Chapter 4 Opportunity recognition

evaluation

Learning Outcomes

On completion of this chapter you will be able to: • Understand the foundations for opportunity evaluation• Explain the role of cognitive biases and heuristics in opportunity

evaluating• Understand the different criteria used by venture capitalists to evaluate new venture proposals• Identify the characteristics of successful products and services• Determine how new ideas can be analysed to filter out those that

are obviously not feasible or marketable;• Assess the viability of product and service ideas; and• Develop and implement a screening guide that can be used to establish which product or service ideas should be pursued.

Valuable business opportunity defined

A perceived means of generating economic value that has not

previously been explored and are not currently being exploited by

others and meets a need or desire

Central characteristics to opportunity

• Potential economic value: potential to generate profit.

• Newness: including a product, service or technology that did not exist

before.

• Perceived desirability: moral and legal acceptability of the new

product and or service in society

Foundations of opportunity recognition and evaluation

In developing a viable business opportunity, the entrepreneur will

have to use their cognitive abilities (cognitive approach), develop

objectivity (the ability to let go of their personal biases, likes and

dislikes) in order to be able to recognise and deal with risks in their

pursuit of the most viable opportunity

Cognitive approach

The entrepreneur’s preferred way of gathering, processing, and

evaluating information

Cognitive biases and heuristics

• Opportunity evaluation needed to choose opportunity to be exploited

• The evaluation criteria reflect values influencing expectations,

personal goals, and effort exerted

• Entrepreneurs tend to exhibit cognitive biases and overestimate

chances of success

• Cognitive biases are common types of mental shortcuts used to

make judgments about opportunities and the business

Role of cognitive biases and heuristics

• Risk perception and biases such as

• Overconfidence

• Planning fallacy

• Believe in the law of small numbers

• Illusion of control

Entrepreneurs evaluation of ventures

• Ability to react well to potential growth in the target market

• Demonstrated market acceptance

• Ten times return on assets in the next five to ten years

• The entrepreneur’s risk

Venture capitalist evaluation

• Experience and a good management team• Proprietary product or service• Marketability• Personal commitment and involvement of the entrepreneur• Openness and honesty• Knowledge and experience• Realistic financials• Exit plan• Return rate on investment• Intellectual property

Characteristics of successful products/services

• Fulfils a need or want• Have either a niche or mass-market appeal• Render an income and profit• Should often be replenished or repurchased by the customer• Compatibility with existing attitudes and beliefs and a drastic change in

the buyer's behaviour should not be necessary• Simple so that the buyer will understand it. • Be easy to communicate the results or benefits to potential users.• Should be made available to potential customers to try out without a

large risk. • Should be readily available once the buyer decides to make the

purchase

Feasibility of products or services

• Products or service screening questions

• Skills of the entrepreneur/ venture team

Marketability • Customers: who and where are they and what are their needs,

habits and preferences

• Competitors: mere fact that there are competitors could be an

indication that the market is large enough to absorb a new product

• Suppliers: can play a vital role at the start-up stage of a new

business venture

• Marketing of products/services

Entrepreneur/ Entrepreneurial team

• Personality and personal preferences

• Skills

• Traits/attributes

• Relevant experience

• Synergy

• Exit plans

Resources • Accessibility of resources

• Optimising resources

• Sustainable advantage

• Type and nature of Industry

• Capital Requirements

Idea screening guide

The idea-screening guide is an instrument that can be used for

choosing between different ideas to find the one or two that can be

pursued.

Idea screening guide

• Establish criteria to be used

• Assign weighting (1-10) to each criterion

• Rate (1-10) extent to which each idea meet each criterion

• Multiply rating with weight of criterion

• Add score for each idea

• Idea with highest total should be tentative first choice