Checklist for Evaluating New Ideas and Ventures

1. Checklist for Evaluating New Ideas and Ventures Key Factors for Success Bruce Gjovig Entrepreneur Coach and Director Center for Innovation, Rural Tech Incubator

2. TECHNICAL EVALUATION • Innovative product, not “me too” • Competitive advantages, features, and benefits • Barriers to competitive entry (hard to imitate) • High quality • Third-party test results • Ability to deliver a consistent, quality product on time • Spin-off, different market applications • Environmentally safe No safety/health risks, regulatory control

3. MARKET EVALUATION • Competitive advantage • “USP”: Unique Selling Proposition Differentiate on quality, service, or innovation • Market Pull vs. Market Push Solves customer problems • Sunrise vs. Sunset market

4. MARKET EVALUATION CONTINUED • Significant market niche • Market plan/strategy • Distribution channels available • Repeat sales likely • Year-round vs. Seasonal demand

5. Approaches to Differentiation • Prestige – Rolex, Mont Blanc • Quality – Honda, Cadillac • Top-of-the-Line image – Ralph Lauren, Cross Pens • Innovative, technological leadership – 3M Corp. • Engineering design and performance – Mercedes

6. Approaches to Differentiation Continued • A different taste – Dr. Pepper, Listerine • Product reliability – Johnson & Johnson baby products • Superior service – Federal Express • Full range of services – Merrill Lynch • Complete line of products – Campbell’s Soups • Spare parts availability - Caterpillar

7. Approaches to Differentiation Continued • More for your money – McDonald’s, Wal-Mart • Special features – Jenn-air’s indoor cooking tops • Economy – GE’s miser light bulbs

8. ECONOMIC EVALUATION • Premium, price possible for quality Competing on innovation, quality & service - not price • Low up-front investment intensity • Low overhead • High value-added • Business plan

9. ECONOMIC EVALUATION CONTINUED • High productivity • Minimum product liability • Owners have financial commitment • Management paid for performance, not title • High Return on Investment (ROI) • Realistic financial projections • Good margins & profitability Good cash flow

10. MANAGEMENT EVALUATION(The most important criteria) • Experienced in industry • Entrepreneurial aptitude and attitude Results-oriented, bias for action • Business experience and education • Visionary leadership – sees “big” picture • Business strategy is clear and concise

11. MANAGEMENT EVALUATION(The most important criteria) • “Team” has experience and depth (Production, engineering, finance, marketing, management) • Experienced consultants, advisors (Technical, business, legal, accounting) • Outside accountability Board of Directors, investors, etc.

12. Five-Year Profitable Survivalof New Business Profitable Marginal Failed Inexperienced, uneducated8% 62% 30% Inexperienced, educated 25% 29% 46% Experienced, uneducated 25% 23% 52% Experienced, educated 61% 16% 25% Experienced, educated, planned 81% 12% 7%

13. RELATIVE MARKET SHARE IS CLOSELY RELATED TO PROFITABILITY High Market Share Increases ROI

14. ROI INCREASES WITH MARKET SHARE RANK Higher Market Share Increases ROI

15. Profit(Pre-Tax, pre-interest) Quality Increases Rate of Return

16. HIGH QUALITY PRODUCTS & SERVICES ARE MOST PROFITABLE (Less 12% cst of cap.) Quality Increases Rate of Return

17. Quality Customer ServiceBased on 3,000 businesses in all sectors of the economy. --Strategic Planning Institute, Cambridge, MA

18. Pay for Quality

19. Definition of “Quality” • The customer’s judgment, not yours • Both the product and the associated services • Not absolute, but relative to competitors • Does not include price Quality Index = Percent of sales from superior minus Percent of sales from inferior products

20. GOOD PRODUCTIVITY IS CLOSELY TIED TO HIGH ROI High Productivity Increases Profitability

21. CAPITAL INTENSITY HURTS PROFITABILITY

22. AS INVESTMENT INTENSITY RISES ROI DECLINES Capital Intensity Decreases Profitability

23. Strong Market Position Relative Market Share > 80% Low Investment Intensity Investment/Sales < 33% High Productivity Value Added/Employee > $60 K High Perceived Quality Quality > 50% Low R&D Marketing Expense Marketing + R&D/Sales < 10% Major Factors Causing High Profits

24. Major Factors Causing Profit Trouble • Weak Market Position Relative Market Share < 25% • High Investment Intensity Investment/Sales < 33% • Fixed Capital or • Working Capital Investment/Sales > 70% • Low Productivity Value Added/Employee < $45K • Poor or Standard Quality Quality < 0 • High R&D & Marketing Expense Marketing + R&D/Sales > 15%

25. Percentage of New Produce Failures For Three Types of Businesses:Consumer, Industrial, Service

26. Percentage of New Produce Failures For Three Types of Businesses:Consumer, Industrial, Service

27. Product Lifecycle • 17-20 years – 1970 • 10-20 years – 1980 • 5-6 years – 1990 • 2-3 years – 2000 • Less than 1 year for some products • Need for constant innovation, improvement, new product development

28. 3M • 30% of sales from products introduces within last 5 years • 10% real growth annually • 10% profitability after taxes • 27% return on capital investment • 15% rule of time

29. New Products • Need a champion • Market test • Get to market swiftly (market plan) • First to market gains share, higher margins, etc. • Sell benefits, not features • Unique benefits – innovative, better, faster, etc.

30. Some 37% of U.S. households include someone who has founded, tried to start or helped fund a small business. - Entrepreneurial Research Consortium

31. Small Business Success… 70% going after 8 years -Dun& Bradstreet survey of 800,000 small businesses started in 1985 80% fail in 5 years is myth!

32. “Every Community will lose about 10% of its jobs each year – from acquisition, downsizing, death, retirements or other causes. About 55% of all new jobs are from expansions of existing local companies and nearly 45% of new jobs are created by startup companies. Less then 1% of net new jobs occur as the result of relocations.” -David Birch, Ph.D. Cognetics

33. “Fast growth companies that utilize university resources boast productivity rates 59% higher than peers without a university relationship, as well as 21% higher annual revenues and 23% more capital investments. Private/public collaboration provides a strategic advantage for a significant number of high growth companies.” -1995 Coopers & Lybrand Study

34. Net new jobs come form… • 66% employers of less than 20 • 80% employers of less than 100 • 50% less than 4 years old • 1/3 generate 2/3 new jobs 80% of new sales

35. High risk Economy Unemployment Low Real Wages – all time high Record Profits Export Growing 3x growth of economy BUT… 12% college graduates lost job since 1993 Corporate downsizing Job insecurity Economic uncertainty

36. Growth Has been traded for Security Higher risk…higher reward

37. Strategies for Workers… • High tech career -most growth, most turmoil • Exporting company -pays 12% more on average • Self-employed

38. Strategies for companies… • Reengineer, restructure -boost productivity, profits -cut costs • Technological innovation • Export in growth countries • Invest in deregulated markets