Finding fertile ground

On Finding Fertile Ground

Ziya G. Boyacigiller

This presentation was created and given by Ziya Boyacigiller who was leading Angel Investor and a loved mentor to many young entrepreneurs in Turkey. We have shared it on the web for everyone’s benefit. It is free to use but please cite Ziya Boyacigiller as the source when you use any part of this presentation. For more about Ziya Boyacigiller’s contributions to the start-up Ecosystem of Turkey, please go to www.ziyaboyacigiller.com

Finding Fertile Ground Identifying Extraordinary

Opportunities for New Venturesby Dr. Scott A. Shane

Ziya G. BoyacıgillerSabanci UniversitesiYonetim Bilimleri Fakultesi

It does not take much strength

to do things, but it requires a

great deal of strength to

decide what to do.

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Elbert Hubbard

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Making of a successful entrepreneur…

Q: What separates successful entrepreneur from the masses that start businesses?

A: The selection of the right business concept to exploit a valuable opportunity.

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Improve Odds of Success…

The number one predictor of new business failure is the industry in which the firm is founded (with retail businesses and restaurants having extremely high failure rates).

Q: What to do then?

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Analyze Industry using “Five Forces” model

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Entry & Exit Barriers determine quality of returns (profit)

EXIT BARRIERSE

NT

RY

BA

RR

IER

S

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Technology & Success

Generally, entrepreneurs are more successful if they start technology businesses.

The professionals in the field, venture-capitalists and serial entrepreneurs, have a reason for picking technology businesses to work on…

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TechnologyFrom Wikipedia

Technology is a broad concept that deals with the usage and knowledge of tools and crafts (processes), and how it affects the ability to control and adapt to the environment.…

Other species have also been observed to have created and used technology, including non-human primates, dolphins, and crows.

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What is Technology?

Technology is the useage of knowledgeknowledge in ways that make it possible to

➦ create new products, ➦ exploit new markets, ➦ use new ways of organizing, ➦ incorporate new raw materials, or ➦ use new processes

to meet customer needs.

( “new” Significantly Differentiated innovation)

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Ask yourself:

1. Is there continuous change in the market, industry?

• Change Problems Solutions Knowledge

2. Can we protect our knowledge?

3. Can we capture the value resulting from our knowledge?

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Features of a Successful Entrepreneur are…

Despite decades of effort to identify the special features of successful entrepreneurs,

there really are NONE!

Academic research on entrepreneurship has shown that the effect of business opportunities on the performance of new ventures is so large that it swamps the effect of entrepreneur’s characteristics.

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First 2 Rules for Entrepreneurial Success:

1. Select the right industry

2. Identify valuable opportunities

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Rule 1: Select the right industry

a) Knowledge conditions

b) Demand conditions

c) Industry Life Cycles

d) Industry Structure

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Rule 1: Select the right industry

(a) Knowledge conditions

Level of complexity of the production process (aerospace/higly complex vs. paper-bag/nothing to think about)

New knowledge creation required for products and services (%R&D spending required) (pharmaceutical/R&D intensive vs. dry cleaning/little-to-no R&D)

Codification of knowledge (steel-reinforced-concrete-building design/mostly on paper vs. analog-chip design/mostly in the brain)

Where the innovation that supports new products and services is made (semiconductors [Intel/industry] vs. superconductors [MIT/universities])

Distribution of value added from {manufacturing & marketing} vs. {product development & innovation} (automobiles vs internet software)

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Stop! Don’t Do It!

1. Don’t start a business without investigating how favorable the industry is to new firms.

2. Don’t fight the odds. Don’t start a business in an industry that is unfavorable to start-ups.

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Rule 1: Select the right industry

(b) Demand conditions

Magnitude of customer demand for products or services (“marginal cost”) (major drugs vs minor drugs)

Rate of growth of demand (new customers low response from incumbents)

Heterogeneity of that demand across customer segments (water vs. clothing) (“niche segments” growth “under the radar”)

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Stop! Don’t Do It!1. Don’t start a business in a small market;

you can just as easily start one in a large market.

2. Don’t start a business in a slow growth market, your competition will respond fiercely.

3. Don’t start a business in an unsegmented market; the incumbents will kill your business.

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Rule 1: Select the right industry

(c) Industry Life Cycles

Early-on, competition is less no established leader in market yet

Learning curve disadvantages don’t exist yet in new markets

Standards don’t exist in new markets, gives a chance to new businesses to compete (MS Office vs all others…)

Early is bad, late is bad… Attracting customers when there is double digit growth is easier.

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Sweet Spot

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Stop! Don’t Do It!

1. Don’t wait until a business is mature to enter it.

2. Don’t wait until after a dominant design has emerged to start your business.

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Rule 1: Select the right industry

(d) Industry Structure

Capital intensity vs labor/knowledge intensity (steel vs. textile/game software)

Advertising intensity (scale & time)

Concentration of industry (pharmaceuticals vs. dry cleaning) (powerful incumbents, collusion, market share from smaller competitors)

Average firm size (small size means lower risk, economies of scale in purchasing),

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Stop! Don’t Do It!1. Don’t start a business in a capital intensive

industry.

2. Don’t start a business in an advertising intensive business.

3. Don’t start a business in a concentrated industry.

4. Don’t start a business in an industry in which the average sized firms are large.

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2. Identify valuable opportunities

a) Changes in technology

b) Changes in political and regulatory rules

c) Changes in social and demographic factors

d) Changes in industry structure

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2.Identify valuable opportunities

(a) Changes in technology Magnitude of new technology

(nanotechnology)

Generality of the change vs single-purpose (laser)

Commercial viability of the change (space shuttle)

Effect of new technology on industry dynamics– changes how companies compete (IP – VoIP, IPTV)

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2.Identify valuable opportunities

(b) Political and regulatory change

Productivity enhancing change (deregulation of telecom)

Shifts value from one set of economic factors to another – from consumers to manufacturers, non-productive change(body-bags in cars)

Increases demand (car-seats for babies)

Support subsidies and other resources result in reduced costs and make products/services common (technoparks)

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2.Identify valuable opportunities

(c) Social / demographic change

Alter peoples’ preferences and creating new demand (markets) (women in work-force take-out and frozen food)

Social trend (deodorant)

Demographic trend (population ages geriatric health care, or Istanbul now is best city for young people)

Shift in perception or demand (chicken with hormones, red-meat raises LDL cholesterol)

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2.Identify valuable opportunities

(d) Changes in industry structure

Firms die or merge

Firms split or diversify businesses

Firms shift focus (hub-and-spoke operation point-to-point airlines like Southwest)

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How to exploit new technology

These 4 changes can open up opportunities by allowing older products and services to be:

i. produced with new production methods (mini-mills for steel),

ii. using new raw materials (plastics or ceramics replacing metals),

iii. organized in new ways (Amazon, Dell),

iv. for sale in new markets (shock freezing vegetables).

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Why is knowledge important?

Start-ups can minimize imitation by keeping trade-secrets (knowledge), which is done more easily when making use of

new raw materials, new production methods, new forms of organizing

to produce old products and services, and by targeting new markets.

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Why did Bill Gates start Microsoft?

Or, Steve Jobs start Apple?

Or, Husnu Ozyegin start Finansbank?

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Why do some people but not others identify a Valuable Opportunity:

1. Access to Information (experts, social networks, customers)

2. Better Information Processing (in digital watches-Swiss vs. Japanese, in operating systems-Xerox vs. Apple)

i. Extrapolating from incomplete informationii. Schemas (analogs/antilogs) from prior experience iii. Seeing information as opportunity, not risk

iv.iv. CreativityCreativity (seeing what others don’t see)

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Idea (+ Execution)I developed a rule over the years that if I have an

idea (no matter how creative it may be) I can almost be sure that someone in the world has also thought of it already.

Great ideas without the ability to execute are useless.

Success comes as much from our ability to execute an idea, as from the idea itself.

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Winning at Execution Requires Strong expertise

Strong network

Strong motivation • discipline and patience• will to succeed• will “to find a way” when faced with

challenges