In the previous section, we discussed opportunity identification, which is the first step of the entrepreneurship process. In this section, we discuss the second stage of this process: opportunity evaluation. Opportunity evaluation occurs when an entrepreneur decides whether he or she has just a good idea or a viable opportunity that will provide the desired outcomes.23 The evaluation step is “where the rubber meets the road,” and it often presents a challenge. When evaluating opportunities, entrepreneurs must be honest with themselves.24 If they are not, they may purposely ignore or accidentally overlook important factors that will limit the potential success of the opportunity.

To evaluate ideas, entrepreneurs will often engage in feasibility analysis, which is analysis that helps entrepreneurs understand whether an idea is practical.25 In such an analysis, entrepreneurs study customer demands, the structure of the industry, and the entrepreneur’s ability to provide the new product or service. Although entrepreneurs have many ideas, not all of them are feasible; this analysis helps them to better understand the likelihood that they will be able to secure the resources required to make their ideas a reality.

Even if an idea is feasible, opportunities are associated with some risk. One of the central factors that entrepreneurs examine in the evaluation stage is the opportunity’s entrepreneurial risk, which is the likelihood and magnitude of the opportunity’s downside loss. In this context, downside loss refers to the resources (i.e., money, relationships, etc.) that the entrepreneur could lose if the opportunity does not succeed. All else being equal, entrepreneurs are more likely to pursue opportunities with low levels of entrepreneurial risk and less likely to pursue opportunities with high levels of entrepreneurial risk.

Research suggests that two factors may adversely influence the accuracy of an entrepreneur’s risk perceptions.27 First, an entrepreneur’s belief in the law of small numbers decreases the risk that he or she perceives with an opportunity. The law of small numbers refers to individuals relying on small samples of information to guide their decisions. Because small samples are more likely to provide encouraging information (i.e., the success stories of other entrepreneurs) and less likely to provide discouraging information (i.e., stories of the failures of other entrepreneurs), small samples of information tend to be biased positively. Such beliefs tend to be common among entrepreneurs because most entrepreneurs do not have access to large amounts of information.28 As such, the extent to which individuals (perhaps subconsciously) believe in the accuracy of the law of small numbers helps determine whether they are likely to obtain biased information and thus associate low levels of risk with their ideas.

Second, the control that an entrepreneur feels with respect to the opportunity’s outcome may influence perceptions of the idea’s risk. Illusion of control exists when entrepreneurs overestimate the extent to which they can control the outcome of an opportunity.29 The outcomes of some opportunities rely more on luck than on entrepreneurial skill. In these situations, believing that one can control the outcomes is unwise.

Taking these two factors together, when entrepreneurs evaluate opportunities, they need to pay careful attention to entrepreneurial risk—and savvy entrepreneurs work to reduce risk before investing substantial amounts of capital.30 It is important that entrepreneurs do not fall victim to a belief in the law of small numbers or the illusion of control when evaluating opportunities because these two factors may negatively influence the accuracy of risk perceptions. In the following section, we discuss the final stage of the entrepreneurship process: opportunity exploitation.