Marking The Key Points On The Opportunity Map

The name of the game in entrepreneurship is adding value. This includes value added for all parties, especially the business pursuing the opportunity. The product must add clear value in the eyes of the customer and any distributors and retailers involved.

How do we measure value-added in real terms? The rule of thumb shared by venture capitalists and other risk capital investors is a gross margin of 35-40 per cent or better.

Thus profit, less the direct cost of labour and materials to produce a product or deliver a service, should be at least 40 per cent of turnover. This is the real value-added of your product.

 

Why does this matter? It is obvious that a higher gross margin translates into a higher potential "bottom line". Furthermore, gross margin indicates how much value is being added by unique intellectual, design and marketing resources. If little value is being added, why do it? Without such value-added you are taking on a significant risk while not creating a great deal, despite the hard entrepreneurial work of assembling people and assets.

How big an opportunity

How big does an opportunity have to be? The answer is: "It depends".

It depends upon how much value you wish to create and how much will attract and retain your interest. It depends upon the size of opportunity that will attract investors who are of interest to you. (Risk capital investors usually have a minimum value in mind.)

It depends upon the value that you need to position yourself in the market to be an effective and growing competitor. It depends upon that economic factor "minimum efficient scale" - how big do you have to be to use the required assets efficiently? And it depends upon the magnitude of the business necessary to attract the key team members needed to make it successful.

Growth-oriented entrepreneurs not only consider the magnitude of the opportunity but also the basic expected growth rate. True growth-oriented entrepreneurs focus on the potential growth rate.

Some realise that too fast a growth rate over an extended period is a negative. It is difficult to manage, attracts competitors like ants at a picnic, and requires extensive and continuous financing to provide adequate working capital. On the other hand too low a growth rate will not allow them to create their desired value and will not attract key stakeholders.

What are the required growth rates? The rates vary considerably and obviously depend upon the context. However, in general sustained single digits are too low and sustained triple digits are extremely difficult. They also depend upon just how big a business you want to build. A `life-style' opportunity should probably not become too big.

Business economics

There are two important issues for the would-be entrepreneur: How much profit and where exactly is the profit created? If a business does not add enough value, you cannot have a reasonable profit.

Beyond this, the question is: where in the income statement and balance sheet do you create value? How do you make money? Where does the profit come from? You need to know the key levers in the business that make money for you. You also need to know whether these levers are sustainable. For example, do you make money because you are able to move quickly to supply shops with bread when they under-ordered from regular suppliers (who visit them once a day only) and their customers are demanding more? The ability to move quickly and fill spot demand (at a premium price, of course) may be the basis of the business. Understanding these levers enables you to understand what your focus should be in managing the business and permits you to test whether it is sustainable and appropriate.

I know of one business which tended to upgrade every neighbourhood it entered. The business itself made a solid though not exciting profit. The entrepreneur would go in, buy a property in which the business was located, upgrade it, start up business and later sell out to a franchisee.

Other businesses were attracted to the area and would also evaluated for sale to the franchisee, it would invariably lead to a large capital gain for the entrepreneur.

Where did he make his money? In the real estate conversion.

He was clear about where to dedicate his time and energy. He did not fritter it away on trying to squeeze significant improvements in the profitability of the underlying shop. Rather, he would move on to look for new locations.

How much time have you?

No opportunity lasts forever. In fact, contact me if you find a highly profitable (legal) opportunity that lasts forever. The real question is how long does an opportunity last before everyone else decides to jump in and shift competition to a cost base rather than value base, or worse? What determines how long you can uniquely pursue an opportunity? First, do you have a contract that makes a technology uniquely available to you? The technology may not be one you have unique control of but, rather, a unique source of supply or a unique distribution channel.

Second, are you looking at a niche opportunity that will provide substitutes for existing products or a strong but unique base for development? Customers whose needs you can meet specifically represent a powerful source of competitive advantage.

Third, do you have a unique relationship that provides you with a competitive advantage? Fourth, are you able to create `post-entry barriers' (something someone has to spend money on to overcome) for other organisations which follow you into the business? The more emotional side of any opportunity often makes that marginal difference that results in the success of one entrepreneur and the failure of another. You alone can assess these factors. Do you like the opportunity? Do you really believe in the opportunity? These factors matter because therein lies your level of likely persistence in the face of all the normal difficulties encountered by entrepreneurs.

The finer aspects

Here are a few lessons about opportunity that long-term successful entrepreneurs have learned.

This opportunity leads to others. To build up a profitable, value-creating business in the long term, an original opportunity must lead to other opportunities.

The opportunity helps you build leverageable skills. Another characteristic of a good opportunity is related to the skills developed and exercised within the organisation. Good opportunities are those that force an organisation to develop a skill that can be leveraged for the pursuit of many new ideas.

Opportunity should not be evaluated or pursued alone. Investigations of "serial entrepreneurs"and how they identify successive successful opportunities suggests that "two heads are better than one" may be true. Successful serial entrepreneurs usually seek out other individuals, often just one, with whom they work from business to business.

The partner adds new skills to the mix and permits a more robust evaluation and implementation of opportunities.

It is also useful to look at the competitive environment and how you compete. Are near competitors `sharks'? Some opportunities involve competition (or near competition) with companies and individuals that are not very aggressive.

On the other hand, in some industries competitors `eat their young'. Find out if there are any new companies that have actually survived in the broad industry you are considering.

How you compete is more important than where you compete. Searching for a location is important but only after you have assessed how you will compete and make money in your business.