Venture Opportunities and Business Opportunities

Submitted by: Philip Anderson, INSEAD

 

 

Course Objectives

 Any entrepreneur or entrepreneurial team preparing a business plan usually has at least five good ideas for a prospective venture.  How do you choose which of them is the most promising platform for a significant growth venture?

 

Many executives in larger organizations receive dozens if not hundreds of proposals per quarter from startups that want to forge a strategic relationship.  If you only have the time and capacity to work with two or three, how do you decide which are the most promising?

 

It often happens that half a dozen newly-founded firms pursue very similar opportunities.  How can you identify which are likeliest to succeed and dominate the niche that all are attempting to pioneer?

 

Understanding the difference between a mediocre, a good, and a tremendous venture opportunity is important for all managers, because each of you will encounter entrepreneurs as customers, suppliers, partners, rivals and/or portfolio companies.  This course is designed to help you assess the potential of a venture and improve its positioning, whether you want to start a company, buy into a company, or create a new business inside an existing organization.  It is targeted at those who wish to work for or with ventures that can grow to a significant size, not those primarily interested in small business.

 

The notion that one can analytically assess the quality of a venture opportunity may seem paradoxical.  After all, if there were a formula for evaluating the prospects of a startup, then all entrepreneurial firms would end up doing more or less the same thing.  Almost by definition, an entrepreneur succeeds because s/he pursues a somewhat idiosyncratic vision, creating a value proposition that others are overlooking, or that others comprehend but cannot implement.  So why take a course in assessing venture opportunities?

The answer is that ventures succeed in part if they can articulate a vision that attracts talent, capital, and partners.  There is no formula for creating an insight that serves as the foundation of a venture.  However, various outside stakeholders evaluate a startup’s prospects in regular, predictable ways.  Anyone involved in founding a company or working with an entrepreneur needs to understand how prospective investors, partners, and recruits are likely to assess that enterprise.  This course helps you understand what professionals typically look for when sizing up a venture, giving you a tool set to appraise and improve your own ideas or someone else’s.

 

At a deeper level, the purpose of this course is to assist you as you develop your own original frameworks for evaluating venture opportunities.  By interacting with the professor, your classmates, and selected alumni, you will challenge and sharpen your thinking about how one identifies and enhances extraordinarily promising entrepreneurial enterprises.  The “deliverable” of this course is not material that you absorb.  It is your enhanced ability at the end of the term to take apart an entrepreneurial business opportunity and improve it.  The true objective of this course is to develop your capacity for generating original insight.

 

We begin by examining how to position yourself so that you encounter great opportunities.  Very few growth businesses are born from brainstorming sessions; creativity alone is not enough to generate a great opportunity, and there are more innovative ideas in the air than one can implement.  Rather, entrepreneurs spot problems that can be solved profitably (relative to the risks they entail) in novel ways.  The challenge is building your career and your connections so that you come into contact with a steady stream of growth opportunities.

 

Given such a stream, how do you pick which prospect is the most promising and will generate the most excitement among prospective investors, partners, and recruits?  We will focus on four broad determinants of success:

 

• Management: quality of management is the most important factor of all; will you be able to attract and retain top-quality people, who adapt as your opportunity evolves?
• Market: are you tapping a growth market with attractive customers, willing to pay well?
• Growth: can the business grow quickly, exploiting options one often cannot foresee?
• Positioning: what makes you unique, and how do you convert that into high margins?

 

Venture Opportunities and Business Models is a general management elective, not a strategy course.  You will draw on many concepts from the core courses, especially from Strategic Management, Marketing Management, and Managing Organisations.  VOBM complements the elective Industrial and Competitive Analysis, which presents a comprehensive and rigorous toolkit for evaluating competitors and thinking about strategic positioning in general.  VOBM has a focus that is both narrower (in that we focus on identifying attractive and under-exploited opportunities that can support a significant growth venture) and broader (in that we focus on issues in marketing, people assessment, and finance, for example, that are outside the purview of a strategy elective).

 

The course is well-suited for those who do not necessarily want to work in a growth venture, but who want to understand how to assess one.  It is also an excellent gateway to entrepreneurship electives designed for those who want to build or buy a business.  During P3, you can identify an attractive opportunity and begin exploring it.  This would give you a head start in crafting a strategy during P4 for starting (New Ventures) or buying (Realizing Entrepreneurial Potential) an enterprise to exploit that opportunity.  The P5 Business Plan Workshop gives you an opportunity to pull your work from P3 and P4 together into a business plan, which you may enter into INSEAD's Roland Berger Business Plan Competition.  If you are interested in private equity, the course will show you how this class of investors assesses opportunities, providing knowledge you can build on via the Private Equity elective and/or the Managing Buyouts elective.  VOBM is about identifying worthwhile opportunities and enhancing them, not about running businesses that exploit those opportunities.  Electives such as Managing Growth and/or Corporate Entrepreneurship (in addition to New Ventures and/or Realizing Entrepreneurial Potential) would give you the skills needed to manage a growth venture, whether it is a startup, a buyout, or a new line of business for an existing enterprise.

 

 

Section 1. Introduction to the course

 

What will you learn how to do if you take this course? 

This session introduces the course, exploring by means of an exercise how each student presently thinks about analyzing venture opportunities.

 

Readings:

• Shepherd, Dean.  Venture Capitalists' Assessment of New Venture Survival.  Management Science, May 1999, Vol. 45 Issue 5.

• [Optional] Buffett, Warren.  Three Lectures to Notre Dame Faculty, MBA Students, and Undergraduate Students, pp. 1-9.  [The entire lecture is available at http://www.tilsonfunds.com/BuffettNotreDame.pdf if you are interested.]   

 

Section 2. How venture opportunities are screened

 

How do professionals integrate criteria into an assessment of a venture's prospects?

Experienced professionals such as venture capitalists, lawyers, underwriters, and prospective board members typically use a combination of formal analysis and intuition to assess the potential of a venture.  In this session, we explore how pattern recognition underpins the evaluation process and how to create your own framework for assessing a venture.

 

Readings:

• Gavetti, Giovanni and Jan Rivkin.  How Strategists Really Think: Tapping the Power of Analogy.  Harvard Business Review, April, 2005, Vol. 83 Issue 4, pages 54-63.

• [Optional] Baron, Robert.  Opportunity Recognition: A Cognitive Perspective. Academy of Management Proceedings, 2004. 

 

Section 3. Quality of management

 

Will the venture attract and retain exceptionally good managers?

Most professional investors believe that the quality of management is the single most important factor to evaluate when assessing a venture.  Identifying high-quality people in an entrepreneurial context can be challenging, and a firm’s needs often change as it grows.  Being able to identify the holes in a management team, and fill them by attracting the best people to a venture is equally challenging.  This session will help you assess a venture’s quality of management and its ability to secure and retain first-rate talent.

 

Readings:

• Hamm, John.  Why Entrepreneurs Don't Scale.  Harvard Business Review, December 2002, Vol. 80 Issue 12.

• Hammonds, Keith.  Soul Proprietor. Fast Company¸ August 2000, Issue 37

• [Optional] Topgrading the Organization Directors and Boards, Spring 1997

 

Section 4. Panel: Attracting and retaining top talent

 

Three professionals involved with executive recruiting for buyouts and startups will discuss how they identify top talent, with some emphasis on differences between Asia and other geographies.  They will also suggest how you might structure your career if you would like to become an attractive senior hire for a growth venture.

 

The panel will be conducted for both sections in a special joint evening session in the Janssen Auditorium.

Visiting Executives: 

• Alberto Bautista, Sector Partner, 3i

• Sanjay Chakrabarti, Founder and Director of MobiApps and Partner, Columbia Capital

• Philip DeFord, Practice Leader Financial, Boyden Global Executive Search

 

Section 5. Market analysis

 

How do you identify a great market and the right initial customers? 

Because business opportunities evolve in unforeseen ways, growth markets are very important; a fast-growing market allows more room for error.  Furthermore, ventures that ride strong trends have greater prospects of success.  Given in an attractive market, the most successful ventures are those that win the most valuable reference customers without becoming overly dependent on a few key clients.  This session will help you assess whether a venture is pursuing a more promising or less promising market opportunity and customer base. 

 

Readings:

• Brown, Roger.  How we built a strong company in a weak industry.  Harvard Business Review, 79(2): 51-58 (2001)

• [Optional] Zeithaml, Valerie; Rust, Roland; and Lemon, Katherine.  The customer pyramid: Creating and serving profitable customers.  California Management Review, 43(4): 118-143 (2001)

 

Section 6. Case: May Lee at Lotus Mediahouse

 

In the spring of 2007, the May Lee Show was broadcast all over Asia by Star Networks as an Asian version of the Oprah Winfrey show.  May Lee, a veteran host of both television news and talk shows, must now decide what opportunities to pursue next as she expands her production vehicle, Lotus Mediahouse, to take advantage of the momentum and recognition generated by the show’s debut run. 

 

Visiting Executive: May Lee, founder and CEO, Lotus Mediahouse

 

Section 7. Scalability

 

Will the business be able to grow to a meaningful size? 

Many ventures attract little outside interest because their ability to grow is inherently limited.  Others have failed because they were unable to cope with rapid growth.  “Scalability” refers to an enterprise’s ability to grow profitably as demand increases.  This session will help you understand typical barriers to growth, and design strategies that are able to overcome them.

 

Readings:

• Hagel, John.  Leveraged Growth: Expanding Sales Without Sacrificing Profits.  Harvard Business Review, October 2002, Vol. 80 Issue 10 

• [Optional] Sawhney, Mohanbir; Balasubramanian, Sridhar; Krishnan, Vish V. Creating Growth with Services.   MIT Sloan Management Review, Winter 2004, Vol. 45 Issue 2, p34-43.

 

Section 8. Flexibility and focus

 

Does the opportunity have the foundations to generate multiple options for revenue streams? 

Ventures must overcome an inherent tension.  On the one hand, in order to succeed, they typically must focus on doing a narrow range of things very well.  On the other hand, in order to grow, especially as the environment changes in unforeseen ways, they must be able to shift their scope, the range of products and services they offer and segments they serve.  Expansion may generate significant organizational challenges, for example when product companies build revenue streams based on delivering services.  This session will help you understand how to expand a venture’s “footprint” without losing the advantages of intense focus.

 

Readings:

• Sull, Donald N.  Disciplined Entrepreneurship.  MIT Sloan Management Review, Fall 2004, Vol. 46, Issue 1

[Optional] Sterling, John.  2002.  Rubicon Technology: A High Tech Startup Successfully Practices Strategic Focus. Strategy & Leadership Vol. 30 no. 6 pp. 18-22

 

Section 9. Case: Switch Media

 

INSEAD Alumnus Christopher Stenhouse has recently founded a company based in Sydney, Australia that manages its corporate clients’ online video presence (think “Youtube for corporations”).  What is the right business model and combination of flexibility with focus to maximize the value of the enterprise?

 

Visiting Executive: Christopher Stenhouse, Founder and CEO, Switch Media

 

Section 10. Business models and profit leverage

 

How does the business create more cash flow and profitability without excessive investment? 

A business is more attractive when it can generate profits with relatively little investment, and can sustainably grow revenues faster than costs, including the cost of capital.  Additionally, producing strong cash flow and economizing on working capital may be as important as sustaining profitability.  Different types of business incur costs, realize revenues, and consume capital in different ways, helping to explain why some sectors attract capital and talent more readily than others.  This session will help you analyze and improve a venture’s design for creating profits and cash.  

 

Readings:

• Magretta, Joan.  Why Business Models Matter.  Harvard Business Review, May, 2002, Volume 80 Issue 5.

• [Optional] Hamermesh, Richard; Marshall, Paul and Pirmohamed, Tax.  Note on Business Model Analysis for the Entrepreneur.  HBS 9-802-048

 

Section 11. Case: Enchanting India

 

Parikshat Laxminarayan and Alex Metzler wrote a business plan for a high-end travel business while they were earning their MBA’s at INSEAD.  Three years later, Enchanting India is flourishing but is at a crossroads: what is the best way to grow revenues from existing customers while penetrating new market segments?

 

Visiting Executive: Parik Laxminarayan, founder and CEO, Enchanting India

 

Section 12. Case: Peng Ong

 

Peng Ong is a serial entrepreneur whose previous ventures include Match.com, Interwoven, and Encentuate.  As Encentuate reaches maturity, he is contemplating a return from Silicon Valley to Singapore to start a fourth venture.  Which of five general sectors is the most promising and what kind of venture should he start next?

 

Visiting Executive: Peng Ong, founder and CEO, Encentuate

 

Section 13. Distinctive capabilities and strategic positioning

 

Is the venture able to mitigate profit erosion from competition? 

In order to convert growth into profitability, a venture must dominate a niche on the rise by building a set of unique assets that are difficult to imitate.  Once rivals understand your business model, you must be able to fend off imitators and maintain points of differentiation.  Often, successful competition against large incumbents depends on understanding what they will not do, as opposed to what they cannot do (typically because of cultural or organizational constraints).  This session will help you analyze the strength of a venture’s distinctive capabilities and enhance its ability to exploit rivals’ predictable competitive blind spots.

 

Readings:

• Coughlan, Peter.  The leader’s (Dis)advantage.  HBS 9-701-084

• Rivlin, Gary.  Wallflower at the Web party.  New York Times, October 15, 2006.

• [Optional]  Burgelman, Robert.  Strategy as vector and the inertia of coevolutionary lock-in.  Administrative Science Quarterly, 47: 325-358 (2002)

 

Section 14. Capstone case: Gareth Dando at Southern Cross

 

INSEAD alumnus Gareth Dando is a co-founding Managing Director of Southern Cross Venture Partners, a technology-focused venture capital firm with offices in Sydney, Brisbane, and California.  We will do an exercise with Gareth that will remind you of the first day of class: looking at the information he had, which (if any) of three prospective early-stage investments would you back and why?  Is your analysis any more sophisticated today than it was at the beginning of the term?

 

Visiting Executive: Gareth Dando, Managing Director, Southern Cross Venture Partners

 

Section 15. Capstone case: the future of the music industry

 

Changes wrought by digital distribution have created a flood of new business models aimed at exploiting new opportunities in the music industry.  We will examine three of these from the point of view of a venture capitalist to assess which seems the strongest and why.

 

Section 16. Capstone session

 

In the final session of the course, we will look back at the entrepreneurs who have joined us as visiting executives and the ventures they are pursuing.  Pulling together the tools and concepts we have learned during the term, we will compare and contrast their ventures, identifying which one you view as the most promising and why.  You will be asked to produce a one-page writeup after this session summarizing your thoughts; this will impact your participation grade significantly.  Your course evaluation will take place at the end of the session.