Chapter 3: Feasibility Analysis
attack a small target market or a segment within a larger target market, at least
at the outset.
3-11.
What are some of the ways to determine the attractiveness of a small target
market within a larger industry?
MyLab Question.
3-12.
What is organizational feasibility analysis?
Answer: Organizational feasibility analysis is conducted to determine whether a
proposed business has sufficient management expertise, organizational
competence, and resources to successfully launch its business. There are two
primary issues to consider in this area: management prowess and resource
sufficiency.
3-13.
What are the two primary issues to consider when conducting an organizational
feasibility analysis?
Answer: First, a potential firm should candidly evaluate the prowess, or ability,
of its management team. This means that the entrepreneur must complete a self–
assessment. Second, a potential firm should determine if it has sufficient
resources to move forward to successfully develop a product or service idea.
The focus in organizational feasibility analysis should be on nonfinancial
resources in that financial feasibility is considered separately. Several areas
should be examined, including the availability of office space, the quality of the
labor pool in the area where the business will be located, and the possibility of
obtaining intellectual property protection on key aspects of the new business.
3-14.
What is a new-venture team?
Answer: A new-venture team is the group of founders, key employees, and
advisers that either manage or help manage a new business in its start-up years.
3-15.
What is financial feasibility analysis?
Answer: Financial feasibility analysis is determining the financial feasibility of
a proposed new venture.
3-16.
What are the three separate components of financial feasibility analysis?
Answer: The three separate components of financial feasibility analysis are:
capital requirements, financial rate of return, and overall attractiveness of the
investment.
Chapter 3: Feasibility Analysis
In regard to capital requirements, an assessment of the feasibility of raising
enough money to fund the capital requirements for the business is necessary.
An entrepreneur should also have a good grasp on what the capital requirements
for launching his or her business will be. In regard to financial rate of return, an
entrepreneur must determine whether the projected return on the proposed
business is adequate to justify the investment. Finally, in regard to the overall
attractiveness of the investment, an entrepreneur must determine, on an overall
basis, whether the potential financial returns from a proposed venture are
sufficiently attractive to move forward. Table 3-6 in the chapter provides a list
of factors that pertain to this topic.
3-17.
What are some of the techniques a start-up can use to estimate its potential
financial performance by comparing it to similar, already established
businesses?
Answer: First, substantial archival data is available online, which offers detailed
financial reports on thousands of individual firms (to compare against). Second,
locate a business that is similar to the one you’re starting, and if the business
isn’t likely to be a direct competitor, simply ask the owner. Finally, simple
observation and legwork. For example, if you were proposing to open a new
smoothie shop, you could gauge the type of sales to expect by estimating the
number of people, along with the average purchase per visit, who patronize
similar smoothie shops in your area.
3-18.
What are some factors that make a potential start-up attractive from an overall
financial perspective?
MyLab Question.
3-19.
What is the purpose of a First Screen analysis?
Answer: First Screen is a template for completing a feasibility analysis. It is
called First Screen because a feasibility analysis is an entrepreneur’s initial pass
at determining the feasibility of a business idea. If a business idea cuts muster at
this stage, the next step is to complete a business plan.
APPLICATION QUESTIONS
3-20.
Jackson Reed, a friend of yours, just told you an interesting story. He was at
his parents’ house over the weekend. While there, his father saw the
and never once completed a feasibility analysis. What do you think the authors
Chapter 3: Feasibility Analysis
of the text would say about that?” What would you suggest that Jackson say in
response to his father’s question?
Answer: Many start-ups may be successful without a feasibility analysis. But a
feasibility analysis is still an important step to help an entrepreneur assess the
potential feasibility of a business idea before a substantial amount of time and
effort is expended. In addition, Jackson’s father may have completed many of
the steps in a formal feasibility analysis—he just did them informally rather
than formally. For example, he probably did a lot of reading about the
businesses he started before he started them and talked to trusted friends about
whether he was making the right decisions. He probably also penciled out
whether the businesses were financially realistic. A feasibility analysis
formalizes these steps and is inclusive enough that a key step isn’t overlooked.
If Jackson pinned his father down he would probably admit that there is
nothing in a feasibility analysis that isn’t a good use of an entrepreneur’s time
to complete before a new business venture is initiated.
3-21.
Jennifer Pisano just applied for a bank loan to finance an Italian restaurant she
wants to launch. When visiting with the banker about the loan application, she
was asked if she had conducted any primary research to assess the feasibility of
her proposed business. Jennifer replied that she had spent many, many
evenings and weekends in the library and on the Internet collecting information
about restaurants in general and Italian restaurants in particular. She further
noted that the information she had collected through these efforts increased her
confidence that she could open and operate a successful restaurant. One reason
for her confidence, Jennifer noted to the banker, was that her library and
Internet searches were carefully conducted in ways that allowed her to verify
that Italian restaurants did well in demographic areas that are similar to the one
in which she wants to open her business. If you were the banker, what would
you say to Jennifer in response to her comments?
Answer: Jennifer has a misunderstanding of what primary research is. Primary
research is research that is collected by the person or persons completing the
analysis. Administering a concept statement is an example of primary research.
What Jennifer has done is complete secondary research, which probes data
that’s already collected. Jennifer’s banker may appreciate the secondary
research she’s done, but probably wants to see evidence that Jennifer has
actually talked to potential customers and business partners.
Chapter 3: Feasibility Analysis
Answer: This is a good question for an individual or group assignment. It’s
actually a fun question—students often come up with very innovative and
creative ways that New Venture Fitness Drinks’ business can be improved.
The exercise illustrates the importance of asking for feedback.
3-23.
Linda Toombs, who has considerable experience in the home security industry,
is planning to launch a new line of home security alarms that she believes
would be superior to other products in the market. Linda knows how to
develop a concept statement and administer a buying intentions survey but is
less clear about the type of library and Internet research that might help her
assess the demand for her product. If Linda asked you about this, what advice
would you give to her about how to conduct successful library and Internet
searches?
Answer: There are many things that Linda can potentially learn via Internet
and library research. First, she should access and read industry reports that are
available via the resources listed in Appendix 3.3 (IBISWorld and BizMiner
are our favorites) about the industry she is about to enter. Second, she should
ask a reference librarian for additional suggestions for trade journals,
magazines, or other publications that are related to her industry. There may be
a trade journal, for example, that deals with the home security industry that the
library has access to. Simply browsing through several issues of the journal
may give Linda useful insights and ideas. Finally, Linda should conduct
Internet searches about her industry and see if there are blogs available to
access and follow. She should also set up Google e-mail alerts with keywords
that pertain to the home security industry.
3-24.
Assess the industry attractiveness for the industry in which Tyto Care, the firm
featured in the “You Be the VC 3.1” feature, competes.
Answer: Urge your students to use resources listed in Appendix 3.3 to
complete this assignment. IBISWorld and BizMiner, in particular, are excellent
resources for conducting an industry analysis.
3-25.
If you were interested in opening a musical instruments store near the college
of university you are attending in order to sell guitars, drums, and other types
of musical instruments, what online resources would you draw on to conduct
secondary research regarding the industry/target market feasibility of your
business idea?
Answer: IBISWorld and BizMiner are excellent databases to check out. For
3-26.
Keith Ambrose, who is a physical therapist, is thinking about starting a firm to
provide in-home therapy services for people who are suffering from sports-
related injuries. Keith lives in Columbus, Ohio. He doesn’t know if Columbus
is large enough to support his proposed business or if people would pay a
premium to receive treatment in their homes for their sports-related injuries.
What suggestions do you have for Keith about primary and secondary research
he might conduct to learn more about the potential target market for his
proposed business?
Answer: First, Keith should assess how large his trade area is. In his case, his
trade area is defined by how far it’s practical for him to travel to provide his in-
home service. If it’s 20 miles, he could then draw a circle extending 20 miles
in every direction, to determine his trade area. He could then use resources
such as American Factfinder, City-Data.com, Census Bureau data, and/or data
from local government authorities to determine how many people live in his
trade area.
The next step would be to determine the national average for how many sports-
related injuries occur per 1,000 people and how often they occur, and then
extrapolate to determine how many people in his trade area are experiencing
sports-related injuries. If his area includes a large number of younger people
who are extremely active, then he might be justified in using a number higher
than the national average to determine the number of people in his trade area
who are likely experiencing sports-related injuries.
Chapter 3: Feasibility Analysis
employ one of the online services featured in Table 3.2, such as Usertesting or
Verify.
3-28.
What are some of the red flags that would suggest that the overall financial
attractiveness of a proposed new venture is poor? Which of the red flags you
identified would suggest that realistically, a proposed venture isn’t feasible?
Answer: A sample of the red flags are as follows:
Initial capital investment is high.
The time to break even is lengthy.
The financial performance of similar businesses is weak.
Sales will be slow to develop.
Low percentage of recurring revenue.
Difficult to forecast income and expenses with a reasonable degree of
certainty.
Ventures in the industry have a high failure rate.
The first three red flags are the most problematic, although each of the red
flags should be taken seriously, and may suggest that the proposed venture
isn’t financially feasible.
3-29.
A friend of yours just completed a First Screen analysis for an e-commerce site
that she hopes to launch to sell horse riding supplies, including saddles, tack,
lead ropes, and feed buckets. She’s disappointed because she rated 10 of the 25
items included in First Screen as having either low or moderate potential. After
thinking about this, your friend says to you, “Well that’s that. Good thing I
completed a feasibility analysis. I definitely do not want to start the business I
was thinking about.” Is your fiend correct in reaching this conclusion? How
would you advise her to interpret the results of her First Screen analysis?
Answer: Your friend shouldn’t rule the business out just because 10 of the 25
items on the First Screen are rated at low or moderate potential for the
following reasons. First, rating a section as low or moderate potential assesses
the business idea “as is.” One of the most valuable aspects of the First Screen
analysis is that it calls attention to these issues. Your friend may be able to go
back to these issues, and find ways to improve upon her plan in ways that raise
one or more of these issues into a more acceptable category. Second, First
Screen is meant to provide an overall impression of a business idea—it is not a
definitive checklist. All businesses have weaknesses. So your friend should
look at the potential positives of the business idea and the potential negatives,
and make a judgment based on a holistic view of the business idea to
determine if it’s feasible.
Chapter 3: Feasibility Analysis
62
YOU BE THE VC 3.1
Company: Tyto Care (www.tytocare.com)
Business Idea: Develop an in-home medical device that offers patients the chance to
meet with a doctor, 24/7, without leaving their home.
You Be the VC Scorecard
Tyto Care
(www.tytocare.com)
Score/Comments
1 2 3 4 5
Tyto Care was founded by Dedi Gilad and Ofer Tzadik.
Tzadik came from a health care background, while Gilad
had extensive entrepreneurship background. Together,
the two have put together a top notch team with
extensive functional experience in the health care sector.
1 2 3 4 5
The opportunity is hard to gauge. As the case indicates,
telehealth hasn’t gained much traction because of the
difficulties associated with remote diagnosis. Tyto
Care’s core product seemingly offers a good alternative
to waiting in doctor’s offices. It is important to consider,
though, that there is already a form of disruption in
health care via businesses such as Minute Clinic (inside
CVS Pharmacies) that offer quick service for common
illnesses.
1 2 3 4 5
Also hard to gauge. It is telehealth or alternatives to
conventional primary care physician-centered health
care. It is hard to estimate the size of the market and
how the conventional health care industry will react to
this. Insurance companies are also an unknown factor
here in terms of how they will react to this.
Chapter 3: Feasibility Analysis
business model. A Tyto Care device is a one-time
purchase and that’s the end of it. The downside of this
model is that it doesn’t produce recurring revenue.
3.50/5.00
Decision: We would not fund this firm. It just strikes us as too much of a niche product.
We do not know how disruptive it would be in the health care industry and how much
key stakeholder (doctors, insurance companies) support it would get.
YOU BE THE VC 3.2
Company: Wonder Workshop (www.makewonder.com)
Business Idea: Create a pair of toy robots, named Dash and Dot, that teach kids how to
code.
You Be the VC Scorecard
Wonder Workshop
(www.makewonder.com)
Score/Comments
1 2 3 4 5
Co-founder Vikas Gupta has considerable start-up
experience plus he had worked at Google and Amazon
after graduating with a graduate degree in computer
science from Georgia Tech. The second co-founder is
Saurabh Gupta (not related to Vikas), a graduate of
Stanford who had worked at Apple. The co-founders
have put together a solid top management with
considerable experience in the major functional areas.
1 2 3 4 5
Coding is increasingly becoming important in today’s
digital world. There is an opportunity to getting young
children exposed to coding early on in a fun and
interactive way. The price point of around $200 is a
Chapter 3: Feasibility Analysis
1 2 3 4 5
In a broad sense, the industry is toys. This is a huge and
growing space. But, more specifically, it belongs to the
segment of educational toys. This is an attractive space
to be in.
Strength of Business Model
1 2 3 4 5
It is a transaction-based model where Wonder Workshop
sells these products to end users. We don’t know
anything about their margins or their retail penetration.
This makes it hard to fully assess the strength of Wonder
Workshop’s business model.
4.50/5.0
Decision: We would fund this firm. Its management team is top notch. It’s the perfect
combination of business experience and specific product/market experience. The product
fills a need in the marketplace and it does not appear that they have any direct
competitors.
CASES
Case 3.1
“Something Borrowed” – How Feasibility Analysis Shaped Rent the Runway into the
Business it is Today
DISCUSSION QUESTIONS
3-34.
Make a list of the ways in which Hyman and Fleiss vetted their business idea
prior to launch. How long was it between the initial idea for Rent the Runway
and when the business was launched? What does the amount of time between the
two events tell you about Hyman and Fleiss’ feasibility analysis process?
Answer: It took one whole year – November 2008 to November 2009 – from
idea to launch for Rent the Runway. During this time they: honed and adapted
their original business, sought validation and support from both suppliers and
customers, field tested their concept, and only then did they launch.
The long period of time between idea formulation and launch shows how
diligent the two Jennifers were about feasibility analysis. They were meticulous
3-35.
To what degree would Rent the Runway be a different company today if Hyman
and Fleiss had not conducted a feasibility analysis? Do you think the business
would be as successful as is currently the case?
Answer: While it is difficult to truly decide what would have happened to their
idea if the two founders had stuck to their original business concept, it is clear
that they would likely have stumbled along without the feasibility analysis they
did. It is important to note that they completely changed their target market after
the initial feasibility analysis. They went after younger women with aspirations
rather than the traditional buyers of designer labels. This opened up a much
larger opportunity for them.
3-36.
Identify at least two “take aways” from the Rent the Runway story not
mentioned in the Lessons Learned portion of the case.
Answer: Students are likely to come up with their own lessons learned or take
aways, such as:
The importance of adaptability. When their original business idea proved
to be less appealing (after their conversation with Diane von
Furstenberg), they were quite willing to change things up fundamentally.
Launching a business is an arduous and stress filled process. It is
important to work with people who you can get along with. The two co-
founders were in the same cohort and socialized together. It made it easy
to work long and hard on the launch.
3-37.
What can young entrepreneurs with business ideas learn from Hyman and Fleiss’
experiences?
Answer: Adaptability and diligence are two important things that ensured the
success of Rent the Runway. The co-founders were willing to adapt their
business model and, more importantly, test every part of it during the feasibility
analysis.
Case 3.2
Embrace Infant Warmer: Sometimes a Business Start Is a Matter of Life and Death
DISCUSSION QUESTIONS
3-38
What target market does Embrace seek to serve and how attractive is that
market?
Answer: Embrace has two target markets. Its principle market is villagers in
rural villages in India. To reach its target market, Embrace is partnering with
multinational medical device companies such as GE Healthcare and with local
Chapter 3: Feasibility Analysis
NGOs. The other target market is hospitals and clinics. The Embrace Infant
Warmer is not only used in rural villages. It is also used in hospitals and clinics
to move premature babies from location to location and to use when a
premature baby is born and all of the traditional incubators are already in use.
3-39.
What examples of primary research that Embrace’s founders completed appear
in the case?
Answer: The Embrace team conducted extensive primary research to ensure the
feasibility of their device. They initially took their prototype to India to solicit
customer feedback. They used rapid prototyping techniques to iterate on
feedback and zero in on the attributes that are of highest relevance and value in
a rural setting. They continued to talk to villagers, which lead to many insights.
Field research took place, involving village mothers in every aspect of the
design of the product. The Embrace Infant Warmer was formally launched in
April 2011, after completing clinical trials. It went through more than 50
iterations before a final design was settled on.
3-40.
What actions did Embrace’s founders take to solicit feedback from prospective
customers and what did they learn from these efforts?
Answer: As mentioned above, substantial primary research was conducted.
They learned a lot as a result of the research. For example, they found that
women in India believe that Western medicine is very powerful, so they
routinely cut back on the recommended dosages of Western medicine, just to be
safe. That knowledge resulted in design changes in the Embrace device. They
learned that villagers wanted different pricing options—like an option to rent
the device rather than buy. Spending time in homes in rural India produced
additional insights. They found that the mother-in-law plays a major role in
families in rural India. As a result, they determined a way to involve mothers-
in-law in the process of using the Embrace Infant Warmer.
3-41.
If you were asked to conduct a financial feasibility analysis for Embrace, what
issues would you consider to complete this analysis and why are those
important?
Answer: A financial feasibility analysis involves three parts: total start-up cost
needed, financial performance of similar businesses, and overall financial
attractiveness of the proposed venture.