Chapter 4

At the foundation of opportunity recognition and evaluation lies the development of a viable business opportunity that will enable the entrepreneur to make a profit, be the creative and meet within the market.

What are the foundations for for opportunity evaluation?

are common types of mental shortcuts used to make judgments about opportunities and the business

Cognitive bias

refer to simplifying the conditions individuals use to make decisions, particularly in uncertain and complex situations

heuristics

a perceived means of generating economic value that has not previously been explored and is currently being exploited by others and meets a need or desire

Define a viable business opportunity and discuss the three central characteristics that emerge from this definition

* Entrepreneurs use heuristics more extensively in their decision-making than manager in larger organisations
* Heuristics or shortcuts can be efficient because they aid judgments without high information

Analyse the role that cognitive biases and heuristics play in the evaluation of a business opportunity.

Risk perception is the subjective judgment of the amount of risk inherent in a situation

Define the concept ‘*risk perception*’

* risk perception
* overconfidence
* planning fallacy
* the illusion of control

Describe four cognitive factors that can directly influence the risk perception of the entrepreneur.

* experience and good management team: investors usually look for a team that is dedicated to growing an exceptionally successful and that has the knowledge, experience and track record to do so
* marketability: venture capitalists are most likely to invest in a business that addresses customers in large,growing markets that can be identified and accessed economically
* openness and honesty: investors want to be able to trust the entrepreneur with their money
* intellectual property: a trademark, copyright or patent can be attractive to the investor as it creates a clear barrier to entry and secures a competitive advantage

Identify and discuss the aspects that investors will look at when they consider new venture proposals

* the new product or service should fulfil a need or want
* the new product or service should have either a niche-market appeal or a mass-market appeal
* the product or service must render an income and profit
* the customer should replenish or repurchase the product or service on a regular basis
* there should be compatibility with existing attitudes and beliefs
* the product or service should be simple so that the buyer will understand it
* easy to communicate the results or benefits of the new product or service
* the product or service should be made available to potential customers for a trial period
* the product or service should be readily available

Identify the characteristics of successful products/services.

* a second screening test should be of the feasibility of the product or service
* the technical requirements for producing a product or service should be identified and evaluated as well as the technical skills of the entrepreneur or the venture team in relation to the product or service

Determine how new ideas can be analysed to filter out those that are not feasible.

* customers: to assess the viability of the idea
* competitors: could be indication that the market is large enough to absorb a new product
* suppliers: they could add to the competitive advantage of the products or service that will be offered
* marketing of the product or service: to inform potential customers about the product or services you plan to offer

Identify and describe aspects that should be included when evaluating the marketability of products and services.

* personality and personal preference: venture capitalists evaluate the commitment and ambition of the entrepreneur and entrepreneurial team
* skills: certain skills are often attributed to new venture skills
* business skills
* interpersonal skills
* creative problem solving and change management skills
* traits and attributes: successful entrepreneurs typically exhibit certain traits
* relevant experience: there are three kinds of experience when it comes to start ups:
* previous entrepreneurial or leadership experience
* industry experience
* educational experience
* synergy: the extent that the entrepreneur or entrepreneurial team reflects the skills and understanding that will be necessary to the success of the venture
* exit plans: what will happen to the business in the case of the death of the entrepreneur

Identify and describe aspects that should be included when evaluating the entrepreneur and his/her business team.

* accessibility of resources: how accessible are the resources that are needed for the start up
* optimisming resources: eliminate unnecessary expenditure and obtain only those resources that are vital to the business
* sustainable advantage: refers to the situation where the entrepreneur is able to retain an initial competitive advantage over a long period of time
* type and nature of the industry: the type and nature of the industry within which each of the alternative products or services will be sold may influence the decision whether or not to start the business

Identify and describe factors that should be included when evaluating the resources needed for each alternative idea or opportunity to identify the most viable business option.