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Pre-Venture Feasibility Analysis: The Andrea Kaneb Case 1
The Pre-Venture Feasibility Analysis: The Andrea Kaneb Case
Mark P. Rice, Worcester Polytechnic Institute
Andrea Kaneb had worn hearing aids for thirty years and had extensive first-hand consumer experience with available assistive hearing devices. In her view, the products she had tried were too expensive and underperformed with respect to user needs and desires. Kaneb stated:
I have a box full of FM and Bluetooth microphones and gadgets for noisy environments that I've tried over several years. I remain very frustrated with the products I’ve tried and find myself frequently isolated and inwardly sad -- as the friendly banter and laughter of others swirl around me at social events. I alternate between using a remote microphone and turning it off, trying to find the best solution -- because neither scenario was working for me. In general, the available alternative products give me very little control and I'm often checking the user manual when pairing the devices, because they are not intuitive enough. I have an engineering background, so it is very likely the lack of user-friendliness is difficult for others as well. Kaneb was intensely committed to helping others find better solutions to alleviate
hearing loss -- particularly in noisy environments. From March through August 2015, Kaneb worked with three classmates in their MBA capstone project course to assess the feasibility of founding a new venture to develop and commercialize an innovative hearing system that would be superior to competing products. After the completion of the capstone course, Kaneb continued the new venture feasibility analysis on her own.
In December 2015, Kaneb met with her professor to review her progress in exploring the feasibility of her proposed new venture, which she had named Parlay, and to discuss possible next steps. Her professor opened the discussion by stating:
At the end of your MBA capstone course experience, Andrea, you still had some critical gaps in your feasibility analysis. These gaps would have to be addressed before you could be confident that your new venture idea would actually be an attractive opportunity. According to your preliminary financial model, you would need a $400K investment from family and friends to support the post-launch activities designed to make your venture attractive to professional investors. By the end of month nine after the formal launch of your venture, you would solicit $600K of investment from outside investors. Deciding whether you will ask your family and friends to invest $400K is presumably your first critical Go – No Go decision.
----------------------------- Copyright © 2016 by the Case Research Journal and by Mark P. Rice. This case study was pre- pared as the basis for classroom discussion rather than to illustrate either effective or ineffective handling of an administrative situation. The author thanks Hemant Ajbani, Ronan Daly, Andrea Kaneb and Kevin Szeredy for their contributions to this case study. The author also thanks Cyn- thia Ingols, Gina Grandy and the anonymous CRJ reviewers for their helpful suggestions.
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Please catch me up on what you have done and what you have learned in the past several months since the end of your capstone course. What additional tasks, if any, do you plan to undertake before you have to make the first critical Go – No Go decision? What tasks do you project you will undertake after securing the $400K investment from family and friends and before you seek the $600K investment from professional investors?”
THE PROJECT AND THE PROCESS
The culmination of Kaneb’s MBA Program was a two-semester capstone project course (running from January – August 2015) that challenged students to identify an entrepreneurial opportunity; to form teams around the most promising opportunities; and to conduct primary and secondary research that would support a new venture feasibility study. During the first seven weeks of the capstone course (January through March 2015), the students searched for potentially attractive new venture opportunities, developed project proposals and submitted them for review by the professor. To be qualified and approved by the professor, the proposed project had to exhibit the following characteristics:
x Involved a market/industry domain with significant technology intensity; x Proposed a new product/service, new process and/or new business model; x Required a higher degree of innovation than incremental; x Enabled significant progress and learning within the capstone timeframe and
resources; and x Ignited and fueled the passion of a project team of four to six students.
The professor provided feedback for each submission and the proposals were improved through an iterative revise and resubmit process until they were either abandoned or were accepted by the professor as “qualified”. One of Kaneb’s qualified new venture proposals centered on developing and commercializing a multi-user technology for improving hearing in noisy environments. The students in her cohort ranked Kaneb’s proposal among the four best of the nineteen qualified project proposals. By the end of Week 6 (February 28, 2015), Hemant Ajbani, Ronan Daly and Kevin Szeredy joined Kaneb to form a four-person project team and to formally submit their project proposal. They adopted the name “Parlay” for their project, reflecting the goal of helping hearing- challenged people converse in noisy environments. On March 2, 2015, the professor approved the project proposal and the team. THE CAPSTONE PROJECT TEAM
Kaneb received a B.S. in Electrical Engineering in 1984 and an M.B.A. in 2015. (See Exhibit A for Kaneb’s resume.) Reflecting on her past experience, Kaneb stated:
After completing my undergraduate studies, I worked as a software engineer in industry for five years. I'm happy to say that my husband, Steve, whom I met during our undergraduate years, has had a successful business career. His success has allowed me — since leaving industry -- to focus on family issues and engagement in various non-profits that advance causes about which I'm enthusiastic. It was Steve who encouraged me to return to school and pursue my MBA. He has been involved in a family business for decades. He felt that an MBA would provide valuable insight into any future endeavors I undertook and would make me a highly effective contributor, whether serving on non- profit boards or in a future career. He was right. Do N
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Pre-Venture Feasibility Analysis: The Andrea Kaneb Case 3
Even while Kaneb had enjoyed the flexibility that came with being a stay-at-home
mom, she continued to develop her leadership capabilities -- serving as a Director or Officer for non-profit organizations within her church and community. In her view, these years of experience provided valuable insight into advocacy and effective versus ineffective leadership.
Ajbani received B.S. and M.S. degrees in Chemical Engineering from Bombay University and UMass Lowell respectively. He was the COO of DiPrete Engineering, an engineering design and construction planning firm. He had twenty years of experience as a Product / Process / Manufacturing / Quality Engineer and Project / Systems Manager. Reflecting on his experience in the MBA Program leading up to the capstone course, Ajbani commented:
A year into the program, I found that the journey was making a difference in me -- as a person, a manager and a leader. I was more introspective, more aware of my own limitations and what to do about them, and more empathetic towards people. Gradually, I also found my effectiveness improving -- effectiveness as a family person, a manager of people and a leader of my organization.
Daly had fifteen years of experience as an IT professional, serving in technical and managerial roles in the Biotech, Enterprise Packaged Software, Pharmaceutical and Retail industries. Daly commented on the beginning of the Parlay project:
When we first formed a team, we were debating whether to choose Parlay or an alternative qualified project proposal. I was very impressed with Andrea’s intense commitment to her concept and recognized her deep, personal experience with the problem Parlay would address. As a result, I advocated strongly for Parlay and helped win over the others.
Szeredy came into the MBA Program with twenty-eight years experience in sales, engineering and management roles in global corporations and in startups. Reflecting on his experience with the Parlay capstone project team, Szeredy commented:
I enjoyed working with Andrea, Hemant and Ronan to develop the presentations we delivered to the Tech Advisors Network and to the panel of entrepreneurs who judged our final presentation at the end of our MBA capstone course. Facing experienced entrepreneurs in both contexts, we had to be prepared to answer their questions and to make sure our feasibility analysis was well developed. We welcomed their constructive comments -- the good, the bad, and the ugly. Their feedback helped reshape the Parlay new venture concept and market approach.
THE CAPSTONE PROJECT: FULL SPEED AHEAD
During the second seven weeks of the capstone course (March through early May 2015), Kaneb and her teammates explored the Micro-Market (customers), the Macro-Market, the Macro-Industry (using Porter’s Five Forces Model), and the Micro-Industry (sources of competitive advantage). In April 2015, Kaneb’s team made a presentation to the Tech Advisors Network, the university’s virtual incubator. (For more information about the Tech Advisors Network, see Exhibit B.) Kaneb commented:
When the idea of presenting to the Tech Advisors Network came up, I voiced opposition, feeling that we did not have enough information to effectively Do
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present our project. Kevin knew the inner workings of the Tech Advisors Network and propelled us into that realm, which turned out to be an invaluable experience.
Kaneb’s team succeeded in attracting seven volunteer advisors from the Tech Advisors Network who provided informal feedback and guidance throughout the remainder of the capstone course. Initially Kaneb’s team was interested in getting access to technical expertise that would help confirm the product concept, technical components and interconnections; and to determine whether they could be programmed to work together through an app. Among their advisors were three serial entrepreneurs: Larry Genovesi (computer systems); Jay Cahill (mobile / wireless systems); and Sean Mahoney (mobile applications and software architecture). They helped the team develop a deeper understanding of what would be required to implement their technical concept. Several of the other advisors offered to connect the Parlay team to industry contacts in companies that were potential strategic partners.
During the third seven weeks of the capstone course (early May through the end of June 2015), the team focused on addressing operations issues. And during the final seven weeks of the course (July – August 2015), Kaneb and her teammates developed a preliminary financial model; discussed the entrepreneurial team that would launch the venture; and prepared to deliver their final presentation. Throughout the course, all the student teams submitted progress reports and received copious feedback from the instructor, who pushed them to continue to refine their understanding of the feasibility issues. At the end of the two-semester capstone course, Kaneb and her teammates presented their final report on their progress in their opportunity assessment and feasibility analysis to a panel of seasoned entrepreneurs and investors, who were an additional source of valuable feedback. THE PROBLEM
Kaneb and her teammates interviewed twenty-five members of the local chapter of the Hearing Loss Association of America. Over half reported that they “always struggled” to hear in noisy environments, such as those that were the norm in restaurants. Another quarter of the respondents reported that they “usually struggled” to do so. Exacerbating the problem was the restaurant trend of enhancing “energy” in a space by increasing noise levels. This was accomplished by using glass and hard surfaces for décor and by piping noise back into a space. In 2015, a national survey by Zagat of people who dined out revealed that noise was the second most common complaint (24%), following service (26%).1 Researchers found normal conversations were conducted at 45-50 decibels, whereas restaurant noise averaged 50-90 decibels.2 This equated to trying to communicate over the noise of a power lawn mower.
In order to overcome this problem, the speech-to-noise (SNR) ratio needed to be enhanced. People with hearing impairment needed between 4 and 10 additional decibels of SNR to enjoy the same speech intelligibility as those with normal hearing.3 Controlled laboratory simulations with people that have hearing loss showed that the best way to increase the SNR was to place a remote microphone very close to the sound source.
Kaneb was committed to helping people avoid the feelings of frustration and isolation that came from struggling to hear conversations in noisy environments. She believed that deploying an unobtrusive network of remote microphones to deliver high quality audio wirelessly right to a person’s hearing aids would improve the ability to follow conversation. Kaneb stated that the raison d’etre for her new venture was: “Improve the ability of people to hear in noisy environments.” Do N
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Pre-Venture Feasibility Analysis: The Andrea Kaneb Case 5
COMPETING SOLUTIONS
The hearing aid industry was undergoing a major disruption, as customers were seeking less expensive solutions with easier access and greater control. A shift was underway from a tightly controlled oligarchy system, with price points of $1,500 - $3,000 per hearing aid to an unbundled product selling for $250 - $800 via the Internet and in Big Box stores, such as Costco. Hearing aid manufacturers were responding by establishing more retail stores, by acquiring the suppliers to the online and Big Box stores, and by acquiring other Personal Sound Amplification Product (PSAP) manufacturers. Mobile apps with smartphones allowed users to customize frequency and volume settings, giving control to the end user.
Most competing products were limited by the capability of the microphone and were typically obtrusive -- with neck loops, wires, or clunky boxes. For a large group of people trying to communicate in a noisy environment (e.g. at a dinner table in a restaurant), the use of remote microphones was awkward and drew undesired attention. The best solutions with respect to functionality were relatively expensive.
Also, because they required special programming, some products had to be sold through audiologists. Involving an audiologist made the process more arduous than buying a device direct, and significantly increased the price of the solution to the consumer. Several competing products, especially PSAPs, were unattractive or obtrusive, causing users to shy away from carrying them or showing them in public. See Exhibit C for a summary description of available products. KANEB’S SOLUTION
Based on its analysis of competing solutions, Kaneb’s team concluded that none of the products on the market at that time were fully optimized with respect to functionality, user-friendliness and price. The goal of Kaneb’s team was to address each of these issues. First, the Parlay system would be designed to enable multiple hearing-impaired users to hear each other in noisy environments. Second, the Parlay system would be designed in a way that would minimize the stigma associated with using an assistive hearing device. And third, Parlay’s system would be priced attractively compared with alternatives. Kaneb’s team believed that it would be able to differentiate its system by outperforming competing alternatives with respect to functionality, user-friendliness and price.
Kaneb’s team proposed to offer a combination hardware / software system that integrated with users’ hearing aids and smartphones. An app developed for smartphones would allow the user to manage the flow of sound through the system’s microphones to the user’s hearing aids. This product design concept had been explored with members of the Tech Advisors Network who had deep experience in app design and with electronic components. These technical experts were encouraging with respect to the concept but also indicated that prototypes would need to be developed and tested to confirm that the design would deliver the projected benefits. The system design, though based on significant research by the Kaneb’s team, was still only a concept. No prototypes had yet been designed, built and tested. A number of system specifications remained to be resolved, including type of microphone; wireless protocol; ease of use options (e.g. location of microphones); power supply; and interface with smartphones. It was not clear whether government regulations would also come into play. Design decisions would also need to take into account the commitment of Kaneb’s team to Do
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deliver the system at an attractive price. Kaneb still needed to determine whether she should apply for a patent. THE MARKET
The Hearing Health Foundation, the largest private funder of hearing research in the U.S., provided the following information.4
x Approximately 50 million people in the USA and approximately 360 million people worldwide suffered hearing loss. From 2000 to 2015, the number of U.S. citizens with hearing loss doubled. Globally the number was up by 44%.
x 5.2 million U.S. youth experienced noise-induced hearing damage and 60% of veterans returning from Iraq and Afghanistan came home with hearing loss; it was the #1 war wound.
x Hearing loss was the 2nd most prevalent health issue globally.
Only about 20% of people in America who could benefit from hearing aids had them5, i.e. approximately 10 million Americans had hearing aids. Assuming all hearing aid users would be considered potential customers for Kaneb’s hearing system, the size of the total addressable market in the United States was $5B. Market-Watch reported that the growing elderly population would drive the growth rate of the hearing aid market, which it forecasted would be 4.6% for the next 4-5 years.6 SALES, MARKETING AND DISTRIBUTION
During the capstone project, Kaneb and her teammates initiated relationships with local Hearing Loss Association of America (HLAA) support groups. Looking ahead to when she would be able to translate her conceptual system design into a prototype, Kaneb intended to test the prototype through partnerships with the Central Massachusetts Chapter of the HLAA; the Boston Chapter of the HLAA, which had a Quiet Restaurants group; and the Rhode Island Chapter of the HLAA. The latter had access to the Governor’s office for promoting innovations. Following HLAA meetings and discussions with its members, the team learned that HLAA chapter members were eager to try out the initial product designs and provide feedback that would guide system design improvements. Kaneb’s team believed that this approach would enable an iterative process of testing and re-design, and would ultimately provide validation of its system design. It would allow the team to identify the attributes that potential customers found most and least valuable in a noisy environment and to incorporate them into Parlay’s product design.
Kaneb anticipated that her first paying customers would likely be the local members of HLAA chapters that had tried the Parlay system, or, other people with hearing impairments who had received word of mouth recommendations from the initial customers. In addition to members of HLAA chapters, Kaneb’s new venture would market its system to people who had been interviewed as part of the capstone project team’s initial market research. In addition to direct sales to early supporters, the new venture would increase visibility and sales of the product through its own website, social media posts, and advertising on web pages of HLAA chapters. Kaneb’s team also proposed to demonstrate and sell the system to potential buyers through trials and kiosks at regional and national conventions and meetings focused on hearing loss. Do N
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Pre-Venture Feasibility Analysis: The Andrea Kaneb Case 7
In the four to five year timeframe, Kaneb’s team anticipated that the system would be sold through pharmacies and through big box stores, in addition to being sold online. A 2014 study of 1,551 hearing-impaired Americans by the Consumer Electronics Association indicated that consumers with hearing impairment preferred to purchase assistive hearing devices through pharmacies. 73% of the study participants indicated that they preferred this option. Reacting to this consumer preference, one of the six leading providers of assistive hearing devices had recently expanded a partnership with a pharmacy chain in the UK to sell its products. Also, one of the big box stores featured onsite hearing centers in which audiology exams were provided and hearing aids were sold. THE BUSINESS MODEL
Determining the best business model for her proposed new venture remained an open issue for Kaneb. She was confident that she had defined an appropriate strategy that would enable her venture to compete. Based upon the interview responses they received, she also felt positive about the process she and her capstone team members had developed for engaging potential customers. During the first couple of years following the launch of her venture, Kaneb intended to outsource production of components, keeping system assembly and testing in-house.
Making decisions about which parts of the value chain she would own and manage internally versus those that she would outsource would come with time. She also foresaw the possibility that her venture would end up partnering with or being acquired by one of the “Big Six” companies that dominated the hearing aid industry: Sonova, William Demant, Siemens (Sivantos), GN ReSound, Starkey Technologies and Widex. The Big Six supplied over 80% of the hearing aid products purchased by consumers globally.7
Similarly, major smartphone, microphone, and mobile application manufacturers, who were constantly under pressure to bring innovative new technology and creative features to the marketplace, could turn out to be important partners. The Parlay system was designed to directly interface with smart phones and microphones. Hence, the manufacturers of these products could be suppliers or even strategic partners for Kaneb’s company. Kaneb anticipated that it would be more challenging to engage with them as strategic partners, as opposed to managing them as suppliers. She hoped that she would be able to develop relationships with these firms in order to influence the evolution of their technologies and to ensure effective integration with her system’s components. Kaneb projected that she would want to be an active member of the Bluetooth Special Interest Group, lobbying for future enhancements that would help optimize her system. She planned to closely follow the work of the Institute of Electrical and Electronics Engineers (IEEE) related to wireless networks. She anticipated partnering with a few select audio companies whose technology would be incorporated into her system. Bringing these alliances and partnerships together would be a key determinant in the evolution of her business model and in product development efforts.
Kaneb also recognized that regulatory agencies could be an important part of the value network. She projected that her company would establish a compliance team that would directly interface with the Food and Drug Administration (FDA), with the objective of securing a medical device designation for her system. This would enable her company to advertise its system as hearing aid compatible, providing a significant advantage over competitors in the PSAP and assistive hearing device industries. She recognized that she would need to quantify the investment necessary for achieving this Do
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designation, i.e. the financial and time commitment required. Given the expectation that her system would incorporate wireless communications, Kaneb also recognized that Federal Communications Commission (FCC) regulations might come into play.
THE FINANCIAL MODEL
At the end of the capstone course (August 2015), Kaneb and her teammates were required to develop a summary financial model. Responding to the recommendation of their professor, they primarily focused on settling on the assumptions that would drive their cash flow analysis. The primary purpose of doing a cash flow analysis was figuring out how much investment would be required to launch the venture and to get to breakeven. Kaneb understood that she would need to develop a comprehensive and defensible set of financials before approaching sophisticated investors. Kaneb’s team decided to focus initially on the 10.8 million people who wore hearing aids as the basis for sales projections and financial calculations. Taking into account the smartphone adoption rate along with hearing aid usage, they estimated that initial 5-year sales would be 104,000 units.
Remote microphone systems sold through audiologists typically cost $2000 or more, and wireless PSAP systems with a single microphone cost $300. Based on the prices of competing products, Kaneb’s team decided to assume an initial system price of $500 and projected revenues from selling additional microphones amounting to 10% of the revenues from system sales. Based on these assumptions, Kaneb’s team projected $2.2M of revenues in aggregate over Quarters 4-8; $12.1M in Year 3; $19.8M in Year 4; and $23.1M in Year 5.
In order to estimate cash inflows and outflows, Kaneb’s team studied the financial statements of two of the Big Six hearing aid companies: Sonova8 and William Demant9. They examined various ratios --- specifically, the following factors as a percentage of Sales: Cost of Goods Sold (COGS), R&D expenditures, Gross Margins, Net Profit, Compensation, and Advertising costs. Kaneb’s team also estimated revenues per employee for these companies. Based on this analysis, Kaneb’s team made choices about the ratios that it would assume for its financial model. See Exhibit D for Parlay’s summary cash flow statement.
To help guide the development of an investment plan for Parlay, Kaneb’s team reflected on the professor’s presentation early in the capstone course describing various sources of funding for pre-venture and early stage venture activities. These sources included family and friends, accelerator funds, grants from government agencies (e.g., the Small Business Innovation Research program), and angel investors. Based on their preliminary cash flow analysis, Kaneb’s team estimated that the venture would need $1M in staged investments to fund start up business activities: product design, software app development, backend platform development, website development, legal fees, trial manufacturing, placing initial orders and bridging the gap between accounts receivable and payables until cash flow turned positive. Kaneb projected that her family and friends would contribute 40% of the initial $1M investment capital. That would give Kaneb nine months from her official venture launch to address the remaining feasibility analysis issues, which would in turn enable her to prepare a credible and compelling investment proposal. She projected that she would be able to attract the additional necessary capital of $600,000 from sophisticated investors. Do N
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Pre-Venture Feasibility Analysis: The Andrea Kaneb Case 9
THE TEAM: LOOKING AHEAD
Kaneb valued her experience with her capstone project teammates and was particularly grateful for the support and encouragement she had received from them, stating:
I am envious of the networks my three teammates have built throughout their careers. Mentoring and networking are areas in which I find myself lacking and where I feel the most lost. I never felt held back as a woman in the MBA program, even though there were only three other women students in my cohort of seventeen students; only three of sixteen courses in my MBA Program were taught by women; and when presenting Parlay to the Tech Advisors Network, only one of approximately sixty business professionals in the room was a woman. When I was preparing to present to the Tech Advisors Network, there was no one around to advise me on how I should dress. I found it hard to figure out how to look professional and feminine in a way that people would take me seriously and that would convey confidence without being too drab. I googled images of women CEOs to gain insight into how to dress, wear my hair and even decide on eyeglasses. To address this challenge, I joined the National Association of Women MBAs and have sought advice from professional women. Kaneb was ready for the transition to pursuing her venture idea on her own. She
reflected on the transition from capstone course project team to Parlay’s new venture team.
One important lesson I learned was the importance of the team, the team, the team. I knew I needed team members with complementary expertise, especially in areas such as new venture finance and software development. Unfortunately, none of the four of us who were part of the capstone project team had this expertise. We were four newly minted MBAs whose work experience and education prepared us for general management. It seemed to me that if I decided to launch Parlay, I couldn't see the benefit for any of us or for Parlay of starting off with four CEOs. After graduating from the MBA Program in August 2015, each of Kaneb’s three
teammates pursued alternative employment opportunities, but all three remained enthusiastic about their capstone project experience, the potential for the feasibility of the new venture opportunity they had explored together, and Kaneb’s capacity for carrying the Parlay concept forward on her own. Ajbani stated:
One of the peak learning experiences for me was the capstone project course. It catalyzed my interest in becoming a participating mentor in the Tech Advisors Network. I treasured my time with my Parlay teammates and wish Andrea great success as she pursues next steps in the development of the Parlay venture.
In the midst of the capstone project course, Daly had been promoted to the position Associate Director, Transparency Business Partner for Shire, and he indicated that he was excited about continuing his transition.
Szeredy, who was recruited post-graduation into a sales position with a top medical electronic records company, reflected on his experience with his Parlay teammates.
Through this capstone project experience, I learned that what carries someone through the ups and downs of the innovation process is the intensity of commitment to taking action; learning from experimentation; adapting; and persistence in pushing ahead. Do
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Although she had made a good start on developing a network of helpful supporters and advisors, Kaneb -- by herself -- was the Parlay team. She would need to figure out how she would establish a credible team, whether by recruiting additional founders or by making key initial hires.
Kaneb also understood that the skillsets needed would be determined at least to some extent by the business model she opted to adopt. Specifically, she had to decide which parts of the value chain she would manage within her firm, and which parts she would outsource. She was feeling a strong sense of urgency, as she recognized that the value of her support network would diminish relatively quickly if she delayed taking action on building her team and dealing with the other critical issues she faced. NEXT STEPS?
During her meeting with her professor in December 2015, Kaneb responded to her professor’s questions as follows.
The best advice I received from one of my Tech Advisors Network mentors was to make a list of people I should talk to about Parlay. Since I have been a stay-at-home mom, I find that I lack a network, so partnerships are very attractive to me. I have been pursuing that idea and I've had mixed results. Some people I sought out for advice or potential networking have not supported me or seen the value of my perspective, and that is disappointing. I learned in my MBA Program that there is a lot of failure along the path to entrepreneurship, so I am not discouraged by these missteps and consider it par for the course.
After the capstone course ended, I began attending meetings of the New Hampshire High Tech Council. Within that umbrella organization is the “Tech Women/Tech Girls” forum, and I attended one of their breakfast meetings that focused on women involved in angel investing. At this point, it seems likely that when I’m ready I will seek capital from one of the five angel investor groups I’ve identified through the New Hampshire High Tech Council.
I’ve also met with managers and researchers at Mass Eye and Ear Infirmary several times. I had been encouraged to work with them to forge a closer link with the Hearing Loss Association of America, which would be beneficial to both. I have been attending regional meetings of the Hearing Loss Association of America in both New Hampshire and Massachusetts and have become even more convinced of the needs and opportunities in the hearing loss world. I have written to the CEO and Chairman of the Board of the Hearing Loss Association of America with marketing advice and advocacy ideas for their convention in Washington DC. Looking ahead to potential partnerships, I have been considering partnering with a Bluetooth company in NH and have also been encouraged to talk to Bose, which may be seeking a new innovative avenue to leverage their audio expertise.
In spite of this promising response from potential strategic partners, I realize I need to pick up the pace and crank up my efforts to pursue this opportunity. I’m sure my competitors are not sitting still. Undoubtedly, they are using their experience with their products and customers to improve their positions in the marketplace.
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Pre-Venture Feasibility Analysis: The Andrea Kaneb Case 11
Throughout 2015, in the context of her capstone course experience and in the several months since graduating, Kaneb had invested a substantial effort in exploring the feasibility of her new venture idea. Was the evidence she had accumulated thus far sufficiently positive to warrant continuing her pre-venture feasibility study, or was it time to pull the plug? If she decided to continue, Kaneb needed to make one overarching decision, specifically: What were the critical uncertainties she needed to resolve in order to be able to make a credible case for investment, and what steps would she take to address them? An important dimension of this decision had to do with the timing of her actions. She needed to determine what progress she could make in bootstrapping mode before she officially launched Parlay with the $400K investment from family and friends. After determining that, she could then decide what actions she would delay undertaking until after receiving the initial $400K investment, knowing that those actions would also need to be completed before seeking the $600K investment from sophisticated investors. Do
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Exhibit A: Andrea Kaneb’s Resume Experience 2007 – 2015 Member, Board of Directors.
One Sky Community Services
Oversaw a $20M non-profit agency that provides community based services to individuals with developmental disabilities and acquired brain disorders.
2002 – 2005 Leader (of 15 middle school girls).
Girl Scouts of America 2000 – 2012 Member, Community Affairs Committee.
St. Michael’s Parish 1999 – Treasurer.
Family Support Advisory Council, Region 8 1996 – 2012 President and Treasurer.
South Hampton Parent Teachers Association 1987 – 1989 Software Engineer.
Wang Laboratories
Developed programs using DOS, Binary and C computer languages to run the Pegasus VS minicomputer system.
1984-1987 Software Engineer.
Hughes Aircraft
Developed integrated circuit-based firmware and database programs for a Korean Air Traffic Control System, including lab testing, team presentations and technical writing.
Education Worcester Polytechnic Institute Master of Business Administration Worcester Polytechnic Institute B.S. Electrical Engineering Source. Andrea Kaneb. 2015.
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Pre-Venture Feasibility Analysis: The Andrea Kaneb Case 13
Exhibit B: Summary Description of the Tech Advisors Network (TAN)
The Tech Advisors Network (TAN) at Worcester Polytechnic Institute (WPI) was a virtual incubator for aspiring entrepreneurs. The advisors (friends and alumni of WPI who were experienced entrepreneurs, investors, and business leaders) offered advice on business plans, marketing strategies, leads to potential partners and funding. The advisees were students, faculty, staff, alumni and friends of WPI who were exploring the development of new ventures for commercializing technological innovations. The Tech Advisors Network engaged with entrepreneurs on a wide range of new products, such as a smartphone application that would prevent texting and driving, an online educational tool for middle school science students, and a process for extracting materials from recycled cell phones.
The Tech Advisors Network focused on filling gaps in new venture development. The two basic elements of the TAN value proposition were advising and networking. TAN was structured as a three phase program: (1) Preparation and Presentation; (2) Periodic Meetings with the TAN Advising Teams; and (3) Ongoing Engagement of TAN advisees after completion of the program.
Source. https://www.wpi.edu/academics/business/innovation/tech-advisors.
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Exhibit C: Assistive Hearing Devices Phonak Roger Pen, the most widely used multi-talker network system, was manufactured by Sonova, which was the largest hearing aid manufacturer in the world. The Roger Pen was based on a 2.4 GHz system and was sold through audiologists and through Amazon. It required programming by an audiologist and also required the purchase of a Roger Pen receiver and hearing aid streamer. It had excellent sound quality and its form factor was very discreet, but the system was not designed to enable user control of audio. Digi-Wave by Williams Sound, the other multi-talker network product on the market, was also a 2.4 GHz system. It supported up to six microphones; retailed for $2,300; and had excellent sound quality. Kaneb perceived that the user guide and operations could be too complex for some users. Even so, Williams Sound’s Pocket Talker PSAP was the product most widely used in noisy environments by Parlay’s survey respondents. The Companion Mics (CM4) system by Etymotic, which was still in beta test, was designed to allow up to four users to converse using a network of remote microphones. This Bluetooth-type system required users to hang microphones around their necks and to take turns speaking. The system cost was projected to be over $1,000. The Companion Mics system garnered special recognition at the 2014 Hearing Loss Association of America conference. Etymotic was the developer of many successful PSAP products and had a strong online presence, especially with ear buds. Smartphone. Apple and other cell phone manufacturers were partnering with hearing aid manufacturers to provide wireless Bluetooth communication. Costco was selling “made for iPhone” hearing aids for $1700 per pair. Mobile phones were emerging as hearing aids with excellent noise-cancelling microphones and apps for customization based on hearing loss. In addition, it was projected that all major carriers would soon offer high definition audio. Users would have the ability to place the smartphone on the table and use the phone’s microphone as a remote microphone. It was judged that this might be an attractive option in a small setting, but would probably be less than ideal for a larger group, because the phone would need to be passed among the people talking. Surflink was produced by Starkey, the largest hearing aid manufacturer in the USA. This system connected a mobile phone to a hearing aid and also worked as a remote microphone. It cost $539 and was available online. SoundHawk was a Bluetooth system with one remote microphone and one ear bud; and it worked with a mobile app. It was reasonably priced at $300 and easily purchased online. However, it did not work with hearing aids. Quattro by Clear Solutions was a single wireless Bluetooth microphone that interfaced with hearing aids and retailed for $300. The Quattro system was black and sleek and provided great sound quality. The Parlay team projected that Quattro could become a serious competitor, if Clear Solutions enhanced its product. PSAPs. There were several inexpensive PSAPs sold online and in catalogs, such as those offered by Harris Communications. The “Pocketalker” by Williams Sound, the “Bellman mini”, and the “Comfort Audio Duett” were all used in noisy environments by some of Parlay’s survey respondents. These systems consisted of a wallet-size microphone hardwired to headphones or a “streamer” to a hearing aid. They were available online and in catalogs for approximately $150. PSAPs were limited by the length of the wire and the form factor. Do N
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Pre-Venture Feasibility Analysis: The Andrea Kaneb Case 15
Exhibit C: Assistive Hearing Devices (continued) The following chart provided a comparison of the features of these products and Parlay’s system.
Price Multiple Mics?
Switching Capability?
Bluetooth & Phone Interface?
Discreet? Accessible Purchase?
Roger Pen
$2800
Yes
No
Yes
Yes
No
DigiWave
$2300
Yes
Yes
No
No
Yes
Companion
Mics
NA
Yes
No
No
No
No
Smartphone
$1700
No
No
Yes
Yes
No
Surflink
$539
No
No
Yes
No
No
Parlay
$500
Yes
Yes
Yes
Yes
Yes
Soundhawk
$300
No
No
Yes
No
Yes
Quattro
$300
No
No
Yes
Yes
Yes
PSAP
$150
No
No
No
No
Yes
Source: Parlay Capstone Project Team Final Project Report. 2015. Do
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16 Case Research Journal x Volume 36 x Issue 4 x Fall 2016
Exhibit D. Projected Cash Flow ($000, except for Systems Sales in # of units)
Projected Cash Flow: Q1 – Q8
Q1 Q2 Q3 Q4 Q5 Q6 Q7 Q8
Investment (start of quarter) 200 100 100 200 200 200 Beginning Cash Balance 200 192 181 257 352 471 482 621 System Sales (# of units) 100 300 600 1000 2000 Systems Sales ($000) 50 150 300 500 1000 Microphone Sales ($000) 5 15 30 50 100 Revenue (See Note 1) 55 165 330 550 1100 Less Expenses COGS (See Note 2) 18 55 110 183 367 Compensation (See Note 3) 50 50 50 50 Consultants (See Note 4) 40 50 60 50 50 50 50 50 G & A (See Note 5)
59
49 49 74 67 73 66 118 Sales & Mktg (See Note 6) 9 12 15 18 24 36 62 105 Total Expenses 108 111 124 160 246 319 411 690 Revenue - Expenses (108) (111) (124) (105) (81) 11 139 410 Ending Cash Balance 92 81 57 152 271 482 621 1031
Projected Cash Flow: Years 3-5 Year 3 Year 4 Year 5
Beginning Cash Balance 1031 6033 13813 System Sales (# of units) 22000 36000 42000 Systems Sales ($000) 11000 18000 21000 Microphone Sales ($000) 1100 1800 2100 Revenue 12100 19800 23100 Less Expenses COGS 4033 6600 7700 Compensation 1200 2400 2800 Consultants 50 50 50 G & A 605 990 1155 Sales & Mktg 1210 1980 2310 Total Expenses 7098 12020 14015 Revenue - Expenses 5002 7780 9085 Ending Cash Balance 6033 13813 22898
Notes to Cash Flow Statement (1) Revenue projections were based on selling systems (microphones, network and
app) at $500 per unit. In addition revenues from incremental microphones sales were assumed at a rate of 10% of revenues from system sales.
(2) The cost of manufacturing the bundled system was assumed to be 33% of the selling price. Do N
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Pre-Venture Feasibility Analysis: The Andrea Kaneb Case 17
(3) Compensation was for office, marketing and administrative personnel. Compensation costs were projected to increase substantially in Year 3 with the hiring of a CEO and CTO.
(4) It was assumed that during the first three quarters of Year 1 Parlay would contract with consultants for the development of the app and backend infrastructure at a cost of $140K. Parlay projected that beginning in Q4 of Year 1 ongoing consultants fees would be $50K per quarter through the end of Year 2, and thereafter $50K per year for maintenance, troubleshooting and upgrades related to the app at a rate of $50 / hour.
(5) G &A expenses included product development costs, travel, rent and utilities, legal and accounting fees, insurance, depreciation, lobbying costs, and system warranties. It was assumed that manufacturing would be outsourced and that office and computer equipment would be leased; hence, depreciation expenses would be limited to system assembly and test equipment. Since reaching initial target customers relied to some extent on word-of-mouth recommendations and referrals from early adopters, continued interactions with target users at regional and national HLAA conventions were perceived to be important. Hence, Parlay assumed an expense budget for founders travelling within the U.S. Anticipating potential alliances with manufacturing partners in the Far East, Parlay also earmarked funds for international travel. G&A expenses beginning in Year 3 were assumed to be 5% of sales revenue.
(6) Using data from online searches that revealed selling expenses typically incurred by Internet retailers, Parlay assumed that its online selling expenses beginning in Year 3 would be 5% of sales; and selling expenses in total would be 10% of sales.
Source: Parlay Capstone Project Team Final Project Report. 2015. Do
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18 Case Research Journal x Volume 36 x Issue 4 x Fall 2016
NOTES 1 Zagat. (2015, January 20). The State of American Dining in 2015. Retrieved from
https://www.zagat.com/b/the-state-of-american-dining-in-2015 2 Hernandez, P. (2014, April 22). For restaurant owners, striking the right noise level
is key. Retrieved from https://www.bostonglobe.com/lifestyle/food- dining/2014/04/22/what-can-hear-you/uJGdqtAwATBLlxAKDxV0wK/story.html
3 Bronkhorst, A.W. & Plomp, R. (1992). Effect of multiple speechlike maskers on
binaural speech recognition in normal and impaired hearing.” The Journal of the Acoustical Society of America, 92.6, 3132-3139. DOI: 10.1121/1.404209
4 Hearing Loss & Tinnitus Statistics. (n.d.). Retrieved from
http://hearinghealthfoundation.org/index.php?pg=statistics&gclid=CjwKEAjw3PGt BRCgapu_uY9hYSJAAICRalJeo7sywSFdRymFW7s5LGMYthrYcCutxA3vG_xJU w0RoCj7bw_wcB
5 U.S. Department of Health and Human Services (NIH). (2013, March 29). Hearing
aids. Retrieved from http://report.nih.gov/nihfactsheets/ViewFactSheet.aspx?csid=95
6 Market Watch. (2015, June 30). Hearing aids market growing at 4.6% CAGR to
2019. Retrieved from http://www.marketwatch.com/story/hearing-aids-market- growing-at-46-cagr-to-2019-2015-06-30-62033114
7 Hearing Mojo. (2016). Hearing aid manufacturers. Retrieved from
http://hearingmojo.com/hearing-aid-manufacturers/ 8 Sonova. (2016). Financial reports. Retrieved from
http://www.sonova.com/en/investors/reporting/financial 9 William Demant. (2016). News and publications. Retrieved from
http://www.demant.com/investor-relations/news-and-publications/
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