Criteria for evaluating venture opportunities

Criteria	Attractiveness
	Highest potential	Lowest potential
Industry and markets
	Changes way people live and work	Incremental improvement only
Market	Market driven: identified recurring revenue niche	Unfocussed: one time revenue
Customers	Reachable; purchase orders	Loyal to others and unreachable
User benefits	Less than one-year payback	Three year+ pay back
Product life	Durable	Perishable
Markte structure	Imperfect, fragmented competition or emerging in industry	Highly concentrate or mature
Market size	\$100M to \$1B sales potential	Unknown, less than \$20M
Growth rate	Growth at 30-50% or more	Contracting or less than 10%
Market capacity	At or near full capacity	Under capacity
Market share attainable (<5 year)	20% or more; leader	Less than 5%
Cost structure	Low cost provider, cost advantages	Declining costs
Economics
Time to break even	Under 1,5-2 years	More than 4 years
ROI potential	25% or more	Less than 15-20%
Capital requirements	Low to moderate, fundable	Very high, unfundable
Internal rate of return potential	25% or more per year	Less than 15% per year
Free cash flow characteristics	Favorable, sustainable 20-30% or more of sales	Less than 10% of sales
Sales growth	Moderate to high (+15% to +20%)	Less than 10%
Asset intensity	Low/Sales \$	High
Spontaneous working capital	Low, incremental requirements	High requirements
R&D/captial requirements	Low	High
Gross margins	Exceeding 40% and durable	Under 20%
After tax profits	Great than 10%	Low
Time to break even	Less than two years	Greater than four years
Harvast issues
Value added potential	High strategic value	Low strategic value
Valuation multiples and comparable	20X PE/E	<=5XP/E
	8-10XEBIT	3-4XEBIT
	1.5 -2 X revenue	<= 0.4Xrevenue
	8-10Xfree cash flow
Exit mechanism and strategy	Present or envisioned options	Undefined; illiquid investments
Capital market context	Favorable valuations; timing, capital available, realizable liquidity	Unfavorable, credit crunch
Competative Advantage Issues
Fixed and variable costs	Lowest	Highest
Control over costs, prices and distribution	Moderate	Weak
Barriers to entry
Propretary protection	Have or can gain	None
Response/lead time	Competition slow, napping	Unable to gain edge
Legal, contractual advantage	Proprietary or exclusivity	None
Contracts and networks	Well-developed; accessible	Crude
Key people	Top talent; an A team	B or C team
Management team
Entrepreneurial team	All-star combiation; free agents	Weak solo entrepreneur
Industry and technical experience	Top of the field; super track-record	Underdeveloped
Integrity	Highest standards	Questionable
Intellectual honesty	Know what they don't know	Do not want to know what they don't know
Personal criteria
Goals and fit	Getting what you want but wanting what you get	Suprises
Upside / downside issues	Attainable success / limitted risk	Linear, on the same continuum
Opportunity costs	Acceptable cuts in salary etc	Comfortable with status quo
Desirability	Fits with lifestyle	SImply pursuing big money
Stress tolerance	Thrives under pressure	Cracks under pressure
Strategic differentiation
Degree of fit	High	Low
Team	Best in class	B team
Service management	Supervisor service concept	Perceived as unimportant
Timing	Rowing with the tide	Rowing against the tide
Technology	Groundbreaking	Many substitutes
Flexibility	Able to adept	Slow stubborn
Opportunity orientation	Always searching	Operating in a vacuum
Pricing	At or near leader	Undercut competitor
Distribution channels	Accessible	Unknown

Part of: M10-S1 - Reading - Opportunity Recognition- Jeff Timmons