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IDEA IDEA v. v. OPPORTUNITY OPPORTUNITY ---- ---- Essentials of Recognizing Essentials of Recognizing Opportunity Opportunity mark leslie mark leslie [email protected] 650/561-1228 650/561-1228

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Page 1: 070801 the startup idea

IDEA IDEA v.v. OPPORTUNITY OPPORTUNITY--------

Essentials of Recognizing Essentials of Recognizing OpportunityOpportunity

mark lesliemark [email protected]

650/561-1228650/561-1228

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IngredientsIngredients

► ProductProduct►MarketMarket► Factor Markets/Service Businesses Factor Markets/Service Businesses ► TeamTeam► CapitalCapital► Economic ModelEconomic Model► Personal FitPersonal Fit► Risk AnalysisRisk Analysis► Business PlanBusiness Plan

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Product – just a place to startProduct – just a place to start► The world will NOT beat a path to the door of the inventor of the The world will NOT beat a path to the door of the inventor of the

better mousetrapbetter mousetrap► Idea itself does not have valueIdea itself does not have value► Contrary to popular belief, entrepreneurial ideas are rarely Contrary to popular belief, entrepreneurial ideas are rarely

“stolen”“stolen” (All the other entrepreneurs think they are the smartest)(All the other entrepreneurs think they are the smartest) It is all about executionIt is all about execution

► Even “being first” is over-rated – many successes were from Even “being first” is over-rated – many successes were from “follower” companies“follower” companies IBM vs. UnivacIBM vs. Univac Excel vs. Lotus 123 vs. Visi-CalcExcel vs. Lotus 123 vs. Visi-Calc Google vs. Yahoo vs. Alta VistaGoogle vs. Yahoo vs. Alta Vista iPod vs. MP3 playersiPod vs. MP3 players iPhone vs. Nokia?)iPhone vs. Nokia?)

► It is one among many, many relevant variable factorsIt is one among many, many relevant variable factors► An idea is “just a place to start”.An idea is “just a place to start”.

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Product – Look for the Product – Look for the DiscontinuitiesDiscontinuities

► What are some examplesWhat are some examples MicroprocessorsMicroprocessors Telecom de-regulationTelecom de-regulation InternetInternet Berlin WallBerlin Wall

► Discontinuities kill older companies that do not Discontinuities kill older companies that do not adapt, create opportunities for many new onesadapt, create opportunities for many new ones Rapidly changing market = opportunityRapidly changing market = opportunity

► What does Andy Grove’s famous saying “only What does Andy Grove’s famous saying “only the paranoid survive” really Mean?the paranoid survive” really Mean?

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Product – Current Product – Current discontinuitiesdiscontinuities

► Technological?Technological? Silicon speed doubles every 18 monthsSilicon speed doubles every 18 months Storage capacity doubles every 12 monthsStorage capacity doubles every 12 months Communication Bandwidth doubles every 6 monthsCommunication Bandwidth doubles every 6 months Wireless revolutionWireless revolution IP telephonyIP telephony Telecom Backbone BandwidthTelecom Backbone Bandwidth

► Other?Other? Sept 11 terrorist attackSept 11 terrorist attack LinuxLinux Human Genome SequencingHuman Genome Sequencing 911 GPS cell phones911 GPS cell phones

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Product – key questionsProduct – key questions

► Radicalness of productRadicalness of product ““Faster / Better / Cheaper”Faster / Better / Cheaper” InnovationInnovation

► Incremental change Incremental change Brave New WorldBrave New World

► Change the way people do things; orChange the way people do things; or► Is it feasible?Is it feasible?

How much timeHow much time What special skillsWhat special skills What is the riskWhat is the risk Similar project been done before?Similar project been done before?

► How much R, how much DHow much R, how much D

rr & & DDR&d

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Product – key questionsProduct – key questions

► Barriers to EntryBarriers to Entry IPIP

► Can the IP be protectedCan the IP be protected► Is it sufficiently difficult (not trivial)Is it sufficiently difficult (not trivial)► Is it too difficult?Is it too difficult?

Network Effect (i.e., e-Bay)Network Effect (i.e., e-Bay)► This is VERY, VERY hard to doThis is VERY, VERY hard to do

Business Model (i.e. Dell vs. Compaq)Business Model (i.e. Dell vs. Compaq)► This is even harder to doThis is even harder to do

Is it non-obviousIs it non-obvious► Veritas created the segment “storage management Veritas created the segment “storage management

software”software”► Starting in 1999 there have been over 500 startup Starting in 1999 there have been over 500 startup

companies in the “storage space”companies in the “storage space”

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MarketMarket

►Market sizeMarket size TAM / SAMTAM / SAM Where can you get market data?Where can you get market data?

►Market growth rateMarket growth rate►Market structureMarket structure

MaturityMaturity In state of flux or establishedIn state of flux or established Market of big players, established products Market of big players, established products

and pricesand prices► Vertical MarketsVertical Markets

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MarketMarket

► Product price and cost vs. market (gross Product price and cost vs. market (gross margin)margin)

► Market willingness to work with startupMarket willingness to work with startup May not stay in businessMay not stay in business May not be able to support the customerMay not be able to support the customer

► How many can you sell, how quickly?How many can you sell, how quickly?► How big is the ultimate market?How big is the ultimate market?

How big to be interesting as venture backed How big to be interesting as venture backed deal?deal?

► Can the company become a market leader?Can the company become a market leader?

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Market – CompetitionMarket – Competition

► Are you entering an existing market?Are you entering an existing market? How will the leader’s react?How will the leader’s react? How quickly?How quickly? Why can’t they simply do the same and put you out of Why can’t they simply do the same and put you out of

business?business?► Competitive Alliances?Competitive Alliances?► Are there other startupsAre there other startups

How many?How many? How well financed, quality of team, etc?How well financed, quality of team, etc? Why do you believe that you are different – uniquely Why do you believe that you are different – uniquely

qualified to win the competitive race?qualified to win the competitive race?►Why do each of your competitors believe the same Why do each of your competitors believe the same

thing?thing?

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Market: Time to Build the Market: Time to Build the BusinessBusiness

► Most High Value Businesses Take Time to Build, e.g. Most High Value Businesses Take Time to Build, e.g. HP, Veritas, IntelHP, Veritas, Intel

► Does Market Allow Bootstrapping? E.g., Pure Software, Does Market Allow Bootstrapping? E.g., Pure Software, Microsoft, Integrated Systems/WindRiver, etc. Microsoft, Integrated Systems/WindRiver, etc.

► Interestingly, many of the most successful businesses Interestingly, many of the most successful businesses raised little capital (some took a long time to ramp up)raised little capital (some took a long time to ramp up)

Cisco = $2.5MCisco = $2.5M Sun = $4MSun = $4M Veritas = $4MVeritas = $4M VMware = $3MVMware = $3M Microsoft <$2MMicrosoft <$2M Oracle < $2MOracle < $2M eBay < $1MeBay < $1M Google < $5MGoogle < $5M etc. etc.etc. etc.

► Excessive capital raised can have disasterous results: Excessive capital raised can have disasterous results: Webvan, Next, Momenta, maybe Vonage Webvan, Next, Momenta, maybe Vonage (SunRocket)??(SunRocket)??

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Bootstrapping: Conditions for Bootstrapping: Conditions for SuccessSuccess

►Market Segment is Small with No Market Segment is Small with No Gorillas or Gorilla Has Little TractionGorillas or Gorilla Has Little Traction

►Market Growth is Not ExplosiveMarket Growth is Not Explosive►You’ve Created a New MarketYou’ve Created a New Market►Management Has Time to Learn the Management Has Time to Learn the

BusinessBusiness►Examples: Microsoft, Oracle, Wind Examples: Microsoft, Oracle, Wind

RiverRiver

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TeamTeam

► ExecExec Big company /entrepreneurial successBig company /entrepreneurial success Domain expertsDomain experts Worked together / Navigated difficult situationWorked together / Navigated difficult situation Unquestioned Integrity / Intellectual honestyUnquestioned Integrity / Intellectual honesty Successful recruiting track recordSuccessful recruiting track record Able to raise capitalAble to raise capital

► TechnicalTechnical Technical leadershipTechnical leadership Demonstrated ability to develop ProductsDemonstrated ability to develop Products

► OtherOther No Trainees – “Done it before”No Trainees – “Done it before”

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CapitalCapital

►How much time and money does it take to build How much time and money does it take to build the product?the product?

►How much time and money does it take to How much time and money does it take to launch, market and sell and support?launch, market and sell and support? How much to “scale up” the business?How much to “scale up” the business?

►Will the capital markets finance a project of this Will the capital markets finance a project of this size and duration?size and duration?

► Is the investment commensurate with the Is the investment commensurate with the market opportunity?market opportunity?

►How do you stage the capitalization to get the How do you stage the capitalization to get the most money for the least cost? (topic for another most money for the least cost? (topic for another presentation)presentation)

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Economic ModelEconomic Model► Business Model (steady state)Business Model (steady state)

Revenue, COGS, COS, ongoing R&D, profit?Revenue, COGS, COS, ongoing R&D, profit?►For example, what is the fully loaded cost of one sales For example, what is the fully loaded cost of one sales

person, and what is that person’s productivity?person, and what is that person’s productivity?►Cost of customer acquisition?Cost of customer acquisition?

Are there examples of similar business modelsAre there examples of similar business models What is the path to get to steady state?What is the path to get to steady state?

►What is the ROI for the investors, What is the ROI for the investors, entrepreneursentrepreneurs

►How long to cash flow break evenHow long to cash flow break even►What does gross margin tell about a companyWhat does gross margin tell about a company► Room for errorRoom for error

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Personal FitPersonal Fit

►AuthenticityAuthenticity►CompetenceCompetence►Tolerance for uncertainty, ambiguityTolerance for uncertainty, ambiguity► InterestInterest►CommitmentCommitment

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RisksRisks

►What are they?What are they? This is usually a very, very long list – This is usually a very, very long list –

makes you kind of wonder why anything makes you kind of wonder why anything ever gets startedever gets started

►Why do you believe they can be Why do you believe they can be overcome?overcome? Response for each item listed aboveResponse for each item listed above

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The Business PlanThe Business Plan► Where all the issues come togetherWhere all the issues come together► Requires everything to be in synchRequires everything to be in synch► Exec Summary -- Write it early and often!!!Exec Summary -- Write it early and often!!!► FinancialsFinancials

Five year Income Statement, Balance Sheet and Cash FlowFive year Income Statement, Balance Sheet and Cash Flow First two years are “Bottoms Up”First two years are “Bottoms Up” Fifth year should be compared to industry proxy for sanityFifth year should be compared to industry proxy for sanity

► Capitalization PlanCapitalization Plan How much to raiseHow much to raise On what milestonesOn what milestones Returns to each stage of investorReturns to each stage of investor Not part of external planNot part of external plan

► FINANCIALS ARE THE CRUCIBLEFINANCIALS ARE THE CRUCIBLE Forces you to make and validate all assumptionsForces you to make and validate all assumptions Forces you to Ask and Answer all the questionsForces you to Ask and Answer all the questions

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The Business PlanThe Business Plan

► It is the Process, not the Product that It is the Process, not the Product that countscounts

►All the issues in one placeAll the issues in one place►Generally, all the things you need to Generally, all the things you need to

know are “outside” (the building, know are “outside” (the building, campus, etc.)campus, etc.) You need to talk to people in the real worldYou need to talk to people in the real world

►Once completed you KNOW what you are Once completed you KNOW what you are doingdoing

►Fully integrated into your mindFully integrated into your mind

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Some Examples Some Examples

… …the Badthe Bad

… …and the and the UglyUgly

The GoodThe Good

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McAfeeMcAfee► Product IdeaProduct Idea

Industry in transitionIndustry in transition► MarketMarket

Clear market needClear market need No competitorsNo competitors

► TeamTeam Unique entrepreneurial backgroundUnique entrepreneurial background High degree of Authenticity to entrepreneurHigh degree of Authenticity to entrepreneur

► CapitalCapital Bootstrapped on bulletin board businessBootstrapped on bulletin board business

► Economic ModelEconomic Model Cash machine!!Cash machine!! But competition changed all thatBut competition changed all that

► RiskRisk Lots of visible risksLots of visible risks

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Veritas –the early ideaVeritas –the early idea

► Product IdeaProduct Idea Unix was transitioning to a commercial Unix was transitioning to a commercial

environment, but was not ready for prime time.environment, but was not ready for prime time. Tolerant (predecessor company) had done a lot Tolerant (predecessor company) had done a lot

of the work already -- We knew the issues and of the work already -- We knew the issues and knew the solutions. knew the solutions.

This was “hard to do” but not impossible. Good This was “hard to do” but not impossible. Good IP, good barriers to entryIP, good barriers to entry

► Customer MarketCustomer Market We knew the customersWe knew the customers ATT agreement gave us “special” access to the ATT agreement gave us “special” access to the

marketmarket

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Veritas –the early ideaVeritas –the early idea► TeamTeam

We had the team of engineers to implementWe had the team of engineers to implement Completed the management teamCompleted the management team

► CapitalCapital We had some money from wind-down of old businessWe had some money from wind-down of old business ““some” investor commitmentsome” investor commitment Almost impossible to raise new money for a “restart”.Almost impossible to raise new money for a “restart”.

► CompetitionCompetition Competition at system OEMs would be “make vs. Competition at system OEMs would be “make vs.

buy”buy” Very little to no merchant market competitionVery little to no merchant market competition

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Veritas –the early ideaVeritas –the early idea

► Economic ModelEconomic Model OEM model like ATT (Microsoft) – source license OEM model like ATT (Microsoft) – source license

plus per-copy royaltyplus per-copy royalty Limited account upside – for more than $2 - $3 Limited account upside – for more than $2 - $3

million per year, OEM could design us out.million per year, OEM could design us out. Highly profitable business with extremely high Highly profitable business with extremely high

gross margingross margin► Risk AnalysisRisk Analysis

Reliability of ATT as partnerReliability of ATT as partner Software OEM model not provenSoftware OEM model not proven Limited overall upside for companyLimited overall upside for company

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WebVanWebVan

► Product IdeaProduct Idea Disintermediate the supermarket supply chainDisintermediate the supermarket supply chain OldOld

► Producer to warehouseProducer to warehouse► Pack and ship to supermarketPack and ship to supermarket► Supermarket every couple of miles – land, building and ~100 Supermarket every couple of miles – land, building and ~100

employees employees ► Unpack and stock shelvesUnpack and stock shelves► Customer drives in to pick up goods…Customer drives in to pick up goods…

NewNew► Producer to warehouseProducer to warehouse► Pick and pack (high tech)Pick and pack (high tech)► Deliver directly to consumerDeliver directly to consumer

Trucks and drivers instead of buildings and clerksTrucks and drivers instead of buildings and clerks

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WebVanWebVan► MarketMarket

Established very large marketEstablished very large market► TeamTeam

World classWorld class► CapitalCapital

““infinite” capital availableinfinite” capital available► Economic ModelEconomic Model

Unproven modelUnproven model Not enough customer density for efficient routesNot enough customer density for efficient routes

► Increased delivery chargesIncreased delivery charges► Reduced produce qualityReduced produce quality

Rolled out in five cities before proven in one Rolled out in five cities before proven in one ► Consumed their cashConsumed their cash► Capital markets closed downCapital markets closed down

► RiskRisk Much more than they thought…Much more than they thought…

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MicrosoftMicrosoft► Product IdeaProduct Idea

Home computer “revolution”Home computer “revolution” BASIC compiler for “Altair 8080”BASIC compiler for “Altair 8080” Six years later, still the same old business…Six years later, still the same old business…

► MarketMarket IBM changed market from hobbyist to businessIBM changed market from hobbyist to business

► TeamTeam Experienced in technology, butExperienced in technology, but Inexperienced in businessInexperienced in business

► CapitalCapital Very humble start up – no real capital neededVery humble start up – no real capital needed But also none availableBut also none available

► Economic ModelEconomic Model Pioneered OEM OS modelPioneered OEM OS model Made the rulesMade the rules Not First Mover in Any Market Not First Mover in Any Market

► RiskRisk It was really a lucky break – no one home at Digital ResearchIt was really a lucky break – no one home at Digital Research

► But then they knew how to leverage the business!!!!But then they knew how to leverage the business!!!!

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Opportunity Check ListOpportunity Check List► Product, Market and IndustryProduct, Market and Industry

DemandDemand Market size Market size Growth Rate Growth Rate Market Capacity Market Capacity Attainable market shareAttainable market share Cost structureCost structure

► Factor MarketsFactor Markets Resources requiredResources required Market structureMarket structure

► EconomicsEconomics Profit potentialProfit potential Time to breakevenTime to breakeven ROI potentialROI potential Capital requirementsCapital requirements IRRIRR Free Cash FlowFree Cash Flow Gross MarginsGross Margins Time to Break-EvenTime to Break-Even

► Competitive AdvantageCompetitive Advantage Variable / fixed costVariable / fixed cost Degree of controlDegree of control Entry barriersEntry barriers Protectable IPProtectable IP Positional AdvantagePositional Advantage

► PersonalPersonal Personal goalsPersonal goals Personal fitPersonal fit Upside vs downsideUpside vs downside Opportunity CostOpportunity Cost Stress Tolerance Stress Tolerance

► Sustainable Advantage Sustainable Advantage

► Opportunities for ExtensionOpportunities for Extension► Management TeamManagement Team► HarvestHarvest

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The Startup IdeaThe Startup Ideamark lesliemark leslie

[email protected]

650/561-1228650/561-1228