Solution Manual for Preparing Effective Business Plans;An Entrepreneurial Approach 2GE by Barringer

SOLUTION MANUAL

SOLUTION MANUAL

Prof.Exams

SOLUTION MANUAL

2023

Prof.Exams

COMPLETE Elaborated Solution Manual for Preparing Effective Business Plans: An Entrepreneurial Approach 2nd Edition Bruce Barringer

2023

Prof.Exams

Preparing Effective Business Plans: An Entrepreneurial Approach 2nd Edition by Bruce Barringer

ISBN-10 0133506976 ISBN-13 978-0137612376

Solution Manual for Preparing Effective Business Plans: An Entrepreneurial Approach 2nd Edition

by Bruce Barringer

ISBN-10 0133506976 ISBN-13 978-0137612376

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TABLE OF CONTENTS

PART I. STARTING THE PROCESS Chapter 1. Why Plan?

PART II. WHAT TO DO BEFORE THE BUSINESS PLAN IS WRITTEN Chapter 2. Developing and Screening Business Ideas Chapter 3. Feasibility Analysis

PART III. PREPARING A BUSINESS PLAN Chapter 4. Introductory Material, Executive Summary, and Description of the Business Chapter 5. Industry Analysis Chapter 6. Market Analysis Chapter 7. Marketing Plan Chapter 8. Management Team and Company Structure Chapter 9. Operations Plan and Product (or Service) Design and Development Plan Chapter 10. Financial Projections

PART IV. PRESENTING THE BUSINESS PLAN Chapter 11. Presenting the Plan with Confidence

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SM-Preparing Effective Business Plans(2E, Barringer)

1

Part I: Starting the Process Chapter 1 Why Plan?

Key Words Business plan—a written document that carefully explains every aspect of a new business venture Due Diligence—the process investors go through after they tentatively commit to an investment Lean Startup Movement—associated with the school of thought that advocates experimentation and trial-and-error learning gleaned through customer feedback over formal planning Elevator speech—a brief, carefully constructed statement, usually 1—2 minutes long that outlines the merits of a business venture Stealth mode—companies that formulate their business plans in secret, to avoid tipping off potential competitors as to what they’re planning Feasibility Analysis—the process of determining if a business idea is viable; normally conducted prior to writing the business plan Corridor principle—an academic principle which states that once an entrepreneur starts a business, he or she begins a journey down a path where “corridors” leading to new venture opportunities become apparent

Chapter Overview This chapter introduces the idea of the business plan, including the rationale for writing one, the multiple purposes that a business plan can serve both inside and outside the firm, and the key audiences for a business plan. Students will also learn about major imperatives in creating a business plan, as well as some potential pitfalls in writing the business plan.

The organization of the text is also laid out by topic and associated chapter(s). The outline of the text walks the reader through the process from understanding and conceptualizing the plan, to preparing to write the plan, to creating the plan, and finally, to presenting the plan to potential investors and others.

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Chapter Summary 1.

2.

3.

4.

5.

6.

7.

8.

9

10.

11.

A business plan is a written document that carefully explains every aspect of a new business venture.

The most effective business plans are part of a comprehensive process that includes (1) identifying a business idea, (2) screening the idea (or ideas) to determine their preliminary feasibility, (3) conducting a full feasibility analysis, and (4) writing the plan.

There are two primary reasons for writing a business plan: (1) it forces the founding team to work together to hammer out the details of the business venture, (2) it communicates the merits of a new venture to outsiders, such as investors or bankers.

The process of writing a business plan forces a team to not only work together, but to turn abstract ideas into concrete realities.

The two primary audiences for a firm’s business plan are the firm’s employees and investors and other external stakeholders.

It is important to remember that a firm’s business plan, executive summary or a set of PowerPoint slides is typically the first aspect of a proposed venture that will be seen by an investor (or anyone else who reads the plan), and if the plan is incomplete or looks sloppy, it is easy for an investor to infer that the venture itself is incomplete or sloppy.

To make the best impression, a business plan should follow a conventional structure. Typically, the individuals who read business plans are busy people who want a plan that allows them to easily find critical information.

It is a good idea to develop a 1—2 minute elevator speech which briefly outlines the merits of the venture.

As a business plan is written, the people involved should continually measure the type of company that they are hoping to start against their personal goals and aspirations.

There are four types of businesses: survival, lifestyle, managed growth, and aggressive growth. This book focuses on lifestyle, managed growth, and aggressive growth firms.

While the preparation of a business plan is essential, it is often an insufficient exercise through which to complete a full and candid analysis of the merits of a new business venture. Steps that logically precede the completion of a business plan, which include the preliminary screening of business ideas and feasibility analysis, are also important.

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Chapter Outline I. II.

III.

IV.

Introduction Reasons for Writing a Business Plan a. Internal Reason b. External Reason Who Reads the Business Plan—And What Are They Looking For? a.

A Firm’s Employees b.

Investors and Other External Stakeholders Guidelines for Writing a Business Plan a.

Structure and Style of the Business Plan i.

Outside resources ii.

Appearance iii.

Develop an Elevator Speech 1.

Four Steps in an Elevator Speech iv.

Red Flags in a Business Plan b.

Content of the Business Plan c.

Measuring the Business Plan Against Your Personal Goals and Aspirations i.

Investor expectations ii.

Attractiveness of revised business plan d.

Recognizing That Elements of the Plan May Change

V.

Types of Business

VI.

The Plan for the Book a.

Section 1: Starting the Process b.

Section 2: What to Do Before the Business Plan Is Written c.

Section 3: Preparing a Business Plan d.

Section 4: Presenting the Business Plan to Investors and Others

Chapter Notes I.

Introduction • Research reveals an increased interest in the study of entrepreneurship o More than 2,000 colleges and universities, about two-thirds of the total, offer entrepreneurship coursework o 54 percent of millennials (ages 18-34) either want to start a business or have already started one o 63 percent of African Americans and 64 percent of Latinos expressed a desire to start their own company • The business plan is a written document that carefully explains every aspect of a new business venture

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Inside the firm, the business plan is used to develop a “road map” Outside the firm, it introduces potential investors and other stakeholders to the business opportunities Although a relatively small percentage of entrepreneurs write business plans, there is ample evidence that writing a business plan is an extremely good investment of time and money. o o

•

II.

Reasons for Writing a Business Plan • There are two primary reasons for writing a business plan o Internal reason—forces the founders of a firm to systematically think through each aspect of their new venture o External reason—communicates the merits of a new venture to outsiders, such as investors and bankers ▪ Investors rely heavily on the business plan to make their decisions regarding initial investment ▪ The business plan helps a new company build credibility by providing detailed information and demonstrating that the entrepreneur has thought through each element of the business ▪ Placing highly or winning a university-, community-, or statesponsored business plan competition also helps to establish credibility for a firm • There is an emerging school of thought, associated with the Lean Startup movement, that opposes the idea of writing a business plan and advocates experimentation and trial-and-error learning through customer feedback over formal planning

III.

Who Reads the Business Plan—And What Are They Looking For? • There are two primary audiences for a firm’s business plan a.

A firm’s employees—because the business plan articulates the vision and future of the firm, both the management team and the rank-and-file employees can benefit from reading the business plan in order to operate in sync and with purpose b.

Investors and other external stakeholders—investors, potential business partners, potential customers, private and government-funded grantawarding agencies, and key employees who are being recruited are all part of the second audience for a business plan ▪ To appeal to this group, the business plan must be clear, concise, and not overly optimistic or naive Guidelines for Writing a Business Plan • It is important to remember that a firm’s business plan, executive summary, or a set of PowerPoint slides is typically the first aspect of a proposed venture that will be seen by an investor or whomever the plan is presented to • A good business plan will be sensitive to the structure, style, and content of a plan before exposing it to a firm’s employees or sending it to an outsider

IV.

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• a.

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Individuals writing the plan should also measure the type of company that they are envisioning against their personal goals, aspirations, and preferred lifestyle Structure and Style of the Business Plan • The business plan should follow a conventional structure • Most experts recommend a length of between 25 and 35 pages • Effective business plans should be sharp, but not look expensive to produce or overly flashy • Business plan software can help provide structure, but all of the content should come from the entrepreneur • Outside assistance in putting the plan together is fine, but the enthusiasm of the founder should remain i.

Develop an Elevator Speech • An elevator speech is a brief, carefully constructed statement, usually 45 seconds to two minutes long that outlines the merits of a business venture (business plan insight feature) 1.

ii.

b.

Steps in an Elevator Speech (from business plan insight feature) • Describe the opportunity—45 seconds • Describe how your product or service meets the opportunity—45 seconds • Describe your qualifications—15 seconds • Describe your market—15 seconds

Red Flags in a Business Plan (Table 1-2) • Founders with none of their own money at risk • A poorly cited plan • Defining the market size too broadly • Overly aggressive financials • Hiding or avoiding weakness • Sloppiness in any area • Too long of a plan

Content of the Business Plan • Most plans are divided into sections that represent the major aspects of a new venture’s business (Table 1-1) • The plan should convince the reader that the opportunity is exciting, feasible, defensible, and within the capabilities of the people who will be launching the firm • Details of each section of the plan will be described later in this book in Section 3: Preparing an Effective Business Plan

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c.

Measuring the Business Plan Against Your Personal Goals and Aspirations • Accepting venture capital will almost assuredly force a firm into a fastgrowth model from the start o Most venture capitalists shoot for a 30 to 40 percent annual return and a total return of five to 20 times their original investment over the life of the investment • Using venture capital also involves surrendering equity in the firm to outsiders in exchange for their investment and accepting heavy scrutiny at all levels • If an entrepreneur places a high value on leisure time or family time or doesn’t want the pressure associated with a group of investors, he or she would be better suited to launch a firm in a target (or niche) market and solicit funds from friends and family or a lender • During the course of writing the plan, the entrepreneur may find that there are aspects to the business that are not as attractive as originally anticipated

d.

Recognizing That Elements of the Plan May Change • Revisions may be made based on early feedback • The corridor principle is an academic principle which states that once an entrepreneur starts a business, he or she begins an journey down a path where “corridors” leading to new venture opportunities become apparent • The corridor principle also applies during the preparing of a business plan; new insights will invariably emerge that weren’t initially apparent • The business plan is a living, breathing document, rather than something set in stone • Guy Kawasaki suggests that authors of business plans should “write deliberate, (but) act emergent” o Create a “deliberate” plan that is a specific blueprint to follow o Think “emergent” with a mindset that is open to change and influenced by the realities of the marketplace

Types of Businesses • There are four distinct types of businesses (Table 1-3) o Survival—provides its owner just enough money to put food on the table and pay bills (handyman, part-time childcare) o Lifestyle—provides its owner the opportunity to pursue a certain lifestyle and make a living at it (clothing boutique, personal trainer) o Managed growth—employs 10 or more people, may have several outlets, and may be introducing new products or services to the market (regional restaurant chain, multi-unit franchise) o Aggressive growth—bringing new products and services to the market and has aggressive growth plans (computer software, medical equipment, national restaurant chain)

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•

VI.

This book focuses primarily on lifestyle, managed growth, and aggressive growth firms

The Plan for the Book a.

Section 1: Starting the Process (Chapter 1) o A business plan is also an essential document for a firm to have at its disposal, particularly if it plans to reach out to others to try to gain access to resources b.

Section 2: What to Do Before the Business Plan Is Written (Chapters 2-3) o Writing a business plan is part of a comprehensive process that includes the four steps of the comprehensive feasibility analysis/business planning process o There are many steps that logically precede the completion of a business plan, including the preliminary screening of business ideas and feasibility analysis

c.

Section 3: Preparing a Business Plan (Chapters 4-10) o This section provides an explanation of how to complete each section of a business plan

d.

Section 4: Presenting the Business Plan (Chapter 11) o Concrete suggestions for how to make effective presentations using PowerPoint slides, and how to field questions from an audience effectively, will be provided

Review Questions 1.

What is a business plan? What are the advantages to preparing a business plan for a new venture?

Answer: A business plan is a written document that carefully explains every aspect of a new business venture. The advantages to preparing a business plan are that inside the firm, it acts as a “road map” for the execution of strategies and plans. Outside the firm, it introduces the business opportunity to potential investors and other stakeholders. Many investors won’t even consider a firm that does not have a business plan. Finally, the process of writing the plan forces the entrepreneur to examine the merits of the business idea and test its feasibility.

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What are the two most common reasons that entrepreneurs write business plans?

Answer: The most common reasons for writing a business plan are that it forces the founding team to work together to hammer out the details of the business venture, and it communicates the merits o f a new venture to outsiders such as investors or bankers.

3.

Who are the primary consumers of business plans? In what ways do the people who read business plans differ in the information they are looking for?

Answer: The primary consumers of a business plan are the firm’s employees, investors, and other external stakeholders. A firm’s employees may use the business plan as a guideline to ensure that all their activities are in sync with the vision and plan of the founders. Investors and other external stakeholders are looking for demonstration that the business idea is viable and can offer an attractive financial return when compared with lower risk investment alternatives.

4.

It is often argued that the process of writing a business plan is as important as the plan itself. How is this so?

Answer: The process of working together on a business plan requires the founders to systematically think through each aspect of their new venture and forces team members to turn abstract ideas into more concrete realities.

5.

Why is it important for the founders of a firm to continually measure whether the type of company they are envisioning, as described by their business plan, is consistent with their personal goals and aspirations?

Answer: It is important that the founders use the business plan writing process to visualize what the firm will look like in terms of the demands on their time, the pressures of accepting venture capital, and the need to accept investor scrutiny over operational decisions for the firm. If an entrepreneur wants to ensure a significant amount of leisure or family time, this should be taken into consideration before moving forward with an aggressive growth business.

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What are the hazards involved with using a software package to help write a business plan or hiring consultants to write the business plan for you?

Answer: Software packages and outside consultants are useful in providing a conventional format for the business plan, but over-reliance on these sources can produce a business plan that looks “canned” or fails to convey the enthusiasm and excitement of the entrepreneur’s vision.

7.

Describe the general rules of thumb for the length and appearance of a business plan.

Answer: Most experts agree that the plan should be between 25 and 35 pages in length. It should be clear, concise, and follow a conventional format. It should look sharp, without looking like the entrepreneur spent too much to produce it.

The plan’s author should also avoid overuse of clip art and other design elements, but a well-designed logo can add to the professionalism of the plan.

8.

Why is it important for a firm to test the feasibility of its business idea prior to writing a business plan?

Answer: There are steps that naturally precede the completion of a business plan. The results of a full feasibility analysis will help the entrepreneur to decide whether it is worthwhile to go forward with the business plan.

9.

Why is it important for a firm to test the feasibility of its business idea prior to writing a business plan?

Answer: Many new businesses fail, not because the founders didn’t work hard or weren’t committed to the venture, but because the idea wasn’t a good one to begin with. Conducting a feasibility analysis helps assess the merits of a business idea prior to dedicating the time and effort to write a business plan.

10.

What is an elevator speech? How can developing an elevator speech help a firm write a more effective business plan?

Answer: An elevator speech is a 45-second to two-minute statement outlining the merits of a business venture. Creating an elevator speech can help the founders to develop a sharp and concise description of their business.

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Application Questions 1.

Justin Wells is one of three founders of an organic snacks company. The founders have decided to write a business plan to try to obtain funding. In a meeting with his cofounders, Justin said, “I know that we’re all very busy, so I’d like to volunteer to write the business plan. My parents have a cabin on a lake about an hour from here, so if it’s alright with the two of you, I’d like to take my laptop up to the cabin for a couple of days and hammer out the business plan.

Any objections?” If you were one of Justin’s cofounders, what would you say?

What alternative approach, if any, would you suggest to writing the plan?

Answer: As one of Justin’s cofounders, I should consider the fact that the process of writing the plan should be a collaborative effort. Writing the plan together can help the team develop a stronger bond and identify potential problems within the team. We should suggest that, following the feasibility analysis, the three founders have a retreat at Justin’s parents’ cabin and begin work on the business plan writing process together.

2.

Melanie Scott is a high school math teacher who is in the process of developing an iPhone app centered on engaging games that require high school students to use math to master the games. Melanie is planning to attend a new business conference in about six weeks that will feature a number of investors. She hopes to make some contacts and schedule follow-up meetings with several investors.

Up until now, Melanie has focused primarily on the technical aspects of building the app, and hasn’t written a business plan or talked to any potential customers.

She’s willing to do whatever it takes to get prepared for the conference. What would you tell Melanie to focus on over the next six weeks to get ready for the conference?

Answer: Since Melanie will be at a conference with other new business founders, she needs to prepare a business plan to use as a selling tool. An investor choosing between two or more business ventures may eliminate one that does not have a professional business plan for them to review. Melanie should also get feedback from potential users and work on an elevator speech to use when speaking with investors at the conference.

3. A year ago, a friend of yours opened in innovative type of fitness center that helps high school athletes improve their fitness and sharpen their skills to the point where they’ll be more likely candidates for college scholarships. He recently wrote a business plan seeking $100,000 in funding to expand from one

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location to three locations. He sent the business plan out to three industry experts for feedback, and was struck by the advice re received. All three experts loved his concept and encouraged him that instead of asking for $100,000 to expand to three locations, he should ask for $1 million to expand to 30 or more locations.

What factors should your friend consider before he pursues this advice?

Answer: He should measure the suggested business plan and expert advice against his personal goals and aspirations. Investors will expect a 30-40 percent annual return over the period of their investment. They will also open the firm to increased input and scrutiny since the investors will now own a stake in the business. Further, the type of aggressive growth advised by the industry experts will drastically chance the amount of time and attention required by the founder.

He should be sure that he is willing to spend that amount of time away from personal and family concerns.

4.

Imagine you just received a text message from a friend. The message reads, “Just wanted to share with you some fantastic news. Last Friday, I talked to an investor about my business idea, and he asked me to send him the executive summary from my business plan along with a PowerPoint overview of the plan. I spent the weekend working on his requires, and am about to send him an 8-page executive summary and a 42-slide PowerPoint overview. Just thought I would check with you to see if you have any last minute words of advice. I really want to get funding.” How would you respond to this request for feedback?

Answer: To make the best impression, a business plan should follow a conventional structure. This includes the executive summary and slide deck. The executive summary should only be 1-2 pages long and the PowerPoint overview should be about 12 slides long. The executive summary and slide deck that this founder plans does not recognize the fact that the investor is a busy person who wants a document that provides a very quick snapshot of the key information regarding the business. If the investor is interested, he or she will ask for a 25-35 page plan.

5. Spend some time studying the website of Heart Juice (www.heartjuice.com), a healthy beverage company referred to in the chapter.

Search for additional information on the company. Write a two minute elevator speech rather than a 60-second elevator speech.

Answer: Student responses will vary, but should cover the four steps of an elevator speech:

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Step 1: Describe the opportunity or problem that needs to be solved.

Answers will vary, but may include information such as documentation of the increased interest in products that support a healthier lifestyle and the high incidence of cardiac events in the target population.

Step 2: Describe how your product or service meets the opportunity or solves the problem.

Answers will vary but might explain how Heart Juice provides a healthier option than more commonly consumed beverages that have fewer health benefits. They may also explain the health effects of the hawthorne berry, a key ingredient of Heart Juice.

Step 3: Describe your qualifications.

Answers will vary but might include the personal story of how the founders were inspired following the heart attack of a professor of one founders, a heart attack by the father of another founder, and the high cholesterol diagnosis of a parent of the third founder.

Step 4: Describe your market.

Student answers will vary but might address the large number of Americans suffer adverse cardiac events, the world’s number one killer.

Additional Activities 1. I Know Someone Who… Purpose: to help students meet other students in your new class, and help students build their network of people who can help connect them to professionals.

This is a good exercise for the first day of class. To prepare for this exercise, create a one-page handout listing many different professions such as attorney, accountant, consultant, banker, angel investor, venture capitalist, website developer, etc. These are the kinds of professionals a startup would benefit from.

Begin by asking students to first think of professionals in these categories whom they personally know, and would go to with questions.

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Then each student is given a handout, told to stand up, leave the classroom (if possible) and network with each other. Tell them how much time you can allow for the exercise. They have two objectives to accomplish: • Introduce them self and get to know as many other students as possible.

• Write other students’ names on their handout who may know a professional they need. o For example, Chris introduces herself to Pat, and asks Pat if he knows anyone who is a professional listed on the handout. If Pat knows a good attorney, then Chris will write Pat’s name next to the word attorney on the handout.

2. Virtual Incubator Tour Purpose: to introduce students to business incubators If you have Internet access in your classroom, take your students on a virtual tour of an incubator. If you do not have classroom access, then you can assign your students to find an incubator’s website to take a virtual tour. If you would like to link directly to an incubator, then visit the University of Central Florida Business Incubator Program in Orlando, Florida, at http://www.incubator.ucf.edu/index.html. You could assign your students to find an incubator on their own by conducting a Google search, starting with http://www.nbia.org/, the National Business Incubator Association (NBIA).

3. Business Plan Competition Purpose: to enhance retention of course concepts and encourage students to apply what they learn Does your college or university participate or sponsor a business plan competition? Encourage your students to enter a competition. This is a great way to generate enthusiasm at the beginning of the term that can carry all the way through to the end of the term. Even if your college or university does not have a business plan competition, there are many events throughout the country that students can explore. Check out the BPC website (http://www.bizplancompetitions.com/) to find a listing of many different business plan competitions.

4. Elevator or Quick Pitch Purpose: to encourage students to practice presenting their new business concepts

Although some colleges and universities put on quick pitch or elevator speech competitions, you can easily have a competition in your classroom. Have each student prepare and deliver a oneminute presentation to the class to inform and persuade the class of the viability of a new business concept.

Students are not pitching a great idea, team, or product. Instead, they are pitching what their business will do for investors and for customers. Therefore, they should pitch how their business will solve a tangible problem that exists today. Their pitch must have some kind of “hook” that will immediately spark interest in the audience. They must demonstrate that they, personally, are very excited about their own concept. Finally, they should close their pitch with some kind of request for action from the listeners, such as a request for funding or to join the founding team.

This YouTube video of an award-winning pitch (http://www.youtube.com/watch?v=BIoenMAIxE) is only one of many to help students prepare their pitch.

You could use the pitch assignment early in the term to form teams. Instead of pitching a business concept, a student could practice preparing and delivering a pitch by attempting to persuade other students to join his or her team. In this case, students will pitch what they can do for the team.

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Chapter 2. Developing and Screening Business Ideas LEARNING OBJECTIVES 1.

2.

3.

4.

5.

Explain the difference between opportunities and ideas.

Describe the three general approaches entrepreneurs use to identify opportunities.

Discuss the personal characteristics of entrepreneurs that contribute to their ability to recognize business opportunities.

Identify and describe techniques entrepreneurs use to generate ideas.

Discuss actions to take to encourage continuous development of new ideas in entrepreneurial firms.

CHAPTER OVERVIEW This chapter begins by describing the difference between an opportunity and an idea.

Students are reminded that many firms fail, not because the entrepreneurs involved didn’t work hard, but because there was no real opportunity to begin with. The four components of a favorable opportunity (attractive, durable, timely, and anchored in a product, service, or business that adds value) are then discussed.

The middle of the chapter focuses on the three primary ways that entrepreneurs discover opportunities: by studying environmental trends, solving a problem, or finding gaps in the marketplace. This material is followed by a discussion of the personal characteristics of entrepreneurs that heighten their ability to recognize business opportunities. The chapter then transitions to talking about techniques that can help entrepreneurs come up with new business or product ideas. The techniques introduced include brainstorming, focus groups, library and Internet research, and an assortment of other techniques.

CHAPTER OUTLINE I. II.

III.

IV.

The Difference Between Opportunities and Ideas Three Ways to Identify Opportunities A. Observing Trends B. Solving a Problem C. Finding Gaps in the Marketplace Personal Characteristics of Entrepreneurs A. Prior Experience B. Cognitive Factors C. Social Networks D. Creativity Techniques for Generating Ideas A. Brainstorming 25 .

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B. Focus Groups C. Library and Internet Research D. Other Techniques Encouraging the Development of New Ideas A. Establishing a Focal Point for Ideas B. Encouraging Creativity at the Firm Level

CHAPTER NOTES I.

The Difference Between Opportunities and Ideas A. An opportunity is a favorable set of circumstances that creates a need for a new product, service, or business.

B. An opportunity has four essential qualities: it is (1) attractive, (2) durable, (3) timely, and (4) anchored in a product, service, or business that creates value for its buyer or end user.

C. For an entrepreneur to capitalize on an opportunity, its window of opportunity must be open.

2. The term “window of opportunity” is a metaphor describing the time period in which a firm can realistically enter a new market.

D. It is important to understand that there is a difference between an opportunity and an idea.

1. An idea is a thought, impression, or notion. It may or may not meet the criteria of an opportunity. This is a critical point because, as we noted in Chapter 1, many businesses fail not because the entrepreneurs that started them didn’t work hard, but because there was no real opportunity to begin with.

II.

The Difference Between Opportunities and Ideas A. Observing Trends—The first approach to identifying opportunities is to observe trends and study how they create opportunities for entrepreneurs to pursue.

1. Economic Forces a. Economic forces affect consumers’ level of disposable income.

Individual sectors of the economy have a direct impact on consumer buying patterns.

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b. For example, when the economy is strong, people have more money to spend and are willing to buy discretionary products and services that enhance their lives. In contrast, when the economy is weak, not only do people have less money to spend, but they are typically more reluctant to spend the money they have, fearing the economy may become even worse—and that in turn, they might lose their jobs because of a weakening economy.

2. Social Forces a. An understanding of the impact of social forces on trends and how they affect new product, service, and business ideas is a fundamental piece of the opportunity recognition puzzle. b. The persistent proliferation of fast-food restaurants, for example, isn’t due primarily to people’s love for fast food but rather to the fact that people are busy—the number of households with both parents working remains high. c. Some of the social trends that allow for new opportunities are as follows: • • • • • • • •

Aging of the population The increasing diversity of the workforce Increased participation in social networks Growth in the use of mobile devices The increasing focus on health and wellness Emphasis on clean forms of energy including wind, solar, biofuels, and others Continual migration of people from small towns and rural areas to cities Desire for personalization (which creates a need for products and services that people can tailor to their own tastes and needs)

3. Technological Advances a. Given the rapid pace of technological change, it is vital for entrepreneurs to remain on top of how new technologies affect current and future opportunities. b. Once a technology is created, products emerge to advance it. For example, the creation of the Apple iPhone, iPad, and similar devices has in turn spawned entire industries that produce compatible devices.

4. Political Action and Regulatory Changes

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a. Political action and regulatory changes also provide the basis for opportunities. For example, new laws create opportunities for entrepreneurs to start firms to help companies comply with these laws.

This is currently happening as a result of the passage of the Affordable Care Act. b. Political change also engenders new businesses and product opportunities. For example, global political instability and the threat of terrorism have resulted in many firms becoming more security conscious. These companies need new products and services to protect their physical assets and intellectual property, as well as to protect their customers and employees.

B. Solving a Problem 1. Sometimes identifying opportunities simply involves noticing a problem and finding a way to solve it.

2. These problems can be pinpointed through observing trends and through more simple means, such as intuition, serendipity, or chance.

3. Some business ideas are clearly gleaned from the recognition of problems in emerging trends. For example, some older people find traditional cell phones hard to use—the buttons are small, the text is hard to read, and it’s often difficult to hear someone on a cell phone in a noisy room. To solve these problems, GreatCall, a recent start-up, is producing a cell phone called the Jitterbug, which is designed specifically for older users. a. A serendipitous discovery is a chance discovery made by someone with a prepared mind.

C. Finding Gaps in the Marketplace 1. The third approach to identifying opportunities is to recognize a need that consumers have that is not being satisfied—by either large, established firms or entrepreneurial ventures.

2. Large retailers compete primarily on price by serving large groups of customers with similar needs. They do this by offering the most popular items targeted toward mainstream consumers. Although this approach allows the large retailers to achieve economies of scale, it leaves gaps in the marketplace. a. This is the reason that small clothing boutiques and specialty shops exist. The small boutiques, which often sell designer clothes or clothes

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for hard-to-fit people, are willing to carry merchandise that doesn’t sell in large enough quantities for Wal-Mart or Costco to carry.

3. A common way that gaps in the marketplace are recognized is when people become frustrated because they can’t find a product or service that they need and recognize that other people feel the same way.

III.

Personal Characteristics of the Entrepreneur Researchers have identified several characteristics that tend to make some people better at recognizing opportunities than others. These characteristics are as follows.

A. Prior Experience—Several studies show that prior experience in an industry helps entrepreneurs recognize business opportunities.

1. By working in an industry, an individual may spot a market niche that is underserved. It is also possible that while working in a particular area, an individual builds a network of social contacts in that industry that may provide insights that lead to opportunities.

B. Cognitive Factors—Opportunity recognition may be an innate skill or a cognitive process.

1. There are some who think that entrepreneurs have a “sixth sense” that allows them to see opportunities that others miss. This sixth sense is called entrepreneurial alertness.

2. Entrepreneurial alertness is formally defined as the ability to notice things without engaging in deliberate search.

C. Social Networks—The extent and depth of an individual’s social network affects opportunity recognition.

1. In one study, the differences between solo entrepreneurs (those who identified their business ideas on their own) and network entrepreneurs (those who identified their business ideas through social contacts) were examined. The researchers found that network entrepreneurs identified significantly more opportunities than solo entrepreneurs, but were less likely to describe themselves as being particularly alert or creative.

2. An important concept that sheds light on the importance of social networks to opportunity recognition is the differential impact of strong-tie versus weak-tie relationships. Relationships with other people are called ties.

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3. Strong-tie relationships are characterized by frequent interactions, such as ties between coworkers, friends, and spouses. Weak-tie relationships are characterized by infrequent interaction, such as ties between casual acquaintances. It is more likely that entrepreneurs will get business ideas via weak-tie versus strong-tie relationships.

D. Creativity—Is the process of generating novel or useful ideas. Opportunity recognition may be, at least in part, a creative process. It is easy to see the creativity involved in forming many products, services, and businesses.

1. For an individual, the creative process can be broken down into five stages, as shown in Figure 2.4 in the textbook. The five steps are: a. Preparation—Is the background, experience, and knowledge that an entrepreneur brings to the opportunity recognition process. b. Incubation—Is the stage during which a person considers an idea or thinks about a problem; it is the “mulling things over” phase. c. Insight—Insight is the flash of recognition, when the solution to a problem is seen or an idea is born. d. Evaluation—Is the stage of the creative process during which an idea is subjected to scrutiny and analyzed for its viability. e. Elaboration—Is the stage during which the creative idea is put into a final form. The details are worked out, and the idea is transformed into something of value.

IV.

Techniques for Generating Ideas A. Brainstorming 1. Is used to generate a number of ideas quickly. It is not used for analysis or decision making.

2. A brainstorming “session” is targeted to a specific topic about which a group of people are instructed to come up with ideas.

3. The number one rule of brainstorming is that no criticism is allowed, including chuckles, raised eyebrows, or facial expressions that express skepticism or doubt. Criticism stymies creativity and inhibits the free flow of ideas. a. There are two reasons brainstorming generates ideas that might not arise otherwise.

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i. First, because no criticism is allowed, people are more likely to offer ideas than they would in a traditional setting. ii. Second, brainstorming focuses on creativity rather than evaluation.

B. Focus Groups 1. A focus group is a gathering of 5 to 10 people who are selected because of their relationship to the issue being discussed. Although focus groups are used for a variety of purposes, they can be used to help generate new business ideas.

2. The strength of focus groups is that they help companies uncover what’s on their customers’ minds through the give-and-take nature of a group discussion. The weakness is that because the participants do not represent a random sample, the results cannot be generalized to larger groups.

C. Library and Internet Research 1. Libraries are often an underutilized source of information for generating business ideas. The best approach to utilizing a library is to discuss your general area of interest with a reference librarian, who can point out useful resources.

2. Internet research is also important. a. If you are starting from scratch, simply typing “new business ideas” into Google or Yahoo! will produce links to newspaper and magazine articles about the “hottest” and “latest” new business ideas. b. If you have a specific idea in mind, a useful technique is to set up a Google “e-mail alert” using keywords that pertain to your topic of interest.

D. Other Techniques 1. Customer advisory boards. Some companies set up customer advisory boards that meet regularly to discuss needs, wants, and problems that may lead to new ideas.

2. Day-in-the-life research. Other companies conduct varying forms of anthropological research, such as day-in-the-life research.

V.

Encouraging the Development of New Ideas

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A. Establishing a Focal Point for Ideas 1. Some firms meet the challenge of encouraging, collecting, and evaluating ideas by designating a specific person to screen and track them.

2. Another approach is to establish an idea bank, which is a physical or digital repository for storing ideas. a. An example of an idea bank would be a password-protected location on a firm’s intranet that is available only to qualified employees. It may have a file for ideas that are being actively contemplated and a file for inactive ideas.

B. Encouraging Creativity at the Firm Level 1. An employee may exhibit creativity in a number of ways, including solving a problem or taking an opportunity and using it to develop a new product or service idea.

2. Although creativity is typically thought of as an individual attribute, it can be encouraged or discouraged at the firm level.

3. Table 2.5 in the textbook provides a list of actions and behaviors that both facilitate and inhibit creativity at both the organizational level and the individual supervisor level.

BOXED FEATURES: QUESTIONS FOR CRITICAL THINKING What Went Wrong?

Why a Company that Solved a Problem with a Great Product Went Out of Business 1.

In the context of this chapter, make a list of three “takeaways” from this feature that you can learn from and try to avoid if you set out to solve a problem by launching a business.

Answer: This is a good question for a group or individual assignment. Three potential takeaways are as follows: (1) When building a business, it is important to focus on both the quality of the product and business that needs to be built to bring the product to market. Everpix spent too much time on the quality of the product at the expense of the business; (2) Web-based apps are much more compelling if they are viral. If a user can share with friends and family what he or she is doing on an app, then the app is more likely to grow; (3) Marketing matters—you may build the best product or service in the world, but if no one knows about it, it will ultimately fail.

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Chapter 2: Recognizing Opportunities and Generating Ideas

2.

To what degree is there a difference between pursuing an opportunity to solve a problem and building a business? In what ways did Everpix fail to do both?

Answer: There is a big difference. An entrepreneur can pursue an opportunity and build a very elegant solution to a problem. But a profitable “business” must ultimately be built to take the solution to market. Everpix built an elegant solution in part, but it wasn’t viral, which was a big handicap. Everpix failed in terms of building a profitable business.

3.

According to the feature, Everpix spent almost nothing on advertising and promotions. How large of a role do you think that decision played in Everpix’s failure?

Answer: Most students will say that the decision to spend almost nothing on advertising or promotions played a large role in Everpix’s failure. There has to be a way for a company to “get the word out” about its business for people to know about it. Everpix’s shortcoming in this area was compounded by the fact that the service wasn’t viral, so they weren’t getting as many customers as they might have via word of mouth.

4.

Venture capitalists are often accused of swinging for the fences—in other words, they don’t invest in firms that are hitting singles, doubles, or triples. They want home runs. In hindsight, do you think Everpix was building a business that had the potential to hit singles, doubles, or triples, or a business that had the potential to be a home run? Explain your answer.

Answer: Most students will say that Everpix wasn’t thinking big enough—and ultimately was building a business that was akin to a single or a double rather than a homerun. Although they were trying to solve a compelling problem (i.e., helping people store and organize photos in a manner that would encourage people to go back and look at them), they built a site that wasn’t viral and wasn’t marketed sufficiently to attract a large number of users.

Savvy Entrepreneurial Firm How to Learn About Emerging Trends Through the Effective Use of Social Media There are no questions associated with this feature.

Partnering for Success Want Help Fine-Tuning a Business Idea? Find a Mentor 1.

If you were working on fine-tuning a business idea, would you check out one of these online options or an association in your area that provides mentoring and advice for business founders? Why or why not?

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Answer: Students will vary in their answers to this question.

2.

To what degree do you believe that having a mentor can make the difference between an entrepreneur succeeding or failing? In what areas of the entrepreneurial process do you believe that mentors are called upon the most?

Answer: Most students will say that having a mentor could make a substantial difference between an entrepreneur succeeding or failing. An inclination in this direction results from the fact that most students have had a coach, a teacher, or an older relative or friend who has “mentored” them in some way, so they see mentoring as a useful process. Students will vary in terms of what areas of the entrepreneurial process that they believe mentors are called upon the most. It’s been our experience that mentoring is particularly helpful in the areas of manufacturing and production (for start-ups with a physical product) and in raising financing or funding.

3.

Make a list of the organizations in your area that provide mentorship and advice for business founders. Which organizations make the most sense to reach out to for someone who is still in the opportunity recognition stage of the start-up process?

Answer: Students will vary in their answers to this question. Challenge your students to be as exhaustive as possible in the list they complete for their area.

4.

How do you know what to do with a mentor’s advice? If you get advice from several mentors or counselors at organizations such as SCORE and local Small Business Development Centers, how can you best sort through the advice and know which advice to take and which advice to set aside?

Answer: Students will vary in their answers to this question. A reasonable answer is to listen to advice, and then pursue the advice that resonates with you. Another way of thinking about this is to record the advice from different people, and then pursue the advice that seems to represent the consensus of the people that you talk to.

REVIEW QUESTIONS 2-1.

What is a product opportunity gap?

Answer: A product opportunity gap is the gap between what is currently on the market and the possibility for a new or significantly improved product, service, or business that results from emerging trends.

2-2.

How can an entrepreneur tell if a product opportunity gap exists?

Answer: Via careful observation and then via (1) emphasizing or enhancing

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personal characteristics that contribute to opportunity recognition, such as prior experience, cognitive factors, social networks, and creativity and (2) utilizing the techniques highlighted in the chapters for improving opportunity recognition, such as brainstorming, focus groups, and library and Internet research.

2-3.

What is an opportunity?

Answer: An opportunity is a favorable set of circumstances that creates a need for a new product, service, or business.

2-4.

What are the qualities of an opportunity, and why is each quality important?

Answer: An opportunity has four essential qualities: it is (1) attractive, (2) durable, (3) timely, and (4) is anchored in a product, service, or business that creates or adds value for its buyer or end user. An opportunity would not be attractive if any of the qualities were missing.

2-5.

What four environmental trends are most instrumental in creating business opportunities? Provide an example of each environmental trend and the type of business opportunity that it might help create.

Answer: The four environmental trends (or factors) that are most important in creating business opportunities are: economic factors, social factors, technological advances, and political action and regulatory changes.

Environmental Factor

Business Opportunity it Might Create

Economic factor

An increase in disposable income in the hands of teenagers creates opportunities to create new electronics products that appeal to teenagers.

Social factors

An increase in the percentage of elderly people in the U.S. creates opportunities to create new products that help elderly people deal with everyday chores.

Technological factors

An increase in the percentage of people who use smartphones creates opportunities for companies to create products and services that enhance the usefulness of smartphones.

Political Action and Regulatory Changes

The passage of new environmental protection regulations creates opportunities for companies to create products to help firms comply with the regulations.

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How can “solving a problem” create a business opportunity for an entrepreneur to pursue?

Answer: Sometimes identifying opportunities simply involves noticing a problem and finding a way to solve it. These problems can be pinpointed through observing trends and through more simple means, such as intuition, serendipity, or chance. An example of a “problem” is homeowners, who live in coastal areas, who do not have a quick and convenient way to protect their homes when they are threatened by a hurricane or tropical storm. An entrepreneur might see this problem as an opportunity, and start a firm to build custom “hurricane strength” shutters that are easy to put up when a hurricane threatens and are easy to store during clear weather. Most coastal residents currently use plywood to cover their windows when a hurricane threatens. Plywood is neither easy to put up nor is it easy to store during clear weather.

2-7.

How can finding a gap in the marketplace create a business opportunity?

Answer: A gap in the marketplace suggests that particular clientele, such as people who need plus-sized clothing or people who are hard to fit, are not being adequately serviced. Providing products or services for these people represents a business opportunity. The trick is whether there is a large enough critical mass of people in a particular area to support a business that fills a gap in their marketplace for a specific clientele.

2-8.

What is meant by the term opportunity recognition?

Answer: Opportunity recognition refers to the process of perceiving the possibility of a profitable new business or a new product or service.

2-9.

In what ways does prior industry experience provide an entrepreneur an advantage in recognizing business opportunities?

Answer: By working in an industry, an individual may spot a market niche that is underserved.

2-10.

What is entrepreneurial alertness and why is it important to entrepreneurs?

Answer: There are some who think that entrepreneurs have a “sixth sense” that allows them to see opportunities that others miss. This sixth sense is called entrepreneurial alertness, which is formally defined as the ability to notice things without engaging in deliberate search. Entrepreneurial alertness is important, because individuals with higher levels of entrepreneurial alertness will presumably identify more business opportunities.

2-11.

How does an extensive social network provide an entrepreneur an advantage in

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recognizing business opportunities?

Answer: The extent and depth of an individual’s social network affects opportunity recognition. People who build a substantial network of social and professional contacts will be exposed to more opportunities or ideas than people with sparse networks. This exposure can lead to new business starts.

2-12.

What is the difference between a weak-tie and a strong-tie relationship? Which type of tie is most likely to help an entrepreneur find an idea and why?

Answer: Strong-tie relationships are characterized by frequent interaction between coworkers, friends, and spouses. Weak-tie relationships are characterized by infrequent interaction between casual acquaintances. According to research in this area, it is more likely that an entrepreneur will get a new business idea through a weak-tie than a strong-tie relationship because strong-tie relationships, which typically form between like-minded individuals, tend to reinforce insights and ideas the individuals already have. Weak-tie relationships, on the other hand, which form between casual acquaintances, are not as apt to be between like-minded individuals, so one person may say something to another that sparks a completely new idea.

2-13.

What is creativity?

Answer: Creativity is the process of generating a novel or useful idea.

Opportunity recognition may be, at least in part, a creative process. It is easy to see the creativity involved in the formation of many products, services, and businesses.

2-14.

How does creativity contribute to the opportunity recognition process?

Answer: Opportunity recognition may be, at least in part, a creative process. On an anecdotal basis, it is easy to see the creativity involved in forming many products, services, and businesses.

2-15.

What are the five stages of the creative process for an individual?

Answer: The five stages of the creative process are as follows: Stage 1: Preparation is the background, experience, and knowledge that an entrepreneur brings to the opportunity recognition process.

Stage 2: Incubation is the stage during which a person considers an idea or thinks about a problem; it is the “mulling things over” phase.

Stage 3: Insight is the flash of recognition—when the solution to a problem is seen or an idea is born.

Stage 4: Evaluation is the stage of the creative process during which an idea is subjected to scrutiny and analyzed for its viability.

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Stage 5: Elaboration is the stage during which the creative idea is put into a final form.

2-16.

What are the differences between an opportunity and an idea and why are those differences important for entrepreneurs?

Answer: An opportunity has four essential qualities: it is (1) attractive, (2) durable, (3) timely, and (4) anchored in a product, service, or business that creates or adds value for its buyers or end users. An idea is a thought, impression, or notion. It may or may not meet the criteria of an opportunity.

2-17.

Why is “no criticism” the number-one rule for brainstorming?

Answer: Brainstorming is used to generate a number of ideas quickly. It is not used for analysis or decision making. No criticism is allowed. Criticism stymies creativity and inhibits the free flow of ideas.

2-18.

How is a focus group used to generate new business ideas?

Answer: A focus group is a gathering of 5 to 10 people who are selected because of their relationship to the issue being discussed. Although focus groups are used for a variety of purposes, they can be used to help generate new business ideas.

Usually focus groups are conducted by trained moderators. The moderator’s primary goals are to keep the group “focused” and to generate lively discussion.

2-19.

What is the purpose of day-in-the-life research?

Answer: Day-in-the-life research refers to sending a team of testers to the homes (or businesses) of a company’s users, to see how its products are working and gain insights for new product ideas.

2-20.

What is the purpose of an idea bank? Describe how an idea bank can be set up in a firm.

Answer: An idea bank is a physical or digital repository for storing ideas.

2-21.

How do businesses encourage creativity at the firm level?

Answer: Through the techniques articulated in Table 2.5, which include (1) supporting an highlighting creativity’s importance in all parts of the firm, (2) overtly rewarding those demonstrating creativity in their work, (3) investing in resources for the purpose of helping employees become more creative, and (4) hiring people with different skills and viewpoints compared to current employees.

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APPLICATION QUESTIONS 2-22.

Justin plans to write an e-mail message to his dad asking for a loan. The purpose of the loan will be to start a company to sell an environmentally friendly line of cleaning supplies that are suitable for light manufacturing facilities. Justin has spent the past two years developing the products in his spare time, and wants to convince his dad that the idea represents an attractive business opportunity. In your opinion, what information and insights about the company he wants to start should Justin include in the e-mail message?

Answer: Justin should try to convince his dad that (1) the idea meets the four tests of an opportunity, (2) the idea either takes advantage of an environmental trend, solves a problem, or fills a gap in the marketplace, and (3) he has done sufficient research, either through brainstorming, focus groups, and/or library and Internet research, to assure himself that the idea is attractive.

2-23.

Identify three start-ups, other than those discussed in the chapter and listed in Table 2.2, which were started to solve a problem. Briefly describe the problems the three start-ups are solving and how they are going about doing so.

Answer: There are countless examples that students might suggest. Urge your students to browse through magazines such as Inc. and Entrepreneur for suggestions if they are having a hard time coming up with ideas. The Springwise blog (www.springwise.com) also provides fresh examples of new products and services on a near daily basis.

2-24.

Marshall Hanson, the founder of Santa Fe Hitching Rail, a chain of nine steak restaurants in New Mexico, is considering expanding his menu, which is currently restricted to steak, hamburger, potatoes, and fries. He has just read a book about entrepreneurship and learned that entrepreneurs should study social trends to help identify new product opportunities. What are some current social trends that might help Marshall choose items to add to his menu? Given the trends you list, what items do you suggest Marshall add to expand his restaurant’s menu?

Answer: This is a good thought question for students. The obvious social trend that Marshall should pay attention to is the increasing emphasis that American’s are paying to health and fitness. Marshall’s menu features food that is high in fat and cholesterol. Although that menu may appeal to a certain clientele, Marshall might think about broadening his menu to include lower fat foods, such as chicken, fish, and salads.

2-25.

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ideas. Suggest to Tiffany some ways she could generate new ideas for her restaurants?

Answer: Brainstorming, focus groups, and Internet and library research.

2-26.

As mentioned in the chapter, “prior experience” in an industry helps entrepreneurs recognize business opportunities. This concept of “help” extends to prior experience in any aspect of life—whether it is sports, music, or a volunteer activity. In what areas do you have a good amount of prior experience?

How could this prior experience position you to start a business?

Answer: This is a good question for an individual assignment. Make sure your students directly tie their prior experience to a potential business opportunity.

Some students will argue that they really don’t have any prior experience that would lend itself to a business opportunity. In these cases, challenge your students to think harder. All of us have unique experiences that might lend themselves to business opportunities. Alice Brooks and Bettina Chen, the student entrepreneurs featured at the beginning of Chapter 11, used their prior experience of enjoying building things as children to start a very successful company, Roominate, which makes toys that encourage girls and young women to become interested in engineering.

2-27.

Make a list of your strong-tie and weak-tie relationships. Include at least five names on each list. Select two names from your list of weak-tie relationships, and speculate on the types of new business ideas that you think these individuals would be uniquely qualified to assist you with.

Answer: This is a good question for an individual assignment.

2-28.

Imagine that you’ve been hired by Fitbit, the wearable activity tracker, to conduct focus groups on your campus to get a better sense of how Fitbit can be as relevant and useful to college students as possible. How would you go about setting up the focus groups? What are the primary issues on which you would concentrate with the focus groups?

Answer: Most students will repeat the material in the chapter in regard to how to set up a focus group to get a better sense of how Fitbit can be as relevant and useful to college students as possible. Challenge your students to be as thoughtful and creative as possible in regard to the primary issues they’d zero in on in the focus group.

2-29.

How could AJ Forsythe and Anthony Martin, the co-founders of iCracked, the subject of the opening feature for this chapter, have utilized library and Internet research to flesh out their business idea?

Answer: There is undoubtedly much that AJ Forsythe and Anthony Martin could

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have learned about the smartphone industry via library and Internet research, regarding whether the industry is growing or shrinking, the percentage of people who buy high-end smartphones vs low-end smartphones, how often smartphones need repair, and so forth.

YOU BE THE VC 2.1 Company: NatureBox (www.naturebox.com) Business Idea: Launch a monthly subscription service that delivers healthy snacks to subscribers at their doorsteps for a low monthly fee.

You Be the VC Scorecard NatureBox (www.naturebox.com) Item

Score/Comments

Strength of New-Venture Team

1

2

3

4

5

NatureBox was founded by Gautam Gupta (CEO) and Kenneth Chen (CMO). The two met when they were students at Babson College. Gupta worked previously for Proctor and Gamble and has a background in brand strategy and consumer knowledge. He is also a former partner at General Catalyst Partners, a VC firm. Chen is a serial entrepreneur. He launched two successful businesses prior to launching NatureBox. VP for Engineering is David Lee. Lee has a background in software design and development and worked formally for Facebook and HP. Strength of the Opportunity

1

2

3

4

5

Societal trends are working in favor of NatureBox. People are looking for healthier foods, and are increasingly busy. So the fact that NatureBox offers a curated selection of snacks that are delivered directly to the customer’s door sounds appealing. On the other hand, it’s hard for us to see that NatureBox is solving a problem. Plentiful selections of healthy snacks are available in all grocery stores—let alone health conscious stores such as Whole Foods. Although people are busy, they still have to shop. It’s not hard to find health snacks in stores.

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Chapter 2: Recognizing Opportunities and Generating Ideas

Strength of the Industry

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5

Although the industry for health snacks may be growing, it is a crowded market with new competitors entering continually. As a result, it’s hard for us to see the industry as a strength.

Strength of Business Model

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5

This is a tough one. The subscription business model is attractive in that it encourages repeat purchases. Once NatureBox enrolls a customer, its product goes out and the customer is billed monthly until the customer tells NatureBox to stop. We also like that fact that NatureBox sells full-sized versions of the snacks that are in its boxes. On the other hand, NatureBox is asking people to change the way they buy snacks. Virtually all consumers shop in stores where plentiful selections of healthy snacks are available, so it’s hard for us to see how NatureBox is offering something unique. Our guess is that churn will become an issue. Eventually, NatureBox will see attrition in the number of subscribers it has and will have to continually advertise to win new subscribers just to stay even.

Average Score

3.5/5.0

Decision: We would not fund this firm. A big plus in NatureBox’s favor is the strength of its management team. We have no quibbles there. In fact, the fact that Gupta and Chen are at NatureBox’s helm makes us wonder what they see about the potential of NatureBox that we’re not seeing. The negatives for NatureBox are the crowded nature of its industry, the lukewarm opportunity, and uncertainties regarding its business model.

These are just too big of negatives for us to overcome. As a result, as the individual sharks on Shark Tank often say, “we’re out.”

YOU BE THE VC 2.2 Company: Parking Panda (www.parkingpanda.com) Business Idea: Create a service that allows motorists to find parking spots on a regular basis or for special events, and allow parking space owners (both individuals and commercial lots) a way of connecting with drivers to rent underutilized parking spaces.

You Be the VC Scorecard

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Parking Panda (www.parkingpanda.com) Item

Score/Comments

Strength of New-Venture Team

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5

Parking Panda was founded at a Startup Weekend in Maryland in 2011. Following the Startup Weekend, cofounders Nick Miller and Adam Zilberbaum entered the ER Accelerator program in New York City. Prior to Parking Panda, Miller spent a year working in product management for Living Social. He also spent time at New York City start-ups Crowdtap and Group Commerce. Zilberbaum started programming when he was in the 5th grade. His previous stints include lead engineer at GAAP Software where he built enterprise software solutions for Fortune 500 companies and running and owning his own IT consulting firm.

Strength of the Opportunity

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5

This strikes us as a large opportunity. The parking problem is pervasive in mid-sized and large cities (not to mention college campuses) and will only get worse as a result of the continual migration of people from rural areas and small towns to cities. Someone will solve the parking problem, and the company that provides an attractive solution to the problem will reap rich rewards.

We like what we see in terms of how Parking Panda is approaching the parking problem. The company’s future hinges on whether they will be able to execute and scale the business Strength of the Industry

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5

According to the International Parking Institute (www.parking.org), the parking industry generates between $25 billion and $30 billion in gross revenue each year in the United States alone. The potential of the industry is larger. Parking Panda hopes to convert private driveways in parking places that can be used when their owners are away and hopes to better fill empty parking spaces in commercial lots. Demand for parking spaces is likely to continue to go up. Cheap gas prices are putting more cars on the road. A risk for 43 .

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Parking Panda is regulation. If they are successful converting private driveways into paid parking spaces, they might experience resistance from neighborhood homeowners associations and community groups. The parking problem is so big, however, it’s hard to see how a solution to a pervasive problem can be held back.

Strength of Business Model

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Parking Panda’s business model is straightforward. It collects a commission for every parking space it helps its customer’s rent. Parking Panda’s efforts should be assisted by city governments, which has a big incentive to find solutions to the parking problem. This aspect of Parking Panda’s business model is particularly attractive.

Average Score

4.5/5.0

Decision: We would fund Parking Panda. The management team is young and untested, which creates an unknown. But the opportunity, industry, and business model are strong.

As mentioned above, the parking problem is large and pervasive, and someone will eventually solve the problem. If it’s Parking Panda, Parking Panda could become a large firm. The wildcard for a company like Parking Panda is how quickly and effectively they can expand. There are certainly regulatory issues in each city that vary and must be dealt with. The silver lining is that everyone benefits by the parking problem being solved.

We’re looking forward to watching Parking Panda’s progress over the next one to three years.

Special note: Our students have pointed out to us the elegance of Parking Panda’s Web site. It is visually appealing and very easy to navigate. This tells us that Parking Panda is placing emphasis on exactly the right metric—the experience that the customer has in utilizing its service.

CASES Case 2.1 Dropbox: Solving a Compelling Problem in a Smooth Manner DISCUSSION QUESTIONS 1.

What environmental trends are working in Dropbox’s favor as the firm seeks to operate profitably? What environmental trends may work against Dropbox and why?

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Answer: The environmental trends that are working for Dropbox are (1) an increased dependence that people have on technology; (2) the increasing amount of digital storage space that people need, as a result of storing photos and videos along with word documents and spreadsheets; (3) an increase in the number of platforms that people work from, which now includes desktop computers, laptop computers, tablet computers, and smartphones; and (4) an increasing mobile population. All of these factors favor Dropbox’s cloud-based storage solution that can be accessed from all of a user’s devices. The trends working against Dropbox are (1) the sheer number of devices that people have is increasing the complexity of Dropbox’s service and (2) the continual drop in the cost of storing digital content is bringing new competitors in the market.

2.

What personal characteristics does Drew Houston possess that suggest he may have what it takes to be a successful entrepreneur?

Answer: Drew Houston seems to have all the characteristics of a successful entrepreneur highlighted in Chapter 1, which include passion for the business, product/customer focus, tenacity despite failure, and execution intelligence. We don’t know enough about Drew Houston to make an informed judgment regarding the personal characteristics mentioned in Chapter 2. He did demonstrate a certain degree of entrepreneurial alertness and creativity in conceiving of the Dropbox business idea and the manner in which the idea has been executed.

3.

What problem did Dropbox’s founders solve with the service they developed?

Answer: Dropbox has completely solved the problem of creating a document on one device (i.e., desktop computer at work) and having the same document available on another device (i.e., laptop computer at home). The same applies for storing any piece of digital content that Dropbox allows, such as photos or videos, available on multiple devices.

Case 2.2 Rover.com: Don’t Chuckle: This Is One Impressive Business Idea 1.

In the United States, what environmental trends are supporting the development of Rover.com’s business?

Answer: Most students will assemble a list that includes (1) increasingly mobile population—which necessitates that dog owners need their dogs watched by others more often, (2) aging of the population—many older people have dogs for companionship, and (3) increase in the spread of technology and mobile devices— people may be more willing to leave their dogs in the care of others if they can get frequent updates on their dogs via e-mail and other forms of digital communications.

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How might Rover.com use focus groups to gain a better understanding of its current and potential customers and their needs?

Answer: Most students will revert to the information in the chapter about focus groups. Challenge your students to apply the material in the text to specifically how Rover.com would setup focus groups and utilize the information gleaned through them.

3.

In this chapter, we noted that a true business opportunity is attractive, durable, timely, and anchored in a product or service that creates value for a buyer. To what extent does Rover.com’s service satisfy each of these criteria?

Answer: Rover.com’s service is attractive in that it places a dog owner’s dog in a home rather than a kennel. This aspect of Rover.com’s service provides a dog more personalized attention and is healthier, given that the dog will not be in close proximity to a large number of other dogs, some of which may be sick. The service is durable in that the number of dogs and dog owners in the United States continues to go up. The amount of money that people spend on their pets, dogs included, also continues to go up each year. The service is timely in that the population in general is increasingly mobile, meaning that people travel more which necessitates dog owners needing to find others to watch their dogs. Finally, the service is anchored in a product or service that creates value for a buyer. The entire intent of Rover.com is to provide a dog owner a better experience that placing a dog in a kennel. There are many examples throughout the case where Rover.com achieves this objective.

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SOLUTION MANUAL

SOLUTION MANUAL

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Chapter Summary 1.

2.

3.

4.

5.

6.

7.

8.

9

10.

11.

A business plan is a written document that carefully explains every aspect of a new business venture.

The most effective business plans are part of a comprehensive process that includes (1) identifying a business idea, (2) screening the idea (or ideas) to determine their preliminary feasibility, (3) conducting a full feasibility analysis, and (4) writing the plan.

There are two primary reasons for writing a business plan: (1) it forces the founding team to work together to hammer out the details of the business venture, (2) it communicates the merits of a new venture to outsiders, such as investors or bankers.

The process of writing a business plan forces a team to not only work together, but to turn abstract ideas into concrete realities.

The two primary audiences for a firm’s business plan are the firm’s employees and investors and other external stakeholders.

It is important to remember that a firm’s business plan, executive summary or a set of PowerPoint slides is typically the first aspect of a proposed venture that will be seen by an investor (or anyone else who reads the plan), and if the plan is incomplete or looks sloppy, it is easy for an investor to infer that the venture itself is incomplete or sloppy.

To make the best impression, a business plan should follow a conventional structure. Typically, the individuals who read business plans are busy people who want a plan that allows them to easily find critical information.

It is a good idea to develop a 1—2 minute elevator speech which briefly outlines the merits of the venture.

As a business plan is written, the people involved should continually measure the type of company that they are hoping to start against their personal goals and aspirations.

There are four types of businesses: survival, lifestyle, managed growth, and aggressive growth. This book focuses on lifestyle, managed growth, and aggressive growth firms.

While the preparation of a business plan is essential, it is often an insufficient exercise through which to complete a full and candid analysis of the merits of a new business venture. Steps that logically precede the completion of a business plan, which include the preliminary screening of business ideas and feasibility analysis, are also important.

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Chapter Outline I. II.

III.

IV.

Introduction Reasons for Writing a Business Plan a. Internal Reason b. External Reason Who Reads the Business Plan—And What Are They Looking For? a.

A Firm’s Employees b.

Investors and Other External Stakeholders Guidelines for Writing a Business Plan a.

Structure and Style of the Business Plan i.

Outside resources ii.

Appearance iii.

Develop an Elevator Speech 1.

Four Steps in an Elevator Speech iv.

Red Flags in a Business Plan b.

Content of the Business Plan c.

Measuring the Business Plan Against Your Personal Goals and Aspirations i.

Investor expectations ii.

Attractiveness of revised business plan d.

Recognizing That Elements of the Plan May Change

V.

Types of Business

VI.

The Plan for the Book a.

Section 1: Starting the Process b.

Section 2: What to Do Before the Business Plan Is Written c.

Section 3: Preparing a Business Plan d.

Section 4: Presenting the Business Plan to Investors and Others

Chapter Notes I.

Introduction • Research reveals an increased interest in the study of entrepreneurship o More than 2,000 colleges and universities, about two-thirds of the total, offer entrepreneurship coursework o 54 percent of millennials (ages 18-34) either want to start a business or have already started one o 63 percent of African Americans and 64 percent of Latinos expressed a desire to start their own company • The business plan is a written document that carefully explains every aspect of a new business venture

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Inside the firm, the business plan is used to develop a “road map” Outside the firm, it introduces potential investors and other stakeholders to the business opportunities Although a relatively small percentage of entrepreneurs write business plans, there is ample evidence that writing a business plan is an extremely good investment of time and money. o o

•

II.

Reasons for Writing a Business Plan • There are two primary reasons for writing a business plan o Internal reason—forces the founders of a firm to systematically think through each aspect of their new venture o External reason—communicates the merits of a new venture to outsiders, such as investors and bankers ▪ Investors rely heavily on the business plan to make their decisions regarding initial investment ▪ The business plan helps a new company build credibility by providing detailed information and demonstrating that the entrepreneur has thought through each element of the business ▪ Placing highly or winning a university-, community-, or statesponsored business plan competition also helps to establish credibility for a firm • There is an emerging school of thought, associated with the Lean Startup movement, that opposes the idea of writing a business plan and advocates experimentation and trial-and-error learning through customer feedback over formal planning

III.

Who Reads the Business Plan—And What Are They Looking For? • There are two primary audiences for a firm’s business plan a.

A firm’s employees—because the business plan articulates the vision and future of the firm, both the management team and the rank-and-file employees can benefit from reading the business plan in order to operate in sync and with purpose b.

Investors and other external stakeholders—investors, potential business partners, potential customers, private and government-funded grantawarding agencies, and key employees who are being recruited are all part of the second audience for a business plan ▪ To appeal to this group, the business plan must be clear, concise, and not overly optimistic or naive Guidelines for Writing a Business Plan • It is important to remember that a firm’s business plan, executive summary, or a set of PowerPoint slides is typically the first aspect of a proposed venture that will be seen by an investor or whomever the plan is presented to • A good business plan will be sensitive to the structure, style, and content of a plan before exposing it to a firm’s employees or sending it to an outsider

IV.

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Individuals writing the plan should also measure the type of company that they are envisioning against their personal goals, aspirations, and preferred lifestyle Structure and Style of the Business Plan • The business plan should follow a conventional structure • Most experts recommend a length of between 25 and 35 pages • Effective business plans should be sharp, but not look expensive to produce or overly flashy • Business plan software can help provide structure, but all of the content should come from the entrepreneur • Outside assistance in putting the plan together is fine, but the enthusiasm of the founder should remain i.

Develop an Elevator Speech • An elevator speech is a brief, carefully constructed statement, usually 45 seconds to two minutes long that outlines the merits of a business venture (business plan insight feature) 1.

ii.

b.

Steps in an Elevator Speech (from business plan insight feature) • Describe the opportunity—45 seconds • Describe how your product or service meets the opportunity—45 seconds • Describe your qualifications—15 seconds • Describe your market—15 seconds

Red Flags in a Business Plan (Table 1-2) • Founders with none of their own money at risk • A poorly cited plan • Defining the market size too broadly • Overly aggressive financials • Hiding or avoiding weakness • Sloppiness in any area • Too long of a plan

Content of the Business Plan • Most plans are divided into sections that represent the major aspects of a new venture’s business (Table 1-1) • The plan should convince the reader that the opportunity is exciting, feasible, defensible, and within the capabilities of the people who will be launching the firm • Details of each section of the plan will be described later in this book in Section 3: Preparing an Effective Business Plan

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c.

Measuring the Business Plan Against Your Personal Goals and Aspirations • Accepting venture capital will almost assuredly force a firm into a fastgrowth model from the start o Most venture capitalists shoot for a 30 to 40 percent annual return and a total return of five to 20 times their original investment over the life of the investment • Using venture capital also involves surrendering equity in the firm to outsiders in exchange for their investment and accepting heavy scrutiny at all levels • If an entrepreneur places a high value on leisure time or family time or doesn’t want the pressure associated with a group of investors, he or she would be better suited to launch a firm in a target (or niche) market and solicit funds from friends and family or a lender • During the course of writing the plan, the entrepreneur may find that there are aspects to the business that are not as attractive as originally anticipated

d.

Recognizing That Elements of the Plan May Change • Revisions may be made based on early feedback • The corridor principle is an academic principle which states that once an entrepreneur starts a business, he or she begins an journey down a path where “corridors” leading to new venture opportunities become apparent • The corridor principle also applies during the preparing of a business plan; new insights will invariably emerge that weren’t initially apparent • The business plan is a living, breathing document, rather than something set in stone • Guy Kawasaki suggests that authors of business plans should “write deliberate, (but) act emergent” o Create a “deliberate” plan that is a specific blueprint to follow o Think “emergent” with a mindset that is open to change and influenced by the realities of the marketplace

Types of Businesses • There are four distinct types of businesses (Table 1-3) o Survival—provides its owner just enough money to put food on the table and pay bills (handyman, part-time childcare) o Lifestyle—provides its owner the opportunity to pursue a certain lifestyle and make a living at it (clothing boutique, personal trainer) o Managed growth—employs 10 or more people, may have several outlets, and may be introducing new products or services to the market (regional restaurant chain, multi-unit franchise) o Aggressive growth—bringing new products and services to the market and has aggressive growth plans (computer software, medical equipment, national restaurant chain)

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•

VI.

This book focuses primarily on lifestyle, managed growth, and aggressive growth firms

The Plan for the Book a.

Section 1: Starting the Process (Chapter 1) o A business plan is also an essential document for a firm to have at its disposal, particularly if it plans to reach out to others to try to gain access to resources b.

Section 2: What to Do Before the Business Plan Is Written (Chapters 2-3) o Writing a business plan is part of a comprehensive process that includes the four steps of the comprehensive feasibility analysis/business planning process o There are many steps that logically precede the completion of a business plan, including the preliminary screening of business ideas and feasibility analysis

c.

Section 3: Preparing a Business Plan (Chapters 4-10) o This section provides an explanation of how to complete each section of a business plan

d.

Section 4: Presenting the Business Plan (Chapter 11) o Concrete suggestions for how to make effective presentations using PowerPoint slides, and how to field questions from an audience effectively, will be provided

Review Questions 1.

What is a business plan? What are the advantages to preparing a business plan for a new venture?

Answer: A business plan is a written document that carefully explains every aspect of a new business venture. The advantages to preparing a business plan are that inside the firm, it acts as a “road map” for the execution of strategies and plans. Outside the firm, it introduces the business opportunity to potential investors and other stakeholders. Many investors won’t even consider a firm that does not have a business plan. Finally, the process of writing the plan forces the entrepreneur to examine the merits of the business idea and test its feasibility.

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What are the two most common reasons that entrepreneurs write business plans?

Answer: The most common reasons for writing a business plan are that it forces the founding team to work together to hammer out the details of the business venture, and it communicates the merits o f a new venture to outsiders such as investors or bankers.

3.

Who are the primary consumers of business plans? In what ways do the people who read business plans differ in the information they are looking for?

Answer: The primary consumers of a business plan are the firm’s employees, investors, and other external stakeholders. A firm’s employees may use the business plan as a guideline to ensure that all their activities are in sync with the vision and plan of the founders. Investors and other external stakeholders are looking for demonstration that the business idea is viable and can offer an attractive financial return when compared with lower risk investment alternatives.

4.

It is often argued that the process of writing a business plan is as important as the plan itself. How is this so?

Answer: The process of working together on a business plan requires the founders to systematically think through each aspect of their new venture and forces team members to turn abstract ideas into more concrete realities.

5.

Why is it important for the founders of a firm to continually measure whether the type of company they are envisioning, as described by their business plan, is consistent with their personal goals and aspirations?

Answer: It is important that the founders use the business plan writing process to visualize what the firm will look like in terms of the demands on their time, the pressures of accepting venture capital, and the need to accept investor scrutiny over operational decisions for the firm. If an entrepreneur wants to ensure a significant amount of leisure or family time, this should be taken into consideration before moving forward with an aggressive growth business.

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What are the hazards involved with using a software package to help write a business plan or hiring consultants to write the business plan for you?

Answer: Software packages and outside consultants are useful in providing a conventional format for the business plan, but over-reliance on these sources can produce a business plan that looks “canned” or fails to convey the enthusiasm and excitement of the entrepreneur’s vision.

7.

Describe the general rules of thumb for the length and appearance of a business plan.

Answer: Most experts agree that the plan should be between 25 and 35 pages in length. It should be clear, concise, and follow a conventional format. It should look sharp, without looking like the entrepreneur spent too much to produce it.

The plan’s author should also avoid overuse of clip art and other design elements, but a well-designed logo can add to the professionalism of the plan.

8.

Why is it important for a firm to test the feasibility of its business idea prior to writing a business plan?

Answer: There are steps that naturally precede the completion of a business plan. The results of a full feasibility analysis will help the entrepreneur to decide whether it is worthwhile to go forward with the business plan.

9.

Why is it important for a firm to test the feasibility of its business idea prior to writing a business plan?

Answer: Many new businesses fail, not because the founders didn’t work hard or weren’t committed to the venture, but because the idea wasn’t a good one to begin with. Conducting a feasibility analysis helps assess the merits of a business idea prior to dedicating the time and effort to write a business plan.

10.

What is an elevator speech? How can developing an elevator speech help a firm write a more effective business plan?

Answer: An elevator speech is a 45-second to two-minute statement outlining the merits of a business venture. Creating an elevator speech can help the founders to develop a sharp and concise description of their business.

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Application Questions 1.

Justin Wells is one of three founders of an organic snacks company. The founders have decided to write a business plan to try to obtain funding. In a meeting with his cofounders, Justin said, “I know that we’re all very busy, so I’d like to volunteer to write the business plan. My parents have a cabin on a lake about an hour from here, so if it’s alright with the two of you, I’d like to take my laptop up to the cabin for a couple of days and hammer out the business plan.

Any objections?” If you were one of Justin’s cofounders, what would you say?

What alternative approach, if any, would you suggest to writing the plan?

Answer: As one of Justin’s cofounders, I should consider the fact that the process of writing the plan should be a collaborative effort. Writing the plan together can help the team develop a stronger bond and identify potential problems within the team. We should suggest that, following the feasibility analysis, the three founders have a retreat at Justin’s parents’ cabin and begin work on the business plan writing process together.

2.

Melanie Scott is a high school math teacher who is in the process of developing an iPhone app centered on engaging games that require high school students to use math to master the games. Melanie is planning to attend a new business conference in about six weeks that will feature a number of investors. She hopes to make some contacts and schedule follow-up meetings with several investors.

Up until now, Melanie has focused primarily on the technical aspects of building the app, and hasn’t written a business plan or talked to any potential customers.

She’s willing to do whatever it takes to get prepared for the conference. What would you tell Melanie to focus on over the next six weeks to get ready for the conference?

Answer: Since Melanie will be at a conference with other new business founders, she needs to prepare a business plan to use as a selling tool. An investor choosing between two or more business ventures may eliminate one that does not have a professional business plan for them to review. Melanie should also get feedback from potential users and work on an elevator speech to use when speaking with investors at the conference.

3. A year ago, a friend of yours opened in innovative type of fitness center that helps high school athletes improve their fitness and sharpen their skills to the point where they’ll be more likely candidates for college scholarships. He recently wrote a business plan seeking $100,000 in funding to expand from one

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location to three locations. He sent the business plan out to three industry experts for feedback, and was struck by the advice re received. All three experts loved his concept and encouraged him that instead of asking for $100,000 to expand to three locations, he should ask for $1 million to expand to 30 or more locations.

What factors should your friend consider before he pursues this advice?

Answer: He should measure the suggested business plan and expert advice against his personal goals and aspirations. Investors will expect a 30-40 percent annual return over the period of their investment. They will also open the firm to increased input and scrutiny since the investors will now own a stake in the business. Further, the type of aggressive growth advised by the industry experts will drastically chance the amount of time and attention required by the founder.

He should be sure that he is willing to spend that amount of time away from personal and family concerns.

4.

Imagine you just received a text message from a friend. The message reads, “Just wanted to share with you some fantastic news. Last Friday, I talked to an investor about my business idea, and he asked me to send him the executive summary from my business plan along with a PowerPoint overview of the plan. I spent the weekend working on his requires, and am about to send him an 8-page executive summary and a 42-slide PowerPoint overview. Just thought I would check with you to see if you have any last minute words of advice. I really want to get funding.” How would you respond to this request for feedback?

Answer: To make the best impression, a business plan should follow a conventional structure. This includes the executive summary and slide deck. The executive summary should only be 1-2 pages long and the PowerPoint overview should be about 12 slides long. The executive summary and slide deck that this founder plans does not recognize the fact that the investor is a busy person who wants a document that provides a very quick snapshot of the key information regarding the business. If the investor is interested, he or she will ask for a 25-35 page plan.

5. Spend some time studying the website of Heart Juice (www.heartjuice.com), a healthy beverage company referred to in the chapter.

Search for additional information on the company. Write a two minute elevator speech rather than a 60-second elevator speech.

Answer: Student responses will vary, but should cover the four steps of an elevator speech:

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Step 1: Describe the opportunity or problem that needs to be solved.

Answers will vary, but may include information such as documentation of the increased interest in products that support a healthier lifestyle and the high incidence of cardiac events in the target population.

Step 2: Describe how your product or service meets the opportunity or solves the problem.

Answers will vary but might explain how Heart Juice provides a healthier option than more commonly consumed beverages that have fewer health benefits. They may also explain the health effects of the hawthorne berry, a key ingredient of Heart Juice.

Step 3: Describe your qualifications.

Answers will vary but might include the personal story of how the founders were inspired following the heart attack of a professor of one founders, a heart attack by the father of another founder, and the high cholesterol diagnosis of a parent of the third founder.

Step 4: Describe your market.

Student answers will vary but might address the large number of Americans suffer adverse cardiac events, the world’s number one killer.

Additional Activities 1. I Know Someone Who… Purpose: to help students meet other students in your new class, and help students build their network of people who can help connect them to professionals.

This is a good exercise for the first day of class. To prepare for this exercise, create a one-page handout listing many different professions such as attorney, accountant, consultant, banker, angel investor, venture capitalist, website developer, etc. These are the kinds of professionals a startup would benefit from.

Begin by asking students to first think of professionals in these categories whom they personally know, and would go to with questions.

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Then each student is given a handout, told to stand up, leave the classroom (if possible) and network with each other. Tell them how much time you can allow for the exercise. They have two objectives to accomplish: • Introduce them self and get to know as many other students as possible.

• Write other students’ names on their handout who may know a professional they need. o For example, Chris introduces herself to Pat, and asks Pat if he knows anyone who is a professional listed on the handout. If Pat knows a good attorney, then Chris will write Pat’s name next to the word attorney on the handout.

2. Virtual Incubator Tour Purpose: to introduce students to business incubators If you have Internet access in your classroom, take your students on a virtual tour of an incubator. If you do not have classroom access, then you can assign your students to find an incubator’s website to take a virtual tour. If you would like to link directly to an incubator, then visit the University of Central Florida Business Incubator Program in Orlando, Florida, at http://www.incubator.ucf.edu/index.html. You could assign your students to find an incubator on their own by conducting a Google search, starting with http://www.nbia.org/, the National Business Incubator Association (NBIA).

3. Business Plan Competition Purpose: to enhance retention of course concepts and encourage students to apply what they learn Does your college or university participate or sponsor a business plan competition? Encourage your students to enter a competition. This is a great way to generate enthusiasm at the beginning of the term that can carry all the way through to the end of the term. Even if your college or university does not have a business plan competition, there are many events throughout the country that students can explore. Check out the BPC website (http://www.bizplancompetitions.com/) to find a listing of many different business plan competitions.

4. Elevator or Quick Pitch Purpose: to encourage students to practice presenting their new business concepts

Although some colleges and universities put on quick pitch or elevator speech competitions, you can easily have a competition in your classroom. Have each student prepare and deliver a oneminute presentation to the class to inform and persuade the class of the viability of a new business concept.

Students are not pitching a great idea, team, or product. Instead, they are pitching what their business will do for investors and for customers. Therefore, they should pitch how their business will solve a tangible problem that exists today. Their pitch must have some kind of “hook” that will immediately spark interest in the audience. They must demonstrate that they, personally, are very excited about their own concept. Finally, they should close their pitch with some kind of request for action from the listeners, such as a request for funding or to join the founding team.

This YouTube video of an award-winning pitch (http://www.youtube.com/watch?v=BIoenMAIxE) is only one of many to help students prepare their pitch.

You could use the pitch assignment early in the term to form teams. Instead of pitching a business concept, a student could practice preparing and delivering a pitch by attempting to persuade other students to join his or her team. In this case, students will pitch what they can do for the team.

lOMoARcPSD|36551809

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Chapter 2. Developing and Screening Business Ideas LEARNING OBJECTIVES 1.

2.

3.

4.

5.

Explain the difference between opportunities and ideas.

Describe the three general approaches entrepreneurs use to identify opportunities.

Discuss the personal characteristics of entrepreneurs that contribute to their ability to recognize business opportunities.

Identify and describe techniques entrepreneurs use to generate ideas.

Discuss actions to take to encourage continuous development of new ideas in entrepreneurial firms.

CHAPTER OVERVIEW This chapter begins by describing the difference between an opportunity and an idea.

Students are reminded that many firms fail, not because the entrepreneurs involved didn’t work hard, but because there was no real opportunity to begin with. The four components of a favorable opportunity (attractive, durable, timely, and anchored in a product, service, or business that adds value) are then discussed.

The middle of the chapter focuses on the three primary ways that entrepreneurs discover opportunities: by studying environmental trends, solving a problem, or finding gaps in the marketplace. This material is followed by a discussion of the personal characteristics of entrepreneurs that heighten their ability to recognize business opportunities. The chapter then transitions to talking about techniques that can help entrepreneurs come up with new business or product ideas. The techniques introduced include brainstorming, focus groups, library and Internet research, and an assortment of other techniques.

CHAPTER OUTLINE I. II.

III.

IV.

The Difference Between Opportunities and Ideas Three Ways to Identify Opportunities A. Observing Trends B. Solving a Problem C. Finding Gaps in the Marketplace Personal Characteristics of Entrepreneurs A. Prior Experience B. Cognitive Factors C. Social Networks D. Creativity Techniques for Generating Ideas A. Brainstorming 25 .

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B. Focus Groups C. Library and Internet Research D. Other Techniques Encouraging the Development of New Ideas A. Establishing a Focal Point for Ideas B. Encouraging Creativity at the Firm Level

CHAPTER NOTES I.

The Difference Between Opportunities and Ideas A. An opportunity is a favorable set of circumstances that creates a need for a new product, service, or business.

B. An opportunity has four essential qualities: it is (1) attractive, (2) durable, (3) timely, and (4) anchored in a product, service, or business that creates value for its buyer or end user.

C. For an entrepreneur to capitalize on an opportunity, its window of opportunity must be open.

2. The term “window of opportunity” is a metaphor describing the time period in which a firm can realistically enter a new market.

D. It is important to understand that there is a difference between an opportunity and an idea.

1. An idea is a thought, impression, or notion. It may or may not meet the criteria of an opportunity. This is a critical point because, as we noted in Chapter 1, many businesses fail not because the entrepreneurs that started them didn’t work hard, but because there was no real opportunity to begin with.

II.

The Difference Between Opportunities and Ideas A. Observing Trends—The first approach to identifying opportunities is to observe trends and study how they create opportunities for entrepreneurs to pursue.

1. Economic Forces a. Economic forces affect consumers’ level of disposable income.

Individual sectors of the economy have a direct impact on consumer buying patterns.

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b. For example, when the economy is strong, people have more money to spend and are willing to buy discretionary products and services that enhance their lives. In contrast, when the economy is weak, not only do people have less money to spend, but they are typically more reluctant to spend the money they have, fearing the economy may become even worse—and that in turn, they might lose their jobs because of a weakening economy.

2. Social Forces a. An understanding of the impact of social forces on trends and how they affect new product, service, and business ideas is a fundamental piece of the opportunity recognition puzzle. b. The persistent proliferation of fast-food restaurants, for example, isn’t due primarily to people’s love for fast food but rather to the fact that people are busy—the number of households with both parents working remains high. c. Some of the social trends that allow for new opportunities are as follows: • • • • • • • •

Aging of the population The increasing diversity of the workforce Increased participation in social networks Growth in the use of mobile devices The increasing focus on health and wellness Emphasis on clean forms of energy including wind, solar, biofuels, and others Continual migration of people from small towns and rural areas to cities Desire for personalization (which creates a need for products and services that people can tailor to their own tastes and needs)

3. Technological Advances a. Given the rapid pace of technological change, it is vital for entrepreneurs to remain on top of how new technologies affect current and future opportunities. b. Once a technology is created, products emerge to advance it. For example, the creation of the Apple iPhone, iPad, and similar devices has in turn spawned entire industries that produce compatible devices.

4. Political Action and Regulatory Changes

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a. Political action and regulatory changes also provide the basis for opportunities. For example, new laws create opportunities for entrepreneurs to start firms to help companies comply with these laws.

This is currently happening as a result of the passage of the Affordable Care Act. b. Political change also engenders new businesses and product opportunities. For example, global political instability and the threat of terrorism have resulted in many firms becoming more security conscious. These companies need new products and services to protect their physical assets and intellectual property, as well as to protect their customers and employees.

B. Solving a Problem 1. Sometimes identifying opportunities simply involves noticing a problem and finding a way to solve it.

2. These problems can be pinpointed through observing trends and through more simple means, such as intuition, serendipity, or chance.

3. Some business ideas are clearly gleaned from the recognition of problems in emerging trends. For example, some older people find traditional cell phones hard to use—the buttons are small, the text is hard to read, and it’s often difficult to hear someone on a cell phone in a noisy room. To solve these problems, GreatCall, a recent start-up, is producing a cell phone called the Jitterbug, which is designed specifically for older users. a. A serendipitous discovery is a chance discovery made by someone with a prepared mind.

C. Finding Gaps in the Marketplace 1. The third approach to identifying opportunities is to recognize a need that consumers have that is not being satisfied—by either large, established firms or entrepreneurial ventures.

2. Large retailers compete primarily on price by serving large groups of customers with similar needs. They do this by offering the most popular items targeted toward mainstream consumers. Although this approach allows the large retailers to achieve economies of scale, it leaves gaps in the marketplace. a. This is the reason that small clothing boutiques and specialty shops exist. The small boutiques, which often sell designer clothes or clothes

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for hard-to-fit people, are willing to carry merchandise that doesn’t sell in large enough quantities for Wal-Mart or Costco to carry.

3. A common way that gaps in the marketplace are recognized is when people become frustrated because they can’t find a product or service that they need and recognize that other people feel the same way.

III.

Personal Characteristics of the Entrepreneur Researchers have identified several characteristics that tend to make some people better at recognizing opportunities than others. These characteristics are as follows.

A. Prior Experience—Several studies show that prior experience in an industry helps entrepreneurs recognize business opportunities.

1. By working in an industry, an individual may spot a market niche that is underserved. It is also possible that while working in a particular area, an individual builds a network of social contacts in that industry that may provide insights that lead to opportunities.

B. Cognitive Factors—Opportunity recognition may be an innate skill or a cognitive process.

1. There are some who think that entrepreneurs have a “sixth sense” that allows them to see opportunities that others miss. This sixth sense is called entrepreneurial alertness.

2. Entrepreneurial alertness is formally defined as the ability to notice things without engaging in deliberate search.

C. Social Networks—The extent and depth of an individual’s social network affects opportunity recognition.

1. In one study, the differences between solo entrepreneurs (those who identified their business ideas on their own) and network entrepreneurs (those who identified their business ideas through social contacts) were examined. The researchers found that network entrepreneurs identified significantly more opportunities than solo entrepreneurs, but were less likely to describe themselves as being particularly alert or creative.

2. An important concept that sheds light on the importance of social networks to opportunity recognition is the differential impact of strong-tie versus weak-tie relationships. Relationships with other people are called ties.

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3. Strong-tie relationships are characterized by frequent interactions, such as ties between coworkers, friends, and spouses. Weak-tie relationships are characterized by infrequent interaction, such as ties between casual acquaintances. It is more likely that entrepreneurs will get business ideas via weak-tie versus strong-tie relationships.

D. Creativity—Is the process of generating novel or useful ideas. Opportunity recognition may be, at least in part, a creative process. It is easy to see the creativity involved in forming many products, services, and businesses.

1. For an individual, the creative process can be broken down into five stages, as shown in Figure 2.4 in the textbook. The five steps are: a. Preparation—Is the background, experience, and knowledge that an entrepreneur brings to the opportunity recognition process. b. Incubation—Is the stage during which a person considers an idea or thinks about a problem; it is the “mulling things over” phase. c. Insight—Insight is the flash of recognition, when the solution to a problem is seen or an idea is born. d. Evaluation—Is the stage of the creative process during which an idea is subjected to scrutiny and analyzed for its viability. e. Elaboration—Is the stage during which the creative idea is put into a final form. The details are worked out, and the idea is transformed into something of value.

IV.

Techniques for Generating Ideas A. Brainstorming 1. Is used to generate a number of ideas quickly. It is not used for analysis or decision making.

2. A brainstorming “session” is targeted to a specific topic about which a group of people are instructed to come up with ideas.

3. The number one rule of brainstorming is that no criticism is allowed, including chuckles, raised eyebrows, or facial expressions that express skepticism or doubt. Criticism stymies creativity and inhibits the free flow of ideas. a. There are two reasons brainstorming generates ideas that might not arise otherwise.

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i. First, because no criticism is allowed, people are more likely to offer ideas than they would in a traditional setting. ii. Second, brainstorming focuses on creativity rather than evaluation.

B. Focus Groups 1. A focus group is a gathering of 5 to 10 people who are selected because of their relationship to the issue being discussed. Although focus groups are used for a variety of purposes, they can be used to help generate new business ideas.

2. The strength of focus groups is that they help companies uncover what’s on their customers’ minds through the give-and-take nature of a group discussion. The weakness is that because the participants do not represent a random sample, the results cannot be generalized to larger groups.

C. Library and Internet Research 1. Libraries are often an underutilized source of information for generating business ideas. The best approach to utilizing a library is to discuss your general area of interest with a reference librarian, who can point out useful resources.

2. Internet research is also important. a. If you are starting from scratch, simply typing “new business ideas” into Google or Yahoo! will produce links to newspaper and magazine articles about the “hottest” and “latest” new business ideas. b. If you have a specific idea in mind, a useful technique is to set up a Google “e-mail alert” using keywords that pertain to your topic of interest.

D. Other Techniques 1. Customer advisory boards. Some companies set up customer advisory boards that meet regularly to discuss needs, wants, and problems that may lead to new ideas.

2. Day-in-the-life research. Other companies conduct varying forms of anthropological research, such as day-in-the-life research.

V.

Encouraging the Development of New Ideas

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A. Establishing a Focal Point for Ideas 1. Some firms meet the challenge of encouraging, collecting, and evaluating ideas by designating a specific person to screen and track them.

2. Another approach is to establish an idea bank, which is a physical or digital repository for storing ideas. a. An example of an idea bank would be a password-protected location on a firm’s intranet that is available only to qualified employees. It may have a file for ideas that are being actively contemplated and a file for inactive ideas.

B. Encouraging Creativity at the Firm Level 1. An employee may exhibit creativity in a number of ways, including solving a problem or taking an opportunity and using it to develop a new product or service idea.

2. Although creativity is typically thought of as an individual attribute, it can be encouraged or discouraged at the firm level.

3. Table 2.5 in the textbook provides a list of actions and behaviors that both facilitate and inhibit creativity at both the organizational level and the individual supervisor level.

BOXED FEATURES: QUESTIONS FOR CRITICAL THINKING What Went Wrong?

Why a Company that Solved a Problem with a Great Product Went Out of Business 1.

In the context of this chapter, make a list of three “takeaways” from this feature that you can learn from and try to avoid if you set out to solve a problem by launching a business.

Answer: This is a good question for a group or individual assignment. Three potential takeaways are as follows: (1) When building a business, it is important to focus on both the quality of the product and business that needs to be built to bring the product to market. Everpix spent too much time on the quality of the product at the expense of the business; (2) Web-based apps are much more compelling if they are viral. If a user can share with friends and family what he or she is doing on an app, then the app is more likely to grow; (3) Marketing matters—you may build the best product or service in the world, but if no one knows about it, it will ultimately fail.

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Chapter 2: Recognizing Opportunities and Generating Ideas

2.

To what degree is there a difference between pursuing an opportunity to solve a problem and building a business? In what ways did Everpix fail to do both?

Answer: There is a big difference. An entrepreneur can pursue an opportunity and build a very elegant solution to a problem. But a profitable “business” must ultimately be built to take the solution to market. Everpix built an elegant solution in part, but it wasn’t viral, which was a big handicap. Everpix failed in terms of building a profitable business.

3.

According to the feature, Everpix spent almost nothing on advertising and promotions. How large of a role do you think that decision played in Everpix’s failure?

Answer: Most students will say that the decision to spend almost nothing on advertising or promotions played a large role in Everpix’s failure. There has to be a way for a company to “get the word out” about its business for people to know about it. Everpix’s shortcoming in this area was compounded by the fact that the service wasn’t viral, so they weren’t getting as many customers as they might have via word of mouth.

4.

Venture capitalists are often accused of swinging for the fences—in other words, they don’t invest in firms that are hitting singles, doubles, or triples. They want home runs. In hindsight, do you think Everpix was building a business that had the potential to hit singles, doubles, or triples, or a business that had the potential to be a home run? Explain your answer.

Answer: Most students will say that Everpix wasn’t thinking big enough—and ultimately was building a business that was akin to a single or a double rather than a homerun. Although they were trying to solve a compelling problem (i.e., helping people store and organize photos in a manner that would encourage people to go back and look at them), they built a site that wasn’t viral and wasn’t marketed sufficiently to attract a large number of users.

Savvy Entrepreneurial Firm How to Learn About Emerging Trends Through the Effective Use of Social Media There are no questions associated with this feature.

Partnering for Success Want Help Fine-Tuning a Business Idea? Find a Mentor 1.

If you were working on fine-tuning a business idea, would you check out one of these online options or an association in your area that provides mentoring and advice for business founders? Why or why not?

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Answer: Students will vary in their answers to this question.

2.

To what degree do you believe that having a mentor can make the difference between an entrepreneur succeeding or failing? In what areas of the entrepreneurial process do you believe that mentors are called upon the most?

Answer: Most students will say that having a mentor could make a substantial difference between an entrepreneur succeeding or failing. An inclination in this direction results from the fact that most students have had a coach, a teacher, or an older relative or friend who has “mentored” them in some way, so they see mentoring as a useful process. Students will vary in terms of what areas of the entrepreneurial process that they believe mentors are called upon the most. It’s been our experience that mentoring is particularly helpful in the areas of manufacturing and production (for start-ups with a physical product) and in raising financing or funding.

3.

Make a list of the organizations in your area that provide mentorship and advice for business founders. Which organizations make the most sense to reach out to for someone who is still in the opportunity recognition stage of the start-up process?

Answer: Students will vary in their answers to this question. Challenge your students to be as exhaustive as possible in the list they complete for their area.

4.

How do you know what to do with a mentor’s advice? If you get advice from several mentors or counselors at organizations such as SCORE and local Small Business Development Centers, how can you best sort through the advice and know which advice to take and which advice to set aside?

Answer: Students will vary in their answers to this question. A reasonable answer is to listen to advice, and then pursue the advice that resonates with you. Another way of thinking about this is to record the advice from different people, and then pursue the advice that seems to represent the consensus of the people that you talk to.

REVIEW QUESTIONS 2-1.

What is a product opportunity gap?

Answer: A product opportunity gap is the gap between what is currently on the market and the possibility for a new or significantly improved product, service, or business that results from emerging trends.

2-2.

How can an entrepreneur tell if a product opportunity gap exists?

Answer: Via careful observation and then via (1) emphasizing or enhancing

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personal characteristics that contribute to opportunity recognition, such as prior experience, cognitive factors, social networks, and creativity and (2) utilizing the techniques highlighted in the chapters for improving opportunity recognition, such as brainstorming, focus groups, and library and Internet research.

2-3.

What is an opportunity?

Answer: An opportunity is a favorable set of circumstances that creates a need for a new product, service, or business.

2-4.

What are the qualities of an opportunity, and why is each quality important?

Answer: An opportunity has four essential qualities: it is (1) attractive, (2) durable, (3) timely, and (4) is anchored in a product, service, or business that creates or adds value for its buyer or end user. An opportunity would not be attractive if any of the qualities were missing.

2-5.

What four environmental trends are most instrumental in creating business opportunities? Provide an example of each environmental trend and the type of business opportunity that it might help create.

Answer: The four environmental trends (or factors) that are most important in creating business opportunities are: economic factors, social factors, technological advances, and political action and regulatory changes.

Environmental Factor

Business Opportunity it Might Create

Economic factor

An increase in disposable income in the hands of teenagers creates opportunities to create new electronics products that appeal to teenagers.

Social factors

An increase in the percentage of elderly people in the U.S. creates opportunities to create new products that help elderly people deal with everyday chores.

Technological factors

An increase in the percentage of people who use smartphones creates opportunities for companies to create products and services that enhance the usefulness of smartphones.

Political Action and Regulatory Changes

The passage of new environmental protection regulations creates opportunities for companies to create products to help firms comply with the regulations.

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How can “solving a problem” create a business opportunity for an entrepreneur to pursue?

Answer: Sometimes identifying opportunities simply involves noticing a problem and finding a way to solve it. These problems can be pinpointed through observing trends and through more simple means, such as intuition, serendipity, or chance. An example of a “problem” is homeowners, who live in coastal areas, who do not have a quick and convenient way to protect their homes when they are threatened by a hurricane or tropical storm. An entrepreneur might see this problem as an opportunity, and start a firm to build custom “hurricane strength” shutters that are easy to put up when a hurricane threatens and are easy to store during clear weather. Most coastal residents currently use plywood to cover their windows when a hurricane threatens. Plywood is neither easy to put up nor is it easy to store during clear weather.

2-7.

How can finding a gap in the marketplace create a business opportunity?

Answer: A gap in the marketplace suggests that particular clientele, such as people who need plus-sized clothing or people who are hard to fit, are not being adequately serviced. Providing products or services for these people represents a business opportunity. The trick is whether there is a large enough critical mass of people in a particular area to support a business that fills a gap in their marketplace for a specific clientele.

2-8.

What is meant by the term opportunity recognition?

Answer: Opportunity recognition refers to the process of perceiving the possibility of a profitable new business or a new product or service.

2-9.

In what ways does prior industry experience provide an entrepreneur an advantage in recognizing business opportunities?

Answer: By working in an industry, an individual may spot a market niche that is underserved.

2-10.

What is entrepreneurial alertness and why is it important to entrepreneurs?

Answer: There are some who think that entrepreneurs have a “sixth sense” that allows them to see opportunities that others miss. This sixth sense is called entrepreneurial alertness, which is formally defined as the ability to notice things without engaging in deliberate search. Entrepreneurial alertness is important, because individuals with higher levels of entrepreneurial alertness will presumably identify more business opportunities.

2-11.

How does an extensive social network provide an entrepreneur an advantage in

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recognizing business opportunities?

Answer: The extent and depth of an individual’s social network affects opportunity recognition. People who build a substantial network of social and professional contacts will be exposed to more opportunities or ideas than people with sparse networks. This exposure can lead to new business starts.

2-12.

What is the difference between a weak-tie and a strong-tie relationship? Which type of tie is most likely to help an entrepreneur find an idea and why?

Answer: Strong-tie relationships are characterized by frequent interaction between coworkers, friends, and spouses. Weak-tie relationships are characterized by infrequent interaction between casual acquaintances. According to research in this area, it is more likely that an entrepreneur will get a new business idea through a weak-tie than a strong-tie relationship because strong-tie relationships, which typically form between like-minded individuals, tend to reinforce insights and ideas the individuals already have. Weak-tie relationships, on the other hand, which form between casual acquaintances, are not as apt to be between like-minded individuals, so one person may say something to another that sparks a completely new idea.

2-13.

What is creativity?

Answer: Creativity is the process of generating a novel or useful idea.

Opportunity recognition may be, at least in part, a creative process. It is easy to see the creativity involved in the formation of many products, services, and businesses.

2-14.

How does creativity contribute to the opportunity recognition process?

Answer: Opportunity recognition may be, at least in part, a creative process. On an anecdotal basis, it is easy to see the creativity involved in forming many products, services, and businesses.

2-15.

What are the five stages of the creative process for an individual?

Answer: The five stages of the creative process are as follows: Stage 1: Preparation is the background, experience, and knowledge that an entrepreneur brings to the opportunity recognition process.

Stage 2: Incubation is the stage during which a person considers an idea or thinks about a problem; it is the “mulling things over” phase.

Stage 3: Insight is the flash of recognition—when the solution to a problem is seen or an idea is born.

Stage 4: Evaluation is the stage of the creative process during which an idea is subjected to scrutiny and analyzed for its viability.

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Stage 5: Elaboration is the stage during which the creative idea is put into a final form.

2-16.

What are the differences between an opportunity and an idea and why are those differences important for entrepreneurs?

Answer: An opportunity has four essential qualities: it is (1) attractive, (2) durable, (3) timely, and (4) anchored in a product, service, or business that creates or adds value for its buyers or end users. An idea is a thought, impression, or notion. It may or may not meet the criteria of an opportunity.

2-17.

Why is “no criticism” the number-one rule for brainstorming?

Answer: Brainstorming is used to generate a number of ideas quickly. It is not used for analysis or decision making. No criticism is allowed. Criticism stymies creativity and inhibits the free flow of ideas.

2-18.

How is a focus group used to generate new business ideas?

Answer: A focus group is a gathering of 5 to 10 people who are selected because of their relationship to the issue being discussed. Although focus groups are used for a variety of purposes, they can be used to help generate new business ideas.

Usually focus groups are conducted by trained moderators. The moderator’s primary goals are to keep the group “focused” and to generate lively discussion.

2-19.

What is the purpose of day-in-the-life research?

Answer: Day-in-the-life research refers to sending a team of testers to the homes (or businesses) of a company’s users, to see how its products are working and gain insights for new product ideas.

2-20.

What is the purpose of an idea bank? Describe how an idea bank can be set up in a firm.

Answer: An idea bank is a physical or digital repository for storing ideas.

2-21.

How do businesses encourage creativity at the firm level?

Answer: Through the techniques articulated in Table 2.5, which include (1) supporting an highlighting creativity’s importance in all parts of the firm, (2) overtly rewarding those demonstrating creativity in their work, (3) investing in resources for the purpose of helping employees become more creative, and (4) hiring people with different skills and viewpoints compared to current employees.

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APPLICATION QUESTIONS 2-22.

Justin plans to write an e-mail message to his dad asking for a loan. The purpose of the loan will be to start a company to sell an environmentally friendly line of cleaning supplies that are suitable for light manufacturing facilities. Justin has spent the past two years developing the products in his spare time, and wants to convince his dad that the idea represents an attractive business opportunity. In your opinion, what information and insights about the company he wants to start should Justin include in the e-mail message?

Answer: Justin should try to convince his dad that (1) the idea meets the four tests of an opportunity, (2) the idea either takes advantage of an environmental trend, solves a problem, or fills a gap in the marketplace, and (3) he has done sufficient research, either through brainstorming, focus groups, and/or library and Internet research, to assure himself that the idea is attractive.

2-23.

Identify three start-ups, other than those discussed in the chapter and listed in Table 2.2, which were started to solve a problem. Briefly describe the problems the three start-ups are solving and how they are going about doing so.

Answer: There are countless examples that students might suggest. Urge your students to browse through magazines such as Inc. and Entrepreneur for suggestions if they are having a hard time coming up with ideas. The Springwise blog (www.springwise.com) also provides fresh examples of new products and services on a near daily basis.

2-24.

Marshall Hanson, the founder of Santa Fe Hitching Rail, a chain of nine steak restaurants in New Mexico, is considering expanding his menu, which is currently restricted to steak, hamburger, potatoes, and fries. He has just read a book about entrepreneurship and learned that entrepreneurs should study social trends to help identify new product opportunities. What are some current social trends that might help Marshall choose items to add to his menu? Given the trends you list, what items do you suggest Marshall add to expand his restaurant’s menu?

Answer: This is a good thought question for students. The obvious social trend that Marshall should pay attention to is the increasing emphasis that American’s are paying to health and fitness. Marshall’s menu features food that is high in fat and cholesterol. Although that menu may appeal to a certain clientele, Marshall might think about broadening his menu to include lower fat foods, such as chicken, fish, and salads.

2-25.

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ideas. Suggest to Tiffany some ways she could generate new ideas for her restaurants?

Answer: Brainstorming, focus groups, and Internet and library research.

2-26.

As mentioned in the chapter, “prior experience” in an industry helps entrepreneurs recognize business opportunities. This concept of “help” extends to prior experience in any aspect of life—whether it is sports, music, or a volunteer activity. In what areas do you have a good amount of prior experience?

How could this prior experience position you to start a business?

Answer: This is a good question for an individual assignment. Make sure your students directly tie their prior experience to a potential business opportunity.

Some students will argue that they really don’t have any prior experience that would lend itself to a business opportunity. In these cases, challenge your students to think harder. All of us have unique experiences that might lend themselves to business opportunities. Alice Brooks and Bettina Chen, the student entrepreneurs featured at the beginning of Chapter 11, used their prior experience of enjoying building things as children to start a very successful company, Roominate, which makes toys that encourage girls and young women to become interested in engineering.

2-27.

Make a list of your strong-tie and weak-tie relationships. Include at least five names on each list. Select two names from your list of weak-tie relationships, and speculate on the types of new business ideas that you think these individuals would be uniquely qualified to assist you with.

Answer: This is a good question for an individual assignment.

2-28.

Imagine that you’ve been hired by Fitbit, the wearable activity tracker, to conduct focus groups on your campus to get a better sense of how Fitbit can be as relevant and useful to college students as possible. How would you go about setting up the focus groups? What are the primary issues on which you would concentrate with the focus groups?

Answer: Most students will repeat the material in the chapter in regard to how to set up a focus group to get a better sense of how Fitbit can be as relevant and useful to college students as possible. Challenge your students to be as thoughtful and creative as possible in regard to the primary issues they’d zero in on in the focus group.

2-29.

How could AJ Forsythe and Anthony Martin, the co-founders of iCracked, the subject of the opening feature for this chapter, have utilized library and Internet research to flesh out their business idea?

Answer: There is undoubtedly much that AJ Forsythe and Anthony Martin could

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have learned about the smartphone industry via library and Internet research, regarding whether the industry is growing or shrinking, the percentage of people who buy high-end smartphones vs low-end smartphones, how often smartphones need repair, and so forth.

YOU BE THE VC 2.1 Company: NatureBox (www.naturebox.com) Business Idea: Launch a monthly subscription service that delivers healthy snacks to subscribers at their doorsteps for a low monthly fee.

You Be the VC Scorecard NatureBox (www.naturebox.com) Item

Score/Comments

Strength of New-Venture Team

1

2

3

4

5

NatureBox was founded by Gautam Gupta (CEO) and Kenneth Chen (CMO). The two met when they were students at Babson College. Gupta worked previously for Proctor and Gamble and has a background in brand strategy and consumer knowledge. He is also a former partner at General Catalyst Partners, a VC firm. Chen is a serial entrepreneur. He launched two successful businesses prior to launching NatureBox. VP for Engineering is David Lee. Lee has a background in software design and development and worked formally for Facebook and HP. Strength of the Opportunity

1

2

3

4

5

Societal trends are working in favor of NatureBox. People are looking for healthier foods, and are increasingly busy. So the fact that NatureBox offers a curated selection of snacks that are delivered directly to the customer’s door sounds appealing. On the other hand, it’s hard for us to see that NatureBox is solving a problem. Plentiful selections of healthy snacks are available in all grocery stores—let alone health conscious stores such as Whole Foods. Although people are busy, they still have to shop. It’s not hard to find health snacks in stores.

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Chapter 2: Recognizing Opportunities and Generating Ideas

Strength of the Industry

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2

3

4

5

Although the industry for health snacks may be growing, it is a crowded market with new competitors entering continually. As a result, it’s hard for us to see the industry as a strength.

Strength of Business Model

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2

3

4

5

This is a tough one. The subscription business model is attractive in that it encourages repeat purchases. Once NatureBox enrolls a customer, its product goes out and the customer is billed monthly until the customer tells NatureBox to stop. We also like that fact that NatureBox sells full-sized versions of the snacks that are in its boxes. On the other hand, NatureBox is asking people to change the way they buy snacks. Virtually all consumers shop in stores where plentiful selections of healthy snacks are available, so it’s hard for us to see how NatureBox is offering something unique. Our guess is that churn will become an issue. Eventually, NatureBox will see attrition in the number of subscribers it has and will have to continually advertise to win new subscribers just to stay even.

Average Score

3.5/5.0

Decision: We would not fund this firm. A big plus in NatureBox’s favor is the strength of its management team. We have no quibbles there. In fact, the fact that Gupta and Chen are at NatureBox’s helm makes us wonder what they see about the potential of NatureBox that we’re not seeing. The negatives for NatureBox are the crowded nature of its industry, the lukewarm opportunity, and uncertainties regarding its business model.

These are just too big of negatives for us to overcome. As a result, as the individual sharks on Shark Tank often say, “we’re out.”

YOU BE THE VC 2.2 Company: Parking Panda (www.parkingpanda.com) Business Idea: Create a service that allows motorists to find parking spots on a regular basis or for special events, and allow parking space owners (both individuals and commercial lots) a way of connecting with drivers to rent underutilized parking spaces.

You Be the VC Scorecard

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Parking Panda (www.parkingpanda.com) Item

Score/Comments

Strength of New-Venture Team

1

2

3

4

5

Parking Panda was founded at a Startup Weekend in Maryland in 2011. Following the Startup Weekend, cofounders Nick Miller and Adam Zilberbaum entered the ER Accelerator program in New York City. Prior to Parking Panda, Miller spent a year working in product management for Living Social. He also spent time at New York City start-ups Crowdtap and Group Commerce. Zilberbaum started programming when he was in the 5th grade. His previous stints include lead engineer at GAAP Software where he built enterprise software solutions for Fortune 500 companies and running and owning his own IT consulting firm.

Strength of the Opportunity

1

2

3

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This strikes us as a large opportunity. The parking problem is pervasive in mid-sized and large cities (not to mention college campuses) and will only get worse as a result of the continual migration of people from rural areas and small towns to cities. Someone will solve the parking problem, and the company that provides an attractive solution to the problem will reap rich rewards.

We like what we see in terms of how Parking Panda is approaching the parking problem. The company’s future hinges on whether they will be able to execute and scale the business Strength of the Industry

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According to the International Parking Institute (www.parking.org), the parking industry generates between $25 billion and $30 billion in gross revenue each year in the United States alone. The potential of the industry is larger. Parking Panda hopes to convert private driveways in parking places that can be used when their owners are away and hopes to better fill empty parking spaces in commercial lots. Demand for parking spaces is likely to continue to go up. Cheap gas prices are putting more cars on the road. A risk for 43 .

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Parking Panda is regulation. If they are successful converting private driveways into paid parking spaces, they might experience resistance from neighborhood homeowners associations and community groups. The parking problem is so big, however, it’s hard to see how a solution to a pervasive problem can be held back.

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Parking Panda’s business model is straightforward. It collects a commission for every parking space it helps its customer’s rent. Parking Panda’s efforts should be assisted by city governments, which has a big incentive to find solutions to the parking problem. This aspect of Parking Panda’s business model is particularly attractive.

Average Score

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Decision: We would fund Parking Panda. The management team is young and untested, which creates an unknown. But the opportunity, industry, and business model are strong.

As mentioned above, the parking problem is large and pervasive, and someone will eventually solve the problem. If it’s Parking Panda, Parking Panda could become a large firm. The wildcard for a company like Parking Panda is how quickly and effectively they can expand. There are certainly regulatory issues in each city that vary and must be dealt with. The silver lining is that everyone benefits by the parking problem being solved.

We’re looking forward to watching Parking Panda’s progress over the next one to three years.

Special note: Our students have pointed out to us the elegance of Parking Panda’s Web site. It is visually appealing and very easy to navigate. This tells us that Parking Panda is placing emphasis on exactly the right metric—the experience that the customer has in utilizing its service.

CASES Case 2.1 Dropbox: Solving a Compelling Problem in a Smooth Manner DISCUSSION QUESTIONS 1.

What environmental trends are working in Dropbox’s favor as the firm seeks to operate profitably? What environmental trends may work against Dropbox and why?

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Answer: The environmental trends that are working for Dropbox are (1) an increased dependence that people have on technology; (2) the increasing amount of digital storage space that people need, as a result of storing photos and videos along with word documents and spreadsheets; (3) an increase in the number of platforms that people work from, which now includes desktop computers, laptop computers, tablet computers, and smartphones; and (4) an increasing mobile population. All of these factors favor Dropbox’s cloud-based storage solution that can be accessed from all of a user’s devices. The trends working against Dropbox are (1) the sheer number of devices that people have is increasing the complexity of Dropbox’s service and (2) the continual drop in the cost of storing digital content is bringing new competitors in the market.

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What personal characteristics does Drew Houston possess that suggest he may have what it takes to be a successful entrepreneur?

Answer: Drew Houston seems to have all the characteristics of a successful entrepreneur highlighted in Chapter 1, which include passion for the business, product/customer focus, tenacity despite failure, and execution intelligence. We don’t know enough about Drew Houston to make an informed judgment regarding the personal characteristics mentioned in Chapter 2. He did demonstrate a certain degree of entrepreneurial alertness and creativity in conceiving of the Dropbox business idea and the manner in which the idea has been executed.

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What problem did Dropbox’s founders solve with the service they developed?

Answer: Dropbox has completely solved the problem of creating a document on one device (i.e., desktop computer at work) and having the same document available on another device (i.e., laptop computer at home). The same applies for storing any piece of digital content that Dropbox allows, such as photos or videos, available on multiple devices.

Case 2.2 Rover.com: Don’t Chuckle: This Is One Impressive Business Idea 1.

In the United States, what environmental trends are supporting the development of Rover.com’s business?

Answer: Most students will assemble a list that includes (1) increasingly mobile population—which necessitates that dog owners need their dogs watched by others more often, (2) aging of the population—many older people have dogs for companionship, and (3) increase in the spread of technology and mobile devices— people may be more willing to leave their dogs in the care of others if they can get frequent updates on their dogs via e-mail and other forms of digital communications.

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How might Rover.com use focus groups to gain a better understanding of its current and potential customers and their needs?

Answer: Most students will revert to the information in the chapter about focus groups. Challenge your students to apply the material in the text to specifically how Rover.com would setup focus groups and utilize the information gleaned through them.

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In this chapter, we noted that a true business opportunity is attractive, durable, timely, and anchored in a product or service that creates value for a buyer. To what extent does Rover.com’s service satisfy each of these criteria?

Answer: Rover.com’s service is attractive in that it places a dog owner’s dog in a home rather than a kennel. This aspect of Rover.com’s service provides a dog more personalized attention and is healthier, given that the dog will not be in close proximity to a large number of other dogs, some of which may be sick. The service is durable in that the number of dogs and dog owners in the United States continues to go up. The amount of money that people spend on their pets, dogs included, also continues to go up each year. The service is timely in that the population in general is increasingly mobile, meaning that people travel more which necessitates dog owners needing to find others to watch their dogs. Finally, the service is anchored in a product or service that creates value for a buyer. The entire intent of Rover.com is to provide a dog owner a better experience that placing a dog in a kennel. There are many examples throughout the case where Rover.com achieves this objective.

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