Evaluating Venture Opportunities

Three kinds of changes may create the conditions for new venture opportunities. The first is new technical options that open up possibilities in performance or new applications that existing design concepts could meet only with great difficulty or not at all. The second impetus may come from changes in tastes, or through changes in prices of substitutes or complements, new customer demands that may impose requirements that can best be met with new design approaches. The third source is government policy. Regulations (or de-regulations) imposed on an established industry may set technical requirements or demand performance standards that favour revolutionary or architectural strategic development.

There is a belief among economists that waves of innovation occur more or less regularly over the past 250 years in roughly 50-60 year cycles. The first few years see a buildup of new technological potential, followed by a period during which new and far-reaching innovations burst on the marketplace, and then gradually slow down during a long period of commercialization. Nikolai Kondratiev, a Russian economist, first postulated this and these long-cycles were thus called Kondratiev cycles. Joseph Schumpeter showed that the first wave lasted from 1790 to 1840, based largely on new technologies in the textile industry. The second wave, which occurred between 1840 and 1890, drew on the development of railways and mechanization of production. A third wave (1890 to 1940) was based on electric power, advances in chemistry and the internal combustion engine and the fourth wave (1940 to 1990) on electronics and computerization. A fifth wave (1990-2040) appears to have started on the development of communications, digitalization, advances in biotechnology and molecular engineering.

The ability to recognise a potential opportunity when it appears and the sense of timing to seize that opportunity are critical. The attachment "Evaluating Venture Opportunities" summarises criteria used by venture capitalists to evaluate opportunities. The criteria provide some quantitative ways in which an entrepreneur can make judgments about market issues, competitive advantage issues, economic and management issues, and whether these make for a compelling opportunity.

There is another discontinuity brought about by the life cycle of a technology. The attachment "Technological discontinuties and the return on R&D" provides a brief about technological discontinuities.