M10-S1 - Reading - Opportunity Recognition- Jeff Timmons
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Opportunity Recognition, by Jeff Timmons. Ch 2 in Portable MBA in Entrepreneurship, 1997.
An Opportunity has the quality of being attractive, durable and timely and is anchored in a product or service which creates or adds value for its buyer or end user. Opportunities are situational. It is often assumed that marketplaces dominated with large companies can not be penetrated. This is often not true. It can take up to six years before a large company changes its strategy and even longer. It can take up to 10 years before a changed strategy is actually implemented.
Small companies success can often be attributed to limited resources (see also M3-S4 - Reading - Everhart, H.R. The art of bootstrapping and M3-S1 - Reading - Kawasaki, G. 2004, The art of the start).
| 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
