7/29/13 How to evaluate business ideas

leadersjournal.org/index.php?option=com_content&view=article&id=106&Itemid=113 1/3

How to evaluate business ideas [1]

POCD was first introduced by HBS professor Bill Sahlman and stands for People,

Opportunity, Context and Deal. People are “the individuals or groups who perform services

or provide resources for the venture”. People are, for some investors, the most important

aspect of the business, as many fund people rather than ideas. The past experiences of the

founders and their successes or failures are an indicator of future performance. A complete

team needs to combine business and technological expertise and potentially other specific

knowledge or experience depending on the industry. Team motivation and commitment are

crucial and many investors reject funding entrepreneurs for whom the success is not really a

“win or die” game. Moreover for practical reasons, and since VCs receive hundreds of

business plans every day, having a network and being known in the entrepreneurial

community helps at least passing the first scan. The model and the author do not state that

not having experience definitely leads to a failure, but for sure probabilities are against you.

After all investments are a game of statistics, where you try to increase the success

probability and decrease risk.

Opportunity is “any activity requiring the investment of scarce resources in hopes of future

return”. Regarding the opportunity, the main question is about the total addressable market,

which ideally should to be large enough and growing (as a rule of thumb VCs expect the

venture to be able to reach $50m in revenue in five years). That stands for the simple reason

that it is easier to take a market share in a growing market, than fight incumbents for their

share. Knowing the customer’s needs and having a simple financial model of how much it

costs to serve him (create and sell the product) and how much you can sell the product for, is

the minimum requirement for market understanding. The go to market strategy has to be

realistic and able to adopt. It is a fact that most startups pivot at least once in their life until

finding a viable business model. A simple way of evaluating industry attractiveness is the

Porter five forces model. The five forces defining the level of competition are the bargaining

power of suppliers, the bargaining power of customers, the threat of substitutes, the threat of

new entrants and the rivalry among existing players. The intellectual property, patents and in

general any way to create a competitive advantage are important in assessing the

opportunity.

Context is “all those factors that affect the outcome of the opportunity but are outside of

direct management control (interest rates, regulations, economic conditions)”. We are

concerned about context but maybe more importantly about context changes. For example a

deregulation can open an entirely new market, creating new opportunities.

7/29/13 How to evaluate business ideas

leadersjournal.org/index.php?option=com_content&view=article&id=106&Itemid=113 2/3

1. http://leadersjournal.org/index.php?option=com_content&view=article&id=106:how-to-evaluate-

business-ideas&catid=39:issue-4&Itemid=113

2. http://www.sequoiacap.com/ideas

Deal is “the set of implicit and explicit contractual relationships between the entity and all

resource providers”. Besides the valuation of the company and the shares that each player

holds, there are other important factors such as restrictions and terms about funding in next

rounds. According to Sahlman, “from whom you raise capital, is often more important than the

terms”. His main argument is that the connections and expertise of your investors will create

opportunities and help you in ways money can’t. A good deal should be simple. Its function is

to ensure that the company has enough time (money) to reach the next goal (develop

technology, bring the product to market) and raise the next round of funding. Moreover it

should align the incentives of all participating parties.

Overall what is important is the “fit” between these four factors. We are not looking for over

performance in just one or two of the before mentioned dimensions, but more of a general

alignment in order to achieve the final goal. Evaluating business ideas is not easy. There are

so many factors and variables that the outcome is unknown. Whoever supports the opposite

is at least naive. What entrepreneurs have to do is try to play with positive odds. Only that

way they can increase the chances of success. I will close with Sahlman’s words using the

Nike model (slightly less sophisticated, but almost equally valuable) to advice young

entrepreneurs “Just do it! If not, just say no!”.

References

• William Sahlman, “Some thoughts on business plans” HBS 1996

• Michael Porter, “Understanding industry structure” HBS 2007

• Sequoia Capital Website [2]

• Marmer, Herrmann and Berman, “Startup Genome Project” May 2011

• Michael Roberts and Lauren Barley, “How Venture Capitalists evaluate potential venture

opportunities” HBS 2004

• Paul Graham, “How to start a startup” Harvard Computer Society 2005

• Bing Gordon, Partner at Kleiner Perkins “CEO 2.0”

7/29/13 How to evaluate business ideas

leadersjournal.org/index.php?option=com_content&view=article&id=106&Itemid=113 3/3