRR).
4. They are a good fit with the founder(s) and
management team at the time and market-
place—along with an attractive risk–reward
balance.
For an opportunity to have these qualities, the
“window of opportunity”
1
is opening and will remain
open long enough. Further, entry into a market with
the right characteristics is feasible, and the manage-
ment team is able to achieve it. The venture has or is
able to achieve a competitive advantage (i.e., to
achieve leverage). Finally, the economics of the ven-
ture are rewarding and forgiving enough to allow for
significant profit and growth potential.
To summarize: A superior opportunity has the
qualities of being attractive, durable, and timely and
is anchored in a product or service that creates or
adds value for its buyer or end user—usually by solv-
ing a very painful, serious problem.
2
The most suc-
cessful entrepreneurs, venture capitalists, and private
investors are opportunity-focused; that is, they start
with what customers and the marketplace want, and
they do not lose sight of this.
The Real World
Opportunities are created, or built, using ideas and
entrepreneurial creativity. Yet while the image of a
carpenter or mason at work is useful, in reality the
process is more like the collision of particles in a nu-
clear reaction or like the spawning of hurricanes over
the ocean. Ideas interact with real-world conditions
and entrepreneurial creativity at a point in time. The
product of this interaction is an opportunity around
which a new venture can be created.
The business environment in which an entrepre-
neur launches his or her venture cannot be altered
significantly. Despite assumptions often made con-
cerning social and nonprofit organizations, they also
are subject to market forces and economic con-
straints. Consider, for instance, what would happen
to donations if it were perceived that a nonprofit or-
ganization was not reinvesting its surplus returns, but
instead was paying management excessive salaries.
Or what if a socially oriented organization concen-
trated all its efforts on the social mission while ne-
glecting revenues? Clearly dealing with suppliers,
production costs, labor, and distribution is critical to
the health of these social corporations. Thus social
and nonprofit organizations are just as concerned
with positive cash flow and generating sufficient cash
flows, even though they operate in a different type of
market than for-profit organizations. For-profit busi-
nesses operate in a free enterprise system character-
ized by private ownership and profits.
Spawners and Drivers of Opportunities
In a free enterprise system, changing circumstances,
chaos, confusion, inconsistencies, lags or leads,
knowledge and information gaps, and a variety of
other vacuums in an industry or market spawn
opportunities.
Changes in the business environment and the abil-
ity to anticipate these changes are so critical in entre-
preneurship that constant vigilance for changes is a
valuable habit. An entrepreneur with credibility, cre-
ativity, and decisiveness can seize an opportunity
while others study it.
Opportunities are situational. Some conditions un-
der which opportunities are spawned are idiosyn-
cratic, while at other times they are generalizable and
can be applied to other industries, products, or ser-
vices. In this way, cross-association can trigger in the
entrepreneurial mind the crude recognition of exist-
ing or impending opportunities. It is often assumed
that a marketplace dominated by large, multibillion-
dollar players is impenetrable by smaller, entrepre-
neurial companies. You can’t possibly compete with
1
The window of opportunity is defined as the period of revenue growth in the life cycle of the target industry when the slope of the revenue curve is increasing.
The window of opportunity begins to close as that revenue curve levels off.
2
See J. A. Timmons, New Business Opportunities (Acton, MA: Brick House, 1989).
tim81551_ch05IT.qxd 1/20/12 10:47 AM Page 153
entrenched, resource-rich, established companies.
The opposite can be true for several reasons. A num-
ber of research projects have shown that it can take
10 years or more for a large company to change its
strategy and even longer to implement the new strat-
egy because it can take 10 years or more to change
the culture enough to operate differently. For a new
or small company, 10 or more years is forever.
When Huawei launched its first digital telephone
switches in 1993, the Chinese telephone switches
market was solely dominated by foreign manufactur-
ers like Ericsson, Siemens, and NEC. Lacking gov-
ernment relations and short of capital, Huawei chose
to deploy its switches in small cities and rural areas
where its huge competitors could not reach, or would
not bother to. Today, Huawei is the largest network-
ing and telecommunications equipment supplier in
China, serving 31 of the top 50 telecoms operators in
the world.
3
Some of the most exciting opportunities have
come from fields the conventional wisdom said are
the domain of big business: technological innovation.
The performance of smaller firms in technological
innovation is remarkable—95 percent of the radical
innovations since World War II have come from new
and small firms, not the giants. A National Science
Foundation study found that smaller firms generated
24 times as many innovations per research and
development dollar as did firms with 10,000 or more
employees.
4
There can be exciting opportunities in plain vanilla
businesses that might never get the attention of ven-
ture capital investors. For example, the lawn care in-
dustry is undergoing massive changes spurred by
popular acceptance of organic fertilizers like Cock-
a-Doodle Do. Dentistry is changing rapidly with
innovations in cosmetic approaches and with new
approaches to market segments. Alex Faigel, a young
dental entrepreneur in Boston, caters to walk-in traf-
fic by locating his five dental offices near subway
stops. Keystone Automotive, an auto parts warehouse
and distribution company, grew rapidly to become a
national firm by utilizing sophisticated enterprise re-
source planning systems.
Technology and regulatory changes have pro-
foundly altered and will continue to alter the way we
conceive of opportunities. Cable television with its
hundreds of channels came of age in the 1990s and
brought with it new opportunities in the sale and dis-
tribution of goods from infomercials to shopping net-
works to pay-per-view. The Internet has created an
even more diverse set of opportunities in sales and
distribution, and companies like Alibaba, Ctrip, and
Dangdang.com have made the most of this.
Consider the following broad range of examples
that illustrate the phenomenon of vacuums in which
opportunities are spawned:
Deregulation of telecommunications and the
airlines led to the formation of tens of thou-
sands of new firms in the 1980s, including
Cellular One (now Cingular) and Federal
Express.
Microcomputer hardware in the early 1980s far
outpaced software development. The industry
was highly dependent on the development of
software, leading to aggressive efforts by IBM,
Apple, and others to encourage software entre-
preneurs to close this gap.
Fragmented, traditional industries that have a
craft or mom-and-pop character may have little
appreciation or know-how in marketing and fi-
nance. Such possibilities can range from fishing
lodges, inns, and hotels to cleaners/laundries,
hardware stores, pharmacies, waste manage-
ment plants, flower shops, nurseries, tents, and
auto repairs.
In our service-dominated economy (70 percent
of businesses are service businesses, versus
30 percent just 30 years ago), customer service,
rather than the product itself, can be the criti-
cal success factor. One study by the Forum
Corporation in Boston showed that 70 percent
of customers leave because of poor service
and only 15 percent because of price or
product quality. Can you think of your last
“wow” experience with exceptional customer
service?
The tremendous shift to offshore manufac-
turing of labor-intensive and transportation-
intensive products in Asia, Eastern Europe,
and Mexico, such as computer-related and
microprocessor-driven consumer products, is
an excellent example.
In a wide variety of industries, entrepreneurs
sometimes find that they are the only ones who
can perform. Such fields as consulting, software
design, financial services, process engineering,
and technical and medical products and serv-
ices abound with examples of know-how mo-
nopolies. Sometimes a management team is
simply the best in an industry and irreplaceable
in the near term, just as is seen with great
coaches with winning records.
154 Part II The Opportunity
3http://en.wikipedia.org/wiki/Huawei#Competitive_position.
4
Leifer, McDermott, O’Connor, Peters, Rice, and Veryzer, Radical Innovation: How Mature Companies Can Outsmart Upstarts (Boston: Harvard Business
School Press, 2000).
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Chapter 5 The Opportunity: Creating, Shaping, Recognizing, Seizing 155
Exhibit 5.3 summarizes the major types of discon-
tinuities, asymmetries, and changes that can result in
high-potential opportunities. Creating such changes
through technical innovation (PCs, wireless telecom-
munications, Internet servers, software), influencing
and creating the new rules of the game (airlines,
telecommunications, financial services and banking,
medical products, music and video), and anticipating
the various impacts of such changes are central to
recognizing opportunities.
Search for Sea Changes
A simple criterion for the highest-potential ventures
comes from famed venture capitalist Arthur Rock:
“We look for ideas that will change the way people
live or work.” As a lead investor both in the Silicon
Valley and Asia, Dr. Da Ling Hsh ( ) knows
what the keys are to great successes: “Whoever pays
attention to the dynamic and vibrant Chinese mar-
ket, the keys are, firstly, be fast! We may not be suc-
cessful if we are fast enough but we won’t get any-
where if we are moving slowly. We should always be
aware that engaging foreign investors will result in a
lengthy assessment process, due largely to the in-
vestor’s attempt to control and supervise national
technological development. The time it takes will
increase the uncertainties.”
The best place to start in seeking to identify such
ideas in a macro sense is to identify significant sea
changes that are occurring or will occur. Think of the
profound impact that personal computing, biotech-
nology, and the Internet have had on the past gener-
ation. The great new ventures of the next generation
will come about by the same process and will define
these next great sea changes. Exhibit 5.4 summarizes
some categories for thinking about such changes.
These include technology, market and societal
shifts, and even opportunities spawned from the ex-
cesses produced by the Internet boom. Moore’s
law (the computing power of a chip doubles every
18 months) has been a gigantic driver of much of our
technological revolution over the past 30 years.
Breakthroughs in gene mapping and cloning,
biotechnology, and nanotechnology and changes
brought about by the Internet will continue to create
huge opportunities for the next generation. Beyond
the macro view of sea changes, how can one think
about opportunities in a more practical, less abstract
sense? What are some parameters of business/rev-
enue models that increase the odds of thinking big
enough and therefore appeal to the food chain? At
the end of this chapter is the sea change exercise,
which will challenge you to think creatively and ex-
pansively about how new technology discoveries will
drive the next new industries. This pattern continues
to this day.
Desirable Business/Revenue
Model Metrics
We will emphasize time and again in New Venture
Creation that happiness is a positive cash flow!—but
think cash last. You don’t have an entry strategy until
EXHIBIT 5.3
Summary of Opportunity Spawners and Drivers
Root of Change/Chaos/Discontinuity Opportunity Creation
Regulatory changes Cellular, airlines, insurance, telecommunications, medical, pension
fund management, financial services, banking, tax and SEC laws,
new societal and/or environmental standards and expectations
10-fold change in 10 years or less Moore’s law—computer chips double productivity every 18 months:
financial services, private equity, consulting, Internet, biotech,
information age, publishing
Reconstruction of value chain and channels of distribution Superstores—Staples, Home Depot; all publishing; autos; Internet
sales and distribution of all services
Proprietary or contractual advantage Technological innovation: patent, license, contract, franchise,
copyrights, distributorship
Existing management/investors burned out/undermanaged Turnaround, new capital structure, new breakeven, new free cash
flow, new team, new strategy; owners’ desires for liquidity, exit;
telecom, waste management service, retail businesses
Entrepreneurial leadership New vision and strategy, new team equals secret weapon;
organization thinks, acts like owners
Market leaders are customer obsessed or customer blind New, small customers are low priority or ignored: hard disk drives,
paper, chemicals, mainframe computers, centralized data
processing, desktop computers, corporate venturing, office
superstores, automobiles, software, most services
tim81551_ch05IT.qxd 1/20/12 10:47 AM Page 155
you have said no to lots of ideas; ideas that just come
to you aren’t usually opportunities; and the numbers
don’t matter but the economics really do matter.
The Role of Ideas
Ideas as Tools
A good idea is nothing more than a tool in the hands
of an entrepreneur. Finding a good idea is the first of
many steps in the process of converting an entrepre-
neur’s creativity into an opportunity.
The importance of the idea is often overrated at
the expense of underemphasizing the need for prod-
ucts or services, or both, that can be sold in enough
quantity to real customers.
Further, the new business that simply bursts from
a flash of brilliance is rare. Usually a series of trial-
and-error iterations, or repetitions, is necessary be-
fore a crude and promising product or service fits
with what the customer is willing to pay for. Howard
Head made 40 different metal skis before he finally
made the model that worked consistently. With sur-
prising frequency, major businesses are built around
totally different products than those originally envi-
sioned. Consider these examples:
When 3-M chemist Spence Silver invented a
new adhesive that would not dry or permanently
bond to things, he had no idea what to do with
it. It wasn’t until another 3-M chemist, Arthur
Fry, needed a bookmark for his choir book that
the idea for applying the glue to small pieces of
paper was found, and Post-it Notes were born.
5
Polaroid Corporation was founded with a prod-
uct based on the principle of polarized light. It
was thought that polarized lamps would prevent
head-on collisions between cars by preventing
the “blinding” glare of oncoming headlights. But
the company grew to its present size based on
another application of the same technology: in-
stant photography.
William Steere, CEO of Pfizer, described the
discovery of Viagra, the fastest-selling drug in
history, as having “a certain serendipity” behind
it. The drug was originally developed by Pfizer
to treat angina; its real potency was discovered
as a side effect.
6
As one entrepreneur expressed it,
Perhaps the existence of business plans and the language
of business give a misleading impression of business
building as a rational process. But as any entrepreneur can
confirm, starting a business is very much a series of fits
and starts, brainstorms and barriers. Creating a business is
a round of chance encounters that leads to new opportu-
nities and ideas, mistakes that turn into miracles.
7
The Great Mousetrap Fallacy
Perhaps no one did a greater disservice to genera-
tions of would-be entrepreneurs than Ralph Waldo
Emerson in his oft-quoted line, “If a man can make a
156 Part II The Opportunity
EXHIBIT 5.4
Ideas versus Opportunities:
Search for Sea Changes
Where are opportunities born?
Brontosaurus factor
• Arrogance
• Loss of peripheral vision
• Deadened reflexes—turning
the tanker
• Examples: IBM 1970s–1980s;
U.S. automakers 1960s–1970s;
large steel companies
Core
spawning
grounds
seen from
50,000
feet
Societal sea change
• Changes in ways we live,
learn, work, etc.
• Gilder's law—10x
s
in
10 years
Market sea change
• Value chain disruption/
obsolescence/vulnerability
• Deregulation
Technology sea change
• Moore's law
• Metcalf's law
• Disruption
Irrational exuberance
• Undervalued assets
5
P. R. Nayak and J. M. Ketterman, Breakthroughs: How the Vision and Drive of Innovators in Sixteen Companies Created Commercial Breakthroughs That
Swept the World (New York: Rawson Associates, 1986), chapter. 3.
6
T. Corrigan, “Far More Than the Viagra Company: Essential Guide to William Steere,” Financial Times (London), August 31, 1998, p. 7.
7
J. Godfrey, Our Wildest Dreams: Women Entrepreneurs, Making Money, Having Fun, Doing Good (New York: Harper Business, 1992), p. 27.
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Chapter 5 The Opportunity: Creating, Shaping, Recognizing, Seizing 157
better mousetrap than his neighbor, though he builds
his house in the woods the world will make a beaten
path to his door.”
What can be called the great mousetrap fallacy
was thus spawned. It is often assumed that success is
possible if an entrepreneur can just come up with a
new idea. In today’s changing world, if the idea has
anything to do with technology, success is certain—or
so it would seem.
But the truth is that ideas are inert and, for all
practical purposes, worthless. Further, the flow of
ideas is phenomenal. Venture capital investors, for in-
stance, receive as many as 100 to 200 proposals and
business plans each month. Only 1 percent to 3 per-
cent of these actually received financing, however.
Yet the fallacy persists despite the lessons of prac-
tical experience noted long ago in the insightful reply
to Emerson by O. B. Winters: “The manufacturer
who waits for the world to beat a path to his door is a
great optimist. But the manufacturer who shows this
‘mousetrap’ to the world keeps the smoke coming out
his chimney.”
Contributors to the Fallacy
One cannot blame it all on Ralph Waldo Emerson.
There are several reasons for the perpetuation of the
fallacy. One is the portrayal in oversimplified accounts
of the ease and genius with which such ventures as
Xerox, IBM, and Polaroid made their founders
wealthy. Unfortunately, these exceptions do not pro-
vide a useful rule to guide aspiring entrepreneurs.
Investors seem particularly prone to mousetrap
myopia. Perhaps, like Emerson, they are substantially
sheltered in viewpoint and experience from the
tough, competitive realities of the business world.
Consequently, they may underestimate, if not seri-
ously downgrade, the importance of what it takes to
make a business succeed. Frankly, inventing and
brainstorming may be a lot more fun than the diligent
observation, investigation, and nurturing of cus-
tomers that are often required to sell a product or
service.
Contributing also to the great mousetrap fallacy is
the tremendous psychological ownership attached to
an invention or to a new product. This attachment is
different from attachment to a business. While an in-
tense level of psychological ownership and involve-
ment is certainly a prerequisite for creating a new
business, the fatal flaw in attachment to an invention
or product is the narrowness of its focus. The focal
point needs to be the building of the business, rather
than just one aspect of the idea.
Zentech is a high growth Taiwanese company that
solves R&D problems for its clients. Zentech’s
founder, Dr. Cheng I Ling ( ), is Taiwan’s
materials science expert and undoubtedly an indus-
trial guru in steels and materials. He explained, “I be-
lieve too-good-to-be-sold products can be found in
Zentech while I was working vigorously on many new
formulas that would ecologically and functionally
solve my customers’ problems. I believe my products
were environmentally friendly enough to satisfy even
EU regulations; such standards were in fact not yet
adopted in the Asian market back in 2004. The mar-
ket quickly proved that the products were too good to
be sold. Simply put, the timing was not right, so the
market was not there.”
Related to “doing it better” is the idea of doing it
first. Having the best idea first is by no means a guar-
antee of success. Just ask the creators of the first Chi-
nese character software company, Hansvision, what
being first did for them. They would describe a
painful downside to being first. Sometimes the first
ones merely prove to the competitors that a market
exists to be snared. Therefore, unless having the best
idea also includes the capacity to preempt other com-
petitors by capturing a significant share of the market
or by erecting insurmountable barriers to entry, first
does not necessarily mean most viable.
Spotting an opportunity within an existing market
was a key aspect in the development of a mass-pro-
duced rotary electric toothbrush. The founding en-
trepreneur had noted a large pricing spread among
retail products. At the low end were devices in the
range of $5. There was then a jump to the $60 to $80
range, and then another jump to products that were
selling for well over $100. His research showed that
new battery technology, plus outsourcing and a new
rotary design, could result in a disposable product
that would fill the gaps, steal market share, and yield
substantial profits. His $1.75 million business turned
into $475 million when his company was sold to Proc-
ter & Gamble. This is an excellent example of a clear
pricing pattern that can be applied elsewhere.
8
There are many other Asian companies that have
spotted and seized opportunities in existing markets.
Mr. Hsieh ( ), founder of CGS International
Inc ( ), spotted technically achievable white
space to fill by offering quality but affordable prod-
ucts that would improve people’s user experience of
IBM computers. (“White space” refers to a market
opportunity that has not been exploited.) Wretch.cc
( ), a Taiwanese community Web site, orig-
inated from dissatisfaction of what was offered on the
market, both domestically and internationally. It has
8
This example was provided by Harvard Business School professor William A. Sahlman during a session of the 2004 Symposium for Entrepreneurship Educators
(SEE) at Babson College.
tim81551_ch05IT.qxd 1/20/12 10:47 AM Page 157
changed the entire landscape and become the norm of
the blogging site designs in Taiwan and beyond. The
founder of CupC+ franchising ( ),
Miss Kao, made acute observations of what was avail-
able in the franchising industry and what was not.
She found that there was a high entry barrier to re-
tailing fruit juices because of the technical difficulty
of juice extraction and preservation. So she looked for
a partner who owned manufacturing and preserva-
tion technologies, and went on to market fruit through
retail outlets and fruit juices through franchising.
Pattern Recognition
The Experience Factor
One cannot build a successful business without ideas,
just as one could not build a house without a hammer.
In this regard, experience is vital in looking at new
venture ideas.
Time after time, experienced entrepreneurs ex-
hibit an ability to recognize quickly a pattern—and an
opportunity—while it is still taking shape. The late
Herbert Simon, Nobel laureate and Richard King,
Mellon University Professor of Computer Science
and Psychology at Carnegie-Mellon University, wrote
extensively about pattern recognition. He described
the recognition of patterns as a creative process that is
not simply logical, linear, and additive but intuitive
and inductive as well. It involves, he said, the creative
linking, or cross-association, of two or more in-depth
“chunks” of experience, know-how, and contacts.
9
Simon contended that it takes 10 years or more for peo-
ple to accumulate what he called the “50,000 chunks”
of experience that enable them to be highly creative
and recognize patterns—familiar circumstances that
can be translated from one place to another.
Thus the process of sorting through ideas and rec-
ognizing a pattern can also be compared to the process
of fitting pieces into a three-dimensional jigsaw puzzle.
It is impossible to assemble such a puzzle by looking at
it as a whole unit. Rather, one needs to see the rela-
tionships between the pieces and be able to fit to-
gether some that are seemingly unrelated before the
whole is visible.
Recognizing ideas that can become entrepreneurial
opportunities stems from a capacity to see what others
do not—that one plus one equals three. Consider the
following examples of the common thread of pattern
recognition and new business creation by linking
knowledge in one field or marketplace with quite dif-
ferent technical, business, or market know-how:
Morris Chang, founder of Taiwan Semi-
conductor Manufacturing Co. (TSMC)
( ), recognized that the
increasing cost of wafer making would reduce the
profitability for integrated design manufacturer
(IDM) companies. TSMC started over by serving
smaller integrated circuit (IC) design houses,
helping them manufacture low-end IC chips,
and then gradually got into the chip-making
business for top IDM companies such as Intel.
TSMC reshaped the business model of the
semiconductor industry, making chips for most
of the IC design houses and IDM companies.
Today TSMC is the biggest chip foundry in the
world, and is an essential partner to U.S.
companies such as Qualcomm and Nvidia
(NVDA ).
10
Taiwan Lung Meng Technology (Lung Meng)
( ) revolutionized the paper mak-
ing industry by not using wood pulp, and there-
fore not having to fell trees, to produce a truly
unique and eco-friendly tree-free paper. Lung
Meng employs a blend of mineral powder and a
small infusion of non-toxic resin in its revolution-
ary “stone paper making” method, an environ-
mentally sustainable solution which has been
patented in over 40 countries including Australia,
Byelorussia, China, Europe, the United States,
and South Africa.
iPartment ( ) saw that a growing num-
ber of female Internet users were seeking a safe
way to meet and make friends in cyberspace. It
correctly positioned itself, and even with stiff
competition from other social networking
services, it has grown into one of the most popu-
lar social networking sites both in Taiwan and
China.
The founder of Atlaspost.com ( ) saw
the uniqueness of adding map/locating functions
to blogs back in 2006 when map-related
application programming interfaces (API) in the
United States were just receiving high market
acceptance. Convinced that such services would
soon be coming to Taiwan, Atlaspost.com took
that step ahead of all the others.
The inception of Xue Xue Institute ( )
was due largely to the Taiwan government’s prop-
aganda in promoting the cultural creativity in-
dustry ( ) Xue Xue’s founder, Ms.
Li Ling Hsh, had observed advancements in the
creativity scene in Asian society in general, and
Taiwan society in particular.
158 Part II The Opportunity
9
H. A. Simon, “What We Know about the Creative Process” in Frontiers in Creative and Innovative Management ed. R. L. Kuhn, (Cambridge, MA: Ballinger,
1985), pp. 3–20.
10
From company profile on:http://www.tsmc.com.
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Chapter 5 The Opportunity: Creating, Shaping, Recognizing, Seizing 159
The founders of Liang An Coffee ( )
observed Taiwan’s environmental and social
development before positioning itself in the mar-
ket place and designing its product offerings. The
reason why the company features western food on
its menu is due to the observation that the people
on mainland China, as they grew more affluent,
did not want to eat Chinese food every day, and
wanted to try something different. The founders
also observed that Western businessmen needed
decent places to eat and talk. Finally, if the busi-
ness was to expand through franchising, western
food would be the logical choice, as there were
just too many regional variations in Chinese food
to make it fit the franchising model.
Enhancing Creative Thinking
The creative thinking just described is of great value
in recognizing opportunities, as well as other aspects
of entrepreneurship. The notion that creativity can be
learned or enhanced holds important implications for
entrepreneurs who need to be creative in their think-
ing. Most people can certainly spot creative flair. Chil-
dren seem to have it, and many seem to lose it. Several
studies suggest that creativity actually peaks around
the first grade because a person’s life tends to become
increasingly structured and defined by others and by
institutions. Further, the development of intellectual
discipline and rigor in thinking takes on greater im-
portance in school than during the formative years,
and most of our education beyond grade school
stresses a logical, rational mode of orderly reasoning
and thinking. Finally, social pressures may tend to be
a taming influence on creativity.
Evidence suggests that one can enhance creative
thinking in later years. The Eureka! Ranch (www.
eurekaranch.com) business was founded on the prin-
ciple that creativity is inherent in most people and
can be unleashed by freeing them from con-
vention. Often executives will be doused with water
as they step out of their vehicles onto the ranch.
One of the authors participated in one of these
training sessions, and it became evident during the
sessions that the methods did unlock the thinking
process and yielded very imaginative solutions.
Approaches to Unleashing Creativity
Since the 1950s, much has been learned about the
workings of the human brain. Today there is general
agreement that the two sides of the brain process in-
formation in different ways. The left side performs ra-
tional, logical functions, while the right side operates
the intuitive and nonrational modes of thought. A per-
son uses both sides, actually shifting from one mode
to the other (see Exhibit 5.5). Approaching ideas cre-
atively and maximizing the control of these modes of
thought can be of value to the entrepreneur.
More recently, professors have focused on the
creativity process. For instance, Michael Gordon
stressed the importance of creativity and the need for
brainstorming in a presentation on the elements of
personal power. He suggested that using the follow-
ing 10 brainstorming rules could enhance creative
visualization:
EXHIBIT 5.5
Comparison of Left-Mode and Right-Mode Brain Characteristics
L-Mode R-Mode
Verbal: Using words to name, describe, and define.
Analytic: Figuring things out step-by-step and part-by-part.
Symbolic: Using a symbol to stand for something. For example,
the sign ? stands for the process of addition.
Abstract: Taking out a small bit of information and using it to
represent the whole thing.
Temporal: Keeping track of time, sequencing one thing after
another, doing first things first, second things second, etc.
Rational: Drawing conclusions based on reason and facts.
Digital: Using numbers as in counting.
Logical: Drawing conclusions based on logic, one thing following
another in logical order—for example, a mathematical theorem
or a well-stated argument.
Linear: Thinking in terms of linked ideas, one thought directly
following another, often leading to a convergent conclusion.
Nonverbal: Awareness of things, but minimal connection with words.
Synthetic: Putting things together to form wholes.
Concrete: Relating to things as they are at the present moment.
Analogic: Seeing likenesses between things; understanding
metaphoric relationships.
Nontemporal: Without a sense of time.
Nonrational: Not requiring a basis of reason or facts; willingness to
suspend judgment.
Spatial: Seeing where things are in relation to other things, and how
parts go together to form a whole.
Intuitive: Making leaps of insight, often based on incomplete
patterns, hunches, feelings, or visual images.
Holistic: Seeing whole things all at once; perceiving the overall
patterns and structures, often leading to divergent conclusions.
Source: “A Comparison of Left-Mode and Right-Mode Characteristics,” from Drawing on the Right Side of the Brain by Betty Edwards, copyright ©
1979, 1989, 1999 by Betty Edwards. Used by permission of Jeremy P. Tarcher, an imprint of Penguin Group (USA) Inc.
tim81551_ch05IT.qxd 1/30/12 10:26 AM Page 159
160 Part II The Opportunity
1. Define your purpose.
2. Choose participants.
3. Choose a facilitator.
4. Brainstorm spontaneously, copiously.
5. No criticisms, no negatives.
6. Record ideas in full view.
7. Invent to the “void.”
8. Resist becoming committed to one idea.
9. Identify the most promising ideas.
10. Refine and prioritize.
Team Creativity
Teams of people can generate creativity that may not
exist in a single individual. The creativity of a team
of people is impressive, and comparable or better cre-
ative solutions to problems evolving from the collec-
tive interaction of a small group of people have been
observed.
A good example of the creativity generated by us-
ing more than one head is that of a company founded
by a Babson College graduate with little technical
training. He teamed up with a talented inventor, and
the entrepreneurial and business know-how of the
founder complemented the creative and technical
skills of the inventor. The result has been a rapidly
growing multimillion-dollar venture in the field of
video-based surgical equipment.
Students interested in exploring this further may
want to do the creative squares exercise at the end of
the chapter.
Big Opportunities with Little Capital
Within the dynamic free enterprise system, opportu-
nities are apparent to a limited number of individu-
als—and not just to the individuals with financial re-
sources. Ironically, successful entrepreneurs such as
Howard Head attribute their success to the discipline
of limited capital resources. Thus, in the 1990s, many
entrepreneurs learned the key to success is in the art
of bootstrapping, which “in a start-up is like zero in-
ventory in a just-in-time system: it reveals hidden
problems and forces the company to solve them.”
11
Consider the following:
A 1991 study revealed that of the 110 start-ups
researched in the United States, 77 had been
launched with $50,000 or less; 46 percent were
started with $10,000 or less as seed capital.
Further, the primary source of capital was over-
whelmingly personal savings (74 percent)
rather than outside investors with deep
pockets.
12
This pattern of frugality in start-ups
is as true today as it was then.
George Yen ( ) started his trading com-
pany at the age of 30 by buying up a branch of
the company which was heavily in debt when
he served as VP of that company in the United
States. It was an opportunity out of a crisis—
he acquired the company for only US$1 and
renamed it Sequoia International. From the
day of the acquisition, George started turning
it around, and his company made profits
within the very first year. George’s former
company took only one day to decide to sell
the branch to him, with the condition that
George also had to pay back pretaxed profit for
the first 5 years of at least half a million dollars,
and this was agreed simply based on George’s
integrity and reputation built up in that
company.
Putting their talents (cartooning and finance)
together, Roy and Walt Disney moved to
California and started their own film studio—
with $290 in 1923. By mid-2007, the Walt
Disney Co. had a market capitalization exceed-
ing $67.5 billion.
13
While working for a Chicago insurance com-
pany, a 24-year-old sent out 20,000 inquiries for
a black newsletter. With 3,000 positive re-
sponses and $500, John Harold Johnson pub-
lished Jet for the first time in 1942. In the
1990s, Johnson Publishing publishes various
magazines, including Ebony.
14
With $100 Nicholas Graham, age 24, went to a
local fabric store, picked out some fabrics, and
made $100 worth of ties. Having sold the ties to
specialty shops, Graham was approached by
Macy’s to place his patterns on men’s under-
wear. So Joe Boxer Corporation was born, and
“six months into Joe Boxer’s second year, sales
had already topped $1 million.”
15
Cabletron founders Craig Benson and Bob
Levine literally started their company in a
garage and grew it to over $1.4 billion in
revenue in under 10 years.
Vineyard Vines is a creative necktie company
that was started on Martha’s Vineyard with
$40,000 of credit card debt.
11
A. Bhide, “Bootstrap Finance,” Harvard Business Review, November–December 1992, p. 112.
12
E. B. Roberts, Entrepreneurs in High Technology: Lessons from MIT and Beyond (New York: Oxford University Press, 1991), p. 144, table 5–2.
13
Financial data from Dow Jones Interactive,http://www.djnr.com.
14
Ibid.
15
R. A. Mamis, “The Secrets of Bootstrapping,” INC., September 1991, p. 54.
tim81551_ch05IT.qxd 1/20/12 10:47 AM Page 160
Chapter 5 The Opportunity: Creating, Shaping, Recognizing, Seizing 161
Real Time
Opportunities exist or are created in real time and
have what we call a window of opportunity. For an
entrepreneur to seize an opportunity, the window
must be open and remain open long enough to
achieve market-required returns.
Exhibit 5.6 illustrates a window of opportunity for
a generalized market. Markets grow at different
rates over time, and as a market quickly becomes
larger, more and more opportunities are possible. As
the market becomes established, conditions are not
as favorable. Thus at the point where a market starts
to become sufficiently large and structured (e.g., at
five years in Exhibit 5.6), the window opens; the win-
dow begins to close as the market matures (e.g., at
12–13 years in the exhibit).
The curve shown describes the rapid growth pat-
tern typical of such new industries as microcomput-
ers and software, cellular phones, quick oil changes,
and biotechnology. For example, in the cellular
phone industry, most major cities began service
between 1983 and 1984. By 1989, there were more
than 2 million subscribers in the United States, and
the industry continued to experience significant
growth. In other industries where growth is not so
rapid, the slope of a curve would be less steep and
the possibilities for opportunities fewer.
In considering the window of opportunity, the
length of time the window will be open is important.
It takes a considerable length of time to determine
whether a new venture is a success or a failure. And
if it is to be a success, the benefits of that success
need to be harvested.
Exhibit 5.7 shows that for venture-capital-backed
firms, the lemons (i.e., the losers) ripen in about
two and a half years, while the pearls (i.e., the
winners) take seven or eight years. An extreme exam-
ple of the length of time it can take for a pearl to be
harvested is the experience of a Silicon Valley venture
capital firm that invested in a new firm in 1966 and
was finally able to realize a capital gain in early 1984.
Another way to think of the process of creating
and seizing an opportunity in real time is to think of
it as a process of selecting objects (opportunities)
from a conveyor belt moving through an open win-
dow—the window of opportunity. The speed of the
conveyor belt changes, and the window through
which it moves is constantly opening and closing.
The continually opening and closing window and the
constantly changing speed of the conveyor belt rep-
resent the volatile nature of the marketplace and the
importance of timing. For an opportunity to be cre-
ated and seized, it needs to be selected from the con-
veyor belt before the window closes.
The ability to recognize a potential opportunity
when it appears and the sense of timing to seize that
opportunity as the window is opening, rather than
slamming shut, are critical. That opportunities are a
function of real time is illustrated in a statement
made by Ken Olsen, then president and founder of
Digital Equipment Corporation, in 1977: “There is no
reason for any individual to have a computer in their
home.” It is not easy for even the world’s leading
experts to predict just which innovative ideas and
concepts for new business will evolve into the major
industries of tomorrow. This is vividly illustrated by
several quotations from very famous innovators. In
1901, two years before the famous flight, Wilbert
Wright said, “Man will not fly for 50 years.” In 1910
Thomas Edison said, “The nickel-iron battery will put
the gasoline buggy . . . out of existence in no time.”
And in 1932 Albert Einstein made it clear: “[There]
is not the slightest indication that nuclear energy will
ever be obtainable. It would mean that the atom
would have to be shattered at will.”
When Taobao.com, now China’s biggest C2C
online bazaar, was founded in 2003, eBay and its
Chinese partner Eachnet was already controlling
90 percent of the online shopping business, and so
didn’t see Taobao as a threat. While eBay’s Eachnet
charged listing and transaction fees, Taobao was free
to use. eBay once ridiculed Taobao’s strategy, saying
that “free is not a business model”. However,
Taobao’s free model quickly attracted a large group
of buyers and sellers. With this free model, com-
bined with its deep understanding of the local mar-
ket, Taobao now commands 80 percent of China’s
C2C market, while eBay was totally defeated and
pulled out of China in 2006.
16
Relation to the Framework of Analysis
Successful opportunities, once recognized, fit with
the other forces of new venture creation. This
iterative process of assessing and reassessing the
fit among the central driving forces in the creation
of a new venture was shown in Chapter 3. Of
utmost importance is the fit of the lead entrepre-
neur and the management team with an opportu-
nity. Good opportunities are both desirable to and
attainable by those on the team using the resources
that are available.
16
David Barboza, “An Online Market Flourishes in China,” August 9, 2009, www.nytimes.com/2009/08/10/technology/start-
ups/10taobao.html?pagewanted=1&_r=1; Helen H. Wang, “How eBay Failled in China,” September 12, 2010 — 10:56 pm,
blogs.forbes.com/china/2010/09/12/how-ebay-failed-in-china/; Thomas Crampton, “How Taobao beats eBay in China,” www.thomascrampton.com/china/
taobao-china-ecommerce/.
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162 Part II The Opportunity
EXHIBIT 5.6
Changes in the Placement of the Window of Opportunity
Window of
opportunity
$1 billion
$500 million
$250 million
$100 million
Market
M
a
r
k
e
t
s
i
z
e
Time (years)
5 10 20
EXHIBIT 5.7
Lemons and Pearls
Less than 3 years More than 3 and
less than 7 years
More than 7 years
Number of years to appear
Losers Winners
N
u
m
b
e
r
o
f
i
n
v
e
s
t
m
e
n
t
s
20
19
18
17
16
14
15
13
12
11
10
9
8
7
6
5
4
3
2
1
0
tim81551_ch05IT.qxd 1/20/12 10:47 AM Page 162
Chapter 5 The Opportunity: Creating, Shaping, Recognizing, Seizing 163
17
See J. A. Timmons, D. F. Muzyka, H. H. Stevenson, and W. D. Bygrave, “Opportunity Recognition: The Core of Entrepreneurship” in Frontiers of Entrepre-
neurship Research: 1987, ed. Neil Churchill et al. (Babson Park, MA: Babson College, 1987), p. 409.
18
E. Parizeau, partner, Norwest Venture Partners, in a speech to Babson College MBAs, December 2000.
To understand how the entrepreneurial vision re-
lates to the analytical framework, it may be useful to
look at an opportunity as a three-dimensional relief
map with its valleys, mountains, and so on, all repre-
sented. Each opportunity has three or four critical
factors (e.g., proprietary license, patented innova-
tion, sole distribution rights, an all-star management
team, breakthrough technology). These elements
pop out at the observer; they indicate huge possibil-
ities where others might see obstacles. Thus it is
easy to see why there are thousands of exceptional
opportunities that will fit with a wide variety of en-
trepreneurs but that might not fit neatly into the
framework outlines in Exhibit 5.8.
Screening Opportunities
Opportunity Focus
Opportunity focus is the most fruitful point of
departure for screening opportunities. The screen-
ing process should not begin with strategy (which
derives from the nature of the opportunity), nor
with financial and spreadsheet analysis (which flow
from the former), nor with estimations of how much
the company is worth and who will own what
shares.
17
These starting points, and others, usually place
the cart before the horse. Perhaps the best evidence
of this phenomenon comes from the tens of thou-
sands of tax-sheltered investments that turned sour
in the mid-1980s. Also, many entrepreneurs who
start businesses—particularly those for whom the
ventures are their first—run out of cash faster than
they bring in customers and profitable sales. There
are lots of reasons why this happens, but one thing is
certain: These entrepreneurs have not focused on
the right opportunity.
Over the years, those with experience in business
and in specific market areas have developed rules
to guide them in screening opportunities. For exam-
ple, during the initial stages of the irrational exuber-
ance about the dot.com phenomenon, number of
“clicks” changed to attracting “eyeballs,” which
changed to page view. Many investors got caught
up in false metrics. Those who survived the
NASDAQ crash of 2000–2001 understood that
dot.com survivors would be the ones who executed
transactions. Number of customers, amounts of the
transactions, and repeat transactions became the
recognized standards.
18
Screening Criteria: The Characteristics
of High-Potential Ventures
Venture capitalists, savvy entrepreneurs, and in-
vestors also use this concept of boundaries in screen-
ing ventures. Exhibit 5.8 summarizes criteria used by
venture capitalists to evaluate opportunities, many of
which tend to have a high-technology bias. As will be
seen later, venture capital investors reject 60 percent
to 70 percent of the new ventures presented to them
very early in the review process, based on how the
entrepreneurs satisfy these criteria.
However, these criteria are not the exclusive domain
of venture capitalists. The criteria are based on good
business sense that is used by successful entrepreneurs,
angels, private investors, and venture capitalists. Con-
sider the following examples of great small companies
(Maipu, GoldTel and Sany Industries) built without a
dime of professional venture capital:
Maipu Communication Technology Co. Ltd,
founded in 1993, is a professional supplier of IP
network equipment and application solutions.
They provide data sets to banks, telecommuni-
cation companies, and the Chinese govern-
ment. Maipu decided not to approach venture
capitalists and instead bootstrapped its business
to profitability.
Located in Chengdu West, China, GoldTel was
founded in 1993 by He Yan. It is a national-
level key high-tech enterprise, ranking among
the Top 100 Electronic Enterprises of China
for a successive five years. Its products and
services cover all provinces and cities across
China and abroad. As a science-and-technol-
ogy-based private enterprise, GoldTel Group
has committed itself to the development, pro-
duction, and distribution of high-tech products
with its own intellectual property and the provi-
sion of quality after-sales technical supports and
services. The founder believes that revenues is
the friend of entrepreneurs, not VCs.
Sany Heavy Industry Group Ltd was founded in
1989, and has now grown into a global corpora-
tion with eight domestic manufacturing facilities,
four production factories in the United States,
Germany, India, and Brazil and 27 support cen-
ters around the world. Currently, SANY employs
over 40,000 people in more than 120 countries.
SANY is the world’s largest concrete machinery
manufacturer and in the Top 50 of Global Con-
struction Machinery Manufacturers. Sany did
not raise any professional venture capital.
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164 Part II The Opportunity
EXHIBIT 5.8
Criteria for Evaluating Venture Opportunities
Attractiveness
Criteria Highest Potential Lowest Potential
Industry and Market Changes way people live, work, learn, etc. Incremental improvement only
Market: Market driven; identified; recurring Unfocused; onetime revenue
revenue niche
Customers Reachable; purchase orders Loyal to others or unreachable
Remove serious pain point
User benefits Less than one-year payback Three years plus payback
Solves a very important problem/need
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 declining
emerging industry industry
Market size $100? million to $1? billion sales Unknown, less than $20 million or
potential multibillion-dollar sales
Growth rate Growth at 30%–50% or more Contracting or less than 10%
Market capacity At or near full capacity Undercapacity
Market share attainable (Year 5) 20% or more; leader Less than 5%
Cost structure Low-cost provider; cost advantages Declining cost
Economics
Time to breakeven/positive cash flow Under 1
1
?2–2 years More than 4 years
ROI potential 25% or more; high value Less than 15%–20%; low value
Capital requirements Low to moderate; fundable/bankable Very high; unfundable or unbankable
Internal rate of return potential 25% or more per year Less than 15% per year
Free cash flow characteristics: Favorable; sustainable; 20%–30% or Less than 10% of sales
more of sales
Sales growth Moderate to high (?15% to ?20%) Less than 10%
Asset intensity Low/sales $ High
Spontaneous working capital Low, incremental requirements High requirements
R&D/capital expenditures Low requirements High requirements
Gross margins Exceeding 40% and durable Under 20%
After-tax profits High; greater than 10%; durable Low
Time to break-even profit and loss Less than two years; breakeven not Greater than four years; breakeven
creeping or leaping creeping or leaping up
Harvest Issues
Value-added potential High strategic value Low strategic value
Valuation multiples and comparables Price/earnings ? ?20x; ?8?10x Price/earnings ? 5x
,
EBIT ? 3?4x;
EBIT; ?1.5?2x revenue: revenue ? .4
Free cash flow ?8?10x
Exit mechanism and strategy Present or envisioned options Undefined; illiquid investment
Capital market context Favorable valuations, timing, capital Unfavorable; credit crunch
available; realizable liquidity
Competitive Advantage Issues
Fixed and variable costs Lowest; high operating leverage Highest
Control over costs, prices, and distribution Moderate to strong Weak
Barriers to entry: Knowledge to overcome
Proprietary protection Have or can gain None
Response/lead time Competition slow; napping Unable to gain edge
Legal, contractual advantage Proprietary or exclusivity None
Contracts and networks Well-developed; accessible Crude; limited
Key people Top talent; an A team B or C team
Sustainability Low social and environmental High social and/or environmental
impact costs and consequences
(continued)
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Chapter 5 The Opportunity: Creating, Shaping, Recognizing, Seizing 165
At age 66, Charlie Butcher had to decide
whether to buy out an equal partner in his
100-year-old industrial polish and wax business
(Butcher Polish) with less than $10 million in
sales. This niche business had high gross mar-
gins, very low working capital and fixed-asset
requirements for increased sales, substantial
steady growth of more than 18 percent per
year, and excellent products. The result was a
business with very high free cash flow and po-
tential for growth. He acquired the company
with a bank loan and seller financing, and then
he increased sales to over $50 million by 1993.
The company continues to be highly profitable.
Butcher vows never to utilize venture capital
money or to take the company public.
The point of departure here is opportunity and,
implicitly, the customer, the marketplace, and the in-
dustry. Exhibit 5.8 shows how higher- and lower-
potential opportunities can be placed along an attrac-
tiveness scale. The criteria provide some quantitative
ways in which an entrepreneur can make judgments
about industry and market issues, competitive advan-
tage issues, economic and harvest issues, manage-
ment team issues, and fatal flaw issues and whether
these add up to a compelling opportunity. For exam-
ple, dominant strength in any one of these criteria
can readily translate into a winning entry, whereas a
flaw in any one can be fatal.
Entrepreneurs contemplating opportunities that
will yield attractive companies, not high-potential
ventures, can also benefit from paying attention to
these criteria. These entrepreneurs will then be in a
better position to decide how these criteria can be
compromised. As outlined in Exhibit 5.8, business
opportunities with the greatest potential will possess
many of the following, or they will dominate in one or
a few for which the competition cannot come close.
Industry and Market Issues
Market. Higher-potential businesses can identify
a market niche for a product of service that meets an
important customer need and provides high value-
EXHIBIT 5.8 (concluded)
Criteria for Evaluating Venture Opportunities
Attractiveness
Criteria Highest Potential Lowest Potential
Management Team
Entrepreneurial team All-star combination; free agents Weak or solo entrepreneur; not free agents
Industry and technical experience Top of the field; super track record Underdeveloped
Integrity Highest standards Questionable
Intellectual honesty 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 what Surprises; only making money
you get
Upside/downside issues Attainable success/limited risks Linear; on same 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 risk/reward 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 team; no free agents
Service management Superior service concept Perceived as unimportant
Timing Rowing with the tide Rowing against the tide
Technology Groundbreaking; one of a kind Many substitutes or competitors
Flexibility Able to adapt; commit and decommit quickly Slow; stubborn
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 and resilient strategy Unforgiving, rigid strategy
tim81551_ch05IT.qxd 1/20/12 10:47 AM Page 165
added or value-created benefits to customers. This
invariably means the product or service eliminates or
drastically reduces a major pain point for a customer
or end user or solves a major problem/bottleneck for
which the customer is willing to pay a premium. Cus-
tomers are reachable and receptive to the product or
service, with no brand or other loyalties. The poten-
tial payback to the user or customer of a given product
or service through cost savings or other value-added
or valued-created properties is one year or less and is
identifiable, repeatable, and verifiable. Further, the
life of the product or service exists beyond the time
needed to recover the investment, plus a profit. And
the company is able to expand beyond a one-product
company. Take, for example, the growing success of
cellular phone service. At prevailing rates, one can
talk for about $25 an hour, and many providers of
professional services can readily bill more than the
$25 an hour for what would otherwise be unused
time. If benefits to customers cannot be calculated in
such dollar terms, then the market potential is far
more difficult and risky to ascertain.
Lower-potential opportunities are unfocused re-
garding customer need, and customers are unreach-
able and/or have brand or other loyalties to others. A
payback to the user of more than three years and low
value-added or value-created properties also make an
opportunity unattractive. Being unable to expand
beyond a one-product company can make for a
lower-potential opportunity. The failure of one of the
first portable computer companies, Osborne Com-
puter, is a prime example of this.
Market Structures. Market structure, such as
evidenced by the number of sellers, size distribution
of sellers, whether products are differentiated, condi-
tions of entry and exit, number of buyers, cost condi-
tions, and sensitivity of demand to changes in price, is
significant.
A fragmented, imperfect market or emerging in-
dustry often contains vacuums and asymmetries that
create unfilled market niches—for example, markets
where resource ownership, cost advantages, and
the like can be achieved. In addition, those where
information or knowledge gaps exist and where
competition is profitable, but not so strong as to be
overwhelming, are attractive. An example of a market
with an information gap is that experienced by a Boston
entrepreneur who encountered a large New York com-
pany that wanted to dispose of a small, old office build-
ing in downtown Boston. This office building, with a
book value of about $200,000, was viewed by the
financially oriented firm as a low-value asset, and the
company wanted to dispose of it so the resulting cash
could be put to work for a higher return. The buyer,
who had done more homework than the out-of-town
sellers, bought the building for $200,000 and resold it
in less than six months for more than $8 million.
The Country Style Cooking Restaurant Chain
(CCSC), founded in 1996, has replicated western-
style restaurant chains, with a Chinese twist. Consid-
ering the majority of China’s population still prefers
Asian cuisine, CCSC has established a profitable
brand by preparing fast and affordable meals in the
popular Sichuan style, with each dish from its one-
page menu, typically delivered within one minute.
CCSC prepares its food offsite, but its standardized
ingredients are quickly combined with its proprietary
sauce packages, which “replicate appealing flavors” in
a sit-down environment. Country Style Cooking
Restaurant Chain IPOed at 2010.
Industries that are highly concentrated, that are
perfectly competitive, or that are mature or declining
are typically unattractive. The capital requirements
and costs to achieve distribution and marketing pres-
ence can be prohibitive, and price-cutting and other
competitive strategies in highly concentrated markets
can be a significant barrier to entry. (The most blatant
example is organized crime and its life-threatening
actions when territories are invaded.) Revenge by
normal competitors who are well positioned through
product strategy, legal tactics, and supplier pressure
also can be punishing to the pocketbook.
The airline industry, after deregulation, is an ex-
ample of a perfectly competitive market and one
where many of the recent entrants will have diffi-
culty. The unattractiveness of perfectly competitive
industries is captured by the comment of prominent
Boston venture capitalist William Egan, who put it
this way: “I want to be in a nonauction market.”
19
Market Size. An attractive new venture sells to a
market that is large and growing (i.e., one where cap-
turing a small market share can represent significant
and increasing sales volume). A minimum market
size of more than $100 million in sales is attractive. In
the medical and life sciences today, this target bound-
ary is more like $500 million. Such a market size
means it is possible to achieve significant sales by
capturing roughly 5 percent or less and thus not
threatening competitors. For example, to achieve a
sales level of $1 million in a $100 million market re-
quires only 1 percent of the market. Thus a recre-
ational equipment manufacturer entered a $60 mil-
lion market that was expected to grow at 20 percent
per year to over $100 million by the third year. The
founders were able to create a substantial smaller
company without obtaining a major market share and
possibly incurring the wrath of existing companies.
166 Part II The Opportunity
19
Comment made during a presentation at Babson College, May 1985.
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Chapter 5 The Opportunity: Creating, Shaping, Recognizing, Seizing 167
However, such a market can be too large. A
multibillion-dollar market may be too mature and sta-
ble, and such a level of certainty can translate into com-
petition from Fortune 500 firms and, if highly competi-
tive, into lower margins and profitability. Further, an
unknown market or one that is less than $10 million in
sales also is unattractive. To understand the disadvan-
tages of a large, more mature market, consider the entry
of a firm into the microcomputer industry today versus
the entry of Apple Computer into that market in 1975.
Growth Rate. An attractive market is large and
growing (i.e., one where capturing a good share of
the increase is less threatening to competitors and
where a small market share can represent signifi-
cant and increasing sales volume). An annual growth
rate of 30 percent to 50 percent creates niches for
new entrants, and such a market is a thriving and
expansive one, rather than a stable or contracting
one, where competitors are scrambling for the
same niches. Thus, for example, a $100 million
market growing at 50 percent per year has the po-
tential to become a $1 billion industry in a few
years, and if a new venture can capture just 2 per-
cent of sales in the first year, it can attain sales in
the first year of $1 million. If it just maintains its
market share over the next few years, sales will
grow significantly.
Market Capacity. Another signal of the exis-
tence of an opportunity in a market is a market at
full capacity in a growth situation—in other words,
a demand that the existing suppliers cannot meet.
Timing is of vital concern in such a situation, which
means the entrepreneur should be asking, Can a
new entrant fill that demand before the other
players can decide to and then actually increase ca-
pacity?
Market Share Attainable. The potential to
be a leader in the market and capture at least a 20
percent share can create a very high value for a com-
pany that might otherwise be worth not much more
than book value. For example, one such firm, with
less than $15 million in sales, became dominant in its
small market niche with a 70 percent market share.
The company was acquired for $23 million in cash.
A firm that will be able to capture less than 5 per-
cent of a market is unattractive in the eyes of most
investors seeking a higher-potential company.
Cost Structure. A firm that can become the low-
cost provider is attractive, but a firm that continually
faces declining cost conditions is less so. Attractive
opportunities exist in industries where economies of
scale are insignificant (or work to the advantage of the
new venture). Attractive opportunities boast of low
costs of learning by doing. Where costs per unit are
high when small amounts of the product are sold,
existing firms that have low promotion costs can face
attractive market opportunities.
For instance, consider the operating leverage of
Johnsonville Sausage. Its variable costs were 6 per-
cent labor and 94 percent materials. What aggressive
incentives could management put in place for the 6
percent to manage and to control the 94 percent?
Imagine the disasters that would occur if the scenario
were reversed!
A word of caution from Scott W. Kunkel and
Charles W. Hofer, who observed,
Overall, industry structure . . . had a much smaller im-
pact on new venture performance than has previously
been suggested in the literature. This finding could be
the result of one of several possibilities:
1. Industry structure impacts the performance of
established firms, but does not have a significant
impact on new venture performance.
2. The most important industry structural variables
influencing new ventures are different from
those which impact established firms and thus
research has yet to identify the industry struc-
tural variables that are most important in the
new venture environment.
3. Industry structure does not have a significant
direct impact on firm performance, as hypothe-
sized by scholars in the three fields of study.
Instead, the impact of industry structure is
strongly mitigated by other factors, including
the strategy selected for entry.
20
Economics
Profits after Tax. High and durable gross mar-
gins usually translate into strong and durable after-tax
profits. Attractive opportunities have potential for
durable profits of at least 10 percent to 15 percent
and often 20 percent or more. Those generating af-
ter-tax profits of less than 5 percent are quite fragile.
Time to Breakeven and Positive Cash
Flow. As mentioned previously, breakeven and pos-
itive cash flow for attractive companies are possible
within two years. Once the time to breakeven and pos-
itive cash flow is greater than three years, the attrac-
tiveness of the opportunity diminishes accordingly.
ROI Potential. An important corollary to forgiv-
ing economics is reward. Very attractive opportuni-
ties have the potential to yield a return on investment
20
S. W. Kunkel and C. W. Hofer, “The Impact of Industry Structure on New Venture Performance,” Frontiers of Entrepreneurship Research: 1993 (Babson
Park, MA: Babson College, 1993).
tim81551_ch05IT.qxd 1/20/12 10:47 AM Page 167
of 25 percent or more per year. During the 1980s,
many venture capital funds achieved only single-digit
returns on investment. High and durable gross mar-
gins and high and durable after-tax profits usually
yield high earnings per share and high return on
stockholders’ equity, thus generating a satisfactory
harvest price for a company. This is most likely true
whether the company is sold through an initial public
offering or privately, or whether it is acquired. Given
the risk typically involved, a return on investment po-
tential of less than 15 percent to 20 percent per year
is unattractive.
Capital Requirements. Ventures that can be
funded and have capital requirements that are low to
moderate are attractive. Realistically, most higher-
potential businesses need significant amounts of
cash—several hundred thousand dollars and up—to
get started. Businesses that can be started with little
or no capital are rare, but they do exist. One such
venture was launched in Boston in 1971 with $7,500
of the founder’s capital and grew to over $30 million
in sales by 1989. In today’s venture capital market,
the first round of financing is typically $1 million to
$2 million or more for a start-up.
21
Some higher-
potential ventures, such as those in the service sector
or “cash sales” businesses, have lower capital require-
ments than do high-technology manufacturing firms
with large research and development expenditures.
If the venture needs too much money or cannot be
funded, it is unattractive. An extreme example is a
venture that a team of students recently proposed to
repair satellites. The students believed that the re-
quired start-up capital was in the $50 million to $200
million range. Projects of this magnitude are in the
domain of the government and the very large corpo-
ration, rather than that of the entrepreneur and the
venture capitalist.
Internal Rate of Return Potential. Is the
risk–reward relationship attractive enough? The re-
sponse to this question can be quite personal, but the
most attractive opportunities often have the promise
of—and deliver on—a very substantial upside of 5 to
10 times the original investment in 5 to 10 years. Of
course, the extraordinary successes can yield 50 to
100 times or more, but these are exceptions. A 25
percent or more annual compound rate of return is
considered very healthy. In the early 1990s, those in-
vestments considered basically risk free had yields of
3 percent to 8 percent.
Free Cash Flow Characteristics. Free cash
flow is a way of understanding a number of crucial
financial dimensions of any business: the robustness of
its economics; its capital requirements, both working
and fixed assets; its capacity to service external debt
and equity claims; and its capacity to sustain growth.
22
We define unleveraged free cash flow (FCF) as earn-
ings before interest but after taxes (EBIAT) plus
amortization (A) and depreciation (D) less sponta-
neous working capital requirements (WC) less capital
expenditures (CAPex), or FCF ?EBIAT ?[A?D] ?
[? or ? WC] ? CAPex. EBIAT is driven by sales,
profitability, and asset intensity. Low-asset-intensive,
high-margin businesses generate the highest profits
and sustainable growth.
23
We will explore this in detail
in Chapter 13, Entrepreneurial Finance.
Gross Margins. The potential for high and
durable gross margins (i.e., the unit selling price less
all direct and variable costs) is important. Gross mar-
gins exceeding 40 percent to 50 percent provide a
tremendous built-in cushion that allows for more er-
ror and more flexibility to learn from mistakes than
do gross margins of 20 percent or less. High and
durable gross margins, in turn, mean that a venture
can reach breakeven earlier, preferably within the first
two years. Thus, for example, if gross margins are just
20 percent, for every $1 increase in fixed costs (e.g.,
insurance, salaries, rent, and utilities), sales need to
increase $5 just to stay even. If gross margins are 75
percent, however, a $1 increase in fixed costs requires
a sales increase of just $1.33. One entrepreneur, who
built the international division of an emerging soft-
ware company to $17 million in highly profitable
sales in just five years (when he was 25 years old),
offers an example of the cushion provided by high
and durable gross margins. He stresses there is sim-
ply no substitute for outrageous gross margins by say-
ing, “It allows you to make all kinds of mistakes that
would kill a normal company. And we made them all.
But our high gross margins covered all the learning
tuition and still left a good profit.”
24
Gross margins of
less than 20 percent, particularly if they are fragile,
are unattractive.
Time to Breakeven—Cash Flow and Profit
and Loss (P&L). New businesses that can
quickly achieve a positive cash flow and become self-
sustaining are highly desirable. It is often the second
year before this is possible, but the sooner the better.
Obviously, simply having a longer window does not
168 Part II The Opportunity
21
J. A. Timmons, W. Bygrave, and N. Fast, “The Flow of Venture Capital to Highly Innovative Technology Ventures,” a study for the National Science Founda-
tion, reported in Frontiers of Entrepreneurship Research: 1984 (Babson Park, MA: Babson College, 1984).
22
For a more detailed description of free cash flow, see “Note on Free Cash Flow Valuation Models” by W. Sahlman, HBS 9-288-023, Harvard Business School, 1987.
23
W. A. Sahlman, “Sustainable Growth Analysis,” HBS 9-284-059, Harvard Business School, 1984.
24
R. D. Kahn, president, Interactive Images, Inc., speaking at Babson College about his experiences as international marketing director at McCormack & Dodge
from 1978 through 1983.
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Chapter 5 The Opportunity: Creating, Shaping, Recognizing, Seizing 169
mean the business will be lousy. TCL is a Chinese
home appliances producer that now enjoys a
significant share of Vietnam’s TV market along-
side more well-known brands like Samsung, Sony,
and Panasonic. However, when it first entered Viet-
nam in 1998, it took TCL three years to gain the
trust of Vietnamese consumers before it started to
breakeven.
25
Harvest Issues
Value-Added Potential. New ventures that
are based on strategic value in an industry, such as
valuable technology, are attractive, while those
with low or no strategic value are less attractive. For
example, most observers contend that a product
technology of compelling strategic value to Xerox was
owned, in the mid-1980s, by a small company with
about $10 million in sales and showing a prior-year
loss of $1.5 million. Xerox purchased the company for
$56 million. Opportunities with extremely large capital
commitments, whose value on exit can be severely
eroded by unanticipated circumstances, are less attrac-
tive. Nuclear power is a good example.
Thus one characteristic of businesses that com-
mand a premium price is that they have high value-
added strategic importance to their acquirer, such
as distribution, customer base, geographic coverage,
proprietary technology, contractual rights, and the
like. Such companies might be valued at four, five, or
even six times (or more) last year’s sales, whereas per-
haps 60 percent to 80 percent of companies might be
purchased at .75 to 1.25 times sales.
Valuation Multiples and Comparables.
Consistent with the previous point, there is a large
spread in the value the capital markets place on pri-
vate and public companies. Part of your analysis is to
identify some historical boundaries for valuations
placed on companies in the market/industry/technol-
ogy area you intend to pursue. The rules outlined in
Exhibit 5.8 are variable and should be thought of as a
boundary and a point of departure.
Exit Mechanism and Strategy. Businesses
that are eventually sold—privately or to the public—
or acquired, usually are started and grown with a har-
vest objective in mind. Attractive companies that re-
alize capital gains from the sale of their businesses
have, or envision, a harvest or exit mechanism. Unat-
tractive opportunities do not have an exit mechanism
in mind. Planning is critical because, as is often said,
it is much harder to get out of a business than to get
into it. Giving some serious thought to the options
and likelihood that the company can eventually be
harvested is an important initial and ongoing aspect
of the entrepreneurial process.
Capital Market Context. The context in
which the sale or acquisition of the company occurs
is largely driven by the capital markets at that
particular time. Timing can be a critical component
of the exit mechanism because, as one study indi-
cated, since World War II, the average bull market
on Wall Street has lasted just six months. For a
keener appreciation of the critical difference the
capital markets can make, one only has to recall
the stock market crash of October 19, 1987, the
bank credit crunches of 1990–1992 and 2007, or
the bear market of 2001–2003. By the end of
1987, the valuation of the Venture Capital 100
index dropped 43 percent, and private company val-
uations followed. Initial public offerings are espe-
cially vulnerable to the vicissitudes of the capital
markets; here the timing is vital. Some of the most
successful companies seem to have been launched
when debt and equity capital were most available
and relatively cheap.
Competitive Advantages Issues
Variable and Fixed Costs. An attractive op-
portunity has the potential for being the lowest-cost
producer and for having the lowest marketing and
distribution costs. For example, Bowmar was unable
to remain competitive in the market for electronic
calculators after the producers of large-scale inte-
grated circuits, such as Hewlett-Packard, entered the
business. Being unable to achieve and sustain a posi-
tion as a low-cost producer shortens the life ex-
pectancy of a new venture.
Degree of Control. Attractive opportunities
have potential for moderate to strong control over
prices, costs, and channels of distribution. Fragmented
markets where there is no dominant competitor—no
IBM—have this potential. These markets usually
have a market leader with a 20 percent market share
or less. For example, sole control of the source of
supply of a critical component for a product or of
channels of distribution can give a new venture
market dominance even if other areas are weak.
Lack of control over such factors as product de-
velopment and component prices can make an op-
portunity unattractive. For example, in the case of
Viatron, its suppliers were unable to produce several
of the semiconductors the company needed at low
enough prices to permit Viatron to make the inex-
pensive computer terminal that it had publicized
extensively.
25
data.book.163.com/book/section/0000NPfV/0000NPfV1.html; news.xinhuanet.com/world/2004-12/19/content_2353771.htm.
tim81551_ch05IT.qxd 1/20/12 10:47 AM Page 169
A market where a major competitor has a market
share of 40 percent or more usually implies a market
where power and influence over suppliers, cus-
tomers, and pricing create a serious barrier and risk
for a new firm. Such a firm will have few degrees of
freedom. However, if a dominant competitor is at full
capacity, is slow to innovate or to add capacity in a
large and growing market, or routinely ignores or
abuses the customer (remember “Ma Bell”), there
may be an entry opportunity. But entrepreneurs usu-
ally do not find such sleepy competition in dynamic,
emerging industries dense with opportunity.
Entry Barriers. Having a favorable window of
opportunity is important. Having or being able to
gain proprietary protection, regulatory advantage, or
other legal or contractual advantage, such as exclusive
rights to a market or with a distributor, is attractive.
Having or being able to gain an advantage in re-
sponse/lead times is important because these can
create barriers to entry or expansion by others. For
example, advantages in response/lead times in tech-
nology, product innovation, market innovation, people,
location, resources, or capacity make an opportunity
attractive. Possession of well-developed, high-quality,
accessible contacts that are the product of years of
building a top-notch reputation and that cannot be
acquired quickly is also advantageous. Sometimes
this competitive advantage may be so strong as to
provide dominance in the marketplace, even though
many of the other factors are weak or average. An
example of how quickly the joys of start-up may fade
if others cannot be kept out is the experience of firms
in the hard disk industry that were unable to erect
entry barriers into the U.S. markets in the early to
mid-1980s. By the end of 1983, some 90 hard disk
drive companies were launched, and severe price
competition led to a major industry shakeout.
If a firm cannot keep others out or if it faces already
existing entry barriers, it is unattractive. An easily
overlooked issue is a firm’s capacity to gain distribu-
tion of its product. As simple as it may sound, even
venture-capital-backed companies fall victim to this
market issue. Air Florida apparently assembled all the
right ingredients, including substantial financing, yet
was unable to secure sufficient gate space for its air-
planes. Even though it sold passenger seats, it had no
place to pick the passengers up or drop them off.
Management Team Issues
Entrepreneurial Team. Attractive opportuni-
ties have existing teams that are strong and contain
industry superstars. The team has proven profit and
loss experience in the same technology, market, and
service area, and members have complementary
and compatible skills. An unattractive opportunity
does not have such a team in place or has no team.
Industry and Technical Experience. A
management track record of significant accom-
plishment in the industry, with the technology, and in
the market area, with a proven profit and lots of
achievements where the venture will compete is
highly desirable. A top-notch management team can
become the most important strategic competitive
advantage in an industry. Imagine relocating the
Chicago Bulls or the Phoenix Suns to Halifax, Nova
Scotia. Do you think you would have a winning com-
petitor in the National Basketball Association?
Integrity. Trust and integrity are the oil and glue
that make economic interdependence possible. Hav-
ing an unquestioned reputation in this regard is a ma-
jor long-term advantage for entrepreneurs and
should be sought in all personnel and backers. A
shady past or record of questionable integrity is for B
team players only.
Intellectual Honesty. There is a fundamental
issue of whether the founders know what they do
and do not know, as well as whether they know what
to do about shortcomings or gaps in the team and the
enterprise.
Fatal Flaw Issues. Basically, attractive ventures
have no fatal flaws; an opportunity is rendered unat-
tractive if it suffers from one or more fatal flaws. Usu-
ally these relate to one of the previous criteria, and
examples abound of markets that are too small, that
have overpowering competition, where the cost of
entry is too high, where an entrant is unable to pro-
duce at a competitive price, and so on. An example of
a fatal flaw entry barrier was Air Florida’s inability to
get flights listed on reservation computers.
Personal Criteria
Goals and Fit. Is there a good match between
the requirements of business and what the founders
want out of it? Dorothy Stevenson pinpointed the
crux of it with this powerful insight: “Success is getting
what you want. Happiness is wanting what you get.”
Upside/Downside Issues. An attractive op-
portunity does not have excessive downside risk. The
upside and the downside of pursuing an opportunity
are not linear, nor are they on the same continuum.
The upside is easy, and it has been said that success
has a thousand sires. The downside is another matter:
It has also been said that failure is an orphan. An en-
trepreneur needs to be able to absorb the financial
downside in such a way that he or she can rebound
without becoming indentured to debt obligations. If
an entrepreneur’s financial exposure in launching the
170 Part II The Opportunity
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Chapter 5 The Opportunity: Creating, Shaping, Recognizing, Seizing 171
venture is greater than his or her net worth—the re-
sources he or she can reasonably draw upon, and his
or her alternative disposable earnings stream if it
does not work out—the deal may be too big. While
today’s bankruptcy laws are generous, the psycholog-
ical burdens of living through such an ordeal are infi-
nitely more painful than the financial consequences.
An existing business needs to consider if a failure will
be too demeaning to the firm’s reputation and future
credibility, aside from the obvious financial conse-
quences.
26
Opportunity Cost. In pursuing any venture
opportunity, there are also opportunity costs. An en-
trepreneur who is skilled enough to grow a success-
ful, multimillion-dollar venture has talents that are
highly valued by medium- to large-sized firms as
well. While assessing benefits that may accrue in
pursuing an opportunity, an entrepreneur needs to
heed other alternatives, including potential “golden
handcuffs,” and account honestly for any cut in
salary that may be involved in pursuing a certain op-
portunity.
Further, pursuing an opportunity can shape an en-
trepreneur in ways that are hard to imagine. An entre-
preneur will probably have time to execute between
two and four multimillion-dollar ventures between
the ages of 25 and 50. Each of these experiences will
position him or her, for better or for worse, for the
next opportunity. Because an entrepreneur in the
early years needs to gain relevant management expe-
rience and because building a venture (either one
that works or one that does not) takes more time than
is commonly believed, it is important to consider
alternatives while assessing an opportunity.
Desirability. A good opportunity is not only at-
tractive but also desirable (i.e., good opportunity fits).
An intensely personal criterion would be the desire
for a certain lifestyle. This desire may preclude pur-
suing certain opportunities that may be excellent for
someone else. The founder of a major high-technology
venture in the Boston area was asked why he located
the headquarters of his firm in downtown Boston,
while those of other such firms were located on the
famous Route 128 outside the city. His reply was that
he wanted to live in Boston because he loved the city
and wanted to be able to walk to work. He said, “The
rest did not matter.”
Risk/Reward Tolerance. Successful entre-
preneurs take calculated risks or avoid risks they do
not need to take; as a country western song puts it,
“You have to know when to hold ’em, know when to
fold ’em, know when to walk away, and know when to
run.” This is not to suggest that all entrepreneurs are
gamblers or have the same risk tolerance; some are
quite conservative while others actually seem to get a
kick out of the inherent danger and thrill in higher-
risk and higher-stake games. The real issue is fit—
recognizing that gamblers and overly risk-averse en-
trepreneurs are unlikely to sustain any long-term
successes.
Stress Tolerance. Another important dimen-
sion of the fit concept is the stressful requirements of
a fast-growth high-stakes venture. Or as President
Harry Truman said so well, “If you can’t stand the
heat, get out of the kitchen.”
Strategic Differentiation
Degree of Fit. To what extent is there a good fit
among the driving forces (founders and team, oppor-
tunity, and resource requirements) and the timing
given the external environment?
Team. There is no substitute for an absolutely top-
quality team. The execution of and the ability to
adapt and to devise constantly new strategies are vital
to survival and success. A team is nearly unstoppable
if it can inculcate into the venture a philosophy and
culture of superior learning, as well as teaching skills,
an ethic of high standards, delivery of results, and
constant improvement. Are they free agents—clear
of employment, noncompete, proprietary rights, and
trade secret agreements—who are able to pursue the
opportunity?
Service Management. Several years ago, the
Forum Corporation of Boston conducted research
across a wide range of industries with several hun-
dred companies to determine why customers stopped
buying these companies’ products. The results were
surprising: 15 percent of the customers defected
because of quality and 70 percent stopped using a
product or service because of bad customer service.
Having a “turbo-service” concept that can be delivered
consistently can be a major competitive weapon
against small and large competitors alike. Home
Depot, in the home supply business, and Lexus, in
the auto industry, have set an entirely new standard
of service for their respective industries.
Timing. From business to historic military bat-
tles to political campaigns, timing is often the one
element that can make a significant difference.
Time can be an enemy or a friend; being too early or
too late can be fatal. The key is to row with the tide,
not against it. Strategically, ignoring this principle is
perilous.
26
This point was made by J. Willard Marriott, Jr., at Founder’s Day at Babson College, 1988.
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Technology. A breakthrough, proprietary prod-
uct is no guarantee of success, but it creates a formi-
dable competitive advantage.
Flexibility. Maintaining the capacity to commit
and uncommit quickly, to adapt, and to abandon if
necessary is a major strategic weapon, particularly
when competing with larger organizations. Larger
firms can typically take 6 years or more to change ba-
sic strategy and 10 to 20 years or more to change their
culture.
Opportunity Orientation. To what extent is
there a constant alertness to the marketplace? A con-
tinual search for opportunities? As one insightful en-
trepreneur put it, “Any opportunity that just comes in
the door to us, we do not consider an opportunity.
And we do not have a strategy until we are saying no
to lots of opportunities.”
Pricing. One common mistake of new companies
with high-value-added products or services in a grow-
ing market is to underprice. A price slightly below to as
much as 20 percent below competitors is rationalized
as necessary to gain market entry. In a 30 percent gross
margin business, a 10 percent price increase results in
a 20 percent to 36 percent increase in gross margin
and will lower the break-even sales level for a company
with $900,000 in fixed costs to $2.5 million from $3
million. At the $3-million sales level, the company
would realize an extra $180,000 in pretax profits.
Distribution Channels. Having access to the
distribution channels is sometimes overlooked or
taken for granted. New channels of distribution can
leapfrog and demolish traditional channels—for ex-
ample, direct mail, home shopping networks, in-
fomercials, and the coming revolution in interactive
television in your own home.
Room for Error. How forgiving is the business
and the financial strategy? How wrong can the team be
in estimates of revenue costs, cash flow, timing, and
capital requirements? How bad can things get with the
firm still able to survive? If some single-engine planes
are more prone to accidents by 10 or more times,
which plane do you want to fly in? High leverage,lower
gross margins, and lower operating margins are the sig-
nals in a small company of flights destined for fatality.
Gathering Information
Finding Ideas
Factors suggest that finding a potential opportunity is
most often a matter of being the right person, in the
right place, at the right time. How can you increase
your chances of being the next Anita Roddick of
The Body Shop? Numerous sources of information
can help generate ideas.
Existing Businesses Purchasing an ongoing
business is an excellent way to find a new business
idea. Such a route to a new venture can save time and
money and can reduce risk as well. Investment
bankers and business brokers are knowledgeable
about businesses for sale, as are trust officers. How-
ever, brokers do not advertise the very best private
businesses for sale, and the real gems are usually
bought by the individuals or firms closest to them,
such as management, directors, customers, suppliers,
or financial backers. Bankruptcy judges have a con-
tinual flow of ventures in serious trouble. Excellent
opportunities may be buried beneath all the financial
debris of a bankrupt firm.
Franchises Franchising is another way to enter
an industry, by either starting a franchise operation or
becoming a franchisee. This is a fertile area. The
number of franchisors nationally stands at more than
4,000, according to the International Franchise Asso-
ciation and the Department of Commerce, and
franchisors account for well over $600 billion in sales
annually and nearly one-third of all retail sales.
27
See
Chapter 11 for a fuller discussion of franchises, in-
cluding resource information.
Patents Patent brokers specialize in marketing
patents that are owned by individual inventors, corpo-
rations, universities, or other research organizations
to those seeking new commercially viable products.
Some brokers specialize in international product li-
censing, and occasionally a patent broker will pur-
chase an invention and then resell it. Although, over
the years, a few unscrupulous brokers have tarnished
the patent broker’s image, acquisitions effected by
reputable brokers have resulted in significant new
products. Notable among these was Bausch & Lomb’s
acquisition, through National Patent Development
Corporation, of the U.S. right to hydron, a material
used in contact lenses. Some patent brokers are
MGA Technology, Chicago.
New Product Development Services,
Kansas City, Missouri.
University Patents, Chicago.
Research Corporation, New York.
Pegasus Corporation, New York.
National Patent Development Corporation,
New York.
172 Part II The Opportunity
27
See also “Economic Impact of Franchised Businesses,” International Franchise Association, IFA Educational Foundation, 2004.
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Chapter 5 The Opportunity: Creating, Shaping, Recognizing, Seizing 173
Product Licensing A good way to obtain expo-
sure to many product ideas available from universities,
corporations, and independent investors is to sub-
scribe to information services such as the American
Bulletin of International Technology, Selected Business
Ventures (published by General Electric), Technology
Mart, Patent Licensing Gazette, and the National
Technical Information Service. In addition, corpora-
tions, not-for-profit research institutions, and universi-
ties are sources of ideas.
Corporations. Corporations engaged in re-
search and development often develop inventions or
services that they do not exploit commercially. These
inventions either do not fit existing product lines or
marketing programs or do not represent sufficiently
large markets to be interesting to large corporations.
A good number of corporations license these kinds of
inventions, either through patent brokers, product-
licensing information services, or their own patent
marketing efforts. Directly contacting a corporation
with a licensing program may prove fruitful. Among
the major corporations known to have active internal
patent marketing efforts are the following:
Gulf and Western Invention Development
Corporation.
Kraft Corporation, Research and Development.
Pillsbury Company, Research and Development
Laboratories.
Union Carbide Corporation, Nuclear Division.
RCA Corporation, Domestic Licensing.
TRW Corporation, System Group.
Lockheed Corporation, Patent Licensing.
Not-for-Profit Research Institutes. These
nonprofit organizations do research and develop-
ment under contract to the government and private
industry as well as some internally sponsored re-
search and development of new products and
processes that can be licensed to private corporations
for further development, manufacturing, and mar-
keting. One example of how this works is Battelle
Memorial Institute’s participation in the develop-
ment of xerography and the subsequent license of the
technology to the Haloid Corporation, now Xerox
Corporation. Some nonprofit research institutes with
active licensing programs are
Battelle Memorial Institute.
ITT Research Institute.
Stanford Research Institute.
Southwest Research Institute.
Universities. A number of universities are active
in research in the physical sciences and seek to
license inventions that result from this research either
directly or through an associated research foundation
that administers a patent program. Massachusetts
Institute of Technology and the California Institute
of Technology publish periodic reports containing
abstracts of inventions they own that are available for
licensing. In addition, because a number of very good
ideas developed in universities never reach formal
licensing outlets, another way to find these ideas is to
become familiar with the work of researchers in your
area of interest. Among universities that have active
licensing programs are
Massachusetts Institute of Technology.
California Institute of Technology.
University of Wisconsin.
Iowa State University.
Purdue University.
University of California.
University of Oregon.
Industry and Trade Contacts
Trade Shows and Association Meetings.
Trade shows and association meetings in a number of
industries can be an excellent way to examine the
products of many potential competitors, meet dis-
tributors and sales representatives, learn about
product and market trends, and identify potential
products. The American Electronics Association is a
good example of an association that holds such semi-
nars and meetings.
Customers. Contacting potential customers of a
certain type of product can identify a need and where
existing products might be deficient or inadequate.
Discussions with doctors who head medical services
at hospitals might lead to product ideas in the
biomedical equipment business.
Distributors and Wholesalers. Contacting
people who distribute a certain type of product can
yield extensive information about the strengths and
weaknesses of existing products and the kinds of
product improvements and new products that are
needed by customers.
Competitors. Examining products offered by
companies competing in an industry can show
whether an existing design is protected by patent and
whether it can be improved or imitated.
Former Employers. A number of businesses
are started with products or services, or both, based
on technology and ideas developed by entrepreneurs
while others employed them. In some cases, research
laboratories were not interested in commercial ex-
ploitation of technology, or the previous employer
tim81551_ch05IT.qxd 1/20/12 10:47 AM Page 173
was not interested in the ideas for new products, and
the rights were given up or sold. In others, the ideas
were developed under government contract and
were in the public domain. In addition, some compa-
nies will help entrepreneurs set up companies in re-
turn for equity.
Professional Contact. Ideas can also be found
by contacting such professionals as patent attorneys,
accountants, commercial bankers, and venture capi-
talists who come into contact with those seeking to li-
cense patents or to start a business using patented
products or processes.
Consulting. A method for obtaining ideas that
has been successful for technically trained entrepre-
neurs is to provide consulting and one-of-a-kind engi-
neering designs for people in fields of interest. For
example, an entrepreneur wanting to establish a
medical equipment company can do consulting or
can design experimental equipment for medical re-
searchers. These kinds of activities often lead to pro-
totypes that can be turned into products needed by a
number of researchers. For example, this approach
was used in establishing a company to produce psy-
chological testing equipment that evolved from con-
sulting done at the Massachusetts General Hospital
and, again, in a company to design and manufacture
oceanographic instruments that were developed
from consulting done for an oceanographic institute.
Networking. Networks can be a stimulant and
source of new ideas, as well as a source of valuable
contacts with people. Much of this requires personal
initiative on an informal basis; but around the coun-
try, organized networks can facilitate and accelerate
the process of making contacts and finding new busi-
ness ideas. Near Boston, a high-density area of ex-
ceptional entrepreneurial activity, several networks
have emerged, including the Babson Entrepreneur-
ial Exchange, the Smaller Business Association of
New England (SBANE), the MIT Enterprise Fo-
rum, the 128 Venture Group, and the Boston Com-
puter Society. Similar organizations can be found
across the United States. A sampling includes the
American Women’s Economic Development Corpo-
ration in New York City; the Association of Women
Entrepreneurs; the Entrepreneur’s Roundtable of
the UCLA Graduate Student Association; and the
Association of Collegiate Entrepreneurs at Wichita
State University.
Shaping Your Opportunity
You will need to invest in thorough research to
shape your idea into an opportunity. Data avail-
able about market characteristics, competitors, and
so on are frequently inversely related to the real
potential of an opportunity; that is, if market data
are readily available and if the data clearly show sig-
nificant potential, then a large number of competi-
tors will enter the market and the opportunity will
diminish.
The good news: Most data will be incomplete, in-
accurate, and contradictory, and their meaning will
be ambiguous. For entrepreneurs, gathering the
necessary information and seeing possibilities and
making linkages where others see only chaos are
essential.
Leonard Fuld defined competitor intelligence as
highly specific and timely information about a cor-
poration.
28
Finding out about competitors’ sales
plans, key elements of their corporate strategies, the
capacity of their plants and the technology used in
them, who their principal suppliers and customers
are, and what new products rivals have under devel-
opment is difficult, but not impossible, even in
emerging industries, when talking to intelligence
sources.
29
Using published resources is one source of such
information. Interviewing people and analyzing
data are also critical. Fuld believes that because
business transactions generate information, which
flows into the public domain, one can locate intelli-
gence sources by understanding the transaction and
how intelligence behaves and flows.
30
This can be done legally and ethically. There are,
of course, less than ethical (not to mention illegal)
tactics, which include conducting phony job inter-
views, getting customers to put out phony bid re-
quests, and lying, cheating, and stealing. Entrepre-
neurs need to be careful to avoid such practices and
are advised to consult legal counsel when in doubt.
The information sources given next are just a small
start. Much creativity, work, and analysis will be in-
volved to find intelligence and to extend the informa-
tion obtained into useful form. For example, a com-
petitor’s income statement and balance sheet will
rarely be handed out. Rather, this information must
be derived from information in public filings or news
articles or from credit reports, financial ratios, and in-
terviews.
31
174 Part II The Opportunity
28
L. M. Fuld, Competitor Intelligence: How to Get It: How to Use It (New York: John Wiley & Sons, 1985), p. 9.
29
Ibid. See also “How to Snoop on Your Competitors,” Fortune, May 14, 1984, pp. 28–33; and also information published by accounting firms such as Sources
of Industry Data, published by Ernst & Young.
30
Fuld, Competitor Intelligence, pp. 12–17.
31
Ibid., p. 325.
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Chapter 5 The Opportunity: Creating, Shaping, Recognizing, Seizing 175
Published Sources
The first step is a complete search of materials in li-
braries and on the Internet. You can find a huge
amount of published information, databases, and other
sources about industries, markets, competitors, and
personnel. Some of this information will have been un-
covered when you search for ideas. Listed here are ad-
ditional sources that should help get you started.
Guides and Company Information
Valuable information is available in special issues and
the Web sites of BusinessWeek, Forbes, INC., The
Economist, Fast Company, and Fortune and online,
in the following:
Hoovers.com.
ProQuest.com.
Bloomberg.com.
Harrisinfo.com.
Additional Internet Sites
Fast Company (http://www.fastcompany.com).
Ernst & Young (http://www.ey.com).
Entrepreneur.com & magazine (http://www.
entrepreneur.com).
EDGAR database (http://www.sec.gov).
Note that subscription sources, such as
ThomsonResearch (http://www.
thomsonfinancial.com), provide images of other
filings as well.
Venture Economics (http://www.
ventureeconomics.com).
Journal Articles via Computerized Indexes
Factiva with Dow Jones, Reuters, The Wall
Street Journal.
EBSCOhost.
FirstSearch.
Ethnic News Watch.
LEXIS/NEXIS.
New York Times.
InfoTrac from Gale Group.
ABI/Inform and other ProQuest databases.
RDS Business Reference Suite.
The Wall Street Journal.
Statistics
Stat-USA (http://www.stat-usa.gov)—U.S.
government subscription site for economic,
trade and business data, and market
research.
U.S. Census Bureau (http://www.census.gov)
—the source of many statistical data including
Statistical Abstract of the United States.
American FactFinder—population data.
Economic Programs (http://www.census.gov
/econ/www/index.html)—data by sector.
County business patterns.
Zip code business patterns.
Knight Ridder . . . CRB Commodity Year Book.
Manufacturing USA, Service Industries USA,
and other sector compilations from Gale Group.
Economic Statistics Briefing Room
(http://www.whitehouse.gov/fsbr/esbr.html).
Federal Reserve Bulletin.
Survey of Current Business.
FedStats (http://www.fedstats.gov/).
Global Insight (http://www.globalinsight.com).
International Financial Statistics—International
Monetary Fund.
World Development Indicators—World Bank.
Bloomberg Database.
Consumer Expenditures
New Strategist Publications.
Consumer Expenditure Survey.
Euromonitor.
Projections and Forecasts
ProQuest.
InfoTech Trends.
Guide to Special Issues and Indexes to
Periodicals (Grey House Directory of Special
Issues).
RDS Business Reference Suite.
Value Line Investment Survey.
Market Studies
LifeStyle Market Analyst.
MarketResearch.com.
Scarborough Research.
Simmons Market Research Bureau.
Other Sources
Wall Street Transcript.
Brokerage house reports from Investext,
Multex, etc.
Company annual reports and Web sites.
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Other Intelligence
Everything entrepreneurs need to know will not be
found in libraries because this information needs to
be highly specific and current. This information is
most likely available from people—industry experts,
suppliers, and the like (see box). Summarized next
are some useful sources of intelligence.
Trade Associations Trade associations, espe-
cially the editors of their publications and informa-
tion officers, are good sources of information.
32
Trade shows and conferences are prime places to dis-
cover the latest activities of competitors.
Employees Employees who have left a com-
petitor’s company often can provide information
about the competitor, especially if the employee
departed on bad terms. Also, a firm can hire people
away from a competitor. While consideration of
ethics in this situation is important, the number of
experienced people in any industry is limited, and
competitors must prove that a company hired a
person intentionally to get specific trade secrets in
order to challenge any hiring legally. Students who
have worked for competitors are another source of
information.
Consulting Firms Consulting firms frequently
conduct industry studies and then make this infor-
mation available. Frequently, in such fields as com-
puters or software, competitors use the same design
consultants, and these consultants can be sources of
information.
Market Research Firms Firms doing market
studies, such as those listed under published sources
above, can be sources of intelligence.
Key Customers, Manufacturers, Suppliers,
Distributors, and Buyers These groups are
often a prime source of information.
Public Filings Federal, state, and local filings,
such as filings with the Securities and Exchange
Commission (SEC), Patent and Trademark Office, or
Freedom of Information Act filings, can reveal a sur-
prising amount of information. There are companies
that process inquiries of this type.
Reverse Engineering Reverse engineering
can be used to determine costs of production and
sometimes even manufacturing methods. An ex-
ample of this practice is the experience of Ad-
vanced Energy Technology of Boulder, Colorado,
which learned firsthand about such tactics. No
sooner had it announced a new product, which was
patented, when it received 50 orders, half of which
were from competitors asking for only one or two of
the items.
Networks The networks mentioned in Chapter 3
as sources of new venture ideas also can be sources of
competitor intelligence.
Other Classified ads, buyers guides, labor unions,
real estate agents, courts, local reporters, and so on,
can all provide clues.
33
176 Part II The Opportunity
Internet Impact: Research
The Internet has become the resource for entrepreneurial research and opportunity exploration. The rapid
growth of data sources, Web sites, sophisticated search engines, and consumer response forums allows for up-to-
date investigations of business ideas, competitive environments, and value chain resources.
Google is currently the top search engine in the world. One of the reasons for Google’s success is its increas-
ingly deep and wide platform of tools. In 2007 Google offered the means to view, for example, the text of U.S.
patents and scholarly papers, archives of news stories, and blogs on hundreds of subjects.
As virtual communities of people who share a common interest or passion, blogs can be a tremendously valu-
able resource of insights and perspectives on potential opportunities. Proactive, low- or no-cost research can also
be conducted with e-mailed questionnaires or by directing potential subjects to a basic Web site set up to collect
responses. In addition, the Internet provides entrepreneurs and other proactive searchers with the extraordinary
capability to tap wisdom and advice from experts on virtually anything—anywhere in the world.
32
Ibid., pp. 46, 48.
33
Fuld, Competitor Intelligence, pp. 369–418.
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Chapter 5 The Opportunity: Creating, Shaping, Recognizing, Seizing 177
Chapter Summary
Ideas are a dime a dozen. Perhaps one out of a hun-
dred becomes a truly great business, and one in 10 to
15 becomes a higher-potential business. The complex
transformation of an idea into a true opportunity is
akin to a caterpillar becoming a butterfly.
High-potential opportunities invariably solve an im-
portant problem, want, or need that someone is will-
ing to pay for now. In renowned venture capitalist
Arthur Rock’s words, “I look for ideas that will
change the way people live and work.”
There are decided patterns in superior opportunities,
and recognizing these patterns is an entrepreneurial
skill aspiring entrepreneurs need to develop.
Rapid changes and disruptions in technology, regula-
tion, information flows, and the like cause opportu-
nity creation. The journey from idea to high-potential
opportunity requires navigating an undulating, con-
stantly changing, three-dimensional relief map
while inventing the vehicle and road map along
the way.
Some of the best opportunities actually require
some of the least amounts of capital, especially via
the Internet.
The best opportunities often don’t start out that
way. They are crafted, shaped, molded, and rein-
vented in real time and market space. Fit with the
entrepreneur and resources, the timing, and the
balance of risk and reward govern the ultimate
potential.
The highest-potential ventures are found in high-
growth markets, with high gross margins, and robust
free cash flow characteristics, because their under-
lying products or services add significantly greater
value to the customer, compared with the next
best alternatives.
Trial and error, or learning by doing alone, is not
enough for developing breakthrough ventures,
which require experience, creativity, and conceptual-
izing.
Study Questions
1. What is the difference between an idea and a good
opportunity?
2. Why is it said that ideas are a dime a dozen?
3. What role does experience play in the opportunity
creation process, and where do most good opportuni-
ties come from? Why is trial-and-error learning not
good enough?
4. List the sources of ideas that are most relevant to
your personal interests, and conduct a search using
the Internet.
5. What conditions and changes that may occur in
society and the economy spawn and drive future
opportunities? List as many as you can think of as
you consider the next 10 years.
6. Evaluate your best idea against the summary criteria
in Exhibit 5.8. What appears to be its potential? What
has to happen to convert it into a high-potential
business?
7. Draw a value chain and free cash flow chain for an
existing business dominated by a few large players.
How can you use the Internet, personal computer,
and other information technology to capture (save) a
significant portion of the margins and free cash
flows?
Internet Resources for Chapter 5
www.ideafinder.com This unique site celebrates
innovative products and services. Includes History, Facts
& Myths, Idea Showcase, and Future Ideas that may
stimulate ideas for your own business.
www.emc.score.org Service Corps of Retired Executives.
A nonprofit organization and a resource partner with the
U.S. Small Business Administration with 11,500 volunteer
members and 389 chapters throughout the United States.
www.enterpriseforum.mit.edu/ The MIT Enterprise
Forum, Inc., builds connections to technology
entrepreneurs and to the communities in which they
reside.
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178 Part II The Opportunity
MIND STRETCHERS
Have You Considered?
1. Steve Jobs, founder of Apple Computer, was 10 years
old when he built his first computer. Colonel Sanders
was 65 years old when he started Kentucky Fried
Chicken. What is an opportunity for whom?
2. Most successful existing businesses are totally preoccu-
pied with their most important, existing customers and
therefore lack the peripheral opportunity vision to spot
new products and services. How is this happening
where you work? Is this an opportunity for you?
3. The most successful ventures have leadership and
people as their most important competitive advan-
tage. How does this change the way you think about
opportunities?
4. Whom can you work with during the next few years
to learn a business and have the chance to spot new
opportunities outside the weak peripheral vision of
an established business?
5. Barriers to entry can create opportunities for those
with the right knowledge and experience. Why is this
so? Can you find some examples?
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Chapter 5 The Opportunity: Creating, Shaping, Recognizing, Seizing 179
Exercise 1
The Next Sea Changes
The devastating tsunami in Asia in late December 2004 was
a sobering reminder of the massive, life-changing impact
that such an event can have. The “sea change” metaphor is
one we have used in earlier editions to urge aspiring entre-
preneurs to research, brainstorm, and envision future quan-
tum changes in technology and society. As we have seen,
such sea changes as electricity, the airplane, the integrated
circuit (Moore’s law), and wireless communications have
been the wellheads of new major industries. What will be
the likely technology and societal changes during the next
20 to 30 years that will spawn the next generation of new in-
dustries? Entrepreneurs and innovators who anticipate the
answers to this complex question will become the Gates,
Jobs, Blank, and Stemberg of the next generation.
Purpose
The purpose of this exercise is to provide a pathway for ex-
ploring this question. We hope to broaden your horizon of
technological literacy and enrich your vision of the next
quarter century—the window of your life when you have the
best chance of creating and seizing the mega-opportunities
that lie ahead.
We ask you to do some research and thinking about the
future directions of technology and how scientific inquiries
which are under way today can lead to knowledge break-
throughs. This new scientific knowledge will, in turn, lead to
innovations. When fueled, ignited, and driven by entrepre-
neurship, some of these innovations will become commer-
cialized and in the process create entirely new industries.
The following steps will assist you in this research task,
but you should not confine your efforts to these steps alone.
You also need to pursue as many other sources as possible
using Google and other resources. Be sure to “follow the
data and your gut instinct.” If you find an area of science and
technology that excites you—or which you instinctively be-
lieve can change the way people will live, work, learn, or
relax—then pursue it.
STEP 1
Go to the National Science Foundation summary of the 50
discoveries that the NSF believes have had the most impact
on every American’s life (www.nsf.gov/about/history
/nifty50/index.jsp). You will find such breakthrough discov-
eries as bar codes, CAD/CAM, genomics, speech recogni-
tion, computer visualization techniques, and Web browsers.
All of these are examples of sea changes—the spawners
and drivers of new industries that we discussed in this chap-
ter and in Chapter 3.
STEP 2
Select one or two of the nifty 50 that interest you the most.
Now examine number 10 on the list: “computer visualiza-
tion techniques.” Note the 11 industries and fields that
have been significantly impacted by this basic discovery.
Out of these 11 pick one or two you know the least about
but for which you have the most passion. Conduct some
keyword searches on Google and the like to identify prod-
ucts, companies, or market segments that are driven by the
entrepreneurs behind these innovations. Repeat this process
for all of the major discoveries you are attracted to. Once
you have a good sense of how these linkages exist, go to
Step 3.
STEP 3
Meet with two to five of your classmates over breakfast,
lunch, dinner, and share what you have learned, your ob-
servations and insights about how industries are born, and
what potential new fields might arise.
What patterns and common characteristics did you
find? What are the lead times and early indicators?
What technologies have the most future potential im-
pact on the way people live, work, learn?
Who are the entrepreneurs who create the technology-
based firms that utilize these discoveries? What are
their background, preparation, skills, experience, and
so forth? Any common denominators?
Have any of your ideas, assumptions, and beliefs been
altered about where and when the next biggest oppor-
tunities will emerge?
STEP 4
Visit the NSF home page (www.nsf.gov) and find the list of
11 different program areas, including geosciences, envi-
ronmental research, and engineering. Select one that inter-
ests you the most and you know the least about. Go into the
Web site and identify the research grants awarded to this
topic over the past few years.
What topics and problems are attracting the most
money and activity? Why is this so?
What new scientific knowledge and/or breakthroughs
might be expected, and what are some of the potential
sea change impacts?
What potential commercial applications can be envi-
sioned from these new technologies?
What existing technologies, products, and services are
most likely to be disrupted and replaced by these inno-
vations?
What societal trends can be combined with these
future technologies to create entire new industries?
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STEP 5
In class, or in informal groups, discuss and explore the im-
plications of your findings from the exercise.
What are two or three future sea changes you anticipate?
What other exploration do you need to do?
How can you better prepare yourself to be able to rec-
ognize and seize these future opportunities now, in 10
years, and in 15 years?
What implications do you see for your personal entre-
preneurial strategy, which you began to develop in
Chapter 2—especially with regard to projects to work
on, next education and work experience, and brain
trust and mentor additions?
180 Part II The Opportunity
Exercise 2
Opportunity-Creating
Concepts and the Quest
for Breakthrough Ideas
After you have fully digested the discussions in this chapter,
you should aim to prepare an industry analysis utilizing the
criteria listed in Exhibit 5.8. This should be a first cut analy-
sis, not an overly exhaustive effort. Your value chain should
be mapped out on one to two pages maximum, with the
other questions/issues answered in bullet points on one to
two pages maximum. Rather than an exhaustive effort,
this exercise is designed to get you to a specific way of
thinking.
Your task is to complete a simple, clear, and articulate
value chain analysis of an industry that is of interest to you.
Analyze the value chain as it currently exists. Next com-
plete an information flow analysis of that value chain, over-
laying an analysis of the flow of information through the
various stages of the value chain. Then broaden your think-
ing to create a value cluster of that industry. Make sure you
are thinking multidimensionally, not just linearly. Describe
or visually depict the impact of these multiple dimensions
on the flow of both goods/services and information. Ex-
plain how this value cluster expansion adds or intensifies
value for that industry, as compared to the linear chain. Fi-
nally, provide a succinct analysis of the margins in this
value cluster, with particular emphasis on the extremes
(highs/lows).
Also consider the following:
What are the deconstructors and reconstructors that
drive the value chain and opportunity in this industry?
What is your best estimate of the composition of the
free cash flow, profit, and value chains in a business in
this industry?
What prevailing industry practices, conventions, wis-
dom in marketing, distribution, outsourcing customer
services, IT, and capital investment are significant in
this business?
What new practices, conventions, and so forth are
now in place, and what are their half-lives?
What are the growth segments?
Where do the pundits (Forrester, IDG, Research
Sources, and other Wall Street analysts) think the next
growth market will be?
What are the parameters and characteristics of that
market?
If you are planning to bring a high-tech product to mar-
ket, you might want to consider the framework discussed in
Crossing the Chasm: Marketing and Selling High-Tech
Products to Mainstream Customers by Geoffrey Moore and
Regis McKenna and look at the value chain and the spe-
cific industry segment(s) you plan to focus on. You should
also consider reviewing Clayton M. Christensen’s writings
on disruptive innovation in, among others, The Innovator’s
Dilemma.
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Chapter 5 The Opportunity: Creating, Shaping, Recognizing, Seizing 181
Exercise 3
Creative Squares
STEP 1
Divide Your Group by (a) Separating into a Number of Groups of Three or More People Each and (b)
Having at Least Five Individuals Work Alone.
STEP 2
Show the Following Figure to Everyone and Ask the Groups and the Individuals to Count the Total Num-
ber of Squares in the Figure. Assume that the figure is a square box on a single flat plane. In counting, angles of any
square must be right angles, and the sides must be of equal length.
STEP 3
Discuss the Creative Processes by Which the Groups and the Individuals Reached Their Answers.
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Exercise 4
Idea Generation Guide
Before beginning the process of generating ideas for new ventures, it is useful to reflect on an old German proverb that says,
“Every beginning is hard.” If you allow yourself to think creatively, you will be surprised at the number of interesting ideas
you can generate once you begin.
This idea generation guide is an exercise in generating ideas. The aim is for you to generate as many interesting ideas
as possible. While generating your ideas, do not evaluate them or worry about their implementation. Discussion and exer-
cises in the rest of the book will allow you to evaluate these ideas to see if they are opportunities and to consider your own
personal entrepreneurial strategy.
And remember—in any creative endeavor there are no right answers.
Name:
Date:
STEP 1
Generate a List of as Many New Venture Ideas as Possible. As a consumer or paid user, think of the biggest,
most frustrating, and painful task or situation you continually must take, and one which would be worth a lot to eliminate or
minimize. These are often the seeds of real opportunities. Thinking about any unmet or poorly filled customer needs you know
of that have resulted from regulatory changes, technological changes, knowledge and information gaps, lags, asymmetries,
inconsistencies, and so forth will help you generate such a list. Also think about various products and services (and their sub-
stitutes) and the providers of these products or services. If you know of any weaknesses or vulnerabilities, you may discover
new venture ideas.
STEP 2
Expand Your List if Possible. Think about your personal interests, your desired lifestyle, your values, what you feel you
are likely to do very well, and contributions you would like to make.
182 Part II The Opportunity
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Chapter 5 The Opportunity: Creating, Shaping, Recognizing, Seizing 183
STEP 3
Ask at Least Three People Who Know You Well to Look at Your List, and Revise Your List to Reflect Any
New Ideas Emerging from This Exchange. See the discussion about getting feedback in Chapter 2.
STEP 4
Jot Down Insights, Observations, and Conclusions That Have Emerged about Your Business Ideas or
Your Personal Preferences. Which ones solve the greatest pain point/aggravation/frustration for which you (and oth-
ers you have spoken with) would pay a significant premium to eliminate?
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184 Part I The Entrepreneurial Mind for an Entrepreneurial World
Case
Storyplanet
1
Serial entrepreneur refers to an entrepreneur who has a penchant of
starting businesses and leading them to a successful exit event
(either IPO or trade sale) and repeating the process.
Preparation Questions
1. How was the opportunity for Storyplanet identi-
fied?
2. What is the most important problem facing Story-
planet? The most urgent?
3. How successful is Storyplanet?
4. Consider the target market and market entry
strategies of Storyplanet. What are the factors
you would consider?
Introduction
This paper addresses the tasks assigned by the Storyplanet
team. It analyzes the digital storytelling industry and
shows how Storyplanet is positioned as a market leader,
recommends improvements to the product, introduces
new marketing strategies, and explains what entry strat-
egy Storyplanet should adopt to enter the Asian market.
Tasks Assigned
Product Perception
Storyplanet tasked the team with identifying areas where
the product appeals only to a Western market and to
suggest what can be adapted so that the product will ap-
peal more to an Asian audience. The team will suggest
changes as well as discuss possible cultural differences
that may affect the attractiveness of the product.
Target Audience
Storyplanet would like the team to profile its potential
users in Asia. This will enable the company to target its
initial marketing efforts at this group of people to get the
company off the ground in Asia.
The team will look at Storyplanet’s current target mar-
ket in the West and attempt to identify a similar group of
people in the Asian context who will want to and be
able to pay for the product. We will then suggest a mar-
keting plan to promote the product to this group of peo-
ple. This will ensure the product is not only well received
but the company’s cash flow is protected.
Entry Strategy into Asia
Storyplanet would like the team to suggest the geo-
graphical areas where the product should enter the
Asian market and the avenues that should be exploited.
The team will discuss the availability of target markets in
the various countries, market size, Internet penetration
rate as well as present the advantages and disadvan-
tages of entering each identified cluster/country.
Company Background
Team
Bjarke Myrthu, founder and chief executive officer of
Storyplanet, is a serial entrepreneur
1
with two successful
ventures, Magnum in Motion and NewClearMedia, in
the digital storytelling industry.
Jakob Kahlen, creative director of Storyplanet, has a
background in advertising. He is responsible for develop-
ing the designs and concepts of the products including
Storyplanet’s visual identity, user experience and workflow.
Mr. Pete Barr Watson, chief technical officer (CTO)
and previously with Microsoft Silverlight, is in charge of
technical development.
Joi Ito is the angel investor voted as one of the 25
most influential people on the Web by Businessweek in
2008. He shares the team’s belief in the idea but is wor-
ried about the execution of the project.
Vision
“We create new possibilities with visual stories by con-
necting storytellers all over the world and giving them
tools to edit, share, and collaborate.”
Storyplanet’s mission is to explore new storytelling
concepts, explore new business models, and to bring so-
cial awareness to social media.
Market
Storyplanet is engaged in the digital storytelling market,
a rather mature market with a developed ecosystem of
service providers and educated consumers. Digital
storytelling uses technology to enhance the oral tradi-
tion. A combination of photographs, video, and narra-
tion is widely used to create stories.
The medium has caught on, especially in the educa-
tion sector, where it is used to enhance engagement and
multimedia awareness.
Competitors in the market include small players, such
as Storybox and Digital Storyteller, who currently have
noninteractive products, and the giants, such as Adobe
and Apple, who have the capability to create a similar
product in a shorter time.
Revenue Model
Storyplanet currently does not charge for its services.
It is provided free for all beta users.
This case was written by Loh Wen-Li Samantha, Lum Wai Yan Vanessa,
and Emilio Jimenez of Singapore Management University, under the
supervision of Yinglan Tan. Research assistance by Mike Lee, with the
kind sponsorship of Tan Wah Yuan.
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Chapter 5 The Opportunity: Creating, Shaping, Recognizing, Seizing 185
Product
Description
Storyplanet turns photographs and videos into inter-
active stories to be published on any Web page for
free. This provides consumers with a simplified product
where they do not need to have technical knowledge
to create interactive stories.
The platform allows the mixing of an owner’s
content with the content available in shared folders.
1. First Mover in Interactive
Storytelling
Although there are many
video editors and digital
storytelling platforms already
available, there is currently
no directly competing prod-
uct. Using widgets to make
the storytelling experience a
two-way thing makes it a
brand new idea.
2. Second Wave of Funding
There is renewed belief in
the idea and with the sec-
ond wave of funding ap-
proved, the team can go
ahead to redevelop the
product.
1. Early Beta
The current version of
the platform is a very
early beta, where many
of the functions are not
fully developed. It is
cumbersome and not
user-friendly.
2. Lack of Instructions
There is a lack of
instructions on the site
which makes it difficult
to navigate. The tutori-
als are also not accom-
panied by voice or
written instructions mak-
ing them difficult to fol-
low.
1. Untapped Education
Services Industry
Storyplanet has not ex-
plored white-labeling the
platform to offer it to this
industry.
2. Social Networking
The spread of social net-
working can be used to
Storyplanet’s advantage,
especially in marketing the
product and educating
consumers on a new prod-
uct.
3. Mobile Internet
There is an increasing num-
ber of people who use the
Internet on their mobile
phones. Should Storyplanet
be able to ride this wave,
a lot of content can be cap-
tured and many stories can
be generated.
1. Consumer Preference
Fluctuations
The timing of entry into the
market needs to be apt as
should the market not be
mature enough for the
product, there might not
be significant traction in
the market for the product.
2. Constant Emergence of
New Products
Software giants such as
Apple and Adobe are
always on the lookout for
the next big thing. Should
they be interested in the
interactive storytelling mar-
ket, they would be able to
develop a similar platform
in a shorter time, with
their available resources.
It also allows users to integrate different media, in-
cluding text pages, wikis, maps, and interactive
components.
This helps storytellers to unlock the possibilities of
online media without incurring time spent on learning
technical skills.
Storyplanet hopes to use this platform to promote a
free media world where people can share stories
about their cultures and discuss current issues in a new
and innovative way.
Proposed Changes
Auto Upload Function
An auto upload function that allows the program to
search for original content such as photographs, videos,
and audio clips such as in Facebook should be imple-
mented. This will increase the ease and decrease the
time spent taken to upload content. More people will
then be willing to share content.
Record Direct
With every laptop having a built-in Webcam and every
mobile phone having a video record function, it will be
useful if consumers are able to record videos of them-
selves directly into their storyboard. This will definitely
make the process of integrating different media more
seamless.
Widgets
Widgets are what make Storyplanet interactive and
hence a differentiated product. Therefore, we recom-
mend a rebranding of this function by coming up with a
new name. This should be something that people iden-
tify only with Storyplanet, such as the “I” naming series
of Apple products.
Also, to get consumers more familiar with the idea of
using widgets, there should be a search function for the
library of widgets. Developers of widgets should also
name widgets well to describe their functionality. Wid-
gets should also be able to be previewed before down-
loading and customizable to a certain extent.
Forum Page
Storyplanet should develop a forum, wiki or community
page for users to interact and share ideas. This will also
create an avenue where users are able to help one an-
other or source out content that they need for their sto-
ries. Through the forum, Storyplanet will be able to get
direct feedback on what is good, what needs to be im-
proved, and what is on its users wish list.
Tags
By making tags a compulsory field, it will help to organ-
ize the content in the shared folders so as to make it eas-
ier for users to find the files of particular content types.
Not only so, it will increase the ranking of Storyplanet
SWOT Analysis
Strengths Weaknesses
Opportunities Threats
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186 Part II The Opportunity
on the search engine since it increases the frequency of
the key words.
Target Market
Current Target Market
Storyplanet currently targets three very broad groups of
people.
1. Citizen journalists: bloggers, photo bloggers, and
media students.
2. Freelance professionals: journalists, film-makers,
designers, and activists.
3. Organizations: universities, schools, nonprofit or-
ganizations, corporations, and the media.
The platform is currently in stealth mode and has
1,000 beta users consisting of what the company calls
prosumers. Prosumers are serious amateurs, aspiring
professional photographers, film-makers or journalists
looking for more advanced tools than the mass-market
user. However, out of the 1,000, only 2 percent are
active users who create stories. These stories are often
underdeveloped and do not showcase what Story-
planet can offer. Users also currently do not pay for the
services.
Analysis of Target Market
The team feels that for a start-up, it is good that the
company dreams big, targeting the whole of the media
sector, particularly the rapidly expanding social media
industry. However, it should develop steps to get there
and have specialized marketing plans to enter immedi-
ate markets before expanding its horizons.
However, in stealth mode, the company has only tar-
geted documentary-making prosumers, which is too
small a market and also difficult to monetize. The small
target group makes it difficult for the product to gain
market traction and to generate any buzz.
The team feels other than looking for consumers
who fit its vision and mission, Storyplanet needs to
look for a steady income stream as well. Only then can
it carry on developing its platform to become a better
product.
Recommended Target Market
Prosumers
Prosumers should still be part of the target market as
they fit the vision and mission best. They are best able to
contribute to the shared content bank. This will also be
the group that is most interested in creating human-inter-
est stories. Building a global platform to share ideas and
content from around the world will also appeal to this
market.
However, this group is highly inaccessible as there
are no channels that will enable Storyplanet to
contact many of them at the same time. The effort
required in reaching out to this market may not be jus-
tified.
Also, prosumers, as aspiring professionals, will likely
be interested to purchase professional software to hone
their craft and may not be interested in a mid-market
product. The mind-set will be to improve their skills
through the acquisition of traditional technical knowl-
edge and that they will be willing to spend the time on
their passion.
Most importantly, it is very difficult to monetize the
group, as this market typically does not have much dis-
posable income. They may be more interested in pur-
chasing professional equipment rather than spending
on new software.
Educational Services Industry
As mentioned earlier, digital storytelling is already very
much a part of the educational service sector. Many ed-
ucators are using it as a tool and there is a high demand
for workshops in the U.S.
Storyplanet should look into entering this market, as
it is another sector that fits well with its vision and mis-
sion. The education sector is always looking to em-
power people with narrative skills. It is also the best sec-
tor to promote social awareness as it is untainted by
companies pushing their own agenda.
There is also an established ecosystem where there
are service providers in the form of institutions and a
constant demand for new tools to enhance the experi-
ence. This group also needs the least introduction to the
product, as it is more about informing them about a
new feature available to improve the storytelling
process.
There are also well-established channels to reach
this sector. As a service provider they are well listed
on the Web or in the Yellow Pages. School systems
are also linked with government bodies and once
accredited, marketing material can easily go out to
the masses. Moreover, should the platform be recom-
mended, positive word of mouth would have a viral
effect.
Most importantly, this market is highly monetizable
as people are willing to pay for products that are educa-
tional. This shifts the platform’s product market from en-
tertainment and interest to education, where disposable
income is more willingly spent on. Also, white-labeling
the platform for this sector will create a viable income
stream, as institutions will have the budget to purchase
new tools.
This market requires a relatively evolved product and
at this point Storyplanet is not able to supply that yet.
There are also many alternatives, though noninteractive,
available and Storyplanet needs to convince educators
of the importance of interactive storytelling to be able to
promote its product.
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Chapter 5 The Opportunity: Creating, Shaping, Recognizing, Seizing 187
Mass Market Users
Storyplanet can also branch into the mass market, push-
ing the interactivity that its platform provides as a selling
point, to people who want to develop their personal
stories.
The market is infinite and Storyplanet only has to em-
ploy general marketing tools. The market is monetizable
but the product will be more difficult to price. Also,
brand dilution may occur which would be detrimental.
Promotion Strategies
With target markets identified, promotional strategies
can be employed to draw in potential consumers. How-
ever, only with improvements to the product can these
promotion strategies truly be effective. The team has
come up with strategies that should be employed to
achieve marked success in different timeframes.
Immediate
Marketing Material
Marketing material should be developed as soon as
Version 2 of the product is ready so that it can be easily
distributed to potential clients. This would be especially
necessary when promoting to the education sector.
Well-developed marketing material will increase credi-
bility that is required for ministry-endorsed products. We
recommend that a story highlighting all the special
features of the Storyplanet platform be produced using
Storyplanet immediately. Other marketing material
could share the story behind the company and the
digital storytelling landscape. A campaign could also
be launched about the rebranding of the widgets, mak-
ing it synonymous with Storyplanet.
Online Forum
An online forum should be available for users to ask
questions, help one another, request for required con-
tent and to share experiences. This will help to build up
an online community, expanding the storytelling tribe.
The buzz created by an engaged community should
generate more interest in digital storytelling and help
users create more developed stories.
Improving Search Engine Ranking
Storyplanet’s current search engine ranking for digital
storytelling and various other keywords is very low and
the company should look into improving its ranking to
direct more people to the site. Strategies can be found
in Exhibit 1.
(continued)
Copyright 2002 Herman Drost
Search engines are still one of the most effective ways to drive
traffic to your Web site. This is because it is highly targeted traf-
fic. A person searching for a particular phrase on a search en-
gine gets taken to your Web site.
It makes sense, then, to make your site as attractive as pos-
sible to the search engines, so your rankings will improve, giv-
ing you more visitors which leads to more sales—your ultimate
goal.
1. Keyword Density
The ratio of keywords on your visible page to nonkeywords is
called Keyword Density, i.e., if you have 100 words on your
page and three of those words are “boat” or “boats”, then you
will get a keyword density of 3 percent of your text for the word
“boat”.
Try to aim for a keyword density on your site of 3 percent to
20 percent. This will give you a good range. You can analyze
your keyword density by using these online tools:http://www.
keyworddensity.com orhttp://www.keywordcount.com.
2. Keywords in Your Domain Name
Try to incorporate one of your keywords or a keyword phrase
in your domain name, i.e.,http://www.isitebuild.com (build-
ing Web sites) orhttp://www.ihost-websites.com (hosting Web
sites). This may also help people to memorize your name when
they are looking for this service.
3. Page Title
Write a short descriptive title of five to eight words for your
Web site, containing your primary keywords or keyword
phrase.
The page title is the first thing that people see when your site
appears in the search engines. Begin your title with a capital
letter, then follow with lower-case letters. This makes it easier to
read than titles with all words capitalized. Place your most im-
portant keyword phrase toward the beginning of your title tag.
4. Description Meta Tag
Some search engines will include this below your title. Choose
20 of your most important keywords and write a 200 to 250
character sentence about your site. Don’t repeat your title de-
scription but write a different one with different keywords.
Some search engines will just take this description meta tag,
some will use both the title and description tags.
5. Keywords Meta Tag
Research 50 to 100 keywords people would insert in the
search engines to find your site. A great tool for doing this is
the keyword suggestion tool or Wordtracker. Refine this list to
your 20 best keywords or keyword phrases.
Leave out the commas between your keywords, so the
search engines can group the words into any phrases that
seem appropriate. This positions your words for minimum
space with maximum combinations.
EXHIBIT 1
Increasing Search Engine Rankings
17 Highly Effective Strategies to Increase Search Engine Rankings
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188 Part II The Opportunity
EXHIBIT 1 (concluded)
Increasing Search Engine Rankings
17 Highly Effective Strategies to Increase Search Engine Rankings
6. Header Tags
Search engines tend to place emphasis on the header tags so
make sure you have your H1 tag at the top of your Web page.
Use CSS (cascading style sheets) to avoid the problem of your
text appearing too large when just using html for this tag.
Use the other header tags (H2, H3, H4) throughout your
Web copy.
7. Comment Tags
These are mostly used by Web designers to remind them of
how to structure Web pages. Write a sentence using some of
your most important keywords, place it in a comment tag, and
insert the comment tag in your body copy.
8. Use the ALT Tag for Images
Some people surf the Web with the graphics turned off. Placing
ALT tags in the html code for your images enables them to see
the description of that image.
Incorporate keywords in the ALT tag of your images.
WARNING: Make sure the words relate to the graphic, other-
wise you could get banned for “keyword stuffing”.
9. Image File Names
Change your image file names to your keywords.
10. Page Link Names
Place a primary keyword in your page link names. Rather than
using a link in your navigation bar like “services”, add a key-
word to that page link. If you offer Web hosting services, it
could be “webhostingservices.htm”.
Also use keywords in the page links throughout your copy.
Instead of writing a paragraph about your testimonials and
linking to a page labeled “testimonials”, create a link to a page
called “marketing successes”.
11. Create a Site Map
Create a site map that contains links to all the sections of your
site. Write a description for each section. Place this site map on
your homepage as some search engines will only index the
homepage and not deeper pages in your site.
12. Quality Content
Provide Web copy of 250 to 300 words which are targeted
for your Web site visitors. Sprinkle your most important key-
words throughout your text, particularly in the first paragraph.
Be careful not to overstuff keywords in your copy so that it
sounds strange when you read it. Get some others to review
and edit your pages before you submit them for the world to
read.
13. Repair Broken Links
Most search engine directories will not list your site if it has bro-
ken links. Also visitors get frustrated when they reach a broken
link page (404 error page) and will click elsewhere. Make sure
you do a link check before your site goes livehttp://www.Any-
Browser.com.
14. Create a Contact Page
The search engine directory, Yahoo, will not index your page if
you do not have a real address (do not use a post office ad-
dress).
15. Reciprocal Links
Search engines (especially Google) place high relevancy on
links to your site in assigning a good ranking.
Create a links page that includes links to sites with similar
content. Make sure they don’t compete with your site and that
they are quality links. Preferably, find sites that already have a
high search engine ranking.
Ask sites that link to your competition to link to your site.
To find out which sites are linking to your competition, visit a
search engine and enter “link:” before your competitors URL.
For example: link:mysite.com or link:www.mysite.com.
16. Cross Linking Multiple Sites
If you have multiple sites, cross link all your sites and include a
description on your Web site for each link.
17. Keep Your File Size Small
If you use dynamic html (i.e., javascript, DHTML) it will often
push your Web copy (containing your keywords) to the bottom
of your page. Since search engines read the text that is near
the top of your page, that nice piece of javascript you have
placed before your Web copy will affect your search engine
rankings.
You can keep your file size small by storing your JavaScript
and CSS code in an external file.
Source:http://www.clickfire.com/archives/seo.php.
Short Term
Short-term promotional strategies can only be achieved
once Version 2 of the platform is developed and further
technical work will be required to tap on these strate-
gies. The short-term strategies capitalize on the interac-
tivity of the platform as a differentiating factor.
Social Networking
Storyplanet can tap onto the growth of social net-
working sites such as Facebook and Myspace by offer-
ing applications to create interactive stories on these
sites. People will then be able to share stories on these
sites with their friends. This will create greater aware-
ness for the platform and serve to educate the mass
market. One strategy to divert traffic to the Story-
planet Web site will be to allow creation of short
stories on social networking sites but leave cliff-
hangers when the interactivity begins. The interactive
journeys should then begin when on the Storyplanet
site.
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Chapter 5 The Opportunity: Creating, Shaping, Recognizing, Seizing 189
Social Media
Well-developed stories can be uploaded onto social me-
dia sites such as YouTube and Twitter. This is especially
important to promote the social awareness brand of the
company. These stories created by socially conscious
Storyplanet users would come up in keyword searches
on these social media sites. There are many people
looking to forward social agendas on these sites and
they will be the best place to seek out more prosumers.
Also, short films on social media sites have quite a fol-
lowing, well-developed videos picked by the Story-
planet team can also enjoy similar popularity. The inter-
activity of the Storyplanet platform will then be able to
gain face time and possibly create a viral effect, direct-
ing those interested to the Web site.
Long Term
Long-term strategies are based on developing relation-
ships and strategic partnerships with stakeholders that
capitalize on a company’s brand image as a socially
aware company.
For scalability, Storyplanet should have strategic
partnerships with different educational service organi-
zations. This will ensure that it receives constant updates
on what consumers would like to see in the product
and constantly have a stream of income. Storyplanet
can keep in close partnership with non-governmental
organizations (NGOs) and organizations with a social
agenda by either doing projects for them via the
Storyplanet platform or providing Storyplanet as a
platform to educate the public on social issues. This
will allow them to be close to the ground on current
buzz issues.
Storyplanet should also explore partnerships with so-
cially aware hardware producers, such as mobile
phone producers, bundling the Storyplanet platform as
a part of the suite of services available. This will allow
Storyplanet to reach its aim of having the whole media
sector as a target market. Such partnerships will be
mutually advantageous as hardware producers are
always looking for the newest most relevant gadgetry
to add to their toolkit to provide better services to their
consumers. This will also allow Storyplanet to gain
mass-market traction.
Price Strategies
In terms of pricing strategy, our team recommends that
Storyplanet offer differentiated services to match the
purchasing power (see Exhibit 2).
The following recommendations have been bench-
marked with market leader competitors in each sector.
For the education industry, the product that should
be white-labeled and promoted is the platform with in-
struction manuals and regular updates at US$20 to
US$30 per year akin to premium services that Flickr
Photobucket provide.
For prosumers, a widget store such as the itunes store
can be set up. The multiuse widgets can be priced about
US$1.99 such as the price of a song. For widgets that
are developed by users, Storyplanet can work out a
commission-based scheme that will reward its develop-
ers as well.
Entry into Asia
Various benefits and costs must be weighed when mov-
ing into the Asian market, primarily, the language bar-
rier that separates the different regions. Market size,
Internet penetration, and culture are used to analyze
and recommend potential markets (see Exhibit 3).
Japan and Korea
We recommend the Japanese and Korean markets as
the best place to enter the Asian market as South Korea
and Japan have the highest Internet penetration rates in
Asia, 77.3 percent and 74 percent respectively. South
Korea has about 37.5 million users while Japan has
94 million users. The bloc totals 131.5 million Internet
users. Both are collectivistic societies with a constant
cultural need for social interaction. The need to ex-
change information and gain consensus is very much a
part of the Asian culture. As risk-adverse and conform-
ist societies, the Internet is used in Japan and Korea as
an avenue for self-expression. This anonymity removes
the fear of assuming social responsibility of negative
expression of emotions.
Advantages
Broadband Quality and Infrastructure Readiness
Japan has the world’s highest quality broadband and is
the third largest broadband country in the world after
the United States and China. South Korea is also one of
the more wired countries in the world with developed
technology infrastructures. In Korea, the reason for the
high penetration rate is the strong support of the govern-
ment body in fostering competition and encouraging in-
novation. Storyplanet has already secured hosting in
Japan, which makes technical sense for the company.
Also, with Storyplanet’s platform being one with large
content, the speed at which it can be accessed is of ut-
most importance.
Creative and Innovative Culture
The strong creative and innovative culture found in
Japan and Korea is partially why they are constantly at
the forefront of technology and able to reap first mover
advantages. Their openness to new concepts and ideas
will make Storyplanet’s entrance into these countries
much smoother as they are more receptive. Being tech-
nologically advanced, the majority of the population
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190 Part II The Opportunity
EXHIBIT 2
Pricing Strategy: Comparisons of Software
Photobucket Digital Story
Vimeo Plus Flickr Pro Pro Memoryminer Teller
Image Sharing, Starter Kit for
Photo Photo Sharing, Editing, Digital
Type of Software Video Uploading Video Sharing Collating Storytelling
Price $59.95/year $24.95/year or $24.95/year $45 $39.95
$47.95/2 years
Original Storage 500 MB/week — —
New Storage 5 GB/Week unlimited storage 25 GB of storage
Quality of images/Videos high video — high resolution
quality images
Adverts no banner ads ad-free browsing no ads in album
sharing
Upload Speed priority — —
uploading
Upload Volume unlimited HD unlimited uploads —
uploading
Quality of Files HD embedding HD playback for SWF/Flash file
high-definition support
video uploads
Customize Profile full customization — custom URLs for all
sub-albums
Number of Collections unlimited groups/ unlimited sets —
channels/albums and collections
Privacy domain privacy — —
Original Files source file access to original permanently
downloads files active links
Statistics — statistics on more statistics
account
— — 4000 ? 3000
Image Size from 1024 ? 768
Pricing Strategy: Comparisons of Add-ons
1) MapleStory
Mode (i) Credit Card through Paypal
(ii) Prepaid Cards
Credit Card S$10.50/US$6.30 per 10,000 A-Cash
* Software is able to detect the country the user is from and convert the prices of the
A-Cash accordingly.
A-CASH Prepaid Cards A-Cash Value – 5,000 SGD$5.35 RM12.00
A-Cash Value – 10,000 SGD$10.70 RM24.00
A-Cash Value – 20,000 SGD$21.40 RM48.00
A-Cash Value – 30,000 SGD$32.10 RM72.00
2) Second Life
L$570 for US$2.50
3) Second Life
US$1.99 for a song
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Chapter 5 The Opportunity: Creating, Shaping, Recognizing, Seizing 191
EXHIBIT 3
Asia Internet Usage and Penetration Rates
Internet Internet
Population Users Users Penetration User Growth Users (%)
Countries (2009 Est.) (Year 2000) (Latest Data) (% Population) (2000–2009) in Asia
Afghanistan 28,395,716 1,000 500,000 1.80% 49,900.00% 0.10%
Armenia 2,967,004 30,000 172,800 5.80% 476.00% 0.00%
Azerbaijan 8,238,672 12,000 1,500,000 18.20% 12,400.00% 0.20%
Bangladesh 156,050,883 100,000 500,000 0.30% 400.00% 0.10%
Bhutan 691,141 500 40,000 5.80% 7,900.00% 0.00%
Brunei Darussalam 388,190 30,000 187,900 48.40% 526.30% 0.00%
Cambodia 14,494,293 6,000 70,000 0.50% 1,066.70% 0.00%
China * 1,338,612,968 22,500,000 338,000,000 25.30% 1,402.20% 48.20%
Georgia 4,615,807 20,000 360,000 7.80% 1,700.00% 0.10%
Hong Kong * 7,055,071 2,283,000 4,878,713 69.20% 113.70% 0.70%
India 1,156,897,766 5,000,000 81,000,000 7.00% 1,520.00% 11.60%
Indonesia 240,271,522 2,000,000 25,000,000 10.40% 1,150.00% 3.60%
Japan 127,078,679 47,080,000 94,000,000 74.00% 99.70% 13.40%
Kazakhstan 15,399,437 70,000 1,900,600 12.30% 2,615.10% 0.30%
Korea, North 22,665,345 — — — — 0.00%
Korea, South 48,508,972 19,040,000 37,475,800 77.30% 96.80% 5.30%
Kyrgyzstan 5,431,747 51,600 750,000 13.80% 1,353.50% 0.10%
Laos 6,834,345 6,000 100,000 1.50% 1,566.70% 0.00%
Macau * 559,846 60,000 238,000 42.50% 296.70% 0.00%
Malaysia 25,715,819 3,700,000 16,902,600 65.70% 356.80% 2.40%
Maldives 396,334 6,000 71,700 18.10% 1,095.00% 0.00%
Mongolia 3,041,142 30,000 320,000 10.50% 966.70% 0.00%
Myanmar 48,137,741 1,000 40,000 0.10% 3,900.00% 0.00%
Nepal 28,563,377 50,000 397,500 1.40% 695.00% 0.10%
Pakistan 174,578,558 133,900 18,500,000 10.60% 1,3716.30% 2.60%
Philippines 97,976,603 2,000,000 24,000,000 21.10% 932.50% 2.90%
Singapore 4,657,542 1,200,000 3,104,900 66.70% 158.70% 0.40%
Sri Lanka 21,324,791 121,500 1,148,300 5.40% 845.10% 0.20%
Taiwan 22,974,347 6,260,000 15,143,000 65.90% 141.90% 2.20%
Tajikistan 7,349,145 2,000 484,200 6.60% 24,110.00% 0.10%
Thailand 65,998,436 2,300,000 13,416,000 20.30% 483.30% 1.90%
Timor-Leste 1,131,612 — 1,500 0.10% 0.00% 0.00%
Turkmenistan 4,884,887 2,000 70,000 1.40% 3,400.00% 0.00%
Uzbekistan 27,606,007 7,500 2,416,000 8.80% 32,113.30% 0.30%
Vietnam 88,576,758 200,000 21,524,417 24.30% 10,662.20% 3.10%
TOTAL ASIA 3,808,070,503 114,304,000 704,213,930 18.50% 516.10% 100.00%
Notes: (1) The Asian Internet Statistics were updated on 30 June 2009. (2) CLICK on each country name to see detailed data for individual
countries and regions. (3) The demographic (population) numbers are based on data contained in Census Bureau. (4) The usage num-
bers come from various sources, mainly from data published by Nielsen Online, ITU, and other trustworthy sources. (5) Data may be
cited, giving due credit and establishing an active link to Internet World Stats. (6) For definitions and help, see the site surfing guide .
(*) For statistical purposes, China figures do not include SAR Hong Kong and SAR Macau which are reported separately. © Copyright
2009, www.miniwatts.com, Miniwatts Marketing Group. All rights reserved.
Source:http://www.internetworldstats.com/stats3.htm.
Internet Internet
Population Users Users Penetration Penetration Users (%)
Countries (2009 Est.) Rank (Latest Data) Rank (% Population) in Asia
Korea, South 48,508,972 4 37,475,800 1 77.30% 5.30%
Japan 127,078,679 2 94,000,000 2 74.00% 13.40%
Internet Internet
Population Users Users Penetration Penetration Users (%)
Countries (2009 Est.) Rank (Latest Data) Rank (% Population) in Asia
China * 1,338,612,968 1 338,000,000 9 25.30% 48.20%
Hong Kong * 7,055,071 12 4,878,713 3 69.20% 0.70%
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192 Part II The Opportunity
owns cameras and mobile phones. With increased af-
fluence, the Japanese and Koreans are also fairly well
traveled and will have the content to contribute to the
platform.
Angel Investor from Japan
With Joi Ito being the angel investor, it also means that
Storyplanet has substantial access to the Japanese mar-
ket. With a very inward-looking community, having a
door open to the New York-based company through a
well-respected personality will be beneficial.
Disadvantages
Relative Asian Market Size
The Korean and Japanese markets constitute only 5.3
percent and 13.4 percent of the Asian market respec-
tively, hence, there is a need to do a cost-benefit analy-
sis to weigh the amount of revenue or the audience
reach the translated sites can attain against the cost of
producing a translated version of the sites.
Copycat Products
There is always the risk that the idea of interactive story-
telling might be poached and developed within the
Japanese and South Korean markets. The creative and
innovative culture of the people would also mean that
they are always looking into ways to improve products.
Hence, there is a need to take appropriate measures to
protect the intellectual property or look into ways that
will enable Storyplanet to stay competitive.
China and Hong Kong
China has 338 million Internet users, making it the
Asian country with the most Internet users, but it has an
Internet penetration rate of only 25.3 percent. Hong
Kong has the third highest penetration rate in Asia of
69.2 percent but only 4.8 million users. The team has
grouped these two regions together due to the similar-
ities in government regulations under the People’s
Republic of China. One might think that due to the
sheer size of the market, this would be the best market
to enter. Research, though, shows that sheer market
size is not enough to counter the disadvantages of
the market.
Advantages
Large Population Size
China has the largest population in the whole world
and the figure is growing at 0.655 percent annually.
Despite ranking only ninth out of 34 countries in terms
of Internet penetration rates, China’s netizens make
up 48.2 percent of the total number of Internet users
in Asia. Since 2000, the number of China’s netizens
has increased by 1,402.20 percent to the current
338,000,000, which surpasses the population size of
the United States of 307,212,123. This is the largest
market in terms of potential users that Storyplanet can
tap into.
Disdvantages
Censorship
Entrance into the China and Hong Kong market is re-
stricted due to the strict censorship by the Chinese gov-
ernment. In a bid to enter and satisfy this fast-growing
market, companies like Google and Yahoo have had to
meet these content censorship demands. This will be the
largest obstacle should Storyplanet enter the Chinese
market, as the censorship body will be constantly regu-
lating the content on the site and limiting any flow of in-
formation that they deem inappropriate. This defeats
the main purpose of Storyplanet as the platform for con-
necting storytellers worldwide with the freedom to col-
laborate, share materials, and edit content with any
other user. The aim of Storyplanet is to give a voice
to people, create communities, and raise awareness
of issues the users feel are valuable to the rest of the
community.
Strong Presence of Local Social Media
China’s censorship body has also taken steps to block
the use of Twitter and Facebook entirely. Despite the
controversial debate on censorship, the proliferation of
social media is not constrained, due to the widespread
usage of local Chinese social networking sites. Up to
92 percent of Chinese netizens use social media, as
shown in a Netpop research study. Some of these sites
include Renren, Tianji, and 51.com. Special mention is
made of Renren, previously known as Xiaonei, which
has features and applications similar to that of Face-
book, hence earning it the reputation of a “Chinese
Facebook”. Currently, 32,000 universities and col-
leges, 56,000 high schools and 85,000 companies in
China and 1,500 universities in 29 other countries are
actively available on the site. Renren is also the main
photo-sharing tool used by China netizens. Popular sites
such as Facebook and Flickr are not common in China
as they are frequently banned.
If Storyplanet is able to latch onto the Chinese
social media bandwagon, it will achieve an extensive
audience reach. However, Storyplanet, being a foreign
company, may face challenges when infiltrating the Chi-
nese local social media as the Chinese are known to be
very supportive of their local companies and products.
Conclusion
We believe that Storyplanet having found its blue
ocean with a platform that is really innovative is ready
to position itself as a market leader in the industry.
The platform will definitely have to be evolved in
Version 2 before it is ready for the market. Meanwhile
the team should develop Storyplanet’s brand equity in
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Chapter 5 The Opportunity: Creating, Shaping, Recognizing, Seizing 193
the industry and make headway into the markets that
it would like to enter. This would lay the groundwork
for steady income streams to continue developing the
product.
The team has done the groundwork to identify Asian
markets that will be most receptive to the platform and
has given Storyplanet insights into the Asian culture.
The team has benefited from a steep learning curve
and is inspired by the passion of the founders of Story-
planet. This project has definitely stretched the team in
mining research data, discussing innovative marketing
strategies, and thinking out of the box.
We wish Storyplanet all the best and hope to be able
to make interactive online stories soon.
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