Toolkit for Evaluating a New Venture

Several entrepreneurship-related classes at Stanford refer to a simple conceptual framework developed by Professor William A. Sahlman of Harvard for planning and evaluating new ventures. In short he proposed looking at People, Opportunity, Context and Deal of a venture and analysing how they Fit with each other in this particular combination at hand. You can read all about the model from his article, Thoughts on Business Plans (on Google Books) which in turn comes from an essay collection Sahlman edited in the 90s.

What inspired me in this material was a systematic use of simple, but carefully targeted questions. I decided to extract a condensed reference of them below – still mostly Sahlman with minor revisions, but I’ve added a few more, and would be happy to keep the list living if anyone proposes more useful questions from their arsenal in comments.

The list can be used as a cheat sheet for an early stage investor evaluating an opportunity that landed on their table. And an aspiring founder better be ready to answer most of them, for himself and eventually to others — or at least know which ones she still needs to find answers for. Having this sort of structure, a checklist to refer to not only helps information exchange. Often asking and answering these kinds of questions will reveal a fatal flaw in a plan.

People (founders, employees, other providers of resources to the venture):

  • Who are the founders?
  • Who are other people involved?
  • What have they accomplished in the past?
  • What directly relevant experience do they have for the opportunity?
  • What skills do they have?
  • Whom do they know and who knows them?
  • What is their reputation?
  • How realistic are they?
  • Can they adapt if circumstances warrant?
  • Are the founders prepared to recruit high quality people?
  • Who is missing from the team?
  • How will they be attracted?
  • How will the team respond to adversity?
  • Can they make the inevitable hard choices?
  • What are their motivations?
  • How committed are they to this venture?
  • How can I gain objective information about each member of the team (including how they will work together)?
  • What are the possible consequences if one or more of the team members leaves?

Opportunity (activity requiring investment of scarce resources in hopes of future return):

  • What is the nature of the opportunity?
    • Does this venture engage in direct combat, or “sell ammunition to all sides of the war”?
    • If this is an arbitrage opportunity: when does it go away and what is the big plan then?
  • Is the total market for the product/service large and/or rapidly growing?
  • Is the industry one that is now or can become structurally attractive?
  • What are the appropriate analogies?
  • If the venture is successful, what will it look like?
  • How will the company make money?
  • Who is the customer?
  • How does the customer make decisions?
  • To what degree is the product/service a compelling purchase for the customer?
  • How will the product/service be priced?
  • How will the venture reach the identified customer segments?
  • How much does it cost (time & resources) to acquire a new customer?
  • How much does it cost to produce & deliver the product/service?
  • How much does it cost to support a customer?
  • How easy is it to retain a customer?
  • How is the opportunity likely to evolve?
  • Is there more than one cash flow source in sight?
  • Can entry barriers be built and maintained?
  • To what degree does the company have control over the rate at which it exploits an opportunity?
  • Who else is (or might be) pursuing the same opportunity?
  • Who wrote the financial projections and why (for which audience)?
  • Do the pro forma projections show evidence of a business model that makes sense? (as specific numbers are almost certain to be wrong)
  • What are the key drivers in the business model that will determine success or failure?
  • Has any sensible sensitivity analysis been done on impact of changes in these key drivers?
  • Who came up with the idea for the opportunity and how? (e.g who owns the IP)
  • Is there anyone who could disagree with the previous answer?

Context (factors that impact the outcome, but are out of founder’s direct control):

  • What external factors will affect the venture?
  • Is the team aware of the context and how it helps or hinders their plan?
  • How might contextual changes affect the business?
  • What can you do in the event the context worsens? (interest rates, regulation)
  • What can you do to affect context in positive way? (impact on regulation, industry standards)

Deal (implicit & explicit contractual relationships between the venture and all resource providers, not limited to just investors):

  • What deals have been (or are likely to be) struck inside and outside the venture?
  • How do the deals struck increase the likelihood of success?
  • How will those deals and the implicit incentives evolve over time?
  • What new information would dramatically change your perception of the likelihood of success for a given venture?
  • How much time and money are required to “buy” that information? (e.g how to stage investments based on progress)
  • From whom should the money be raised?
  • How much money is needed and for what purpose?
  • What deal terms are fair and provide appropriate incentives for each side under a wide range of scenarios?
  • What are the consequences of losing the time race with competition?
  • What are the incentive effects of allocation of risk & reward? (e.g is the risk tolerance of parties in sync)
  • Does the deal provide any perverse incentives that can cause one or both parties to behave in destructive ways?
  • Who will be attracted by the deal terms offered?
  • What are the logical implications if the parties to a deal behave in their own perceived best interest?
  • Is the deal complex and can it be simplified?
  • Is the deal fair to involved parties?
  • Does the deal reflect trust rather than legalese?
  • Is the deal robust or will it blow apart if actual differs even slightly from plan?
  • Does the deal (even accidentally) foreclose any valuable options?
  • What decisions have been made (or can be made) to increase the ratio of reward to risk?

Fit (how the puzzle plugs together – hold 3 aspects constant to validate the fourth with specific questions):

  • To what degree do the people have the right experience, skills and attitudes, given the nature of the opportunity, the context and the deals already struck?
  • To what degree do the deals involved in the venture make sense, given the people involved, the nature of the opportunity and the context?
  • etc…

For more posts on the Stanford GSB Sloan life – see the table of contents here.