1. IDEA v. OPPORTUNITY
----
Essentials of Recognizing
Opportunity
mark leslie
mleslie@leslieventures.com

2. Ingredients
► Product / Service
► Market
► Factor Markets
► Team
► Capital
► Business Model
► Personal Fit
► Risk Analysis
► Business Plan

3. Product – just a place to start
► The world will NOT beat a path to the door of the inventor of the
better mousetrap
► Idea itself does not have value
► Contrary to popular belief, entrepreneurial ideas are rarely “stolen”
 (All the other entrepreneurs think they are the smartest)
 It is all about execution
► Even “being first” is over-rated – many successes were from “follower”
companies
 IBM vs. Univac
 Excel vs. Lotus 123 vs. Visi-Calc
 Google vs. Yahoo vs. Alta Vista
 iPod vs. MP3 players
 iPhone vs. Nokia?
► It is one among many, many relevant variable factors
► An idea is “just a place to start”.

4. Product – Look for the
Discontinuities
► What are some examples
 Microprocessors
 Telecom de-regulation
 Internet
 GPS
 Berlin Wall
 Cloud Computing
 Mobile Computing (smart handsets)
► Discontinuities kill older companies that do not adapt,
create opportunities for many new ones
 Rapidly changing market = opportunity
► What does Andy Grove’s famous saying “only the
paranoid survive” really Mean?

5. Product – Current discontinuities
► Technological?
 Silicon speed doubles every 18 months
 Storage capacity doubles every 12 months
 Communication Bandwidth doubles every 6 months
 Wireless revolution
 Web 2.0
 Internet is “Always On”
► Cloud Computing
► SaaS business models
► Other?
 Sept 11 terrorist attack
 Linux
 Human Genome Sequencing
 911 GPS cell phones

6. Product – key questions
► Radicalness of product
 “Faster / Better / Cheaper”
 Innovation
► Incremental change
 Brave New World
► Change the way people do things; or
► Is it feasible?
 How much time
 What special skills
 What is the risk
 Similar project been done before?
► How much R, how much D
 r & D
R&d

7. Product – key questions
► Barriers to Entry
 IP
► Can the IP be protected
► Is it sufficiently difficult (not trivial)
► Is it too difficult?
 Network Effect (i.e., e-Bay)
► This is VERY, VERY hard to do
 Business Model (i.e. Dell vs. Compaq)
► This is even harder to do
 Is it non-obvious
► Veritas created the segment “storage management software”
► Starting in 1999 there have been over 500 startup companies
in the “storage space”

8. Demand for Product – TALK TO
CUSTOMERS!!!!!!!
► Who?
 Actual user
 Actual buyer
 All the points of influence
► Why?
 What is the pain
 How does this solve that pain
► Good signal is lots of homegrown custom solutions
 Aspirin v. Vitamin?
► How Much?
 What is the cost of not doing
 What are their alternatives

9. Demand for Product – TALK TO
CUSTOMERS!!!!!!!
► Convince them
 Make the pitch
 Do the demo
 Show all the cool features
► Then convince them not to buy
 Explain what is missing
 How expensive
 How long to implement
 Risks (including start up company risks)
 Convince them they will not buy…
► Only when they argue you to the ground do you know you
MIGHT actually have something.

10. Market
► Market size
 TAM / SAM
 Where can you get market data?
► Market growth rate
► Market structure
 Maturity
 In state of flux or established
 Market of big players, established products and
prices
► Vertical Markets

11. Market
► Product price and cost vs. market (gross
margin)
► Market willingness to work with startup
 May not stay in business
 May not be able to support the customer
► How many can you sell, how quickly?
► How big is the ultimate market?
►How big to be interesting as
venture backed deal?
► Can the company become a market leader?

12. Market – Competition
► Are you entering an existing market?
 How will the leader’s react?
 How quickly?
 Why can’t they simply do the same and put you out of
business?
► Competitive Alliances?
► Are there other startups
 How many?
 How well financed, quality of team, etc?
 Why do you believe that you are different – uniquely
qualified to win the competitive race?
►Why do each of your competitors believe the same
thing?

13. Market: Time to Build the Business
► Most High Value Businesses Take Time to Build, e.g. HP,
Veritas, Intel
► Does Market Allow Bootstrapping? E.g., Pure Software,
Microsoft, Integrated Systems/Wind River, etc.
► Interestingly, many of the most successful businesses
raised little capital (and some took a long time to ramp up)
 Cisco = $2.5M
 Sun = $4M
 Veritas = $4M
 VMware = $3M
 Microsoft <$2M
 Oracle < $2M
 eBay < $1M
 Google < $5M
 etc. etc.
► Excessive capital raised can have disasterous results:
Webvan, Next, Momenta, maybe Better Place??

14. Bootstrapping: Conditions for
Success
►Market Segment is Small with No Gorillas
or Gorilla Has Little Traction
►Market Growth is Not Explosive
►You’ve Created a New Market
►Management Has Time to Learn the
Business
►Examples: Microsoft, Oracle, Wind River

15. Team
► Exec
 Big company /entrepreneurial success
 Domain experts
 Worked together / Navigated difficult situation
 Unquestioned Integrity / Intellectual honesty
 Successful recruiting track record
 Able to raise capital
► Technical
 Technical leadership
 Demonstrated ability to develop Products
► Other
 No Trainees – “Done it before”

16. Capital
► How much time and money does it take to build
the product?
► How much time and money does it take to launch,
market and sell and support?
 How much to “scale up” the business?
► Will the capital markets finance a project of this
size and duration?
► Is the investment commensurate with the market
opportunity?
► How do you stage the capitalization to get the
most money for the least cost? (topic for another
presentation)

17. Economic Model
► Business Model (steady state “operating stack”)
 Revenue, COGS, COS, ongoing R&D, profit?
►For example, what is the fully loaded cost of one sales person,
and what is that person’s productivity?
►Cost of customer acquisition?
 Are there examples of similar business models
 What is the path to get to steady state?
► What is the ROI for the investors, entrepreneurs
► How long to cash flow break even
► What does gross margin tell about a company
► Room for error

18. Personal Fit
►Authenticity
►Competence
►Tolerance for uncertainty, ambiguity
►Interest
►Commitment

19. Risks
►What are they?
 This is usually a very, very long list – makes you
kind of wonder why anything ever gets started
►Why do you believe they can be overcome?
 Response for each item listed above

20. The Business Plan
►Where all the issues come together
►Requires everything to be in synch
►Exec Summary -- Write it early and often!!!
►Financials
 Five year Income Statement, Balance Sheet and
Cash Flow
 First two years are “Bottoms Up”
 Fifth year should be compared to industry proxy
for sanity

21. The Business Plan
►Capitalization Plan
 How much to raise
 On what milestones
 Returns to each stage of investor
 Not part of external plan
►FINANCIALS ARE THE CRUCIBLE
 Forces you to make and validate all
assumptions
 Forces you to Ask and Answer all the questions

22. The Business Plan
►It is the Process, not the Product that
counts
►All the issues in one place
►Generally, all the things you need to know
are “outside” (the building, campus, etc.)
 You need to talk to people in the real world
►Once completed you KNOW what you are
doing
►Fully integrated into your mind

23. Some Examples
…the Bad
…and the Ugly
The Good

24. McAfee
► Product Idea
 Industry in transition
► Market
 Clear market need
 No competitors
► Team
 Unique entrepreneurial background
 High degree of Authenticity to entrepreneur
► Capital
 Bootstrapped on bulletin board business
► Business Model
 Network effect
 Pioneered free to get massive distribution
► Risk
 Lots of visible risks

25. Veritas –the early idea
► Product Idea
 Unix was transitioning to a commercial
environment, but was not “ready for prime time”.
 Tolerant (predecessor company) had done a lot of
the work already -- We knew the issues and knew
the solutions.
 This was “hard to do” but not impossible. Good
IP, good barriers to entry
► Customer Market
 We knew the customers
 ATT agreement gave us “special” access to the
market

26. Veritas –the early idea
► Team
 We had the team of engineers to implement
 Completed the management team
► Capital
 We had some money from wind-down of old
business
 “some” investor commitment
 Almost impossible to raise new money for a
“restart”.
► Competition
 Competition at system OEMs would be “make vs.
buy”
 Very little to no merchant market competition

27. Veritas –the early idea
► Economic Model
 OEM model like ATT (Microsoft) – source license
plus per-copy royalty
 Limited account upside – for more than $2 - $3
million per year, OEM could design us out.
 Highly profitable business with extremely high
gross margin
► Risk Analysis
 Reliability of ATT as partner
 Software OEM model not proven
 Limited overall upside for company

28. Apple – iPod
► Create a network effect marketplace for music, sell MP3 players
► Music - old
 Controlled by “labels”
 Sold on hard media (records / CDs)
 Distributed via retail
► Music - new
 Replace distribution channel to internet
 Break the “Album” packaging – sell by the song
 Create high concept design player
► Business model = network effect marketplace
 Create a VERY reasonable / profitable deal for the publishers to distribute
electronically
 Apple has all the music
 So all the buyers go there
 So all the publishers go there
 And it only works on an iPod – Apple sells a lot of iPods
► It wasn’t about the iPod – it was all about iTunes!!
► So whatever happened to Tower Records?
► So whatever happened to Zune?

29. Apple - iPhone
► It is the iPod all over again
► Instead of the publishers it is the carriers
 ATT agreed to cede great control over content over the network to get the
iphone (everyone else turned them down…)
► Business model = network effect marketplace
 Create a VERY reasonable / profitable deal for the app developer (70% for
the developer)
 Apple has all the apps
 So the app users (smart phone customers) go there
 So all the app developers go there
 And it only works on an iPhone – so Apple sells a lot of iPhones
► It wasn’t about the iPhone – it was all about the App
Store!!
► So whatever happened to Microsoft Windows Mobile
► So whatever happened to Nokia and Ericson?

30. WebVan
► Product Idea
 Disintermediate the supermarket supply chain
 Old
► Producer to warehouse
► Pack and ship to supermarket
► Supermarket every couple of miles – land, building and ~100
employees
► Unpack and stock shelves
► Customer drives in to pick up goods…
 New
► Producer to warehouse
► Pick and pack (high tech)
► Deliver directly to consumer
 Trucks and drivers instead of buildings and clerks

31. WebVan
► Market
 Established very large market
► Team
 World class
► Capital
 “infinite” capital available
► Economic Model
 Unproven model
 Not enough customer density for efficient routes
► Increased delivery charges
► Reduced produce quality
 Rolled out in five cities before proven in one
► Consumed their cash
► Capital markets closed down
► Risk
 Much more than they thought…

32. Microsoft
► Product Idea
 Home computer “revolution”
 BASIC compiler for “Altair 8080”
 Six years later, still the same old business…
► Market
 IBM changed market from hobbyist to business
► Team
 Experienced in technology, but
 Inexperienced in business
► Capital
 Very humble start up – no real capital needed
 But also none available
► Economic Model
 Pioneered OEM OS model – created a monopoly
 Made the rules
 Not First Mover in Any Market
► Risk
 It was really a lucky break – no one home at Digital Research
► But then they knew how to leverage the business!!!!

33. Opportunity Check List
► Product, Market and Industry
 Demand
 Market size
 Growth Rate
 Market Capacity
 Attainable market share
 Cost structure
► Factor Markets
 Resources required
 Market structure
► Economics
 Profit potential
 Time to breakeven
 ROI potential
 Capital requirements
 IRR
 Free Cash Flow
 Gross Margins
 Time to Break-Even
► Competitive Advantage
 Variable / fixed cost
 Degree of control
 Entry barriers
 Protectable IP
 Positional Advantage
► Personal
 Personal goals
 Personal fit
 Upside vs downside
 Opportunity Cost
 Stress Tolerance
► Sustainable Advantage
► Opportunities for Extension
► Management Team
► Harvest

34. IDEA v. OPPORTUNITY
----
Essentials of Recognizing
Opportunity
mark leslie
mleslie@leslieventures.com