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Assessing Your Company's Potential
"Know yourself and know the enemy . . . and you will know the outcome of the battle before it starts."
- Tsun Zsu
The iterative process of assessing and reassessing the fit among the central driving forces in the creation of a new venture are vital to the growth of a business. Of utmost importance when talking about the growth potential of a small business is the fit of the lead entrepreneur and the management team with an opportunity. Good opportunities are both desirable to and attainable by those on the team using available resources.
In order to understand how the entrepreneurial vision relates 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 represented. Each opportunity has three or four critical factors (e.g., proprietary license, patented innovation, sole distribution rights, an all-star management team, breakthrough technology). These elements pop out at the observer; they indicate huge possibilities where others might see obstacles. Thus, it is easy to see why thousands of exceptional opportunities will fit with a wide variety of entrepreneurs but not fall neatly into the framework outlined in Exhibit 2.1.
Exhibit 2.1 |
Criteria for Evaluating Venture Opportunities |
|
Attractiveness |
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Criteria |
Highest Potential |
Lowest Potential |
Industry and Market
Market:
Customers User benefits Value added Product life
Market structure
Market size
Growth rate
Market capacity
Market share attainable (Year 5)
Cost Structure
Changes way people live and work
Market driven; identified; recurring
revenue niche
Reachable; purchase orders
Less than one-year payback
High; advance payments
Durable
Imperfect, fragmented competition or emerging industry
$100+ million to $1 billion sales potential
Growth at 30-50% or more
At or near full capacity
20% or more; leader
Low-cost provider; cost advantages
Incremental improvement only Unfocused; one-time revenue
Loyal to others or unreachable Three years plus payback Low; minimal impact on market Perishable
Highly concentrated or mature or declining industry
Unknown, less than $20 million or multibillion sales
Contracting or less than 10%
Under capacity
Less than 5%
Declining cost
Favorable; sustainable; 20-30% or more of sales Less than 10% of sales Moderate to high +15% to +20% Less than 10% Low/sales $ High Low, incremental requirements High requirements Low requirements High requirements Exceeding 40% and durable Under 20% High; greater than 10%; durable Low Less than two years; breakeven not creeping Greater than four years; breakeven creeping up |
Economics
Time to breakeven/positive cash flow
ROI potential
Capital requirement
Internal rate of return potential
Free cash flow characteristics: Sales growth Asset intensity Spontaneous working capital R&D/capital expenditures Gross margins After-tax profits
Time to break-even profit and loss
Harvest Issues
Value-added potential
Valuation multiples and comparables
Less than \'A-2 years 25% or more per year Low to moderate; fundable 25% or more per year
High strategic value
Price/earnings = 20 + x$; 8-10
EBIT 1.5-2 + Xj, revenue: free cash flow 8-10 + x<
More than 4 years Less than 15-20% Very high; unfundable Less than 15% per year
Low strategic value
Price/earnings <5x, EBIT <3~4x;
revenue ^.4
(continued)
Exhibit 2.1 Criteria for Evaluating Venture Opportunities (continued)
Criteria
Highest Potential
Lowest Potential
Exit mechanism and strategy Capital market content
Competitive Advantage Issues
Fixed and variable costs
Control over costs, prices, and distribution
Barriers to entry
Proprietary protection Response/lead time Legal, contractual advantage Contracts and networks Key people
Management Team
Entrepreneurial team
Industry and technical experience
Integrity
Intellectual honesty
Present or envisioned options
Favorable valuations, timing, capital available; realizable liquidity
Lowest; high operating leverage Moderate to strong
Have or can gain Competition slow or napping Proprietary or exclusivity Wei I-developed; accessible Top talent; an A team
All-star combination; free agents Top of the field; super track record Highest standards Know what they do not know
Undefined; illiquid investment Unfavorable; credit crunch
Highest Weak
None
Unable to gain edge
None
Crude; limited
B or C team
Weak or solo entrepreneur
Underdeveloped
Questionable
Do not want to know what they do not know
Fatal-Flaw Issue
Nonexistent
One or more
Personal Criteria
Goals and fit
Upside/downside issues Opportunity costs Desirability Risk/reward tolerance Stress tolerance
Strategic Differentiation
Degree of fit
Team
Service management
Timing
Technology
Flexibility
Opportunity orientation
Pricing
Distribution channels
Room for error
Getting what you want, but wanting what you get
Attainable success/limited risks
Acceptable cuts in salary, etc.
Fits with lifestyle
Calculated risk; low risk/reward ratio
Thrives under pressure
High
Best in class; excellent free agents
Superior service concept
Rowing with the tide
Groundbreaking; one of a kind
Able to adapt; commit and decommit quickly
Always searching for opportunities
At or near leader
Accessible; networks in place
Forgiving strategy
Surprises, as in The Crying Game
Linear; on same continuum Comfortable with status quo Simply pursuing big money Risk averse or gambler Cracks under pressure
Low
B team; no free agents
Perceived as unimportant
Rowing against the tide
Many substitutes or competitors
Slow; stubborn
Operating in a vacuum; napping
Undercut competitor; low prices
Unknown; inaccessible
Unforgiving, rigid strategy
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