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Real Estate Entrepreneur Shortage

Posted on Sunday 28 September 2014

(A version of this article first appeared in Ottawa Business Journal)

The term “real estate entrepreneur” may become an oxymoron in Ottawa as some great figures from the last generation reach retirement age or pass from the scene. Who will replace Bill Malhotra, Claridge’s founder, Irving Greenberg, the genius behind Minto’s rise to prominence and his nephew, Roger Greenberg, the man most responsible for getting Lansdowne Live off the ground, Kris Singhal, Richcraft owner, John Doran, one of the two founding partners at Domicile or Doug Casey at Charlesfort?

landsdowne live before
Lansdowne Live Before

For the last two generations, the economic engines of Ottawa have been—government, education, technology, tourism, health, real estate and construction. Bright, talented young people are attracted to all but the last two. It’s real estate and construction, an important sector, that is suffering from a shortage of entrepreneurial minds despite the presence of talented younger people like Alan Whitten at Huntington or Windmill’s Jeff Westeinde.

landsdowne live after
Lansdowne Live After

There is a 177-acre property about an hour and 15 minutes northwest of Ottawa with more than 4,000 frontage feet on a great fishing lake. Its owners wish to retire to their Toronto condominium. It has not 1 but 3 houses on it, 3 cottages, 8 RV sites (with room for many more), 3 docks, stainless steel outdoor boiler, its own island and peninsula plus 50-acres of tillable land, boats, fishing hut and gear. Its price? $740,000. Number of offers in the last year—zero. Now why is that?

It’s because we aren’t seeing enough entrepreneurs like Joe Kowalski, Wilderness Tours founder and Mount Pakenham owner, who originally came from the great state of Pennsylvania, decide to live and work in this area, more particularly in Beachburg, Ontario. Beachburg is a village of 900 people. The impact Wilderness Tours has had on it and the area can hardly be understated—Wilderness Tours grows to a town of about 3,500 on most summer weekends as guests come to whitewater raft, bungee jump, and kayak.

Invest Ottawa President and CEO Bruce Lazenby is right—we don’t want more “economic development” like Dell’s Ottawa experience. Sir Terence Matthews’ group (Kanata Research Park) built two new shiny towers for Dell only to see them left vacant two years later. Instead, Mr Lazenby’s prescription is to attract, train, support and keep entrepreneurs in this community. He figures if they live here (and not, say, in Austin like Michael Dell does), they will be less likely to cut and run when times change.

Why aren’t more young people attracted into real estate? Frankly, Ottawa’s other sectors look more promising. It doesn’t help that development in Ottawa is seen as an anachronistic and adversarial process, which takes an extraordinary amount of time to complete and comes with a high risk of failure. The NCC (National Capital Commission) has long been viewed as an organization that studies problems until one of two things happens—the proponent runs out of money and time and gives up or s/he dies, whichever comes first. The City of Ottawa is not far behind the NCC in the public’s view.

It took Doug Jones and his family more than 4 years to get his new facility in west end Ottawa approved and built. Mr Jones’ family ran PlayValue Toys (PVT) out of rented accommodation for a generation, paying landlords more than $3.5 million over that period. As the business passes to the next generation, his goal was to see PVT owning its own premises.

Ottawa has some excellent development companies like Colonnade and Canderel, but their business models are focused on triple or double A covenants and a build-to-suit to lease formula. They prefer to keep buildings in their portfolios or sell them at very low cap rates to pension funds and others with an appetite for close to risk-free investments. Finding a development partner who will lease space may not be an issue. But if an entrepreneur wants to own her/his own building, it could be.

Why did it take 4 years for PVT (and nearly 2 more for John Deere’s new project currently under construction next door) to get approved by the City? Firstly, Ottawa believes they have enough industrial land for 50 years. Of course, they have a study, which “proves” it. The facts that most of the land is owned by a few major players who won’t sell any or is in the wrong location or is owned by the NCC (whose nickname in the industry is “No Commitment Club”) are not taken into account. Secondly, the City has an official plan that is supposed to guide development in Ottawa, but really places a straightjacket on it.

PVT is emblematic of a new hybrid—they sell toys in their showroom and on the Internet. The latter (which is by far the fastest growing part of their business) requires warehousing and fulfillment plus access to truck transports and highway interchange. Unfortunately, there is nothing in the City’s OP that permits such a building so Doug and his advisers had to invent it. City planners opposed the development at every stage. ARAC, a 5-member committee of Ottawa Council, unanimously approved it.

Tech companies 20 years ago did not want to own their premises, but as some of their founders age, they’ve come to realize that diversification of their own investment portfolios might be in order. Still, they face the same issues owning their own premises as PVT and John Deere.

For tech startups, the lack of an entrepreneurial culture in real estate can also cause problems for them—conservative landlords (many of them now REITs, pen funds, insurance companies, banks, publicly traded firms) don’t want to lease to them. For non tech startups like locally owned restaurant chains Busters, Barley Mow, Don Cherry’s, good luck competing for landlord attention against national covenants like Swiss Chalet, McDonald’s, Keg Steakhouse & Bar.

The corollary to all this is that for any young person willing to bring his/her entrepreneurial talents to real estate development and construction, there is an enormous vacuum to be filled.

Bruce M Firestone, PhD, Ottawa Senators founder, Century 21 Explorer Realty broker. Follow him on Twitter @ProfBruce.

What’s in a Name?

Posted on Saturday 2 August 2014

(A version of this article first appeared in Ottawa Business Journal)

What’s in a name? Well, if you are Syfy channel, creator of masterpieces like Sharknado, Sharknado 2, Mansquito, Sharktopus, Dinoroc, Dinoshark, and Supergator, title is everything. That’s what they start with and a script comes later. They make their films at an average cost of $1.5 million, less, a lot less it turns out, than what it cost five founding partners to fit up their first Big Rig restaurant and brewery in a tiny mall hidden behind a gas station in suburban west end Ottawa, which was $5 million. It was financed half equity and half debt with TD Bank providing the debt portion. The restaurant and microbrewery fit up took 4 months to complete.

Big Rig restaurant and brewery and Sharknado 2
Big Rig Restaurant and Brewery 1

What do Chris Phillips, Angelis Koutsos and Lon Ladell, three of the five founders of Big Rig who sat down with me recently for an interview (the other two are Pierre Cleroux and Jimmy Zourntous), share in common with Syfy? A strong name and brand. “Big Rig” is Ottawa Senators defenceman Chris Phillips’ nickname. “My name is above the door so it’s tied to my image in the community and vice versa. It’s not just a business or a job. Staff are representing not just themselves but me, and together we are building a lasting brand.” Mr. Phillips says.

Chris Phillips and the Big Rig
Ottawa Senators Defenceman Chris Phillips at the Big Rig

When asked what revenues are, Mr. Koustos discloses, “We did $6 million in our first year and north of $5 million now.” In a small town like Ottawa, these are big numbers. Part of their revenues comes from licensees, other restaurants who sell Big Rig brewery product, and another part is made up of sales in LCBO outlets across the province of Ontario. “LCBO has been stocking Big Rig Gold for about a year now,” Mr. Ladell, their brew master, says proudly. Mr. Ladell worked for Spinnakers Brewery in Victoria B.C., one of the first tied-house breweries opened in 1986, before moving to Ottawa because his wife’s family is there. It was his availability that made Big Rig possible. Before opening Big Rig, the partners considered opening a Brazilian steakhouse downtown but, fortunately for beer lovers, their real estate deal fell through and two days after that Mr. Ladell appeared on scene. “Lon fell in our lap and we went from there,” Mr. Koustos adds.

One of their biggest problems so far has been handling the volume of people coming in the door—2,300 visitors just in their first three days of operation. Mr. Phillips says, “I got my hand slapped. I was inviting members of the media to come to the pub for a tour, doing interviews in the building and in studio and Angelis (he is the founding partner with restaurant operations experience) asked me to STOP.”

The other challenge they have is brewing enough beer to meet not only their own demand but their licensees’ and LCBO’s as well. Big Rig has recently leased 16,000 sq. ft. of warehouse space in the Kanata North Business Park (at 103 Schneider Road, just off Carling Avenue) where they plan to brew beer, launch a tall can, do taste tours, retail merchandise as well as beer, and, if they can successfully navigate Ottawa’s byzantine zoning rules, host events and serve food. Increased production is also required because they are opening a second restaurant in the Gloucester Centre where they’ve just signed a lease.

They currently employ 70 people in their restaurant and will add a similar number once their second location begins operating in Ottawa’s east end. The Brewery employs 8 more and this will grow depending on what Ottawa planners decide to let them do in their new warehouse location.

“Some restaurants, a few, have told us that they won’t take our licensed products because we compete with them with our location,” Mr. Koutsos says. “But I can’t see how one west end location can have any impact on a pub downtown except a positive one. We are extending an opportunity to bring some of the Chris Phillips and Lon Ladell magic into their own stores, what can be wrong with that?”

Mr. Ladell adds, “We won 9 awards at the Ontario Craft Brewing Awards, the most of any microbrewery. We won a gold medal at the Canadian Craft Brewery Awards and took home the 2013 Best New Brewery in Ontario award.”

Asked if they have 5-year goals and a written-out business plan, they answer that each of the five partners is consulted on everything, but they mostly stick to their own specialties—operations, brewing, marketing, finance… i.e., they don’t have a business plan. They are proceeding based on their experience and pushed by demand, which, it could be argued, is better than a 30-page document full of unsubstantiated assumptions, tables, spreadsheets and graphs.

Plus it doesn’t hurt that they have the on-going endorsement of the Senators current longest-serving player who clearly understands how important Big Rig could be to his after-hockey career. When asked if he would like to play his entire career with one team, having just signed a new 2-year contract, Mr. Phillips says with a smile, “That’d be pretty cool.” Asked if he will be the next team captain, Chris just smiles.

Bruce M Firestone, PhD, Ottawa Senators founder; Century 21 Explorer Realty Inc broker. Follow him on Twitter @ProfBruce

Prof Bruce @ 7:32 am
Filed under: Business Models andFinancing andFranchise and Concession andMarketing andReal Estate
Duty of Care

Posted on Sunday 18 May 2014

(This article first appeared in Ottawa Business Journal)

Steve Edgett is an Ottawa 40 Under 40 winner so it’s not surprising to find him involved in another startup at age 42. This one (called Knowmadics) is focused on collecting data from cameras, UAVs and other remote surveillance systems then turning it into useful information.

Steve Edgett Knowmadics
Steven R Edgett, VP BD & Strategy, Knowmadics Inc

If this is a bit obtuse then think of it this way—Steve was able to pre-sell their system to a large petro-company in a NAFTA partner country after demonstrating to their satisfaction that real time information from surveillance cameras could effectively stop what is known in the trade as “milking the pipelines”. This company alone experiences $2 billion per year of oil theft, mostly by their own employees. Knowmadics expects its system to provide a ROI within three months of implementation.

Paul Maguire, a former US navy intel guy now CEO and co-founder of Knowmadics as well as former president of Ultra Electronics and Strategic Programs Autometric Inc, says this about Mr Edgett, “Steve ended up being a godsend for us in that he was becoming available just as we were looking for someone to manage our Canadian, Halifax and Ottawa opportunities. We wanted someone who would be comfortable operating remotely (their HQ is in Chantilly, Virginia) and growing a plan from $0. We also wanted someone who had an international business development background. Steve ticked both of those boxes and got us our initial sales, six months ahead of schedule.”

Steve earned his stripes spending years in defense posts—first modernizing SAR (search and rescue) information systems for the Canadian military just after leaving university. He took them from grease pencils and flip charts to a world-class system called “SAR Master”. The armed forces decided to market this worldwide on a cost-recovery basis but it wasn’t long before they realized that they should not be in business. So Steve licensed the IP (giving the GOC perpetual rights to it) and went out on his own. His first customer? The USAF.

Mr Edgett says, “If you can get a contract with the USAF and get paid for it, you’ve just won the lottery.” Then he asks, “Do you know who EDC’s (Export Development Canada’s) biggest credit risk is? It’s the US government because getting such an enormous bureaucracy to approve anything including paying an invoice is very complex.” So it’s not enough to get a contract, you also have to work just as hard or harder to actually get paid…

At that time EMS was his main competition so like many large firms it proved less costly for them to buy Steve’s company than build it themselves. They also brought in Mr Edgett to run the division since he was beating the bejesus out of them in the marketplace anyway. EMS paid $2m for the firm, 2 times revenue in December 2000. Mr Edgett’s timing was fantastic—three months later the dot-bomb crisis hit and tech valuations crashed.

After that, Steve found himself building a sensor network in Iraq and Afghanistan, one which tracked soldiers in harm’s way. It was part of their duty of care to help personnel in places where there was no help. Mr Edgett built PRCCs, Personal Recovery Coordination Centers, which had to collect, analyze and transmit data after being alerted by small, secret tracking devices on their persons (activated by isolated US or Canadian military personnel) that they were in trouble. “We saved more people in our first two years than all other technology combined,” Mr Edgett says. “After an isolating event, you have maybe 60 minutes to spin up special ops personnel or that guy is probably lost. That’s what we did with our PRCCs.”

Asked if he was ever in danger, he says, “In 2005 in Iraq, I was woken up at 3 am when the windows of my trailer were blown out by an RPG. But, frankly, this was routine. I was more concerned driving the Highway of Death where more than 100 IEDs exploded daily.”

EMS was eventually bought by Honeywell, which is a Fortune 50 company for a reason—it is incredibly process driven, which suits an enormous business but not necessarily Mr Edgett who says, “EMS got Honeywell’ized. Our division alone (ACS, Automated Control Systems) had 75,000 people and $17 billion in revenues. That’s just a division. Getting anything innovative approved or even getting Honeywell to invest in our product was next to impossible. They wanted to milk the technology for cashflow not growth. In fact, the only innovation I could see going on was either in finance or acquisitions and neither interested me much.”

So Steve left the low-risk-tolerance culture of Honeywell to join Paul Maguire and president and co-founder Claire Ostrum, just after Paul had raised $2 million to start Knowmadics. Mr Maguire says about the raise and startup, “It was a combination of luck and timing. The idea behind the company is pretty simple and our slavish adherence to a lean start enabled us to stay relatively focused during our formative months when a lot of companies flounder trying to chase everything they see.” These guys get the idea that the three most important things for every startup are sales, sales, sales.

Technology-wise, Knowmadics is not that much removed from their competition but their philosophy is different—they based it on an open architecture instead of proprietary systems and they widely distribute their API. “Governments and business are fed up with proprietary systems and tied selling,” Mr Edgett says. “We use Amazon cloud services, which allows rapid deployment by us but, along with open standards, permits our clients and maybe even our competitors to become part of the Knowmadics ecosystem.”

Steve is married with two kids and is an investor in the Ottawa-based Barley Mow chain of restaurants so technology is not all he knows. Asked where he thinks Knowmadics will be in five years, he answers, “$50 million per year in revenues and active in Kuwait, Abu Dhabi, Dubai, Mexico, Nigeria, the US and many other nations, maybe even Canada! We have deals on the table for companies like Royal Dutch Shell, Pemex and a lot of other firms so wherever they operate, you’ll see us too.” That is a very large number of countries.

Then he adds, “Longterm, we think Knowmadics can be very big—we see our ecosystem being used to do really new things like creating a platform for, say, crowd souring crime-solving. Imagine if all the remote surveillance data together with citizen video of the Boston Marathon bombing was available in real time not only to law enforcement but everyone. Could they have found the bombers sooner? It worked in Iraq and should work here.”

Dr Bruce M Firestone, Ottawa Senators founder; Century 21 Explorer Realty Inc broker. Follow him on Twitter @ProfBruce.

Your Car is Your Wallet

Posted on Monday 2 December 2013

[A version of this article first appeared in Ottawa Business Journal]

No one knows what the platform will ultimately look like but it may surprise readers to learn that your car could be your wallet, fob and access card at least if the parking industry has anything to say about it. Starting with 700 pay and display machines (each costing more than $10,000) installed under a ten year agreement with the City of Ottawa, national firm Precise ParkLink and its Ottawa-based director of business development Tom Keeley are in a unique position to know.

“We really are a tech solutions company. Right now pay and display is the leading edge of technology in our industry but it is only a matter of time before your smart phone’s digital wallet combines with RFID, NFC (Near Field Communication) and HID (the successor to Hughes Identification Devices) to not only gain access to parking lots or spaces and pay automatically but also to go to, say, a Tim Hortons’ drive through and never have to worry about carrying cash, a tap-and-go fob or debit card. But you’ll still have to wind down your window to get your coffee,” Mr. Keeley concludes wryly.

His vision is a city where your vehicle talks to pay and display machines, access control gates, bank/restaurant/store/gas station payment systems and automated tellers, parking lots in condos, office towers and at entertainment facilities like Canadian Tire Centre, toll gates and roads as part of the coming wave of machine-to-machine Internet. You’ll never again have to stop to pay for anything or roll down your window to gain access.

Former Telfer MBA student and now local Ottawa entrepreneur Abdul Haseeb Awan hopes to be first out of the gate with ChipTag.ca, his system to turn your car into (at least part of) your digital wallet. “I saw cars getting stuck trying to get out of or into parking lots and garages. Drivers were rolling down their windows in terrible weather or they were too far for their fobs to work and I thought, hey, we can do better.” His low cost solution allows parkers to monitor their spending across various parking lots and spaces while giving parking lot owners similar access to real time data about their revenues and capacity utilization. The latter, Mr. Haseeb Awan believes, will allow owners to direct cars to unfilled spaces reducing delays for parkers and increasing revenues for them.

Mr. Keeley, when asked how he got into this business, replies with another smile, “I call it my no-plan, plan. I thought I was going to be a lawyer but instead my part time job during my university days was with the City of Nepean (as a by-law enforcement officer) which led me to a full time position with the City of Kanata. I was head of Kanata’s by-law enforcement group at age 23. The pay was amazing so I never bothered being called to the bar.” So much for a law career.

Next he moved into a role with the City of Ottawa as their manager of licensing and enforcement. After the province amalgamated 11 municipalities and townships into the City of Ottawa, Tom spent the next 18 months harmonizing myriad parking by-laws. After that, he was looking for a new challenge and it came along in the form of AutoVu’s LPR (automated License Plate Recognition system) which made chalking tires by parking enforcement officers redundant. They also sold the system to police forces including LAPD and Dallas so their cruisers could recognize and run plates even when both vehicles were moving at high speeds.

When AutoVu was sold to Montreal-based Genetec, Tom left. It was 2006 and he knew that there was an opportunity to propose a pay and display system to the City of Ottawa. Mr. Keeley met with owner of Precise ParkLink Peter Groccia and they talked about the Ottawa situation—a place where Precise had no presence.

Under former mayor Bob Chiarelli, the City of Ottawa started allowing proponents to come forward with innovative ideas and have their IP protected—they’d get to bid on City contracts as part of the normal procurement process that arises out of their idea like everyone else. What isn’t like everyone else though is that they have the right to match the low bidder on their idea. It’s called the “Ottawa solution”.

Today, Precise manages, in addition to their pay and display city-wide system, two City of Ottawa owned garages in the Byward Market and 30 other facilities including surface parking lots, office parking lots, hotel lots and the Ottawa International Airport’s lots. They employ 27 people locally.

Precise is a cross-Canada company with more than 400 employees so they are in a position, Mr. Keeley feels, to be part of a national solution turning vehicles into moving payment platforms. It’s exciting and part of his continuing no-plan, plan.

Dr Bruce M Firestone, founder, Ottawa Senators; broker, Century 21 Explorer Realty; executive director, Exploriem.org. Follow him on Twitter @ProfBruce.

Prof Bruce @ 12:09 pm
Filed under: Future Vision and Technology andTransportation
How to Calculate the Capitalization Rate

Posted on Friday 30 August 2013

The Cap Rate

Most real estate professionals do not use the IRR, Internal Rate of Return (but probably should)—they use Cap Rates to compare one project with another. The Cap Rate (‘Capitalization Rate’) is an approximate measure, as all financial measures are anyway. But they are way more approximate than the IRR is. Nevertheless, it’s a handy first order of magnitude measure. The Cap Rate can be determined by simply dividing the Gross Operating Income of a property by its Selling Price.

One way to look at the inverse of Cap Rate is that it is an approximation for the number of years it will take you to earn back your capital. It is widely used in the commercial real estate sector. The higher the Cap Rate, the better it is for the Buyer and the worse for the Seller.

Another way to look at the Cap Rate is that it is a rough measure of your rate of return on the project—it measures the rate of return on the overall project not your equity (unless you finance 100% of the property with equity).

For a project with financing that is provided by both equity and first mortgage, we can determine the Cap Rate as shown below.

Cap Rate = ROR, where ROR is the Rate of Return for the entire project.

ROR = (NOI + CRF (i, A) x (Selling Price or Purchase Price– Equity))/Selling Price or Purchase Price, where NOI is the Net Operating Income, CRF is the Capital Recovery Factor, i is the cost of borrowing and A is the amortization period.

Thus,

Cap Rate = (NOI + CRF (i, A) x (Selling Price – Equity))/Selling Price. Basically, the NOI + CRF (i, A) x (Selling Price – Equity) is the Gross Operating Income for the project.

If the Amortization period approaches infinity, the CRF = i. In this case, we can say that the Cap Rate can be calculated as follows:
Cap Rate = (NOI + i(S.P. – E))/ S.P., for A à infinity.

As the Equity in a project approaches zero (100% of financing is debt), we can calculate the Cap Rate as follows:
Cap Rate = (NOI + i x S.P.)/ S.P., for E à zero.

But NOI will be zero if E = 0 assuming that the selling price is jacked up to the point where all income is used to support debt. In that case, we have:

Cap Rate = (i x S.P.)/ S.P., for E approaching zero and NOI approaching zero or Cap Rate = i. Q.E.D.

What we have done in typical engineering fashion is to look at the boundary conditions for our formula and discovered that under certain circumstances, the Cap Rate is simple equal to the cost of borrowing. This gives you a first order of approximation for determining a Cap Rate for a project and explains, in part, why real estate is so sensitive to changes in interest rates.

The higher interest rates are, the higher the Cap Rate will be and, hence, the lower selling prices will be. The opposite is also true. Obviously, Buyers want to purchase property with the highest possible cap rates and Sellers want to sell at the lowest possible cap rates.

Real estate is highly cyclic and moves largely with interest rates. As we found out above, higher Cap Rates imply lower Selling Prices but, by definition, it also means lower Purchase Prices.

Do you want to make money in the real estate business?

Then buy when everybody else is selling (i.e., when Cap Rates are the highest and interest rates are the highest) and sell when everyone else is buying (i.e., when Cap Rates are the lowest and interest rates are the lowest). A simpler way to put it is: “Buy low, sell high.”

Now this is easier said than done. People are very sheep like. We like to buy what everyone else is buying. Ever bought a suit and had the sales person tell you: “This is really in this season—everyone who is anyone is buying this.” They tell you this because it works.

It’s hard to buy real estate when no one else is and interest rates are high. Everyone will tell you not to—your CFO, your auditor, your bank, your spouse, your BOD (Board of Directors), your CAO, COO, even your CTO (Chief Techie) will not want you to—she or he will want more dough for their department instead—it’ll have a better ROR, or so they will tell you. But you are the CEO and, at the end of the day, the decision is yours.

The best deals I ever did (and if only I had stuck to Real Estate and not got into hockey and other distractions) were when the real estate markets were depressed. I bought some land in Ottawa near a major, east-end shopping centre in 1983 when interest rates were 19%. The land cost me $1 per square foot for ten acres. In 1984, I got an offer for the land at 50 cents a square foot—I thought I was in real trouble. But I went to my Dad and he reminded me about rule number 1—buy low/sell high and I declined the offer.

By 1985/86, interest rates were down by half and I sold four acres for $10 per square foot to an auto dealer and the other six acres to an industrial company for $12. We made about $4m in three years on an investment of $450k; you don’t need to do an IRR calculation or ROR or ROE on deals like this—they are good deals. (That money too later found its way into the Sens, ugh. Money in NHL hockey seems to go on a one way trip—in, but never out.)

In 1994, the real estate biz was again in a slump. (These down cycles seem to come about every seven years and real estate tends to lead the national economy into a recession and lag it coming out which means it usually lasts longer than the general recession. But when real estate bounces up, it bounces in a hurry and you have to start selling right away if you want to time the market). I bought 60 acres of industrial land in Kanata for just 15 cents a square foot. I couldn’t believe it—people were just giving the stuff away—prices were lower than at any time since the Depression of the 1930s for goodness sake. By 1999, in the tech boom, serviced industrial land in Kanata was selling for $6 to $8 per square foot, if you could find it.

A client of mine is looking at buying a building in Ottawa for his packing supplies business. He is following my advice—own your own real estate. The SodaPop Building is selling for $4.8m. His biz will occupy about half the premises and the other half he will rent out. The Cap rate for his acquisition is:

Cap Rate (SodaPop Building) = (NOI + CRF(I, A) x (S.P. – E))/ $4,800,000 = ($301,736 + $313,864)/ $4,800,000 = 12.825%.

From his point of view (as the Purchaser), this looks pretty good. Cap Rates for industrial property can easily climb to 9, 10, 11, 12 or even more which would mean a much lower cost of acquisition for Paul (not his real name).

As discussed above, another way to look at the inverse of the Cap rate is that it is a rough measure of how long it takes to get your money back. Another useful engineering approach to problems is to check your units, viz:

Inverse of Cap Rate units = $/($/yr. + $/yr.) = $/$/yr. = yr.

So Paul’s new project will take 7.8 years to return all of its capital back to Paul (his equity) and to his debt holders. That is pretty fast if you think about the average homeowner taking 20, 25 or 30 years to pay off their home mortgage which many actually never accomplish.

But Paul should be much more interested in when he gets back his equity—this means he can turn around and do something else with his equity—buy more real estate, buy more equipment for his packing supplies biz, go on a nice holiday, buy a boat, whatever.

You get an approximate time for Paul to get his money back by simply dividing his Equity by the NOI. This works out to $1.2m divided by $301,736 or roughly 4 years. The IRR is a much more precise tool but it seems that the industry is just much more comfortable with a ‘rule of thumb’ cap rate approach.

Now let’s look at the cap rate for a small investment property. Let’s use as a n example, a multi-residential building, “Langlier Place” which has 12, 1-bedroom units and 36, 2-bedroom units. Note that it is important to know whether the cap rates you are using are effectively net or gross cap rates. The cap rates calculated above used gross operating income; for small investment properties it is typical to use net operating income where NOI is found by subtracting operating costs that the owner must pay from revenues received. The operating costs do not include either depreciation or mortgage interest. This is because cap rates remove from their calculation the debt structure of the owner. Obviously, a large well funded REIT, Pen Fund or Insurance Company will have a lower COF (Cost of Funds) than a typical private investor.

Therefore, for cap rates to be useful to compare one property with another similar one (similar in terms of quality, location, age, etc.) , you need to remove the impact of different capital structures.

Langlier Place—Owner’s Pro Forma Langlier Place—Appraiser’s Pro Forma
Revenues

YEAR 1 YEAR 2 YEAR 3

Rent $688,000 $694,000 $698,000
Parking and Laundry $ 24,000 $ 24,800 $ 26,400
Total $712,000 $718,800 $724,400

Expenses

Realty taxes…………………………………………………… $ 52,800
Water………………………………………………………….. $ 9,800
Hydro………………………………………………………….. nil*
Insurance………………………………………………………. $ 7,800
Maintenance and Repairs……………………………………… $ 5,500
Painting………………………………………………………… $12,000
Supplies………………………………………………………… $ 1,300
Elevator maintenance…………………………………………… $ 1,100
Accounting and Legal…………………………………………… $ 3,000
Superintendent…………………………………………………. $ 22,000
Mortgage Payments** (Principal and Interest)………….………$404,186
Total Operating Costs…………………………………………. $519,486
Potential Gross Income

12, 1-bedroom units @ market rent of $900 each……………. $129,600
36, 2-bedroom units @ market rent of $1,325 each………….. $572,400
Sub-total……………………………………………………… $702,000

Additional Income

Parking, 42 spaces @ $55 per month………………………… $ 27,720
Laundry, 5 w/d @ $30 per month…………………………….. $ 1,800

Total Potential Gross Income………………………………… $731,520
Less vacancy allowance of 6%………………………………………….-$ 43,912
Effective Gross Income………………………………………. $687,628

Operating Costs

Realty taxes…………………………………………………… $ 52,800
Water………………………………………………………….. $ 9,800
Hydro………………………………………………………….. nil*
Insurance………………………………………………………. $ 7,800
Maintenance and Repairs……………………………………… $ 5,500
Painting………………………………………………………… $12,000
Supplies………………………………………………………… $ 1,300
Elevator maintenance…………………………………………… $ 1,100
Accounting and Legal…………………………………………… $ 3,000
Superintendent…………………………………………………. $ 22,000
Property Management (3% of Effective Gross Income).…….… $ 20,629
Total Operating Costs…………………………………………. $135,929

Net Operating Income…………………………………………. $204,914 Semi-Net Annual Operating Income………..…………………. $551,699
Selling Price…………………………………………………. $6,500,000
Cap Rate…………………………………………………….……..8.49%

(* Paid by Tenants.)
(** Mortgage is a Canadian mortgage of $4.2 million with an interest rate of 7.25% and amortization period of 20 years.)

You will notice that the Cap Rate for Langlier Place is calculated using a ‘semi-net’ operating income. This shows how difficult and seat-of-the-pants Cap rates can be. As long as you know how the cap rate you are being quoted was used, this can be a useful way to compare one property with another. But what if someone is using NOI and someone else is using a semi-net number and someone else is using gross income? Use cap rates carefully.

@profbruce
@Quantum_Entity

Postscript: For more on ROE, Return on Equity, please read: Why Invest in Real Estate?

Dr Bruce M Firestone, B Eng (Civil), M Eng-Sci, Phd. Founder, Ottawa Senators; Author, Quantum Entity Trilogy, Entrepreneurs Handbook II; Executive Director, Exploriem.org; Broker, Century 21 Explorer Realty Inc; Entrepreneurship Ambassador, Telfer School of Management, University of Ottawa. 613.566.3436 X 200. bruce.firestone @ century21.ca

Follow Prof Bruce on Twitter @ProfBruce and @Quantum_Entity and read his blogs at www.EQJournal.org and www.dramatispersonae.org.

You can find his works at www.brucemfirestone.com and also at LearnByDoing.ca.

You can engage with him on Facebook via http://www.facebook.com/QuantumEntityTrilogy and http://www.facebook.com/Exploriem as well as via LinkedIn at http://www.linkedin.com/in/profbruce.

His real estate interests are summarized at www.ottawarealestatenews.com and www.thelandstore.org.

YouTube channels include http://www.youtube.com/user/ProfBruce and http://www.youtube.com/user/quantumentitytrilogy.

You can also read the first four chapters of Quantum Entity Trilogy or send it to your friends for free from: http://www.old.dramatispersonae.org/images/QuantumONE_CS_Third_Edition_First_Four_Chapters.pdf

You can read the first two chapters of Entrepreneurs Handbook II or send it to your friends for free: http://www.brucemfirestone.com/wp-content/uploads/2013/03/entrepreneurs-handbook-2013-edited-first-two-chapters-withCovers.pdf

Prof Bruce’s current motto is: “Making Each Day Count

Why VCs Don’t Buy Ideas or Invest in (Most) Startups

Posted on Friday 30 August 2013

And Why Large Firms Aren’t Really Interested in Hearing from Entrepreneurs Either

The role of investment banking firms, venture capital companies, law firms, commercial banks, public financial markets and securities firms is limited in the startup process. In Fool’s Gold, The Truth Behind Angel Investing in America (Oxford University Press, 2008), Scott Shane estimates that approximately 600 (pre-revenue) tech startups were funded in the US by VCs in 2004 while about 35.5% of all Angel-backed startups were pre-revenue. This works out to approximately 16,000 startups funded by Angels each year during this period (J Basil Peters, http://www.angelblog.net/Angels_Finance_27_Times_More_Start-ups_Than_VCs.html).

The US Census Bureau’s BDS data base suggests that an average of 198,000 tech startups (defined as those with 100 employees or less) were created per year in the five year period leading up to 2010 in the United States. Taken together, these figures imply that 91.6% of all US tech startups during this time were self-funded or bootstrapped, 8.1% were Angel-backed and just 0.3% were VC-funded.

So it is apparent that VC-funding, even angel-funding, of tech startups in the US is quite limited which means they are probably even less of a factor in Canada and other nations. VCs and angels are probably still less involved in all other sectors of the economy which means that the vast majority of all startups are self-funded or bootstrapped.

Now why is it that VCs and angels are not more interested in startups and even less so in ideas? The answer is that this is a rational decision on their part and may in fact be good for most startups to be so ignored. It may also be good for the national economy by making better use of a scarce resource– investment capital.

The reasons most VCs aren’t interested in most startups (or ideas/concepts) are as follows:

1. Most business startups don’t have sufficient growth prospects to attract VC funding.
2. Most startups are in industry sectors that don’t appeal to VC funds anyway.
3. Most startups should be much further along in their development before they go after VC funding, if they ever do. If their business has real cashflow and real customers and clients, they are on a much more even footing with respect to negotiating a fair agreement with VCs, if that is what they choose to do. In the end, founders are more likely to get higher valuations and retain control of their enterprises longer if they wait.
4. Finally, it is much more efficient for Canada if VCs fund more mature companies that are at a stage where large capital injections are: a) less risky, b) more inclined to be put to wise use by (now) experienced entrepreneurs.

Of course, startups may be thinking of an alternative. Why not go instead to large companies and get them to buy their idea or concept instead. Saves a lot of time and cuts out a lot of risk, right?

Except large (non-venture) firms don’t much like startups either because:

1. They might be funding a competitor.
2. If an upstart competitor does arise, they might be able to buy them out one customer at a time; i.e., they can lower their prices and take away a startup’s clients anyway.
3. Even listening to an idea pitch is dangerous, especially in the US with an over-supply of expert litigators. Large companies know that if they are already working on something similar and they launch it after listening to a startup’s elevator pitch, they can get sued.
4. They are married to their existing business model and don’t want to embrace change.
5. It is more efficient for them to simply wait for the tall poppy to appear then buy them. This can often be via a friendly buyout offer or, better yet, through a bankruptcy trustee. Even very fast growing startups can experience a cashflow crunch due to their inattention to runaway costs or due to a poor cash conversion cycle inherent in their biz model creating the perfect opportunity for a larger firm to swoop in and take advantage with a lowball offer.

So many large firms prefer to buy cashflow not invest in ideas, concepts or startups. With their superior access to low cost capital, they can, if called upon to do so, pay extraordinarily high prices and still make sense of an investment. If they buy, say, at a p/e (price-earnings) ratio of 20:1 it implies a 5% capitalization rate which sounds horrible. But if they leverage 95% of the purchase price with a cost of capital that is, say, around 150 basis points above the current 3-year t-bill rate (0.79% on August 30, 2013), they have a cap rate on their equity which is 20.4% p.a. which is right about where most large firms wants it. Cap rates don’t take into account future growth or paydown of debt by customer-supplied cashflow so the truest measure of rate of return is probably measured using Internal Rates of Return.

For fast growing divisions of large companies, their IRR is almost certainly going to be higher than their cap rate so you can see it makes sense in many ways for large firms to wait. In this sample case I am using, the IRR is a whopping 83.7% p.a. (ignoring transaction costs but using a growth in value of just 14% p.a. which for fast growing divisions might be far too low.) I have put the spreadsheet in .xls format (Why-Large-Firms-can-Afford-to-pay-High-Prices-for-Promising-Competitors.xls) in a public dropbox you can access from: http://t.co/9dQs58FVQI. You can safely download it and use it as a model. It is also included as an appendix to this post below.

So if you plan to start a business and you don’t want to give up control and a ton of equity to VCs and Vulture funds or go begging to large firms who really aren’t interested in hearing from you, learn everything you can about self capitalization—you’re going to need it. And instead of just talking about doing something, go out there and start your new enterprise and, once you’ve built it, hold onto to it.

@profbruce
@Quantum_Entity

Postscript: For more on self-capitalization, please read: Things Every Tech Startup Needs to Know about Self-Capitalization.

Dr Bruce M Firestone, B Eng (Civil), M Eng-Sci, Phd. Founder, Ottawa Senators; Author, Quantum Entity Trilogy, Entrepreneurs Handbook II; Executive Director, Exploriem.org; Broker, Century 21 Explorer Realty Inc; Entrepreneurship Ambassador, Telfer School of Management, University of Ottawa. 613.566.3436 X 200. bruce.firestone @ century21.ca

Follow Prof Bruce on Twitter @ProfBruce and @Quantum_Entity and read his blogs at www.EQJournal.org and www.dramatispersonae.org.

You can find his works at www.brucemfirestone.com and also at LearnByDoing.ca.

You can engage with him on Facebook via http://www.facebook.com/QuantumEntityTrilogy and http://www.facebook.com/Exploriem as well as via LinkedIn at http://www.linkedin.com/in/profbruce.

His real estate interests are summarized at www.ottawarealestatenews.com and www.thelandstore.org.

YouTube channels include http://www.youtube.com/user/ProfBruce and http://www.youtube.com/user/quantumentitytrilogy.

You can also read the first four chapters of Quantum Entity Trilogy or send it to your friends for free from: http://www.old.dramatispersonae.org/images/QuantumONE_CS_Third_Edition_First_Four_Chapters.pdf

You can read the first two chapters of Entrepreneurs Handbook II or send it to your friends for free: http://www.brucemfirestone.com/wp-content/uploads/2013/03/entrepreneurs-handbook-2013-edited-first-two-chapters-withCovers.pdf

Prof Bruce’s current motto is: “Making Each Day Count

APPENDIX:

Why Large Firms can Afford to pay High Prices for Promising Competitors

Sample Case– Cap Rate/ROE
Cap Rate for Buyout Offer 5% p.a.
3-year t-bill 0.7900%
Basis points over t-bills 0.1500%
Cost of Capital for Large Co 0.9400%
Earnings of Competitor $500,000 p.a.
p-e ratio 20
Buyout price $9,500,000
Leverage 95% 25 year amortization
Debt added to b/s $9,025,000
Equity $475,000
Cost of servicing debt ($402,975.67) p.a.
Accretive earnings $97,024.33 p.a. cash on cash
ROE 20.4% p.a.

Sample Case– IRR
0 ($475,000)
1 $97,024.33
2 $97,024.33
3 $97,024.33
4 $97,024
5 $7,723,272.57
irr 83.7% p.a.

Growth in value 14% p.a. inflation effect
Value of new division $18,291,438.53 after 5 years
Paydown of principal on debt
1 ($321,928.64)
2 ($324,954.77)
3 ($328,009.34)
4 ($331,092.63)
5 ($334,204.90)
Total paydown of debt ($1,640,190.29) wealth effect

E&OE

How to Get Rich, Slow

Posted on Tuesday 27 August 2013

Register now for ‘Real Estate Investing Made Simple, How to Get Rich, Slow’, a 45 minute FREE webinar with Bruce M Firestone, B Eng (Civil), M Eng-Sci, PhD, real estate guru & broker at Century 21 Explorer Realty Inc in Ottawa, Canada. You can log into the webinar or call in toll-free.

This intimate seminar is limited to just ten people during which Bruce will walk you through four simple steps that you can take to provide for your own and your family’s future. Note that of the 100 wealthiest families in Canada, 62 of them have substantially all of their wealth invested in real estate.

If you are fed up with the stock market, mutual funds, tech bubbles, option trades, day trading, fund and financial advisors, GICs, t-bills, money market funds, savings account interest, bank fees, life insurance investments and other types of investing save and except your own small or medium sized enterprise, one you own and control, this seminar is for you.

Bonus—

If you register for the seminar, you will also receive a free PDF copy of Bruce’s booklet Real Estate Investing Made Simple, How to Get Rich, Slow and a copy of Bruce’s monthly real estate newsletter.

More about Bruce M Firestone—

Bruce applied to go to McGill University in Montreal at age 14, arrived after turning 15, and graduated as a civil engineer before legally becoming an adult (then, age 21). Bruce worked for the New South Wales government, doing operations research and building mixed integer programming models while continuing his education at the University of New South Wales, where he obtained his Masters of Engineering-Science degree, and then at the Australian National University in Canberra, where he received his PhD in urban economics.

He has been, at different times, an engineer, a real estate developer, a hockey executive (founder of NHL team the Ottawa Senators, Canadian Tire Centre and the Senators Foundation—a children’s charity), a university prof, a consultant, an art collector and benefactor, a writer, a columnist, a futurist, and a novelist as well as Executive Director of not-for-profit Exploriem.org—an organization dedicated to assisting entrepreneurs, artpreneurs, and intrapreneurs everywhere. Bruce went back to school in his 50s, completed eight real estate courses and is now a real estate broker with Century 21 Explorer Realty Inc.

He is a well-respected real estate coach with abundant practical experience and training. He is married to a most wonderful girl, Dawn MacMillan. They have five great kids and one fine grandson.

Follow him on Twitter, @ProfBruce.

For more information, please visit www.brucemfirestone.com or contact Ms Nina Brooks, ninabrooks @ rogers.com.

Take Responsibility Mindset (TRM)

Posted on Saturday 27 April 2013

Guest Post by Gus Takkale. Excerpted from his book, THE ROAD: A Journey through the 5 C’s of Change, General Store Publishing House – Canada, 2011

People either live at “cause” or “effect”. Average people don’t live at “cause”, they are living at “effect”. They blame situations or other people for their lives. They feel sorry for themselves and focus on why they fail in these circumstances. I am sure you know people who love to feel sorry for themselves, they enjoy playing the victim and even get vocal about it. They are blaming everyone and everything else for their life – but not themselves. They are at “effect” of other people`s actions.

The people who adopt TRM are the people who live at “cause”. They cause everything – no matter what happens. These people work at a level that no average person can understand. They believe that no matter what happens, whether it is good or bad – they are responsible for it. Even if they are not the ones who have created it, they still take responsibility for it.

How do we take responsibility of things when other people’s actions affect us? It’s a three step process, the ALL approach:

Step 1 – Acknowledge: What did I do (or not do) to get this result?

Step 2 – Learn: What could I have done differently that could have improved that result?

Step 3 – Leverage: What will I do now to leverage this situation?

Put yourself in charge of everything that happens to you. You owe it to yourself, there is no one in this world that knows you more than you. So you are the best person to appoint for making things happen in your life, right? Now, let’s go make it happen!

Gus Takkale

@GusTakkale
President & CEO, Bytown Sports & Entertainment Inc.
President, Gus Takkale International Inc.
CRAZY ABOUT CHANGE

Prof Bruce @ 11:51 am
Filed under: 25 Steps to Business Success andEntrepreneur Skill Set
Negative Cost Selling Solar Arrays

Posted on Tuesday 9 April 2013

School Board Pays Negative Cost for new Solar Panel Installations

Rex Parris, Mayor of Lancaster, California doesn’t like to lose. It must come from his class-action lawyer background where he won almost $1 billion in claims for his clients and himself.

Three years ago he decided to make the city where the sun (almost) always shines the first on the planet to produce more electricity from solar panels than the town as a whole consumes.

He tried to get the local school board onside but they called Mr. Parris’ initiative unaffordable so the Mayor used negative cost selling on them.

He created a city-owned micro utility which purchased more than 32,000 solar panels capable of generating 7.5 megawatts on school property. In all, 25 schools got solar arrays.

Rex Parris
Mayor Parris

He then sold it to the Lancaster School Board for 35% less than they were currently paying for their electricity from the State’s grid, i.e., they bought their solar panels at a negative cost.

That is an irresistible sales proposition. Everyone in sales should be using it.

If you know your client’s businesses nearly as well as they do (which you should do anyway), you can use negative cost selling on them–where you can truthfully say, the decrease in their costs combined with an increase in their revenues from buying your product or service is greater (hopefully much greater) than the cost of buying your product or service. Or as one of my students put it, “I’ll pay you to hire me.”

Bruce M Firestone

Source/read more: Felicity Barringer, New York Times (April 8, 2013): http://www.nytimes.com/2013/04/09/us/lancaster-calif-focuses-on-becoming-solar-capital-of-universe.html?nl=todaysheadlines&emc=edit_th_20130409.

More examples of negative cost selling:
Best Of Kanata, http://www.eqjournal.org/?p=425
Maple Leaf Design and Construction, http://www.eqjournal.org/?p=482
Negative Cost Selling the Pro Sports team, http://www.eqjournal.org/?p=713
Negative Cost Selling a Mobile App, http://www.eqjournal.org/?p=2436
Jeff Hunt and the Ottawa 67s, http://www.eqjournal.org/?p=297
Negative Cost Marketing, http://www.eqjournal.org/?p=2585

@ProfBruce
@Quantum_Entity

Dr Bruce M Firestone, B Eng (Civil), M Eng-Sci, Phd. Founder, Ottawa Senators; Author, Quantum Entity Trilogy, Entrepreneurs Handbook II; Executive Director, Exploriem.org; Broker, Century 21 Explorer Realty Inc; Entrepreneurship Ambassador, Telfer School of Management, University of Ottawa. 613.566.3436 X 200. bruce.firestone @ century21.ca

Follow Prof Bruce on Twitter @ProfBruce and @Quantum_Entity and read his blogs at www.EQJournal.org and www.dramatispersonae.org.

You can find his works at www.brucemfirestone.com and also at LearnByDoing.ca.

You can engage with him on Facebook via http://www.facebook.com/QuantumEntityTrilogy and http://www.facebook.com/Exploriem as well as via LinkedIn at http://www.linkedin.com/in/profbruce.

His real estate interests are summarized at www.ottawarealestatenews.com and www.thelandstore.org.

YouTube channels include http://www.youtube.com/user/ProfBruce and http://www.youtube.com/user/quantumentitytrilogy.

You can also read the first four chapters of Quantum Entity Trilogy or send it to your friends for free from: http://www.old.dramatispersonae.org/images/QuantumONE_CS_Third_Edition_First_Four_Chapters.pdf

You can read the first two chapters of Entrepreneurs Handbook II or send it to your friends for free: http://www.brucemfirestone.com/wp-content/uploads/2013/03/entrepreneurs-handbook-2013-edited-first-two-chapters-withCovers.pdf

Prof Bruce’s current motto is: “Making Each Day Count

Things Every Tech Startup Needs to Know about Business Models

Posted on Sunday 7 April 2013

By Bruce M Firestone, B Eng (Civil), M Eng-Sci, PhD

Abstract

The Business Model is supplanting the Business Plan in many organizations. It not only describes the complete business ecosystem, it is a mechanism to discover profitable new relationships amongst stakeholder groups. The Business Model is more resilient than a plan and harder for competitors to copy. The Business Model today has 12 main elements—flow chart, value proposition, financial model, benchmarking, effective marketing, talent acquisition, self capitalization, differentiated value, cash conversion cycle, integration of the Internet and Mobile Internet, leverage and social overlay. It is possible today, for the first time in history, to make service businesses scalable and mass customization possible due to the advent of the Internet and Mobile Internet.

Introduction

The Business Model (BM) has come a long way in the last few years from a one page pictogram (or flowchart) of the ‘engine of a business’ to a many faceted model that fully describes the ‘engine room’ of an enterprise.

Recall what a basic BM is—clients are usually on the RHS (Right Hand Side) of the page, the business is in the middle and suppliers are on the LHS. Typically, products and services flow from left to right—from suppliers to the enterprise where some type of value is added and then through the organization to their clients and customers. Usually, money flows in the opposite direction—from clients to the enterprise and then from there to suppliers when they are paid. Occasionally, these directions can reverse with money flowing to clients and customers, for example, and information or marketing opportunities flowing in the opposite direction.

There is an orthogonal dimension in every model—a marketing dimension, which is where each organization demonstrates how they acquire clients and customers in a cost effective manner.

A fuller picture of every enterprise is formed when at least two dimensions on either side (and sometimes more) are included in the model. That is, the clients of the company’s clients and who the suppliers to the company’s suppliers also become known. In this way, new relationships amongst players and stakeholders can be discovered and creative new ways to enhance every organization can be found. Each enterprise is now being looked at as part of an overall business ecosystem and when they are able to secure place as a liked and trusted part of an ecosystem, business longevity is likely to increase.

Steve Jobs insisted that AT&T provide Apple with a share of its monthly subscriber revenues in return for exclusive access to the iPhone for two years (Wall Street Journal, How Steve Jobs Played Hardball In iPhone Birth, February 17th, 2007, http://online.wsj.com/public/article/SB117168001288511981-euxzmjNFZTZhA_2z8OBtD6GK900_20070224.html?mod=blogs). With this single strategic move, Jobs revolutionized yet another industry’s business model—cell phone manufacturers went from selling a ‘shrink wrapped’ gadget for a one-time payment in a brutally competitive market that was racing to the bottom to an industry with multiple sources of revenues, some of which are recurring.

Imagine how much harder Steve Jobs and Apple would have to work today and how much lower their productivity as measured in terms of revenue per employee would be without recurring revenues from iPhone app sales and revenues, advertising revenues on their iOS platform, downloads of paid content from iTunes and iBooks plus a share of their carriers’ subscriber fees? We estimated that Apple’s Internal Rate of Return on the iPhone is an incredible 288% p.a. (http://www.eqjournal.org/?p=1714). But it wasn’t the iPhone per se that propelled Apple to becoming the most valuable company on the planet; it was the iPhone’s business model that did that.

Was this unprecedented move by AT&T (to give Apple access to a share of its monthly subscriber revenues) worthwhile from the telecom’s POV? Well, Wired.com (http://www.wired.com/gadgetlab/2012/01/iphone-att-q4-sales) reported that the iPhone represented 80% of all AT&T smartphone activations in the last quarter of 2011 during which they added 9.4 million new subscribers, 50% more than in any previous quarter in company history.

Sam Palmisano, when he was CEO of IBM, told BusinessWeek (April 3rd, 2006) why he places a great deal of emphasis on the importance of business model innovation, “… with product innovation, it’s a certainty that your competition is shortly going to copy what you have done. With business-model innovation, though, if you can come up with a unique way of doing things, it’s much tougher to react to.”

The Complete Model

The complete Business Model is today made of a dozen elements—

1. A one page pictogram (flowchart) showing the whole business ecosystem (the enterprise embedded in a network of relationships with clients, clients’ clients, suppliers and suppliers’ suppliers together with an orthogonal marketing dimension showing how the enterprise acquires customers and clients in a cost effective manner.)
2. A spreadsheet which calculates the value proposition for a single customer or client; it demonstrates in a clear and concise way how a new enterprise/product/service/division creates either lower costs or higher revenues (or some combination of both) for a single customer. The corollary here is that organizations should insist that their suppliers provide them with their value proposition too. They should not expect less of their suppliers than they do of themselves.
3. A second spreadsheet develops a financial model for the enterprise. From this model, each firm is able to measure the impact each additional client has on the top line of the firm. The firm is also able to test the sensitivity of its top line to, say, changes in success rate in any of its marketing channels, changes in its COGS (Cost of Goods Sold) and other variables. The value proposition for clients and their impact on the enterprise (which is measured by the financial model) are mirror images of each other. The business ecosystem is complete when suppliers provide the organization with their value proposition and they also have a financial model of how their client’s organization impacts them. Why should any organization care if their suppliers have workable financial models? Long term viability of every firm depends, in part, on maintaining a sustainable and efficient supply chain.
4. Each business model should be benchmarked against the best-of-breed in their industry. We developed a Business Model Scoring Test, http://www.old.dramatispersonae.org/BusinessModels/BusinessModelScoringTest.htm to assist in this regard.
5. Each enterprise will not be successful unless it can acquire clients or customers in a cost effective way. If Super Bowl commercials are needed before acquiring any launch clients, the new enterprise is unlikely to be successful. If any new organization requires heroic efforts to land clients, they won’t be around long. So Guerrilla Marketing, Social Media and Market Channel Development have to be part of the marketing dimension in every business model. This is just as true for NGOs, Not-For-Profits and Charities. These types of enterprises need to have complete Business Models including financial model, value proposition and other elements described here. They have a fiduciary duty to be efficient and effective too.
6. Having a great business model without the ability to execute is not very useful. That is, execution counts, ideas by themselves, even great ideas, are not enough. We developed an online ECQ Test to test individual entrepreneurial ability: http://www.old.dramatispersonae.org/ECQTest/ECQ(ns)TestAuto.htm.

Once a musician has enough ability to get into a top music school, the thing that distinguishes one performer from another is how hard he or she works. That’s it. And what’s more, the people at the very top don’t work just harder or even much harder than everyone else. They work much, much harder,” Malcolm Gladwell, Outliers: The Story of Success, 2008.

7. There are business models that do not easily lend themselves to entrepreneurial startups. Typically, they require enormous amounts of capital that simply cannot be raised by entrepreneurs. Business models that use Bootstrap Capital and Self Capitalization techniques to fund their new startups are usually more focused on customer needs, customer acquisition and building cashflow. Strong cashflow is clearly part of improving survivorship rates and low cost or free bootstrap capital can lead to higher Rates of Return (both project IRR, Internal Rate of Return, and ROE, Return on Equity, will likely increase). Greater use of self capitalization techniques in early stages of startup development will also reduce the need for either Angel or VC capital which will increase the likelihood that original founders will retain control for a longer period. Having launch customers and growing cashflow improve valuations and improve negotiating positions of entrepreneurs vis–à–vis sophisticated investors.
8. Most startups do not necessarily have to find a never-before-tried-idea. Perhaps the reason it has never been tried before is that it is a bad idea. There are very few startups like Priceline.com (where each customer sets a price instead of the business) or Fed-Ex (pioneer of the airline hub and spoke system that made overnight package delivery possible). But at a minimum, each organization requires something that differentiates it from existing firms—there must be some type of innovation brought to bear on the industry. Differentiated Value and the ability to be able to succinctly explain it are essential. Imagine YouTube, for a moment, having been around circa the latter half of the 18th Century. Perhaps a video of Mozart’s last concert or Albert Einstein’s speech when he won his Nobel Prize in physics in 1921 would now be available? (YouTube actually has one minute and 22 seconds of Einstein speaking in Stockholm, http://www.youtube.com/watch?v=aOAzNYVvaNc.) What would such a video archive be worth today? What if Pinterest.com had been around since the 1800s and you could see what else interested James Watt (inventor of the steam engine)? Test and discover enterprise differentiated value using thought experiments like these (by thinking backwards as well as forwards).

I’m actually as proud of the things we haven’t done as the things I have done. Innovation is saying no to 1,000 things,” Steve Jobs.

9. The Cash Conversion Cycle should be determined for each business model. What use is a fast growing business if it goes bankrupt in the process? This occurs when the CCC is too long which means that it either takes too long to collect receivables or the organization is paying for inputs too soon before being able to deliver its products or services or inventories are too high.
10. Jack Welch when asked upon his retirement from GE, ‘What was the single most important invention during his decades with GE?’ pointed to the Internet and said it’s ‘the biggest change I have ever seen.’ The Internet (and the Mobile Internet) must be integrated into every business model. More on this later.
11. Building leverage into every model is essential; this multiplies the force and effect of effort, time, brainpower and capital. Leverage in business models comes from ten primary sources—i. HR (Human Resources), ii. OPM (Other People’s Money), iii. forced savings, iv. innovation, v. capital equipment, vi. location, vii. network effects, viii. marketing channels that reduce a marketing problem from one to many to one to a few, ix. branding, co-branding, co-opetition and co-creation and, finally, x. inflation. Test your business model by asking yourself do you have great Human Resources, are you using Other People’s Money, benefiting from forced savings, innovating, do you have a great location or brand, does your enterprise benefit from network effects or marketing channels that allow you to connect cost effectively with your clients or customers and reduces that task from one to many to one to a few and is your capital equipment top notch/best-of-breed & do you benefit from inflation? If so, you are probably maximizing your leverage.

In looking for people to hire, you look for three qualities: integrity, intelligence and energy. And if you don’t have the first, the other two will kill you. You think about it; it’s true. If you hire somebody without [integrity], you really want them to be dumb and lazy,” Warren Buffett.

12. Business Models with a social overlay can create a coherent community around each enterprise which make it difficult to knock off. They also provide a platform for a separate way of giving back to society often through a not-for-profit organization bolted onto the model. Such bolt-ons can become independent, self-funded marketing channels for the for-profit operation.

Case Study—Loose Button’s Business Model

Ray Cao and Aditya Shah are both young engineers from the University of Waterloo. Now what can they possibly know about the beauty products industry for a client base that is approximately 98% female and growing fast? It turns out that Ray and Aditya and their small crew of hackers and marketing mavens know a lot about their industry—they are reshaping the way it delivers samplers to their consumers.

Previously, suppliers like L’Oreal, Moroccan Oil, Dermalogica and dozens of others would employ agencies to go into malls and high end stores to hand out samples to consumers picked out nearly randomly. How much data did they collect? Almost nothing.

Ray and Aditya are highly analytical and believe in the value of tracking metrics to help build an enterprise and make it smarter. So they decided to do something about this part of the industry and, in doing so, have created one of the most innovative business models yet seen.

Their value proposition is, “We’re the Netflix of the beauty products industry but with e-Harmony for brains,” says Cao.

Every consumer who signs up is asked to complete a profile letting LooseButton.com know what type of products they are interested in. Then once a month, a Luxe Box is delivered to their door by CPC (Canada Post Corporation) or USPS with travel-size samplers from suppliers they are interested in. This is a form of mass customization—every Luxe Box can contain different products matching individual consumer interests with the right type of supplier products with a few surprises on the upside thrown in.

Clients respond well to LB surveys and have independently started to record YouTube videos of themselves receiving, using and experimenting with Luxe Box products. Some of these videos are getting phenomenal numbers of views (over 10,000) spreading the word for LB at no cost to LB. Tribes of makeup evangelists are forming around the strongest influencers in their ecosystem.

What’s also interesting is that clients are paying $12 per month ($10 if they sign up for a year) to receive their monthly try-before-you-buy Luxe Box filled with samples that LB’s suppliers provide them for free. There’s still more cleverness here. In addition to providing them with free samplers, suppliers like L’Oreal and Moroccan Oil pay a rights fee to be included in the Luxe Box which means that LB is in the enviable position of being paid not only by clients but suppliers as well.

Ray and Aditya have also implemented some negative cost marketing—organizations are paying them to market Luxe Box for them… The Globe and Mail, Chatelaine and other publications, desperately trying to hold onto their readers, buy Luxe Box subscriptions (at around 80% of retail price) to give to their most loyal customers vastly extending LB’s reach and increasing its growth rate as well. The Founders won’t say exactly how many clients they have but it’s over 10,000.

Based in Toronto on Bay Street in shared co-worker space, their Ottawa tie-in was they wanted to use By-ward market-based Shopify’s platform but instead had to move to Recurly.com because the former is not set up for recurring payments (aka, subscription billing). Shopify is set up for dozens or hundreds of SKUs, LB has only one.

This is a tough business to knock off in the sense that until the Internet can download mini portions of makeup or beauty potions and as long as Canada Post Corporation and USPS keep going, they’re in great shape.

Here is LooseButton.com’s business model circa 2012. See below. Ray and Aditya have plans to change this model in 2013—adding product sales—because their clients are demanding that.

Loose Button's Business Model

When asked why they named their company ‘Loose Button’, Ray says, “Buttons are fasteners that connect two pieces of cloth. We intelligently connect consumers and brands.”

They started LB right out of University and have an Advisory Board with luminaries such as Harry Rosen and Jagoda Pike (former publisher of the Toronto Star) sitting on it. “Mentoring helped us a lot,” says Aditya. “We decided not to go into the apparel space since it was already saturated. We went into the market research and product discovery side instead.”

Their biz coach comes in once per week and makes them set goals, track metrics and live up to their word. Internet startups that track their metrics grow 7x faster than those that don’t according to Startup Genome Report 01, Max Marmer, Bjoern Lasse Herrmann, Ron Berman, 2011.

They are also part of Impact.org which focuses on fast growing enterprises. Started out of Waterloo, it is now a national organization.

Both Ray and Aditya were part of the coop program at Waterloo and they each had six tries to figure out that they wanted to do during their course of studies. What it taught them was that they didn’t like working for other people (Ray at a Wall Street firm and Aditya at a large accounting firm and then various tech companies).

LB has plans for other Boxes—perhaps another line focused on Men’s products, possibly a foodie version. They intentionally called their first Box something different from their company name so they could conquer other verticals later. It’s what RIM tried to do with Blackberry and Playbook.

There wasn’t much to change in their biz model other than suggesting that they might consider adding a social layer over the whole thing—the follow/follower model is a powerful one which knits the community more closely together and makes it even tougher to knock off. They might integrate the Twitter API and allow customers and suppliers to follow top influencers in their ecosystem on a more coherent basis than just stumbling onto one of their YouTube videos.

Other changes might include adding a Qricket Code to each Luxe Box (that’s a QR code where you can change the website it resolves to after printing them) so that, like ET, each Box can call home. Maybe there will also one day be a LooseButton.org to give back to their community too.

Business models today are not just about making money—enterprises that are all about the money seem to have none and those that are about building insanely great products and services plus making a contribution to society seem to have it all. This is a Gen Y (and Steve Jobs) phenomenon. So bolting on to their existing model a standalone not-for-profit dedicated to say health and fitness and with its own sources of funding and marketing to their existing business model would not only help LB, it would help the wider community cope with issues like obesity, diet, lifetime fitness, abuse of drugs, alcohol and cigarettes.

Their model as it exists today where they get paid by consumers and suppliers plus other organizations pay them to market their product for them while forming an intelligent community that is hard to knock off is, frankly, amazing.

Integrating the Internet and the Mobile Internet into Everything You Do

The Internet is making it feasible to do things with business models that were never possible before including:

A. Create custom outputs from standard inputs

Unlike Henry Ford who said you can have whatever color of car you want so long as it is black, the Internet allows an enterprise to provide a nearly unlimited choice by combining standard inputs into a myriad of customized products or services. Every experience with an Internet-mediated entity can be wildly varied.

Mass Customization
Mass Customize Products and Services

B. Reverse out the work to clients and suppliers

For example, a Spa could allow clients to pick and choose amongst services and so tailor each visit to their individual preferences, tastes and needs. Since they are doing all the work of customizing their next visit (adding hair styling, massage therapy, pedicure, manicure, dietary consultation, yoga class and hair coloring and then deleting half the services because, say, they exceed current budgetary constraints), the enterprise doesn’t care how many times they change their minds before hitting the ‘submit’ button.

C. Embed each enterprise in a trusted, networked business ecosystem made up of clients, suppliers, clients’ clients, suppliers’ suppliers and the organization itself

To show how this works, ask for example the question, ‘Who are the clients of a Spa’s clients?’ Since most clients for most spas are probably women, the clients of the Spa’s clients are likely to be men. And what do men want? They want to purchase gift certificates from the Spa. By examining the nodes and links in a business model, it is often possible to discover new ways of delivering value in the ecosystem as well as discovering new marketing channels and supply chains as well.

D. Matchmaking—directly connecting clients to suppliers making service industries scalable for the first time ever

Returning to the example of the Spa, their employees could be treated not as employees but as suppliers. In this way, if a client wants to have a manicure, pedicure, massage and hair colouring, the Internet or the Mobile Internet allows the spa to create a backend system that matches them up much as, say, eHarmony.com or PlentyOfFish.com do. Match making is not a widely understood phenomenon. Service industries are notoriously labor intensive and hard to scale; i.e., more output requires more inputs in a more or less linear relationship or, worse, the ratio of marginal output to marginal input might be less than one. This happens when a service business is too complex to manage effectively as it grows. In consulting, that size is often one person. As soon as the enterprise grows beyond a single practioner, their earnings per person may actually go down while the time to produce those earnings goes up. This is not a happy event and explains there are so many one person service firms in real estate, management consulting, IT consulting, accounting, legal, plumbing, electrical, carpentry, the Mr. Fix It industry, roof repair, mechanic, appliance repair, PC repair, Network management and so forth. Internet matchmaking is likely to change all of these industries by making them scalable. Industry consolidation and larger average firm sizes are likely occurrences.

E. Mass communicate planet-wide through social media and other Internet tools at almost no cost

What is interesting is that some of these communication tools which are free to use like social media powerhouses Twitter, YouTube, LinkedIn, Pinterest and Facebook produce a powerful, newish form of communication—the viral message. It’s newish (as opposed to new) because the chain letter permitted something similar before. But it’s powerful.

F. Crowd sourcing (using the Internet as intermediary) means relying on the wisdom of the crowd to, for example, pick and vote on stories for news agglomeration sites like Reddit.com

Google can serve up ads to people who are searching for, say, digital cameras. Facebook, on the other hand, by mining its d-base, can serve up digital camera ads to new Moms in New Jersey who have never posted any photos of their kids. FB can also advertise wedding photographers in Vancouver to women who have just changed their status from ‘single’ to ‘engaged’. In ‘The Facebook Effect’, David Kirkpatrick points out that Google’s style of advertising (providing information to people who already know what they are looking for, at least in general terms) makes up 20% of all advertising. The rest is brand advertising meant to target people who have not yet made a buying decision or don’t know what they are looking for. That is Facebook’s specialty and you can understand why Kirkpatrick thinks FB will ultimately be a hugely successful commercial enterprise.

G. Relational data base

Organizations mine their customer (or supplier) interactions for intelligence. For example, Amazon asks questions such as, ‘Would you like to see what other people who bought this (book, CD, video, etc.) also bought?’ These suggestion engines result in significant increases in average order size and volume of sales.

H. User generated content

This is another form of reversing out the work to customers and suppliers. It underpins the business models of YouTube.com, Threadless.com, Facebook, Twitter and many other new enterprises.

I. Network effects

Google is an example of network effects—the more people who use their search engine, the better their algorithm is which brings more users which brings more data which delivers greater accuracy which results in more ads served in a self-reinforcing virtuous circle. It is more difficult to produce network effects in a gated community which is why Google+ is likely to struggle while Twitter flourishes.

Conclusion

Business modeling is a relatively new field of research and practice; it will undoubtedly evolve extensively in just a few years.

Business modeling may be superseding business planning in many ways because, as successful Generals know, the best battle plan ever created changes the instant it comes into contact with the enemy. Business models change too when they come into contact with the marketplace and the supply chain and they evolve over time as each organization comes to know and better understand the relationships implicit in their business ecosystems. Also business models are much harder to copy than any single product or service and, if an organization gets them right, they can create amazing new (sustainable) enterprises.

As former student Daniel Beauchamp once said, “Your competitors can copy what you are doing now but what they can’t know and can’t copy is what you are going to do next.” Dwight D. Eisenhower said it a bit differently, “Plans are worthless, but planning is everything,”

Entrepreneurs, intrapreneurs and product managers with a solid business model know that their implementation and execution of it will test their entrepreneurial skill set and, while they set goals each day and plan out each day and create To Do lists each day, they also know they always have to be flexible as circumstances change and new opportunities and challenges multiply around them.

The Internet is having a profound impact on the way business models are designed and implemented. The more that the Internet and Mobile Internet are incorporated in new or existing models, the more they are likely to prosper. The Internet is just a teenager and is likely to subsume everything in its path over the coming decades.

Business modeling and the integration of the Internet into Business Models are key factors as entrepreneurs and intrapreneurs try to decode the DNA of successful startups and product launches.

Bibliography

The $100 Startup: Reinvent the Way You Make a Living, Do What You Love, and Create a New Future, Chris Guillebeau, Crown Business, New York, 2012.
Blue Ocean Strategy, W. Chan Kim and Renée Mauborgne, Harvard Business School Press, 2005.
Business Model Generation, Alexander Osterwalder and Yves Pigneur, John Wiley and Sons, NJ, 2010.
Co-Creating Unique Value with Customers, The Future of Competition, C.K. Prahalad and Venkat Ramaswamy, Harvard Business school Press, 2004.
Co-Creating Unique Value with Customers, The Future of Competition, C.K. Prahalad and Venkat Ramaswamy, Harvard Business school Press, 2004.
Co-opetition’, Brandenburger and Nalebuff, Harvard Business School and Yale School of Management. (See also Co-opetition Interactive).
Crossing the Chasm: Marketing and Selling High-Tech Products to Mainstream Customers, Geoffrey A. Moore, Harper, 1999.
Delivering Happiness: A Path to Profits, Passion, and Purpose, Tony Hsieh, Hachette Books, June 2010.
Good to Great, Jim Collins, Harper Business, 2001.
Guerrilla Publicity, Jay Conrad Levinson, Rick Frishman and Jill Lublin, Adams Media, 2002.
Inside the Tornado: Marketing Strategies from Silicon Valley’s Cutting Edge, Geoffrey A. Moore, HarperCollins, 1999.
Outliers: The Story of Success, Malcolm Gladwell, Little, Brown and Company, 2008.
Predictably Irrational: The Hidden Forces That Shape our Decisions, Dan Ariely, Harper-Collins, 2008.
Purple Cow, Transform Your Business by Being Remarkable, Seth Godin, Penguin Group, New York, 2002.
ReWork, Jason Fried and David Heinemeier Hansson, Crown Publishing Group, New York, 2010.
Seizing the White Space: Business Model Innovation for Growth and Renewal, Mark W. Johnson, Harvard Business School, 2010.
Success Made Simple: An Inside Look at Why Amish Businesses Thrive, Erik Wesner, Wiley, John & Sons, Incorporated, 2010.
The Black Swan, The Impact of the Highly Improbable, Nassim Nicholas Taleb, Random House, New York, 2007.
The E Myth Revisited: Why Most Small Businesses Don’t Work and What to Do About It, Michael E. Gerber, HarperCollins, NY, 1995.
The Facebook Effect: The Inside Story of the Company That is Connecting the World, David Kirkpatrick, Simon and Schuster, NY, 2010.
The Ingenuity Gap: How can we solve the Problems of the Future, Thomas Homer-Dixon, Alfred A. Knopf, New York, 2000.
The Innovator’s Dilemma: The Revolutionary Book That Will Change the Way You Do Business, Clayton Christensen, Harper Business, 2011.
The Tipping Point, Malcolm Gladwell, Little Brown and Company, 2000.

Author Biography

Prof Bruce Unposed
Bruce M Firestone, B Eng (Civil), M Eng-Sci, PhD

Bruce M Firestone is best known as a professor, entrepreneur and founder of NHL hockey team, the Ottawa Senators and their home arena, Scotiabank Place, as well as Author, Quantum Entity Trilogy, Entrepreneurs Handbook II and Urban Nirvana (2015).

Firestone is Executive Director of Exploriem.org, a Canadian registered Not-For-Profit corporation focused on educating and mentoring entrepreneurs, intrapreneurs and artpreneurs in Canada and around the world. He is also coaching and teaching via Learn By Doing School, an organization dedicated to providing student entrepreneurs with access to research, education and a network of high achievers not available elsewhere. Prof Bruce is also an effective keynote speaker for organizations with a positive focus on creating opportunity for their stakeholder group.

Prof Bruce has launched or helped launch more than 172 startups in fields including tech, real estate, design, art and services. He advises clients on business modeling, self-financing, smart marketing, social media, differentiated value, strategic selling and business development, market channel development, harnessing the Internet and mobile web, urban design, real estate development, design economics, product management, sponsorship, fundraising and development economics as well as issues related to entrepreneurial organizations including not-for-profits, NGOs and charities.

In May of 2006, Dr Firestone joined the University of Ottawa’s Telfer School of Management at as its first Entrepreneur-in-Residence. He previously taught or studied at McGill University (Bachelor of Civil Engineering), Laval University, Harvard University, University of Western Ontario, University of New South Wales (Master of Engineering-Science, Traffic and Transportation), Australian National University (PhD in Urban Economics) and Carleton University. Prof Bruce is now Entrepreneurship Ambassador for the Telfer School.

Dr Firestone has been an operations research engineer, real estate developer, hockey executive, professor of architecture, engineering, business and entrepreneurship, real estate broker (with Century 21 Explorer Realty Inc), writer, researcher, columnist and novelist. He is a peerless husband and father of five great kids and one fine grandson.

You can follow him on Twitter @ProfBruce and @Quantum_Entity and read his blogs at www.eqjournal.org and www.dramatispersonae.org. You can find his works at www.brucemfirestone.com and at www.learnbydoing.ca. You can engage with him on Facebook via—http://www.facebook.com/QuantumEntityTrilogy and http://www.facebook.com/Exploriem as well as via LinkedIn at—http://www.linkedin.com/in/profbruce. His real estate interests are at www.OttawaRealEstateNews.com and www.thelandstore.org. His YouTube channels include—http://www.youtube.com/user/ProfBruce and http://www.youtube.com/user/quantumentitytrilogy. You can also send the first four chapters of Quantum Entity Trilogy to your friends for free from: http://www.old.dramatispersonae.org/images/QuantumONE_CS_Third_Edition_First_Four_Chapters.pdf.
His current motto is: “Making Each Day Count”.

@ProfBruce
@Quantum_Entity

Dr Bruce M Firestone, B Eng (Civil), M Eng-Sci, Phd. Founder, Ottawa Senators; Author, Quantum Entity Trilogy, Entrepreneurs Handbook II; Executive Director, Exploriem.org; Broker, Century 21 Explorer Realty Inc; Entrepreneurship Ambassador, Telfer School of Management, University of Ottawa. 613.566.3436 X 200. bruce.firestone @ century21.ca

Follow Prof Bruce on Twitter @ProfBruce and @Quantum_Entity and read his blogs at www.EQJournal.org and www.dramatispersonae.org.

You can find his works at www.brucemfirestone.com and also at LearnByDoing.ca.

You can engage with him on Facebook via http://www.facebook.com/QuantumEntityTrilogy and http://www.facebook.com/Exploriem as well as via LinkedIn at http://www.linkedin.com/in/profbruce.

His real estate interests are summarized at www.ottawarealestatenews.com and www.thelandstore.org.

YouTube channels include http://www.youtube.com/user/ProfBruce and http://www.youtube.com/user/quantumentitytrilogy.

You can also read the first four chapters of Quantum Entity Trilogy or send it to your friends for free from: http://www.old.dramatispersonae.org/images/QuantumONE_CS_Third_Edition_First_Four_Chapters.pdf

You can read the first two chapters of Entrepreneurs Handbook II or send it to your friends for free: http://www.brucemfirestone.com/wp-content/uploads/2013/03/entrepreneurs-handbook-2013-edited-first-two-chapters-withCovers.pdf

Prof Bruce’s current motto is: “Making Each Day Count

Why Businesses (Really) Fail

Posted on Saturday 30 March 2013

And Why Even Mighty IBM Can’t Forget the Basics

Below are some data published by BusinessWeek on why businesses fail. I’ll bet you that the top five reasons (too much debt, inadequate leadership, poor planning, failure to change and inexperienced management) are in fact related to number six on their list: not enough revenue; i.e., business not generating enough income is probably by far the biggest cause of business failure and they are not generating enough revenue because of inadequate leadership, poor planning, failure to change and inexperienced management, which also means they can’t meet their debt obligations.

KEYS TO FAILURE
The top reasons most businesses fail, according to 1,900 professional who help troubled companies:

1. TOO MUCH DEBT 28%
2. INADEQUATE LEADERSHIP 17%
3. POOR PLANNING 14%
4. FAILURE TO CHANGE 11%
5. INEXPERIENCED MANAGEMENT 9%
6. NOT ENOUGH REVENUE 8%

Data: Buccino & Associates, Seton Hall University, Stillman School of Business (BusinessWeek, August 25, 2003)

If you have enough revenue, you will get financing today, not the other way round. This is the lesson of the false boom of the late 1990s and early 2000s when VCs and others financed startups with interesting business models but no revenue or early prospect of revenues. This has almost never worked, in any age.

If you have enough revenue, you can meet debt servicing cashflow demands so a focus on revenue growth is vital. One needs to not only generate revenue but collect it too. This seems self evident but a lot of startups don’t do billing, invoicing and collections very well.

How long do you think mighty IBM would last if it didn’t collect its receivables? IBM sells around $105 billion (in 2012) worth of goods and services (one customer at a time, btw); their monthly revenues average around $8.75 billion. Also in 2012, IBM had around $18 billion in free cashflow which means, like everyone else, they have bills to pay—only theirs are humongous. Their payables are approximately $87 billion per year, an average of $7.25 billion per month. If they somehow ‘forget’ to collect their receivables for three months, their AR (Accounts Receivable) would balloon by $26.25 billion. Worse, their receivables would be aging fast. Meanwhile their employees, contractors, suppliers, Landlords and so forth would expect to be paid over the same period; their AP (Accounts Payable) during that time would be around $21.75 billion which they would have to pay from existing bank lines, cash on hand or via deferment. Even for IBM, this is untenable; they would be in serious trouble in less than 90 days as bankers, analysts, shareholders and other stakeholders become increasingly nervous. Their CEO would not last out the quarter.

So we need to be cautious in how we interpret the Seton Hall University Stillman School of Business data. In my experience, the number one reason for failure is absence of buoyant revenues. I mean how many businesses have you heard of folding if their revenue numbers are ratcheting up every month?

@ProfBruce
@Quantum_Entity

Dr Bruce M Firestone, B Eng (Civil), M Eng-Sci, Phd. Founder, Ottawa Senators; Author, Quantum Entity Trilogy, Entrepreneurs Handbook II; Executive Director, Exploriem.org; Broker, Century 21 Explorer Realty Inc; Entrepreneurship Ambassador, Telfer School of Management, University of Ottawa. 613.566.3436 X 200. bruce.firestone @ century21.ca

Follow Prof Bruce on Twitter @ProfBruce and @Quantum_Entity and read his blogs at www.EQJournal.org and www.dramatispersonae.org.

You can find his works at www.brucemfirestone.com and also at LearnByDoing.ca.

You can engage with him on Facebook via http://www.facebook.com/QuantumEntityTrilogy and http://www.facebook.com/Exploriem as well as via LinkedIn at http://www.linkedin.com/in/profbruce.

His real estate interests are summarized at www.ottawarealestatenews.com and www.thelandstore.org.

YouTube channels include http://www.youtube.com/user/ProfBruce and http://www.youtube.com/user/quantumentitytrilogy.

You can also read the first four chapters of Quantum Entity Trilogy or send it to your friends for free from: http://www.old.dramatispersonae.org/images/QuantumONE_CS_Third_Edition_First_Four_Chapters.pdf

You can read the first two chapters of Entrepreneurs Handbook II or send it to your friends for free: http://www.brucemfirestone.com/wp-content/uploads/2013/03/entrepreneurs-handbook-2013-edited-first-two-chapters-withCovers.pdf

Prof Bruce’s current motto is: “Making Each Day Count

Justintime Trudeau Announces New Foreign Policy Initiative for Nation

Posted on Thursday 21 March 2013

Canada to Annex Ecuador

MONTREAL (March 18, 2013)—Newly elected Liberal leader, Justintime Trudeau, announced today that if elected Prime Minister he will introduce a new foreign policy initiative—the annexation of Ecuador.

Surfing in Ecuador

“It is my government’s view that Canada and Canadians must look south to solve recurring weather-related economic issues. Today, I am setting out a bold five step plan to mitigate this important challenge that all Canadians face together—

“One. After each New Year’s Eve, all Canadians will henceforth travel south for the months of January, February and March returning north when better weather arrives in April of each year.

“Two. This is an opportunity that should be shared equally by all Canadians whatever their income or housing status and, to that end, the Government of Canada will be introducing the Fairness in Travel Act in the next session of Parliament. This new Bill will provide each Canadian with an annual taxable grant of $3,000 per month (total of $9,000) to assist them with and offset some of their travel costs.

“Three. A skeleton crew of volunteers will be stay behind in Canada to maintain vital infrastructure and the built environment of this country so ordinary Canadians will not have to worry about returning to homes and businesses destroyed by fire or other misadventure.

“Four. The after tax cost to Federal and Provincial Treasuries will be approximately $116 billion annually. However, our Government intends to enter into immediate negotiations with the Democratic Republic of Ecuador with a view to having the great nation of Ecuador join our Federation as its 11th Province. If these negotiations are not successful, the Government of Canada will move to annexation.

“Five. After joining Canada, Ecuador’s GDP will jump from around $68 billion CAD to more than $184 billion and its population from 14.7 million to 49.1 million during winter months.”

Mr. Trudeau’s announcement today at the Bell Centre was widely welcomed by a throng of well wishers. He passionately called upon his followers in the audience and on Twitter to right an historic wrong that Tories and Joe (Prime-Minister-for-a-day) Clark made when they timidly refused to annex the Turks and Caicos in 1979 even after a non-binding referendum there showed more than 60% of their population wished to join Canada. Whipped into a frenzy, Bell Centre fans poured out of the home of Les Glorieux to march along René Lévesque Boulevard whereupon a riot broke out and windows in more than 30 stores and businesses were shattered. Montreal riot police in full gear arrested more than 50 celebrants.

When asked, “Why Ecuador?” Mr. Trudeau answered this way, “Hola! It’s a peaceful democracy like Canada with great cities, cultures and history, amazing bio diversity, fantastic Pacific coastline plus ownership and stewardship of the Galapagos Islands. It is close to the equator with mild weather year-round and no hurricanes. Most importantly, real estate in Ecuador is a fraction of the cost elsewhere in Latin America or the Caribbean and Canadians will be able to live there at Ecuador prices but with gringo dollars.”

Mr. Trudeau urged Canadians to go to http://canada.gc.ca/ and sign up right away for their free grant.

-30-
For more information, please contact:

Mr. Justintime Trudeau @justintimetru
Justintime Trudeau

If you would like to beat the crush, please come to our FREE information seminar on Hola Ecuador, a project by Canadians for Canadians. Sign up here—http://HolaEcuador.eventbrite.com

To find out more about lots at Hola Ecuador, please view http://www.ottawarealestatenews.com/c21-Mirador-san-jose-info-pack-18-March-2013.pdf

Yubarta homes available too:

Yubarta Homes at Hola Ecuador

Another day at the beach:

Hola Ecuador Beach

Media release as PDF, http://www.old.dramatispersonae.org/images/ecuador-media-release-18-march-2013.pdf

FOR MORE INFORMATION:

@ProfBruce
@Quantum_Entity

Dr Bruce M Firestone, B Eng (Civil), M Eng-Sci, Phd. Founder, Ottawa Senators; Author, Quantum Entity Trilogy, Entrepreneurs Handbook II; Executive Director, Exploriem.org; Broker, Century 21 Explorer Realty Inc; Entrepreneurship Ambassador, Telfer School of Management, University of Ottawa. 613.566.3436 X 200. bruce.firestone @ century21.ca

Follow Prof Bruce on Twitter @ProfBruce and @Quantum_Entity and read his blogs at www.EQJournal.org and www.dramatispersonae.org.

You can find his works at www.brucemfirestone.com and also at LearnByDoing.ca.

You can engage with him on Facebook via http://www.facebook.com/QuantumEntityTrilogy and http://www.facebook.com/Exploriem as well as via LinkedIn at http://www.linkedin.com/in/profbruce.

His real estate interests are summarized at www.ottawarealestatenews.com and www.thelandstore.org.

YouTube channels include http://www.youtube.com/user/ProfBruce and http://www.youtube.com/user/quantumentitytrilogy.

You can also read the first four chapters of Quantum Entity Trilogy or send it to your friends for free from: http://www.old.dramatispersonae.org/images/QuantumONE_CS_Third_Edition_First_Four_Chapters.pdf

You can read the first two chapters of Entrepreneurs Handbook II or send it to your friends for free: http://www.brucemfirestone.com/wp-content/uploads/2013/03/entrepreneurs-handbook-2013-edited-first-two-chapters-withCovers.pdf

Prof Bruce’s current motto is: “Making Each Day Count

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