15 th Annual Edward L. Kaplan New Venture Challenge How to write a Feasibility Summary Workshop

1. 15th Annual Edward L. Kaplan New Venture Challenge How to write a Feasibility Summary Workshop Thursday, January 6, 2011 Charles M. Harper Center, Room C25 University of Chicago Booth School of Business

2. 15th Annual Edward L. Kaplan New Venture Challenge Feasibility Summary Workshop • AGENDA • Review of Timeline • Key Elements of a Feasibility Summary • Outside-Impacts (A framework for evaluating a business plan) • Dos and Don’ts • Q&A

3. 15th Annual Edward L. Kaplan New Venture Challenge Feasibility Summary Workshop 2011 New Venture Challenge Timeline Jan. 6 Guidelines for writing Feasibility Summaries Feb. 7 Phase I Summaries due Feb. 24 Teams advancing to Phase II announced Feb. 28 Orientation Meeting at Harper Center 6 – 9 pm Mar. 28 Bus. 34104, Developing a New Venture, Begins April 29 Full Business Plans due May 23 Finalists announced May 26 Finals at Charles M. Harper Center

4. 15th Annual Edward L. Kaplan New Venture Challenge Feasibility Summary Workshop Key Elements of a Feasibility Summary • Company Mission or Objective • Market Information • Competitive Landscape • Technology or Proprietary Aspects of the Product/Service • (if appropriate) • Revenue Model • Operations Model • Management Team • Financial Information (if available) • Progress to Date • Business Risks

5. 15th Annual Edward L. Kaplan New Venture Challenge Feasibility Summary Workshop Key Elements for a Feasibility Summary • Mission (objective) of the business • What are you selling? • What business problem are you solving? • How big is this problem? • Why should an investor read any further? What is different?

6. 15th Annual Edward L. Kaplan New Venture Challenge Feasibility Summary Workshop Which is better? Example 1: The company has developed the SalivaSac™, a proprietary semi-permeable membrane that enables the collection in saliva of biochemical markers below 12 kilodaltons. The company will focus on finding those applications which meet this criteria and where there is an advantage to collecting a non invasive sample. Example 2: The Company’s objective is to develop non invasive medical diagnostic tests. The first application is for using a proprietary saliva collection device to measure glucose levels in diabetics.

7. 15th Annual Edward L. Kaplan New Venture Challenge Feasibility Summary Workshop Key Elements for a Feasibility Summary • Market Information • How do you define the market? • Who is the customer? • What is the potential size of the market? • How many customers? How much do they buy?

8. Surfaces: 21% or $558 Million Frames Brushes 75% market is price sensitive 25% Prof artists or $147Million 15th Annual Edward L. Kaplan New Venture Challenge Feasibility Summary Workshop $ 2.8 Billion art supply industry Paint

9. 15th Annual Edward L. Kaplan New Venture Challenge Feasibility Summary Workshop Key Elements for a Feasibility Summary Competitive Landscape -- Why will you win? • Who are current players in the market? • Who could be your competition in the future? • What are your competitive advantages / disadvantages • What barriers to entry will protect you? • IP • Customer • Development process • How are you positioned with respect to the competition?

10. 15th Annual Edward L. Kaplan New Venture Challenge Feasibility Summary Workshop Key Elements for a Feasibility Summary Technology • Describe technology if it is a key differentiator / element of plan. • Is it proprietary? Are there patents? • Are there key milestones in terms of development or product testing? • What are the technology risks?

11. 15th Annual Edward L. Kaplan New Venture Challenge Feasibility Summary Workshop Key Elements for a Feasibility Summary Key Elements for a Feasibility Summary Revenue Model / Go to Market Strategy? • How will you make money? • Why will the customer buy your product? • What will the customer pay? - Why are you sure the customer will pay this? - Have you spoken to customers? • How will you get to the customer? i.e., distribution channel. • How many customers will you get? Operations Model: • How will you deliver this product or service? - Make internally or use external resources? • Do the costs of providing this product or service provide a sufficient profit? • Are there execution risks?

12. 15th Annual Edward L. Kaplan New Venture Challenge Feasibility Summary Workshop Key Elements for a Feasibility Summary Management Team/Advisors/Partners • Who are they? • Why are they relevant for this business? • Do you have any holes in the management team? • How do you plan on filling these gaps? e.g. Frank Smith, our CTO, has extensive experience in managing and building data warehouses. He previously served as Vice President in charge of Thompson Financial’s database management systems, and worked as a consulting manager with IBM for organizations building data warehouses. Frank received a B.S. in computer science from MIT and an MBA from Chicago Booth with a concentration in operations. e.g. We currently are looking for a Director of Sales. We have identified several individuals in data/information companies also selling to the Fortune 500 companies, consulting and investment firms that would be interested once we have secured our financing.

13. 15th Annual Edward L. Kaplan New Venture Challenge Feasibility Summary Workshop Key Elements for a Feasibility Summary Key Elements for a Feasibility Summary Financial Information (if available) • What are your economics? (use unit model analysis if appropriate) • What are your key assumptions? • Why will you eventually make money / go cash flow positive? - When will this happen? • How much money do you think you will need? • How big will you get? • Eventually, this section will need to get very detailed.

14. 15th Annual Edward L. Kaplan New Venture Challenge Feasibility Summary Workshop Key Elements for a Feasibility Summary Progress to Date • Milestones that have been achieved • Patents, trademarks that have been filed • Prototypes, websites, focus groups, beta customer, etc. Business Risks • What are you worried about? • What do you plan to do about it?

15. 15th Annual Edward L. Kaplan New Venture Challenge Feasibility Summary Workshop Comparables Are there comparables in the industry or other industries that validate your business model? • Who are they and why have they been successful? • How are they valued and how did they get funded? • Have there been successful exits? Multiples • Also look for the ‘corpses’. Have similar businesses failed? Why?

16. 15th Annual Edward L. Kaplan New Venture Challenge Feasibility Summary Workshop A Framework For Evaluating a Business Plan Steven Kaplan University of Chicago Booth School of Business

17. 15th Annual Edward L. Kaplan New Venture Challenge Feasibility Summary Workshop How Will Angels and VCs Evaluate a Business Plan / Opportunity? • When I look at an opportunity, I use the following framework. • OUTSIDE- IMPACTS Approach.

18. 15th Annual Edward L. Kaplan New Venture Challenge Feasibility Summary Workshop OUTSIDE - IMPACTSOpportunity, Uncertainty, Team, Strategy, Investment, Deal, Exit. • (O) Opportunity: Is this a positive present value opportunity? (Does it have IMPACTS?) • (I) What is the idea / industry? • (M) Is the target market large enough to support substantial growth / valuation? • (P) Why does the opportunity generate a positive present value? What is unique? • (A) Acceptance: Will customers in that market accept / buy this new product / service? • (C) Why won't the value be competed away? • (T) Why is this a good time to enter? • (S) Speed? How quickly can this be implemented?

19. 15th Annual Edward L. Kaplan New Venture Challenge Feasibility Summary Workshop OUTSIDE - IMPACTS • (O) Opportunity: Is this a positive present value opportunity? (Does it have IMPACTS?) • (I) What is the idea / industry? • Explain the idea / opportunity clearly and succinctly. • What problem does it solve? • What is the pain point • (M) Is the target market large enough to support substantial growth / valuation? • How large is the overall market? • How large is the market segment you are targeting? • Who are the key customers? • How many are there? • What will they spend? • Provide solid support for your analysis. • Are there additional opportunities?

20. 15th Annual Edward L. Kaplan New Venture Challenge Feasibility Summary Workshop OUTSIDE - IMPACTS • (O) Opportunity: Is this a positive present value opportunity? (Does it have IMPACTS?) • (P) Why does the opportunity generate a positive present value? What is unique? What is differentiating? • The answer to this should be implicit in other parts of OUTSIDE-IMPACTS. But, doesn’t hurt to be explicit. • Why will you make money? • How will you make money? • “What is your edge?” • First-mover advantage? • network effect. • switching costs. • execution. • Technology? • advantage? • defensible?

21. 15th Annual Edward L. Kaplan New Venture Challenge Feasibility Summary Workshop OUTSIDE - IMPACTS • (A) Acceptance: Will customers in that market accept / buy this new product / service? • Who is the customer in the target segment? Put yourself in shoes of a customer. • How does the customer spend the day. • Why will they buy your product / service? • What do they buy now? • Why do they buy what they do now? • Why will they switch from their current product? • How will you get to the customers? • Direct Salesforce? Resellers? Distributors? • How much of each? How quickly? • Advertising? • How much will it cost? • Common to underestimate time / cost • How will you keep customers? How much will it cost?

22. Customers, customers, customers. Get beta sites, beta customers, etc. VC pitches. Kathryn Gould.

23. 15th Annual Edward L. Kaplan New Venture Challenge Feasibility Summary Workshop OUTSIDE - IMPACTS • (C) Why won't the value be competed away? • What will existing competitors do? • What will other new entrants do? How will you respond? • (T) Why is this a good time to enter? • Why hasn't the opportunity been taken already? • (S) Speed? How quickly can this be implemented? • Good opportunities have positive IMPACTS. • If the opportunity does not have IMPACTS, then it should not be pursued.

24. 15th Annual Edward L. Kaplan New Venture Challenge Feasibility Summary Workshop OUTSIDE - IMPACTS • (U) Uncertainties: What are major uncertainties? • Possible uncertainties: • Market size. • Customer acceptance. • Customer approach. • Competition. • Management team. • Potential real options. • Which uncertainties can be managed so that outcome is more likely to be favorable? • Choice of initial customers? Choice of investors? • How do the answers affect the opportunity?

25. 15th Annual Edward L. Kaplan New Venture Challenge Feasibility Summary Workshop OUTSIDE - IMPACTS • (T) Team. • Can management team implement opportunity? • How does previous experience relate to opportunity? • How “hungry” is the management team? • If management pieces are missing: • What pieces are missing? • What type of person will you look for to fill them? • How will you find that person? • For VCs, a good team and a good opportunity are necessities. • (S) Strategy. • Is strategy consistent with opportunity, uncertainty, team, and exit?

26. OUTSIDE - IMPACTS • (I) Investment Requirements. • Forecasts and Cash flow requirements. • Forecasts: • What do investors look for? • Possibility of 10 X return. • Credible forecasts. • Growth, margins, exit value. • Analogs • What do investors do? • Cut forecasts “in ½,” “by 2/3,” • Push out forecasts. • What should you do? • Plausible best-case scenario.

27. Cash flow requirements. CIMITYM Use as little cash as possible. Be very careful about growing SGA ahead of sales. Particularly hiring sales people. M*

28. 15th Annual Edward L. Kaplan New Venture Challenge Feasibility Summary Workshop OUTSIDE - IMPACTS • (D) Deal. • Does deal structure provide appropriate incentives? • Is the deal priced attractively? • Do key individuals have incentives to do deal? • Do key individuals have incentives to make deal work? • Does deal structure provide / ensure appropriate governance? • Does deal structure help manage the uncertainties? • (E) Exit. Can investors exit the deal? How? • If an investment does not pass the OUTSIDE tests, leave it outside.

29. GrubHub.com a website for finding and ordering from restaurants that deliver. have to call every restaurant in city to get menu / ask if and where they deliver.Info is hard to collect. M - Not a huge market, but large enough. Make money off on-line ordering. A - Useful for consumers. Key issue is whether you can get them economically. Restaurants follow once consumers are engaged. P - First-mover advantage / network effect for consumers. Costly and time intensive to get menu / delivery info. Consumers have no reason to switch because restaurants pay. Example

30. Example Bump iPhone App to exchange contact info. Uses unique identification of two phones from: GPS Synchronicity of Bump. A Consumers liked it / found it useful. Huge piece of luck when billionth iPhone App. P Network effect. But what is M? I? How do you make money?

31. 15th Annual Edward L. Kaplan New Venture Challenge Feasibility Summary Workshop Dos and Don’ts Clichés to Avoid: • We have no competition. • We are the low cost provider. • We only need a 5% market share. • Our numbers are conservative. Avoid Acronyms (or at least explain them) • Don’t assume everyone reading plan has your knowledge base Make sure the car has a driver. • Someone should be the current CEO. OK to say you will find a permanent / better one later.

32. 15th Annual Edward L. Kaplan New Venture Challenge Feasibility Summary Workshop Dos and Don’ts Be Clear and Brief • Yes: Middleware for wireless networks • No: Develops and delivers an integrated suite of packaged applications for web and wireless deployment. Global enterprises use these applications to become more competitive and profitable by establishing and sustaining high-yield interactions and transactions with customers, suppliers, and employees. • Be optimistic but believable • Avoid the hockey stick effect unless you have assumptions to back it up

33. 15th Annual Edward L. Kaplan New Venture Challenge Feasibility Summary Workshop Dos and Don’ts Capture the reader’s attention – fast • Typical VC will not read past the first page • Should answer the following questions in the first page • - What is the opportunity? • - Why does anyone care? • - How will it be achieved? • - What is your unique differentiator?

34. 15th Annual Edward L. Kaplan New Venture Challenge Feasibility Summary Workshop Dos and Don’ts Provide tangible examples / experiences wherever possible: • Reference customers, • - Actual customers best. Potential customers next best. • - TALK TO CUSTOMERS. Describe what you discovered. • - There is nothing more important than a customer! Focus on how you are going to get that first customer. • Credible partners, suppliers, advisors, etc. • Identify comparable businesses or business models

35. 15th Annual Edward L. Kaplan New Venture Challenge Feasibility Summary Workshop • Link to online team building site where people can post ideas and team openings • Link to key dates, deadlines, and events for the 2010-11 New Venture Challenge • Link to sample business plans, NVC class workshops, sample equity agreement • Link to official rules and regulations, sample feasibility summaries • Check here for the latest news on current & former NVC Companies

36. 15th Annual Edward L. Kaplan New Venture Challenge Feasibility Summary Workshop Fast Pitch Event TO FOLLOW THIS PRESENTATION Event is for students interested in: 1 • Finding a team or team members Pitches have been pre-scheduled, but please talk to Jonathan Allan if you are not already signed up 2 • Giving a 60 sec Pitch of your idea and receive feedback Wanting to mix, mingle, and brainstorm 3

37. 15th Annual Edward L. Kaplan New Venture Challenge Feasibility Summary Workshop Team Formation and Networkinghttp://linkd.in/NVC2010 Get feedback on a new business idea! Find team members for your NVC Entry! Share your resume & expertise to let other students find you!

38. 15th Annual Edward L. Kaplan New Venture Challenge Feasibility Summary Workshop Questions?