The Road to Financial Security and Independence
Have you ever wondered whether entrepreneurs are born or whether they can be trained? What are the ten key steps in creating and running a successful start-up? What is a Personal Business for Life and how can you get one? How do you start a business without much in the way of your own start-up capital? Can you organize your work life so that if anything goes wrong in your business, you and your family will be OK? If you are successful, can you hold onto your business so that it will sustain you and your family for a long time? What does it take to be a successful entrepreneur? Can you be an ethical entrepreneur?
If these are questions that interest you, read on below to learn more. You will learn how people are creating long-lived enterprises that have significant differentiated value—control over factors of production that sustain their business models in a tough competitive world. Find out how to start a business with no (or little) money down. Learn how businesses from the Ottawa Senators and the Ducks of the National Hockey League to Qwantz.com, an online comic strip, used Bootstrap Capital and Smart (Guerrilla) Marketing to get going.
You will also learn what Chris Rock, Comedian and Satirist, meant when he said that Shaq is rich but the man who signs his paycheque is wealthy; i.e., find out what the difference is between being rich and being wealthy…
You will learn that it takes a big commitment to turn an idea into a successful organization—one that can provide more value than if you just had a JOB and one that can survive its founder. Lastly, you may be surprised to learn what the moral underpinnings of entrepreneurship are and how entrepreneurs also serve a higher social purpose.
Go for it,
Can you train entrepreneurs or are they just borne? I believe that, in part, entrepreneurship must be learned by doing and that success in entrepreneurship comes from a combination of personal attributes and other factors such as:
a. a pre-disposition to it;
b. supportive family and friends;
c. education and training;
d. finding the right mentor(s);
e. good timing;
f. focus and effort;
g. creativity and innovation;
h. openness to new ideas;
i. willingness to change;
j. ability to discover ideas in the process of doing;
k. high energy;
l. tolerance for risk and stress;
m. acceptance of outside best practices;
n. ability to compartmentalize;
o. ability to sell ideas, products and services;
p. leadership skills;
q. figure things out as you go;
r. dump the losers and keep the winners (know when to quit and when to stay in the race);
s. self motivated;
t. team player;
u. impeccable warrior (see Appendix I for more on this);
v. not easily discouraged;
w. able to juggle many tasks and hats;
x. a finisher—able to complete things;
y. commitment and passion;
Now let’s assume you have most of the above working for you. Is that enough? Obviously not. In order to create a successful new enterprise, you need to be able to execute on your ideas. I have created a list of ten things that you also need to do to be successful.
Of course, there are certainly a lot more than ten things you need to do to create a successful startup but for the sake of brevity, I limited myself to ten.
So here is my list:
1. Select the right idea for your next startup;
2. Create business models for the 21st Century that produce great results so that the harder you work, the more money you make and so you can compete effectively with hard charging entrepreneurs from China, India and other Tigers by having a business model that can not be easily duplicated or dislodged and gives you a lasting, sustainable competitive advantage and concession or franchise.
3. Add differentiated value, innovation and ‘pixie dust’ to your business models.
4. Create a compelling value proposition and learn how to clearly demonstrate it to customers and clients.
5. Self-capitalize (bootstrap) the new enterprise so that you end up owning it and not a VC firm or other investors or partners.
6. Use smart marketing (guerrilla marketing and social marketing) so you will acquire customers and clients cost effectively.
7. Mass customize products and services using the Internet so that, for the first time in history, you can get custom outputs from standard inputs as well as reverse out some of the work to your clients, customers and suppliers creating a scalable enterprise that can produce more value than if you had a JOB.
8. Find pre-launch and launch customers and sell, sell, sell (as Ben Affleck said in the film Boiler Room: “ABC—always be closing).
9. Execute expertly, show leadership and become a trusted member of your community and business ecology.
10. Make your own rules and set and achieve your goals!
PB4L—Personal Business for Life
For the last few years, I have become increasingly certain that people in the 21st Century are going to need what I can only call a Personal Business. It seems to me that there are so many changes going on in the local, national and global economy and so many things can and do go wrong, that it might not be a bad idea after all to have a fallback position.
I have insisted that my students have a Personal Web Site for life—a place where they can collect their personal IP over their lifetime and career and one day, maybe, they can find a way to make money from it too—while they are lying on a beach.
But something else struck me recently: just how many people have little sideline hobbies, gadgets, gizmos … micro businesses really, that make a bit of money. It also struck me that this could be a highly useful thing to have.
Best of Kanata
Let me give you an example. My friend, Richard Rutkowski, a former City of Kanata Councillor is an intriguing person—very sure of himself, a good marketer, a good promoter and a sure handed politician (now a successful REALTOR with his own Brokerage.)
I asked Richard if he did something else beyond being a REALTOR and, sure enough, he hauls out this cute little magazine called The Best of Kanata. Now this is really low tech—essentially, local businesses advertise in it, so that is one revenue stream for Richard.
It costs about $600 for a half page and there are lots of pages. Then, people buy these books for 20 bucks and in the back of the magazine, there is a ‘member’s card’ about the size of a credit card, which entitles them to 10% off at all stores and services featured in the book.
When I did a Google search, there was no mention of it. So, Richard hasn’t even bothered with a web site.
Well, this is a pretty simple business and folks advertise in it like crazy because they like Richard and it works for them and it is pretty inexpensive.
Richard sells 5,000 copies of the book, so you can figure out for yourself the economics pretty easily.
The business model has more depth to it than it might first appear. Revenues are generated from advertisers and book purchasers. But it turns out that Richard’s clients are also his suppliers and his suppliers are also his clients.
Advertisers supply ads, which form the content of the book. Plus they supply the 10% off cards that drive sales to the public. But interestingly, the advertisers also stock the books for sale to members of the public. If you place a half page ad in the book for, say, $350, and you sell the book for $20 of which you get to keep $10, so you only need to sell 35 books before your ad costs you nothing.
Think about the compelling value proposition that Richard can present to a single customer—you can buy an ad for a negative cost if you can sell more than 35 books.
In this way, his clients form one of his sales channels. Another sales channel consists of local charities and other good causes. The Kanata Food Cupboard, for example, sells each book for 20 bucks and keeps 15. Minor hockey teams use it too—to raise funds for hockey tournaments, for example.
There have got to be a zillion of these kinds of ideas. I told Richard: “NEVER, NEVER sell this thing; it is like a sinecure, a franchise, a license, a concession … it is your ‘pixie dust’ forever.”
It is low tech and low intensity to manage this particular micro business and it is a kind of concession as it is so local, so focused and Richard is so well known locally that everyone who is anyone in the ‘urban village’ that is Kanata is going to be in it.
The cost to start the Best of Kanata was negative—Richard was able to pre-sell enough advertising so that the cost of printing the first book was more than offset by deposits from advertisers. They gave Richard 50% of the cost of their ads upfront because they trust Richard and because they want Richard to succeed since it’s in their best interests that he does.
I have thought that there is a big, scalable business in this model—how about the Best of Dartmouth, Best of Cole Harbour, Best of Lower Sackville, Best of Manhattan!
I think creating businesses via entrepreneurship should aim to provide an individual with more value than if he or she just had a J.O.B. but maybe there is a more subtle message here.
Perhaps, we should each have one micro business that we hang onto for life; that never gets shared with anyone, no partners, never is pledged to a Bank for a loan and, thus, something that we can fall back on in troubled times.
It would be pretty cool if every man, woman and child on the planet each had a Personal Business (PB) that stayed with us throughout our lives and, if things get messed up, well, we have (as my father would say): a fallback position or an iron reserve. My father lived through two World Wars and he really understood the need for both.
A PB4L does not include things like the guy who tells you: “I can show you how to make a million! Just send me ONE dollar, and I will tell you how.” And, of course, the answer is: “Get a million fools to each send you a dollar to tell them how…”
They have to be real businesses. One way to find inspiration I think would be to go get a copy (from your library) of the Encyclopedia Britannica and look for crafts from the 1930s. Say, for example, making high end paper for socialites and important persons who want acid-free paper to preserve their writings. Who knows what you might find there.
Dinosaur Comic, Qwantz.com
Let me give you another example. Ryan North, a brilliant IT professional, started qwantz.com in the learn-by-doing part of Entrepreneurialist Culture, one of the courses I teach. Qwantz.com is an online dinosaur comic strip.
The only problem Ryan had was that he couldn’t draw. Like most entrepreneurs, he turned a weakness into a strength. His comic strip has six panels with two dino characters—all images are taken from free, publicly available clip art. The key is that the panels and characters NEVER change.
They are the same, day-to-day.
What changes is the dialogue between the characters—T-Rex is a large, stumbling, know-nothing and chauvinistic loud mouth. The other two characters are: Dromiceiomimis (the tan coloured dino in the middle panel) and Utahraptor (the orange one), who is loving, warm, smart and wise. From this somewhat inauspicious start, Ryan has become an internationally known writer who creates and self-publishes the only daily comic strip with images that never move or change. It is the subtlety of the dialogue that creates interest and a strangely compelling read that becomes more interesting the more you read it.
It doesn’t hurt that Ryan is brilliant and quirky.
Here is T-Rex’s take on entrepreneurship:
Ryan’s daily routine is to get up and answer his fan mail for about an hour. Mixed in are requests for merchandise. That is one of Ryan’s revenue streams. He sells a ton of t-shirts and, wisely, he handles the money while outsourcing fulfillment.
After an hour or so, he turns his mind to the comic of the day. By noon, he’s done and ready for the rest of his day. He travels widely, does appearances at comic conventions where he signs copies of his books (such as Your Whole Family is Made of Meat) and had time to fool around developing an advertising engine (Project Wonderful) that was profitable within ten days of its launch*. He makes a ton of money and has a wonderful life.
(* I talk more about the Project Wonderful launch and how Ryan did it here: http://www.eqjournalblog.com/?p=690.)
Ryan in a Tree
Ryan started Qwantz.com with less than $100. His marketing budget was around $20. He bought the domain name poo.ca and put up cardboard cutouts of T-Rex around the University with this domain name on it and nothing else. Students started checking out the mysterious site and got hooked on his comic.
(If you type in poo.ca it still resolves to the Qwantz.com URL. The comic has been continually published since Feb 1, 2003. Revenue streams include: merchandise, appearance fees, book sales, Project Wonderful ads.)
Ryan also allows guests to create their own Qwantz.com panels. Here are two of mine based on my experience in Australia where I did both me Masters degree and PhD and also a send-up of our Bring Back the Senators campaign. See below.
Why Australians Wins Olympic Medals
Bring Back the Ottawa Senators Campaign
Qwantz.com has also served as a platform for Ryan to build ProjectWonderful.com, a democratic and successful advertising engine and Oh No Robot, a personalized comic search engine and transacription service. To learn more about Ryan North, read his interview with Newsarama.com’s Zack Smith (Feb. 2, 2011): http://www.newsarama.com/comics/wide-world-webcomics-dinosaur-comics-110202.html.
Now a PB4L is not just a fallback position. It can be a contributor to pulling people out of poverty in LDCs around the world. It was not government Five Year Plans that brought India and China out of poverty—it was the unleashing of the entrepreneur class in those countries that did it.
Here are two examples of the power of entrepreneurship to alleviate poverty:
Gulbadan Nesa in the village of Bishnurampur received a $90 loan from the Grameen Bank in 2001 when she was completely destitute. She bought some egg-laying chickens, which have an interesting characteristic: they lay eggs every day– it is the start of a sustainable cashflow.
She has since traded up and now is selling construction materials. She is an entrepreneur; she is self sufficient; she now has her own home; she can take care of her family. Now, she must also learn that once you have struggled to build a successful business, you have to hold on to it: she needs a build and hold strategy.
Gulbadan Nesa, Micro Entrepreneur
I read an interesting article years ago in the Globe and Mail (by Luke Harding of the Guardian News Service, February 10, 2003) about micro entrepreneurship in Kalmandhai, India.
There, slum dwellers erected latrines—one for men and one for women and a third for children only.
Charging just one cent per use, they built a profitable business using only $900 USD in start-up capital advanced to them by UK based WaterAid.
Who would have thought that you could make a successful business out of a latrine but that is apparently what the women of this village did. I was intrigued so I sat down and did a spreadsheet on it this morning and here is what I conjectured:
Village of Kalmandhai, India with assistance from WaterAid, UK
Cost of Construction of New Latrine
Men’s $450 USD
Women’s $450 USD
Total $900 USD
Revenues Per Use $0.01 USD
Daily Use Men 300
Children 400 free
Total Use 1,075
Total Paid Use 675
Total Daily Revenue $6.75 USD
Annual Revenue $2,463.75 USD
Maintenance 10% $90
Night Watchman 1 $450 $450
Cleaning Staff 3 $1,350
Net Revenues $573.75
Return on Investment 64% p.a.
So they achieved a (possible) 64% p.a. rate of return on this investment, which is impressive. Just as importantly, there are significant health benefits that accrue to these people from proper disposal of human wastes. Plus they generated additional activity including:
a. the construction of a shower block for traveling truck drivers that pass through the Village and for the villagers themselves (and more fees);
b. the use of their ‘product’ (from the latrines) in their herb garden (for self use and third party sales);
c. start-up of a composting business;
d. money lending to women in other villages to start similar enterprises.
Think about the number of jobs they created-from a latrine! Give a human a fishing rod, not a fish.
If these women could create a thriving business from a $900 investment just imagine what privileged people like us, like you students here today—with all the advantages you have: great education, access to capital, free, civil societies and much more—can do.
Innovation and Value Creation
How much innovation do you need to create a successful PB4L? Does innovation always have to be about BIG ideas or never-before-tried ones? No, of course not.
Not all of us are blessed with the insight to create equations like: E=mc**2.
But here are three relatively minor insights that added significant value to their respective enterprises:
a) Ray Kroc, Founder of McDonalds, taught his employees to famously ask: “Do you want fries with that?” Who knows if Ray invented the concept of upselling but he sure made good use of it to create a globe-spanning business.
b) Jeff Bezos, Founder of Amazon.com*, saved his business by adding one question to the website: “Would you like to see what other people who bought this book (CD, DVD, etc.) also bought?”*
This use of Amazon’s gigantic relational data base meant that instead of perhaps selling one book to a customer, they had a shot at selling two or three. If you are having a minimum wage slave going into a large warehouse to pick a single item, imagine how Amazon’s bottom line is changed when he or she picks and then ships two, three or more items at a time.
c) Ralph Shaw is helping to create a Real Estate Brokerage that is one of the few that does both commercial and residential real estate. He is teaching his agents to ask: “Is there anything else we can help you with?” after completing a transaction or a listing presentation. You might be surprised at how many residential clients need help with a commercial lease for example or how many commercial clients need help selling or buying a home.
Innovation is where you find it. Often, great innovations flow from contact with the marketplace—contact with clients and customers. That is one of the reasons why I always want the folks I mentor to find pre-launch clients, you can learn so much from them. Innovation is everywhere—you just have to be open to new ideas wherever they come from.
The Japanese believe in constant improvement.
Small things do make a difference.
Now once you have stumbled upon your next great idea on how to improve and innovate within your industry, remember that innovation and good ideas without excellent execution are practically useless.
(* Amazon’s relational data base has another cool application—for researchers, you can put in a book you are reading and see what other people who ordered this book are also reading. A lot of smart people use Amazon and it is a simple way to add to your bibliography whether you are a researcher or student writing an essay.
For example, I recently read Nassim Nichoas Taleb’s book, The Black Swan. Taleb makes a convincing case that unlikely events (such as the recent economic meltdown) in areas such as economics, weather forecasting, science and tech, are actually far more common than typical statistical models (based on bell curves) would suggest. I tend to believe this from my experience as an entrepreneur. Bell curves might work well for distributions such as height or weight in human populations but don’t fit the data well in many other areas. Surprises, good and bad ones, are surprisingly frequent in many other fields of endeavour.
Here is what Amazon suggests others who bought Taleb’s book also bought: The Age of Turbulence: Adventures in a New World by Alan Greenspan, Fooled by Randomness: The Hidden Role of Chance by Nassim Nicholas Taleb, A Demon of Our Own Design: Markets, Hedge Funds… by Richard Bookstaber, The Halo Effect by Phil Rosenzweig, Way of the Turtle by Curtis Faith, When Genius Failed by Roger Lowenstein, Super Crunchers: Why Thinking-by-Numbers Is the New Way to Be Smart by Ian Ayres. These are just some of the Amazon results. There are 17 pages of results! Enough to round out any bibliography! This is a free ‘service’ by the way. Just put in the name of a book and you get the suggestions from Amazon.)
Having said that, the only real way to boost your take home pay is to increase your productivity. And by now, just about everyone has realized that in a global economy, the only way to do that sustainably is to innovate. Working longer hours for less pay will also boost a nation’s productivity stats but who wants to volunteer for that duty?
My wife recently introduced me to a new kind of dental floss—it is sold by a major consumer products company. Their dental floss is caked with a toothpaste powder. This is so when you floss your teeth, toothpaste is applied to hard-to-get-with-a-toothbrush areas, namely your gums between your teeth.
I wanted to shake the inventor’s hand. If you think eating nice foods with your own teeth in your 50s, 60s, 70s and 80s would be nice, this is an important innovation.
And I am sure it is not trivial to do this. Adding toothpaste powder to a long string isn’t easy: first, it has to stick to the string, second, dental floss is exposed to a lot of different environments and the toothpaste powder must not dissolve when the floss gets wet or is exposed to a lot of humidity and, thirdly, it can’t rot and poison people if it sits around the store for a while and then in your cupboard or (worse still) your shower stall.
Now I have read lots of books on becoming more creative and innovative, and I recommend: Think Better: An Innovator’s Guide to Productive Thinking by Tim Hurson (McGraw-Hill, 2007) and The Black Swan, The Impact of the Highly Improbable by Nassim Nicholas Taleb (Random House, 2007).
Hurson has a formula that he applies to organizations to help them become more creative; part of his formula is using Galeforce—writing down as many ideas as you and your team possibly can in five minutes (at least 50) to solve a problem you face. By going really hard at the problem in a short period of time, you prevent group-think from taking over the session or guess-what-the-boss wants behaviours or satisficing (settling for the first likely useful idea before you get any other ideas on the table) or allowing your own or others critical judgment to suppress ideas by saying things like: ‘that sucks’ or ‘that will never work’ or ‘we can’t do that because we have never done it that way before’ or ‘we don’t have the resources to do that’…
Hurson also has a six step Productive Thinking Model that he takes his clients through that looks pretty useful.
But one of the things that I think is missing from his model is provision for Black Swan events.
Taleb’s book’s title is based on the idea that just because you have seen thousands of swans and all the swans you have seen are white, that doesn’t mean that there aren’t any black swans. I think that Taleb’s book will appeal to entrepreneurs a lot.
Go Travel Direct and Zoom Airlines
I have flown with GoTravelDirect.com a few times.
Their business model was certainly a sound one in my view. Let people book charter flights and hotels online; fly from my home town (Ottawa) direct to their vacation destinations without having to transit through either Montreal or Toronto (which adds as much as one day to trip times); fly and stay at nice places for not too much money if you book well in advance and fly full planes and get cheap hotel rates because you are delivering a lot of people to the resorts.
They later added to their business model by buying their own airline, Zoom Airlines. This way, they would have more control over their schedules and costs (or so they thought).
On the afternoon of August 28th, 2008, Zoom went bust and now (August 2009) GoTravelDirect.com has suspended operations. Clearly, the consumer’s confidence has suffered.
I was wondering what could possibly have been done to prevent the demise of Zoom. The business model absolutely requires people to book well in advance. It is the only way to be sure that you can fly full planes. And people who book in advance want certainty about the price they pay and they want low prices.
But who would have thought two years ago that oil prices would reach $140+ per bbl? If anyone tells you that they predicted that, they are probably not telling you the truth. I predicted higher fuels prices over six years ago (which is why I bought a VW Beetle at the time) but there is no way that I would claim I foresaw $140 per bbl.
Neither did Zoom*. Their fuel costs went up over $50 million in less than a year and there was no way they could pass those rising costs on to their customers. This is a Black Swan event of the first order and shows you that sound business models can go south in a hurry and planning can be useless.
(* This would make a good case study and I hope one of my student teams will take this on. If Zoom and GoTravelDirect.com had anticipated the rapid increase in fuel costs maybe they could have built-in an inflation factor into their pricing policies. But I would guess that if they had done this, they would have lost many of their customers and actually may have gone bankrupt even sooner. It is a difficult and possibly intractable problem but, perhaps, some creative genius student will solve the problem in his or her case study.)
I suspect that what the US experienced in 2008 and 2009 is not only a Black Swan event but also something that Malcolm Gladwell described in his book, The Tipping Point. Running (unsustainable) twin deficits (Trade and National Account) for many, many years, the US courted disaster during George W. Bush’s two terms. Either one by itself might have been manageable but when combined with a credit crunch, a housing meltdown, little or no personal savings, enormous household debt loads (including high interest payments and rates, unsecured debt such as credit card debt, ridiculous CEO pay levels tied not to long term performance of their companies but to short term stock market fluctuations, greed and corruption on Wall Street plus ever increasing complexity and opaqueness in financial products), sometime in 2008, the tipping point was reached and a non-linear event happened.
What I am saying is that being more innovative and creative is important. I believe that you can learn to be more innovative and creative. But part of that is learning to take advantage of unpredictable events—somehow seeing that toothpaste powder and dental floss go together or that getting my real estate broker’s license would lead to a completely new situation in my life, a better one.
Entrepreneurs know that necessity is the mother of invention and, while I wouldn’t wish all of the circumstances I have faced to be replicated for anyone else, I think you have to recognize that chance plays a big part in life. Mind you, you have to be open to change, be able to see how seemingly unrelated things are, in fact, relevant to each other and be prepared to seize the day.
Field Notes: Something Old is New Again
I collect stories about Personal Businesses for Life (PB4L). We can all learn a great deal from people who have already bootstrapped an enterprise, made it successful and kept ownership of it—away from Banks, VCs, Angel investors, angry creditors, partners, ex-spouses, what have you.
As we have already seen, a good source of ideas for PB4Ls might be to visit your local Library and look at old copies of the Encyclopedia Britannica. I recommend pre-World War II and even pre-World War I vintage encyclopedias—what you are looking for are ‘ancient’ crafts that you can reuse and recycle.
Former snowboarder, Aaron Draplin, created a $1 million per annum business based on an old recipe—authentically crafted, offset printed sets of Field Notes.
Field Notes Nostalgia
I am an inveterate note taker and the nostalgic look and feel of their website and product really appeal to me. See: http://fieldnotesbrand.com/. Their tagline, taken from one of their ancestors, is too precious for words: “I am not writing it down to remember it later, I’m writing it down to remember it now.”
There is a lot of truth in this—I don’t care what anyone says, there is something quite different between writing something down using pen and paper versus recording it on your tablet, say. Many authors over the years have told me that they produce a completely different style of writing if they eschew a computer (or for that matter a typewriter) and write a novel by hand. No one does that anymore and it shows.
When we designed the Palladium (now called Scotiabank Place), you NEVER saw the architects of record (Gino Rossetti and his son, Matt) without their Field Notes and Sketch Pads. I asked Matt why, with all the CAD software he has access to, he still used his sketch pad. He told me: “Here’s why: I can create much more complex, much more graceful architecture, much faster, with my sketch pad than with a computer. It is much too confining.”
I still haven’t found any better way to control a business, even large businesses, than through the daily making of lists of things to do. I insist that people around me do that. Folks I know who use their smartphones or PCs to control their calendars and to-do lists are much less accurate and productive, I am sure of it.
This is not to say that I don’t love the tools we have available to us today. I am on record as saying: “I’m like the Scarecrow in the Wizard of Oz: I have half a brain. My computer is the other half.” So this post is not an argument against technology, just its misuse.
To survive today, you need to be innovative as well as productive and I think Field Notes or just a simple pad of paper can still help you with all of that.
Now Draplin and his partner, designer Jim Coudal, sell these 3” x 5” books for $9.95 in sets of three. They have developed numerous sales channels including their website, attendance at agricultural fairs and 250 retailers who have to apply to be accepted into their network. This reverse snobbery works for them—these retailers have to prove that they buy-in to their philosophy which includes: authenticity, “Made in the USA”, use of local materials, a heightened sense of the importance and central mission of design and fashion, transparency, and nostalgia for community values of days gone by. Their clients go out of their way to suggest to them which retailers might qualify…
They bootstrapped the firm—no VC money. Their marketing is based on video documentaries they produced for an online community that focuses on the Founders’ experiences with the development of Field Notes as well as those of their suppliers, retailers and customers—they understand that they work within a business ecosystem that nourishes them and that they, in turn, embrace by involving them in the whole, evolving story of Field Notes. Customers can post examples of how they use Field Notes and learn from each other’s experiences with the notebooks.
Now let me tell you a story about Jeff Cavanagh from Thomas Cavanagh Construction.
A few years ago, I asked him: “Hey, Jeff, do you have a Blackberry?”
“No, Bruce, I got me a Strawberry instead.”
“What’s a Strawberry? I haven’t heard of a smart phone called the ‘Strawberry’.”
“Well, it’s this here little black, pocket-sized notebook of mine where I write down all the things I gotta do with this little pencil.”
“But don’t you miss not having email, your calendar and a bunch of apps on your cell phone?”
“Nope. Look at it this way. Let’s you and me suppose that Sir Alexander Graham Bell had invented email instead of the telephone, that his patent in 1876 was for email not voice communications. OKAY?”
“Let’s further assume that voice did not become possible until Tim Berners-Lee invented the Web in 1991. So we reverse the order of invention, OK?”
“Then imagine the conversation you and I might be having today. It might go something like this: ‘Did you see this new fangled thing that just came out—it’s called a tell-a-phone. You can get someone on the other end and you can actually hear what they are saying. You can pick up nuances in their voices, you can laugh together, you can plan together, you can negotiate and you can do it all in real time. It’s almost as good as being there.
‘No more waiting, sometimes days, for someone to answer your email. No more misunderstanding stuff just because you were trying to be funny or sarcastic and it fell flat in yer email.
‘Or suppose you need something done urgently, you can actually get some action by impressing upon someone the importance of what you are saying by raising or lowering your voice—people are good at picking up tonality on the tell-a-phone…’”
There is a lot of wisdom in this. The best way to do things might just be a bit old fashioned—like having F2F meetings, like writing things down, like making phone calls. Clearly, Draplin and Coudal have found something special that people want and, by combining it with modern marketing and distribution, they have created lasting value for themselves and their families.
It will be hard to knock off Field Notes, not because you can’t create a nice looking notebook too but because you can’t (easily) recreate their dedicated community of suppliers, retailers, customers who have also become friends/fans and followers and who have together formed a bond around the themes that the Founders have woven together into a compelling story.
Sources: Financial Post, December 6, 2010 story by Deborah L. Cohen: “Social media gives old medium new life”.
Identifying Risk Factors—A Case Study: Two Monkeys Coffee & Tea House Inc.
Here is a short case study of a new Personal Business for Life (a coffee house) set up in suburban Ottawa by two partners, both in their 30s, Jill Sheppard and Rob Kay, who each own 50% of the business. The current business environment is fraught with peril—they have opened during a world-wide economic crisis that began in October 2008 and continues, the location is a suburban mall (in Barrhaven, a suburb outside of Ottawa, Canada) that is close to a relatively prosperous residential area but the storefront is not easy to see or find, there is a lot of competition from established national chains like Starbucks and Tim Horton’s as well as local chains such as Bridgehead.
The students’ job is to read Jill’s description of the business below and identify the risks for the business in addition to the ones described above.
From your analysis, you should be able to describe all the risks you have found and identify possible solutions. You will be talking to an audience made up of family and friends who are thinking of investing in this business.
From: Jill Sheppard
Sent: Friday, September 04, 2009 12:27 PM
To: Firestone, Bruce
Cc: Rob Kay
Subject: Two Monkeys Coffee & Tea House Inc.
It was a pleasure to see you yesterday in the shop; it seems life after we worked together at (unnamed tech co., ed.) has been good for both of us.
I was thrilled to hear you enjoyed your muffin and tea yesterday – the next time you come in I will try to coax you into trying one of our loose leaf teas, I know you will enjoy every drop.
I have attached photos of the shop in hopes of taking you up on your offer to be one of your students’ case studies. In terms of our “secret sauce”, we believe there are four major components that contribute to our ongoing success.
A. The first is my mom – she does all our baking and soup making. That’s not just a name we put on the cook, she really is my mom.
Everything we serve is made fresh on site. Our soup is made daily from fresh ingredients and lots of love. Our regulars don’t even ask what the soup and sandwich of the day is, they just order it and tell us: ‘It doesn’t matter what it is, it’s going to be good.’
At Two Monkeys: Mom’s Cooking
B. The second is our kids’ zone. Without a doubt, we are the most family friendly coffee shop in the city. We are parents first and we have designed the shop from a parent’s perspective. We have given the front of our shop a traditional coffee house layout to ensure we satisfy the need of those without “little monkeys”. We feel it’s a great blend of both worlds. (Moms and Dads can actually go someplace and get a tea of coffee and bring the tykes. No complaints here about rambunctious kids, Ed.)
C. We wouldn’t be an outstanding coffee shop without our fair trade, organic, locally roasted coffee, prepared fresh 15 minutes from our shop. It could only be fresher if we roasted in the shop ourselves, which we won’t do for several reasons. Our tea selection is growing almost daily. The best thing about being independent is the ability to react to our customers’ requests. We can order any flavor as often as we need to. Our suppliers are first rate and our relationship with them ensures continued success for all.
D. And of course, we couldn’t be a great place to hang out if we didn’t have a décor that worked for adults too—with comfortable seating, lots to read, Wi-Fi wireless Internet (for free) and great service.
Comfortable Place to Hang Out for Adults Too
I welcome the opportunity to discuss this with you in more detail. Obviously I am passionate about my business and could talk endlessly about it. I love what I do and I love making Moms and Dads happy when they are here.
One of the best comments I have heard in our short five months is: “I spoke in full sentences today and I had my kids with me.” The formula is easy… make the little ones happy and Moms and Dads are happy too.
It was also nice to hear you say: “Why didn’t they have a place like this when my five kids were little!”
As you know, we hope to start franchising the business and spreading the joy to other areas too…
I look forward to seeing you again and hopefully providing you with excellent service and outstanding products!
Jill Sheppard, Two Monkeys Coffee & Tea House Inc.
This section is not to be read by students until they have completed their analysis and pitch.
The risks the business is faced with include:
1. There are still two chairs in Heaven waiting for the first partners to get there and still like each other. Will Rob and Jill (who are business partners, have kids and are married but not to each other) put in the same amount of capital, put in an equal share of the work and have the same objectives over the long term?
2. A 50-50 partnership is one where there is no controlling mind—maybe the two partners face a crisis and can’t decide what to do about it—they are paralyzed/stalemated by their equal say.
3. Suburban malls tend to age poorly—there is little to prevent a newer mall from opening up nearby and drawing traffic away from established malls. Unlike most downtowns in Canada and Europe, there is no scarcity of space that creates long lasting traffic patterns that also support long lasting businesses.
4. They are renting space—many Landlords will raise rents for successful tenants so that, if Jill and Rob are successful, the cream may end up in the Landlord’s pocket.
5. Landlords are also fussy about changes to the premises and outside as well—they may be limited in what they can do over time to change and renew their premises.
6. What about relying on Jill’s Mom for part of their ‘pixie dust’/secret sauce/differentiated value (DV)? What happens when Mom retires?
7. Suburban neighborhoods change over time—kids grow up. Whole streets tend to evolve together—soon the kids are teens and not going to Two Monkeys for play time. Middle aged parents don’t tend to go out as much either. Will Jill and Rob’s business dry up and blow away?
8. What about the name? ‘Two Monkeys’ may work today but will it work long term? Aren’t demographic trends (favoring smaller families or households with no kids) working against them?
9. What about City of Ottawa policies favoring downtown inside the Greenbelt development over suburban development? Will that curtail growth in Barrhaven where they are located?
10. They are thinking of franchising their concept but are they a generation or two too late?
11. Will franchising work without Mom in each store? Is there enough pixie dust and DV to sustain a franchising expansion plan?
12. Should they focus on getting their first store to the stage where they have proved the concept, that it is sustainable, that they can make real money before even thinking of franchising?
13. How can they survive competition from established chains like Starbuck and Tim Horton’s?
14. Could their competitors mimic part of their secret sauce by, for example, adding playrooms for kids?
15. Maybe they shouldn’t have opened during the worst recession since the 1930s?
16. Lastly, what is their ‘Magic Marketing Button’? Their storefront is a bit hidden. What is something inexpensive and effective that they can do to attract customers for the first time? We can be pretty certain that they will probably keep their clients coming back once they have stopped by once; but how to get them in the door that first time? If they can’t find some marketing that really works in a cost effective manner, their business is sunk.
Conclusion to the Case
At the end of the day, every enterprise is started not because a hard-headed analysis says it will be worthwhile doing. New enterprises are started as an article of faith—the founder or founders believe that they can make a difference and that their endeavour will succeed.
This is not an argument against quantitative analysis—setting goals, financial and otherwise, is very important. Knowing what your breakeven is, aiming for that plus enough to sustain you and your family and your employees and suppliers and other stakeholders is incredibly important.
But most new enterprises take twice as long as you thought to get off the ground and twice as much money plus three times as much effort. In most cases, if you knew then what you know now (to paraphrase Bob Seger), no one in their right mind would start a new business.
But I am proud of Jill and Rob and their new place and I believe it will be successful. It is up to you, students, to deal with the problems I have outlined above and identify other challenges and their solutions. I just get to be a cheerleader here for these entrepreneurs.
MINI HERB FARM IN THE SUBURBS
You never know where a Personal Business for Life (PB4L) may pop up (so to speak).
Here is an example from BusinessWeek and the Wall Street Journal, where they are turning small properties in the suburbs into profit-making herb gardens.
They have to pitch landowners in the suburbs and convince them as to why they should rent them their gardens for the season.
It is not just that this represents local food growing and a (small) contribution towards a more environmentally sustainable economy, it could be a cool thing to do with your family as well:
Mini Herb Farms in the Suburbs
Here is a bit of analysis on the above:
Area 0.125 acre
43,560 sq. ft. per acre
5,445 sq. ft.
Cost of Plot $5,500 BW
Start up Cost $2,000 BW
Sales $15,000 est.
Gross Margin 30% est.
Gross Profit $4,500
IRR 58% p.a.
a. You sell for the same as you purchased for at end of year 5.
b. You can probably require most developers to put aside
more than 5% of their lands for parkland and mini farms
too. You might even be able to get a plot for a de minimus
To download the above in .xls format, please go to: http://dramatispersonae.org/MiniHerbFarmInTheSuburbs.xls.
You may also want to introduce some innovation of your own—perhaps you could stress organic farming as a competitive advantage here or instead of renting property (you pay the landowner), you could get the landowner to pay you! E.g., you could open a ‘school’ and teach the landowner how to start his or her own mini herb garden. You could also sell them seeds, fertilizers, soils, books, manuals, even merchandise. You could help them to sell their produce and take a cut. You could act as a middleperson and arrange for a local merchant to sell their products.
So you want to start a new business? Which one should you select from that list of ideas you have?
Selecting the right one is very important—one of the things you learn about successful entrepreneurs is that they know which ideas to choose to put their efforts behind. Even more importantly, when they choose wrong, they admit it and go on to other more worthwhile endeavours.
When some of my engineering students from the Carleton University and the University of Ottawa came to me after graduation with their list of six ‘great’ ideas, five were either impractical, required an amazing amount of R & D, needed the world (read markets) to come to them or required a huge amount of startup capital. Then there was the sixth idea—which turned out to be GradeAStudent.com (today rebranded as GradeATechs.com).
Their value proposition was simple—we will come to your home or place of business and fix your PC or network: on-site computer repair and training at a fraction of the cost of the computer repair industry. The results have been outstanding.
There was only one problem they said– NerdsOnSite.com was already up and going.
Is this a problem?
Why not? Because they had:
• a strong value proposition;
• a huge and growing market.
If it is a good idea, there will be competition. If it is a bad idea, there won’t be but so what?
It’s a BAD idea!
What they needed to do was out-execute the competition by:
• Providing superlative Customer Service;
• Using GASnet to reverse out the work to clients and suppliers.
GASnet was a match-making service; it linked techies and clients. For first time ever, a service business is scalable due to the Internet.
GradeAStudent.com was not the first at home computer repair service but their execution was good and they used their back end system (GASnet) to automate their appointments and their billing systems.
Grade A Techs
They have turned it into a multi-million dollar biz (Ottawa, Mississauga, Montreal, Tampa, Bellville, Brockville, Oakville, Gatineau, etc.)
Your biz idea/biz model has to meet the following criteria:
1. you must be able to bootstrap it (GAS was started with around $10,000);
2. you must be able to use Guerrilla Marketing (GAS used lawn signs and market by press release);
3. it doesn’t have to be the very first of its kind (GAS had NerdsOnSite to contend with);
4. but you don’t want to face humongous competitors though (like if Dell or HP were in the GAS space say);
5. there has to be BIG demand (probably 20 to 30% of PCs in NA don’t work at all or less than optimally at any one time; so GAS’ market is probably 120,000,000 PCs just in NA alone at any one time);
6. you must be able to get customers without killing yourself and they must become repeat clients which gives you recurring revenues (once people hear about GAS and use GAS, they use them over and over again);
7. the biz must be able to grow big enough so that you get more out of it than if you just worked for someone else in a JOB (GAS could be a $100m per annum biz);
8. you need to bring some creativity and differentiators to the industry (GAS uses GASnet to match student techies and customers and to invoice instantly; they also use fixed pricing);
9. you need to be able to explain your value proposition in less than two minutes (GAS provides at-home COMPUTER SERVICE at prices you can afford; no need to disconnect your PC, take it to a repair shop, wait three weeks, pay an unknown amount, take it back home, reconnect it to find it still doesn’t work properly or your hard drive has been wiped or both.)
You are the Chef running a high-end restaurant at 4816, rue Wellington, Montréal, Québec and you are trying to convince your two partners to sell the restaurant to your employees and focus exclusively on canning your recipes and selling them across the planet in specialty shops and at trade fairs and shows like the Fête des vendanges in Magog-Orford, Quebec.
You just came back from a visit with your accountant and he told you that last year you made around $55,000 from your restaurant and deli counter. You worked unbelievable hours running the restaurant and you have a dedicated client base that love your food.
You speak some English but like many Québécois, you feel more comfortable in French.
As you were leaving your accountant’s office, he offhandedly told you that one unusual thing he noticed was that your deli counter made le Chef and his partners almost 80 grand last year. You didn’t think too much about this but a few days later, you found yourself awake at 3 am with a thought: “If we made $80k from our puny nine foot long deli counter but only $55k overall from the whole enterprise, is there a message here for us?”
You know you are a great chef with unbelievable recipes—this is your business’ ‘secret sauce’. Colonel Saunders had his 11 secret herbs and spices, Coca Cola has their secret formula but how many people know how to make your Smoked Meat de Canard that sells for $18.95 per tin (CAD) or TAJINE DE LÉGUMES À L’OLIVE ET À L’AGNEAU that sells for $14.95 for a tin that holds 530g? Answer: only one person knows how to do that—you.
Le Naked Lunch
What if you could work 1/3 fewer hours, travel the world selling your stuff, visit fabulous places, meet cool people, sell online and in specialty stores? What if you could actually make money by selling your restaurant to your employees and make still more money by selling them your products on an ongoing basis too? Is the fact that you made more money from your tiny nine foot long deli counter selling take home products than running a complex operation like a high-end restaurant with its long hours, demanding clients, needy employees and greedy landlord, is this telling you something?
(It’s interesting to note that when you disaggregate results for even quite small businesses, you can learn something new. In this scenario, the deli counter is making an $80,000 profit while the overall business is seeing just $55,000 on the bottom line. That means the restaurant itself is losing $25,000 per annum.
When we ran the largest mini-office operation in eastern Ontario, we found that we made money renting minis but lost money in our word processing and services division. Rather than closing it, we did something similar to what the owners of Le Naked Lunch did: we sold it to an entrepreneur. Within six months of buying it from us, she had turned a $3,500 per month loss into a $4,500 per month profit. Meanwhile, we received $45,000 from selling the biz, its equipment, client list and lease plus we turned a monthly loss into a new rental income stream (she paid us rent for her space).
Also, when we were a partner in Rentalex Tool and Equipment Rentals, our analysis found that the 16 locations in Ottawa were making money and all 17 locations in Toronto were not. We sold the locations in TO to our chief competitor and between the money we got from our leases there, our inventory and goodwill, we made enough to recover all our losses from the Toronto operations since their inception. We also turned an overall annual loss for the company from a negative $800,000 to a positive $1.4 million per year in just two years. As my father, the late Professor O.J. Firestone, said: “Keep the winners and dump the losers.”
Please note: that the accounting scenario presented above for Le Naked Lunch is created by the author as a plausible set of circumstances for the change that took place for the Chef and his two partners based on a discussion with one of the partners in Magog, Québec in September 2009.)
How can you start a great business or, for that matter, a PB4L, with no money down? How do you get ‘table stakes’ so you can have a place at the table too? The rule today is, if you have cashflow, you will get financed, not the other way round.
There really are no ‘no money down startups’; there are only those with little money down. In reality, every business requires some investment. What we are talking about is starting a business with an amount of money that is really de minimus with respect to the size of the opportunity.
The late Mark McCormack started a world-leading sports management business (IMG, International Management Group) with $500, his law degree and Arnold Palmer as his first client. Mind you, it doesn’t hurt if your first client is an Arnold Palmer.
Probably less than 1% of all startups ever get any funding from VCs; that means that 990 out of 1,000 new enterprises are forced to use bootstrapping as their only means to success.
Some observers feel that bootstrapped businesses, ones that start with nothing, can actually be better businesses because they are more focused on results as well as efficiency and economy of effort.
They certainly appear to be hardier if they manage to get by their first few years.
Maybe it is the same difference between people who win the megabucks lottery as their way of becoming rich and the self-made entrepreneur. Many million-dollar lottery winners are worse off five years after their big win than before; by that time, they have blown their dough on can’t miss opportunities and they have no J.O.B. to go back to. Whereas, someone who earned it himself or herself knows how hard it is to do it and are less likely to throw it away.
I find that students and others cite the reason they can’t start a business as not having any money are really saying that they are afraid to start a business. Now it’s true that starting a capital intensive business like, say, an alternative energy photovoltaic farm can not be done without funding. But that does not mean that the entrepreneur has to have the money in his or her piggy bank before starting.
Entrepreneurs, almost by definition, have no (or very little) money. But if I was starting a photovoltaic farm, I would look for capital from strategic partners—you can identify those people by asking the question: Who benefits? This would include: power generators, power distributors, power consumers, land owners, Provincial or State Economic Development agencies, equipment manufacturers, constructors, indeed, all stakeholders are also potential investors.
Maybe you could pre-sell five years worth of power to a large industrial products company and get cash up front for that contract. Maybe you could get equipment from photovoltaic manufacturers with no up front payments in exchange for a cut of your power sales. Maybe a friendly landowner would give you a land lease for $2 per year plus a cut of your power sales. Maybe you could get a higher rate for your green power*.
(* In Ontario, you can get 42 cents per Kwh or more versus around 8 cents for conventional power.)
So even a capital intensive project like this might be amenable to a bootstrap approach. Certainly, the longest journey is one where you never take the first step.
Here are some sources of Bootstrap Capital. This is a partial list—which is all it can be: there are as many varieties of bootstrap capital as there are ideas out there in the minds of clever entrepreneurs.
(For the Last Word on Bootstrap Capital, please see: http://www.eqjournalblog.com/?p=1162.)
1. Soft Capital: Mom, Dad and rich Uncle Buck; basically this is a friends (Angel Investors) and family round of financing either formally or informally organized.
2. Home equity loans.
3. Business plan competitions for cash (e.g., the Wes Nicol Competition or the Celtic House Competition.)
4. Future customers, clients or launch clients (e.g., homebuyers in Ontario can be asked for deposits of up to $20k in advance).
5. Future suppliers can sometimes be persuaded to extend long term credit to you (e.g., Vendor financing of 30, 60, 90 days or more) or invest cash in your business since they have a lot to gain if you become another (good) customer of theirs. They will probably want a long-term supply agreement though.
6. Strategic partners (like Ogden was for the Ottawa Senators in return for a 30 year arena management deal plus F&B deal, they invested, loaned and guaranteed significant capital to/for the nascent team.)
7. Micro capital lending and grant programs; for example, the GOC’s SBL Program (Small Business Loan or other government-sponsored sources of start-up capital like the Ottawa Community Loan Fund.)
8. Supplier rights, product placement and licensing fees (for example, Molson’s purchased pouring rights for Scotiabank Place and the Civic Centre after the City of Ottawa was awarded a franchise by the NHL in December 1990 but before they commenced play in October of 1992. Another example was the selling of 15,000 PRNs (Priority Registration Numbers) during the Bring Back the Senators campaign of 1990 for $25 each. Each PRN holder the right to purchase a season ticket in their preferred location in numerical order, if the team was awarded to the City of Ottawa in the NHL expansion round of December 1990. Note, however, that there were no refunds if they were not successful. For $25, one got the right to purchase a season ticket and a bumper sticker and a cool looking certificate too.)
9. Patent or other IP licensing fees and royalty payments (e.g., Noma Industries purchase of the rights to LED Xmas light strings).
10. Consulting services (a lot of entrepreneurs support their startups by providing consulting services at the same time).
13. Financial leasing of fixed assets.
14. Receivables factoring.
15. Publisher’s advance on a book or script.
16. Sponsors (see for example the signing up of 500 Corporate Sponsors at $500 each and 31 Original Corporate Sponsors at $15,000 each for the Ottawa Senators before the team was awarded. Or for example, getting sponsors like a beer company, an accounting company, a law firm and others to put their logos on a new curved gold club that a client of mine is coming out with (it helps golfers drive the ball straighter). Not only are these types of firms looking for ways to get in front of a valuable audience like golfers, they are also looking for ways to advertise that is non-zappable. Every time a golfer brings the club out of the golf bag for the next five to ten years, they will see sponsor messages. From the POV of the inventor, sponsors not only defray part of the cost of producing the new drivers, they are also a distribution channel. A beer company, an accounting company, a law firm or others like this will probably buy a number of clubs each year of their sponsorship to give out to their valuable clients as prizes or than you’s. So sponsorship applies not only to large businesses like pro sports teams but to startups and SMEEs as well.)
17. Trading activity: buying low and selling high, taking advantage of arbitrage opportunities (like finding out what percentage of dot-CA holders do not have their dot-COM equivalents and the dot-COM equivalents are available and then selling them the dot-COM extensions), building-businesses-to-sell, buying and selling and buying and selling and trading up, … Check this out:
http://oneredpaperclip.blogspot.com/. This person traded a red paper clip for a pen and traded the pen for a doorknob and then for a Coleman stove and then for a generator and then for one instant party and then for a snowmobile and then for a trip to Yahk and then for a cube van… His idea was eventually to get a home for himself, which he did and now they are trading the house for who knows what…
18. Credit cards (oft used strategy but dangerous because of high interest costs and what can happen to you and your credit rating if you fail to make payments).
19. Scientific R&D Tax Credits (e.g., SR&ED from the GOC).
20. Extracting upfront value from your lease for office space– an example of a services company that got $800,000 upfront.
21. Reverse or Negative Pledging of Assets (e.g., O & Y not pledging the value of an office tower to anyone and extracting loans from banks based on the value of their real estate and based on their not agreeing to pledge it to anyone. Another dangerous strategy because you can end up over-leveraged.)
22. Co-guarantor: borrowing someone else’s stronger credit rating (e.g., Scotiabank Suite Leases pledged for construction financing or Mom or Dad co-signing a loan…)
23. Accretive buying: buying another company with the target company’s balance sheet as collateral where you end up with more cash than before. (E.g., Disney buys the Mighty Ducks of Anaheim for $50m: $25m goes to the NHL and $5m per annum for 5 years goes to Bruce McNall and the LA Kings. Then they borrowed $35m against the asset and, after receiving a $20m leasing inducement from Ogden to enter into a 20 year lease for Arrowhead Pond, they had more cash on hand after than before they bought the team.)
24. Accretive Selling: sell products or services with financing in place where you end up with more cash after the sale than before (e.g., Leon’s don’t pay a cent until…. (OAC). Leon’s than turns around and sells the sales contract for cash.)
25. Employee ESOPs (Employee Stock Ownership Plans).
26. Pre-sold services. (For example, here is an example from Craig deSchneider, a student in EC 491 (2003): “In looking for some start-up capital for our automotive related business, myself and my partner offered potential investors future discounts through our business. In selling automotive parts, we had accounts set up with distributors, accounts which could only be set up through having a business license, tax numbers, and some negotiating, so the average person off the street does not have access to these discounts. We set no specific investment amounts, simply the most the person could afford. We kept these contributed amounts a secret among the different investors as we offered them all the same return. Therefore, in return for a fair investment, we extended to our investors cost prices for all of their future purchases through our company. The only limit we set on this agreement was that the investors’ annual purchases could not exceed our company’s sales revenue from our average monthly sales figure (not including cost purchases made from investors). The overall idea was to provide our investors a very fair return on their investment, and at the same time, these investors would promote our company. Why you may ask, well the greater our monthly sales were, the greater the amount of goods they could buy for themselves at a cost price.” Ed.: Basically, Craig and his partner turned their investors into customers and their customers into investors. Nice going.
27. Collectibles sales and auctions. Here is a new one. Michael Moshier put the original version of his SoloTrek flyer up for auction on eBay, hoping a museum would pick it up. It didn’t even fly but by January 12th, 2003, the bidding on eBay had already reached $6.5 million USD: money he planed to use to fund his Trek Aerospace startup. Cool.
28. Extended family savings and investment fund: an old style of acquiring start up capital is to have the extended family contribute to a pool of funds to help family members acquire or build businesses.
29. Vendor Take Back mortgages: typically used in real estate transactions, the Vendor provides some or most of the financing for the sale by way of a (first or even second) mortgage back to the Purchaser.
30. Sweat equity.
31. Investor syndicate or investment club.
32. Retainers (typical for consulting services or legal and accounting services) and deposits on sales.
33. Collecting early and paying late (boosts cashflow in the short term).
34. Progress payments and deposits on contracts.
35. Advance ticket sales.
36. Becoming a reseller (this is big in the Internet age where you can set yourself up for practically nothing as an agent to resell services such as domain names or web hosting). There are a huge number of things that can be resold on the Internet: many sites generate large revenues by reselling ads powered by Google or other providers. Check out this silly site which generates up to 8,000 so-called facts on Chuck Norris and got 18 million hits in December 2005. Really the purpose of the site is to generate clicks (by asking people to rate the facts) which generates a new ad and maximizes revenues for the site’s owner:http://www.4q.cc/chuck/. Or have a look at this site: http://www.milliondollarhomepage.com/. Here the young person (age 21, based in the U.K.) apparently wanted to pay for his tuition and so he created a million pixel home page. You could buy an ad for $1 per pixel (minimum ten pixels) linked to your site. He sold all 1,000,000 pixels so guess what? He got his tuition and a lot more. I presume the ads are for a limited time so he also has the chance to resell the million pixels over and over again. The site gets a LOT OF TRAFFIC. Remarkably, this might be a sustainable business (a Personal Business For Life!)
40. Exploiting signage rights.
41. No money down, land speculation.
42. Using OPM (other people’s money).
43. Asset flipping.
44. Buying under power of sale (again, real estate related).
45. Buying distressed companies and turning them around.
46. Day trading.
47. Asset speculation.
50. Training and uniform fees (e.g., GradeAStudent.com required each of their contractors to be Grade A certified before they could provide services to clients and customers and get access to the billing system and the appointments calendar (a system called GASnet). To be certified the contractors had to pay in advance to take the course.
51. Pre-sales in real estate allows you not only to ask for cash deposits but also may give you access to Bank or private lender financing. For example, if you pre-sell 50% of your condo or townhouse project—you can usually qualify for construction lending where, in essence, your Bank or private lender is advancing you money to build the condos or townhouses on the basis of the strength of the credit ratings of your customers (buyers) and not your credit rating per se.
52. The same type of thing can help you a lot if you are a manufacturing business: if you have a guaranteed supply contract with a credible client or customer, you can often finance against that.
53. Land options: sometimes you can convince a landowner to give you an inexpensive option to buy his or her land at a fixed price at a later date. You can then use the time to set up a sale office and begin pre-selling. As discussed above, you can then take cash deposits (which are impressed with a trust in that the money doesn’t really belong to you until you actually have delivered the condo, townhouse, single family home, whatever), finance against Agreements of Purchase and Sale executed by you and your clients, approach a Bank or private lenders for funding (often through a mortgage broker), arrange for private equity lenders or other investors to invest in your project, etc.
54. I recently learned about a new method of bootstrap capital from my daughter, Jessica. One of her best friends lives in a single parent family. Her friend’s parent is unable to work and lives on a modest income. However, every year they are able to take a family vacation to a nice destination in a rented van. How do they afford to do that? Bootstrap capital. They take with them five other kids: each kid pays $250 for a week’s holiday: that’s a total of $1,250, enough for a camping holiday and some neat adventures too. It pays for the gas, the van rental, food and a few outings. The kids` parents contribute cash and their children,
Jessica’s friend and her parent go for free but they provide the opportunity. Everyone wins.
At the University of Ottawa’s Telfer School of Management, we are focused on the bootstrap entrepreneur. There are other colleges and universities where the VC track takes prominence.
So self-capitalization is an important area of study and research.
If Canadian Banks had their way, they would probably do no small business lending at all. If you go to the bank for a small business loan (SBL) of, say, $350,000, you will find that: a) they need a massive amount of data from you and b) they need an expensive infrastructure in terms of on-the-ground bank managers, loan officers and back office types to approve your loan application. If they could get away with it, they would probably choose to turn down nearly every small business loan request and eliminate a whole cadre of Bank staff.
Other students tell me that they want VC funding. I believe that most startups have about as much chance of attracting VC funding as they have of winning the annual Ottawa Hospital Lottery and probably less.
First of all, most business startups don’t have the growth prospects to attract VC funding.
Secondly, most startups are in industry sectors that don’t appeal to VC funds anyway.
Thirdly, most startups should be much further along in their development before they go after VC funding, if they ever do. If your business has real cashflow and real customers and clients, you are on a much more even footing with respect to negotiating a fair agreement with VCs, if that is what you choose to do. 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.
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, learn everything you can about self capitalization—you are going to need it.
I have always believed that (most) debt is less expensive than equity but many of my students view equity as ‘free’.
Let’s suppose you want to start that mini farm business we looked at above and you need $7,500 to start it. The mini herb garden business, under certain assumptions produces cashflow of $4,500 per year and a return of 58% p.a. (This is an IRR, Internal Rate of Return.)
Now let’s say you are like me and know nothing about farming so you decide to bring in a partner who does and you are going to give her, say, 1/3 of the business and she is going to put up 1/3 of the startup capital or $2,500. You can not only use the extra expertise but also the extra dough and since it is equity, there are no interest or monthly repayments. Phew, you say.
Maybe she is a great partner but let’s assume as in many partnerships, this is your idea, your baby and you are the one with the most enthusiasm. So after giving you a few tips that you probably could have found on the Internet yourself (like how to grow herbs organically, without pesticides, and not let the bugs eat them all either), she kind of loses interest and you end up doing most of the planning, planting, weeding harvesting and sales.
You become a bit resentful because you have to give her 1/3 of the annual profits ($1,500) and it is bugging you that she is getting a heck of a return ($1,500 each and every year on her $2,500 investment) and not putting in her fair share of the work.
Her ROI is obviously the same as yours: 58% p.a. (Don’t make the mistake of thinking the ROI, Return on Investment, is $1,500/$2,500 or 60% p.a. Be a bit more rigorous and use the IRR as a lifecycle approach to analyzing projects.)
Now let’s say you had to borrow this extra amount on a credit card instead of getting it for ‘free’ from your partner. Many credit cards charge you 14% to 28% p.a. depending on your creditworthiness (which is what Banks determine using your beacon score). Even at 28%, you are borrowing for much less than the cost of your equity which is 58%!
So the advantages of debt are:
1. It is usually cheaper than equity.
2. You don’t have to put up with a partner.
3. Decision making is fast: your Board of Directors meets in a closet (i.e., you meet with yourself).
The advantages of a partner are:
1. If there is a problem in the business, you may have an extra pair of hands around to help you deal with it (if the partner doesn’t throw up her hands and bug out on you).
2. You have access to what you hope will be patient capital.
3. You hope she brings expertise that you don’t have to the table.
Most partnerships end up badly and you will have to buy her out, let her buy you out, sell the business or shut it down. Now if in the above example, your partner likes the returns she is getting and say she puts a 11 cap rate (capitalization rate) on her share of the annual profits, then it will cost you a LOT to buy her out.
Here is how it works:
Cap Rate = NOI/S.P.
where, NOI is Net Operating Income and S.P. is Selling Price.
S.P. = NOI/Cap Rate.
Therefore you are going to have to pay her:
S.P.(your partner’s share of the business) = $1,500/0.11 or $13,636.36.
You have turned a $2,500 problem into a $13,636.36 problem in a hurry.
a) don’t have a partner to begin with if you can avoid it;
b) use debt or bootstrap capital to fund your business because it will probably be cheaper in the end;
c) understand that there is a higher risk with debt.
Debt is like the hare and the tortoise running around a track. Debt is the hare. You are the tortoise. If you take on debt (especially bad debt like credit card debt), your tortoise better be relentless and get around the track because he is working all the time to pay off the debt as soon as he can. Once the hare catches you (in a foreclosure or power of sale or bankruptcy), you are probably dead.
Maybe instead of ending up borrowing the extra $2,500 from a credit card, you could have got a loan from Farmers Credit or a government grant program to grow more food locally or even gotten a pre-order from Whole Foods or a few organic food shops in your area that included a down payment on their first herb orders that just happened to equal $2,500. The latter has an interest cost equal to zero and also gives you a secure feeling that once you start producing herbs, you will have customers!
Negative Cost Labour
Sometimes, you can turn a cost into a negative cost. A former architecture student of mine, Dominique Tonetti and her husband, Frank Dutton, are managing to do that on their new project, Solisterra in Québec.
Dominique and Frank are building wonderful straw bale structures on a 150 acre property they own in West Québec (in Kazabazua) close to Ottawa. The lands are beautiful—abundant wildlife, several lakes plus a huge variety of trees.
They are going to build off-grid cottages on their lands that will be rented by the week to people who want to de-stress and live a simpler life. (Where do I sign up?) Some of the things they are working on include: straw bale construction, solar electricity, solar heating (for hot water [which I really like]), solar ovens and green roofs.
Negative Cost Labour/Straw Bale Construction
They are determined to retain ownership of their property, not go into a mountain of debt (and thus run the not insignificant risk that the bank or finance company will one day own the cottages and the lands) and yet produce seven or eight cottages, a rec hall and a retreat to compete with the best in Eastern Ontario or West Québec. How will they do that?
First, they turned down ruinous interest rates from some predatory financiers who were going to advance construction funds. Not only were their interest rates punishing, they also required large fees—fees when they originate the loans, fees when they provide a draw, even fees when you pay the thing off with a permanent mortgage. And on top of that, Dom and Frank would have to pay legal fees and appraisal fees. Every time they want a draw, they would have to beg the appraiser to come out, then beg him or her for a decent appraisal, then beg the loan company and lawyer for a draw that was enough to pay all the darned fees plus their costs of construction (less the 10% holdback).
A friend of mine (another former student, Matt Nesrallah, who runs his own financial advisor shop at Primerica) told me that the most powerful force in economics is compound interest. This is not a new idea but it needs to be said again here. If your repayments to a Bank or a credit card company or the IRS or CRA compounds at a high rate of interest, you’re doomed.
So Dominique* and Frank decided to:
a) build the homes themselves thus reducing the cost of construction;
b) build only one unit at a time thus reducing their cash requirements further;
c) take a low interest rate mortgage on their existing home to fund what out of pocket costs they do have;
d) lastly, Dominique has offered to train and teach people straw bale construction.
In effect, she is running a school and can charge people for coming out and working on her project.
They learn design from Dom, they learn construction techniques, they work with their hands which can be therapeutic, they work in a lovely setting with great people, they have fun, they feel like they are a part of something bigger than themselves and they gladly pay for the privilege.
THIS IS NEGATIVE COST LABOUR.
Now how about that?
(* Comment from Dominique:
It is a good story, it makes us sound more business savvy than we feel, but it is indeed how we operate. A small correction however, Solisterra is 350 acres, 150 of which is the two lakes. The workshops go beyond straw bale construction.
Since we needed extra arms and many people wanted to learn how to build their own dream homes, we discovered that we could “sell” knowledge of: a) timber framing (which is very easy to build when you know how), b) masonry ovens, as well as c) installation of solar electric systems.
For next year’s unit, we are putting together a 10 workshop package (some people really want to know every step from the foundation up) in a one price deal. The great thing for us is that people become much handier by participating in our workshops…
I almost feel guilty charging them when they become very useful…but not quite! I have to remind myself that knowledge has a price. I learned all these construction techniques the hard way. I had to perform many tests before I could write specs (with a good conscience) to accompany my plans on previous projects.
Thank you for thinking of us for this story.
Bootstrapping the Senators
Let’s look at another example where I have some direct personal knowledge—the steps we took to secure a National League franchise for Ottawa.
Step 1 (Generate Idea): Driving down the Queensway in 1987 wondering what I could do next, I asked myself what does Toronto have that we don’t? (Ottawans constantly compare themselves to big brother Torontonians). Ah, back came the answer: “They have a NHL team and we don’t.”
Step 2 (Apply Ingenuity): To clip the wings of any other potential bidders arising locally, we secretly bought 600 acres of land for a new arena, rezoned it, sold 15,000 PRNs (Priority Registration Numbers, basically giving people the right to buy season tickets in the then non-existent franchise), signed 500 corporate sponsors and 31 original corporate sponsors to help us in our campaign to BRING BACK THE SENATORS (a team that had played in the NHL until 1934 when they transferred to St Louis because of the deepening Depression).
Step 3 (Have Courage): The local media wrote a story the night before we won the franchise that there wasn’t much hope for success for our bid.
Step 4 (Form Team): We had a superb group of young, talented and extremely dedicated executives, all trained by me. THEY WOULD’T BACK DOWN.
Step 5 (Execute Well): The campaign was tightly focused on the only people who mattered—the 21 voters (Members of the Board of Governors and owners of the NHL Member Clubs) and the President of the League too.
It took a great team of unimaginably dedicated people to BRING BACK THE SENATORS.
I still remember an Ottawa Citizen headline a few days before we got the Ottawa Senators franchise: “And the winners are … Seattle, Milwaukee.” That hurt.
Of course, it was Ottawa and Tampa.
The night before we won the franchise, one of the voters (i.e., a member of the Board of Governors) told me (at a NHL dinner thrown for the nine bidders) with his face just centimeters from mine: “You’ll never, ever get a franchise for Ottawa.”
I can remember Norm Green, then Owner of the Minnesota North Stars, coming over to my table and asking: “What’s wrong.” “Nothing,” I said. “Well, get that smucky look off your face, kid, and get out there and hustle.”
Good advice. Lydia Leeder, in Ottawa, on hearing that comment from her spouse, Cyril later that night said: “You can’t stop now! It’s just like the Canada/Russia series of 1972. Canadians never quit. Everyone is running to their radios every half hour for an update … We’re counting on you.” Now that’s pressure!
We did just that and in fact the last thing the Board of Governors saw before they shut the door to consider the matter the next day at 8:00 am was my nose and the faces of my whole team.
We never stopped.
At about noon that day, the pressure was enormous and frankly getting to me; so I went for a run along the beach (this was Palm Beach in December- actually December 6, 1990). I returned at about ten to one and saw some of my team members waving frantically to me. “What’s up,” I asked. “The NHL has asked all bidders to be in their suites at one for an announcement,” said Connie Cochran. “What announcement?” “They didn’t say.”
Without a shower, I changed into a suit. At one, NHL security took us down to the basement of the Breakers Hotel, a huge antique of a hotel. Next to rotting garbage and standing under dripping pipes, I turned to my colleagues to say: “Fellows. This doesn’t look too good. You have done everything that you could do. I am proud of you. If we have lost, we are going to thank the NHL for allowing us to join this process, we are going to congratulate the winners and then we’re going to have a press conference to announce- ‘we’ll be back’.”
Then NHL security took us up to the meeting room. Marcel Aubut (of the Quebec Nordiques) gave Randy Sexton, a big hug: “Felicitation, mon ami,” he said. We thought he was congratulating us on a good try!
When I went up to the front of the room and sat next to John Ziegler, I saw the words: ‘The NHL is proud to welcome, as conditional Members under the Plan of Sixth expansion, the cities of Ottawa … and Tampa.” It was a magic moment.
Winners never quit and quitters never win.
(Footnote: After collecting myself for a few minutes, I asked Mr. Ziegler what the final vote was and he told me with a nonchalant shrug: “It was unanimous, 21 to 0.” About six weeks later, I did call the Governor who had told us that we would never, ever get a franchise. He told me that his comment was part of a plan by a few Governors. They told each bidder the same thing; it was a character test designed to see how each bidder would react. Two of the bidders stormed out; they weren’t successful. Only two bidders got up the next day to continue lobbying until the last possible second—Phil Esposito (leader of the Tampa group) and us.)
Now is it possible to bootstrap a NHL expansion franchise that cost $50 million US to purchase. Well, the answer is a qualified yes.
The Ottawa Senators were supposed to be an accretive arrangement too. (Not all good plans work out I am sorry to say. Oh well.)
Cyril Leeder, Randy Sexton and I dreamed up the idea of bringing back the Ottawa Senators in 1988, after a pick up hockey game at the old Lyons Arena. Cyril, in true CA-style, after hearing the idea, asked: “How much is an expansion franchise likely to cost?” We all wrote down our guesses, which ranged from $25m to a high of $34m (the latter being the number for a NBA expansion franchise the year before.)
Our idea was simple—private money would buy the team and build the arena (this would not be another SkyDome, which cost the Ontario taxpayers at least $450m), the Province would build us an interchange (at a cost of $30m) and the City of Ottawa would use a Magic Wand to make sure it all happened.
Jimmy Durrell’s and Andy Haydon’s Magic Wand
Jim Durrell was Mayor of the City of Ottawa and Andy Haydon was Chair of the RMOC (Regional Municipality of Ottawa-Carleton) at that time. Our concept was that: a) we would buy 600 acres of land for an average of $12,500 an acres (which we did), b) we would keep 100 acres for construction of the Palladium (aka the Corel Centre, which we did) and c) we would ask the RMOC and the City of Kanata for a rezoning of all the lands causing the value of the additional lands to increase from $12,500 to $112,500 per acre and we would sell the additional, surplus lands (500 acres) for a profit of $100,000 per acre or, hmm, $50m in total, which would then be shipped in a couple of Brinks Security trucks to John Ziegler in NHL head office in NYC to pay for the franchise. Ah, it was a simple plan.
From the POV of the City, it wouldn’t actually cost them anything—they just wave their magic wand, et voila, the lands are rezoned. We make a $50m profit, which we don’t get to keep, but instead we give it to Ziegler and he gives us (a fairly ratty-looking) piece of paper for a NHL franchise* for Ottawa.
(* There has been a lot of air and ink about what the City gets from the franchise being here but one thing I can tell you, when I traveled in the US in the 1980s, no one knew anything about Ottawa and now everyone does. Some VCs have told me that by having a world-class sports team here, we got on their radar. Without it, they would question whether the ideas coming out of Ottawa were also world-class. Hundreds of millions, billions, in fact, of investment money came here, at least in part because of the Sens. Fair? No. But then life isn’t fair at all.)
Well, many of you may know the story—Liberal Premier David Peterson who had approved much of our plan called an election two and a half years early, lost to NDP Premier Bob Rae, whose government opposed the Palladium. We won the battle to rezone the Palladium lands (100 acres) at the OMB but lost the war (the other 500 acres remained unzoned for another ten years). We had an $80m hole in our capitalization plan (yes, Mr. Rae declined to have the Province build the public infrastructure (aka, the $30m interchange)) and I sold control of the team to new owner Rod Bryden within two years. C’est la vie.
Large or small, there are thousands upon thousands of examples of Bootstrap Startups. This is the way most businesses get started. And one can argue that Bootstrap Startups are often ‘better’ than VC-funded startups
Better in the sense that: a) they have to put an enormous emphasis on sales from the moment they begin; b) they have to have real customers and real cashflow otherwise they are dead in a few months; c) they need to be more creative and more adaptable to changes in their environment; d) they need to be more efficient with what money they do have.
“Simply put, an entrepreneur is someone who can (creatively) do with a dollar, what any fool can do with two,” Prof Bruce.
The Ottawa Senators formally returned to the National Hockey League on October 8, 1992 after a 58-year absence; it was another great day for Ottawa. I was at ice level at the old Ottawa Civic Centre when the team was introduced. The people in that arena applauded those players—they gave them a standing ovation—for six minutes. I realized that they weren’t really applauding the players, they were applauding themselves. This City came of age that day—there was a feeling that ‘we did it, we did it together’. It was that special feeling that only comes from being part of something greater than ourselves. Professional sports can do that. But surely, we can add more days like that. It is a challenge for you to take up. Carpe diem.
Let me give you a quote about the role of hope in human affairs, which frankly does not get enough attention. Human beings need to have hope to live.
“Most of the important things in the world have been accomplished by people who have kept on trying when there seemed no hope at all,” Dale Carnegie.
Build and Hold—The Difference between being Rich and Being Wealthy
I read in October 2004 that Ottawa-based QNX Software Systems was sold to Harman International for $138 million USD. I know that some of my students and clients read it too and they will be thinking build something and sell it for A LOT OF MONEY. The only problem is that most of them might not read to page 2 of the Ottawa Citizen article (October 28, 2004) which says: “For Mr. Dodge, 50 and his partner Gordon bell, 49, the deal marks a vindication for their effort to build a profitable company without venture capital over 24 years.” (The emphasis is mine.)
I am not saying that you should never sell your business but what I am saying is that it takes time to build a great business.
People who build and sell quickly are known as flippers. Most of them flip ‘til they flop. If you have built a successful business, you have climbed Mount Everest twice. You have captured lightning in a bottle.
It is so hard to build a successful business, it takes so long to do it, you use up so much of your lifetime storehouse of luck doing it, that you should think very carefully before you sell it. Successful entrepreneurs often think: “Well, I did it once, I can do it again and again”. Bad news, people, often you can’t.
If you have built a great business, why sell it? What exactly will you do next? Start again? Why go through all the heartache and risk again when you already have a fine business you built yourself?
I didn’t feel that an essay on Building and holding onto your business (and helping to creditor proofing yourself at the same time) would be complete without mentioning this trap that so many of us fall into. It’s called hubris.
One of the best ways to get out of creditor hell is never to get into it in the first place. One of the ways to do that is to not sell your successful business. In almost all cases, a successful business will sustain you and your family and your employees and your suppliers and your other stakeholders far, far better than cash in the Bank.
Let me tell you another story, this one about Sean (not his real name). Sean was a by the bootstrap kind of guy and he had one great thing going for him—he had charm. He was a born salesperson and in the game of entrepreneurship, if you can’t sell, you’re out of the game before you can begin. (The three most important things in entrepreneurship are SALES, SALES, SALES.)
Well, one day about fifteen years ago, Sean found himself working in the fish department for a large supermarket chain; he was wearing one of those hair net things and he was developing arthritis in his hands from the cold and ice he was constantly exposed to. He and his spouse, Freda, had their first child (of what would eventually be a clan of three kids).
Sean thought to himself: “I can do better than this.”
The next day he went out and bought himself his first computer (never having even booted one up before) and started an advertising and promotion business in his basement with nothing other than guts, charm and a high school diploma. (I have changed his industry too to protect their identity. I apologize to my readers.)
I met Sean one day, about two years after he started working out of his basement, and he convinced me to move our entire advertising and promotion account over to his company. He was that good. I certainly asked him about his bona fides. Could he produce the volume we needed? How was his Quality Assurance program? Yadda, yadda, yadda.
I didn’t know until years later that this was his big break—it allowed him to finally move his business out of his basement, buy more equipment, hire more, better people, etc. But when he told me, we laughed about it together and I was doubly glad—glad that he was a success and glad that he didn’t let us down.
A few years later, Sean called me out of the blue. He had an offer to buy his business from a larger competitor for TWO MILLION DOLLARS IN CASH. I told him to slow down and think about it a bit more. I asked him a few questions. How much are you taking out of the business? About $200 to $250k a year. How much do you pay Freda to do your books? Oh, about another $50k. Do you have any company cars? Yeah, reckon so—two of them in fact.
In total, Sean and his family were getting about $300,000 a year from the Company, year in year out—it was a sustainable number.
I asked Sean, do you know what interest rates are on term deposits right now? No. Well, they are about 1.7% p.a., which means that even if this sale was tax free, your income from your two million dollars is going to be 34,000 bucks a year and every year inflation is going to eat away your principal. Now why would you give up $300,000 a year and a business you love and built yourself for that?
Let me quote actor and comedian Chris Rock:
“Shaq (Shaquille O’Neal who plays in the NBA) is rich but the man who signs Shaq’s pay check is wealthy.”
Chris Rock got it exactly right. You can get rich by winning the lottery, becoming a NBA Star, speculating, asset flipping, gambling, picking the right parents or prospecting for gold, diamonds, nickel, whatever, but you can’t become wealthy doing any of these things.
Wealth derives from control over a factor of production, a license, a franchise, a territory, a concession, some IP (Intellectual Property like the secret formula for Coca Cola or the 11 secret herbs and spices that the Colonel used to fry chicken), a competitive advantage, a comparative advantage, property ownership—anything that creates a sustainable, repeating and renewable income stream; it is your ‘pixie dust’—the magic that really makes your business work.
What was the grant by the Crown of exclusive fur trapping and trading rights to the Hudson Bay Company in Rupert’s Land (all the lands [all 3.9 million square kilometres of it] that drained into Hudson’s Bay) in 1670 worth to that firm? Well, they became one of the longest-lived corporations ever known—in continuous operation to this day. Their great wealth and economic and political reach was based not only on their fur trading rights concession but also on their control of real estate—they later came to control some of the most valuable sites in many Canadian cities.
Long term wealth is often based on these types of privileges gained through political maneuvering.
The Fred Harvey Company controlled the Mule Train concession to the bottom of the Grand Canyon for many years and was an enduring source of monopoly profits for them. As discussed above, my wife and I had an opportunity to take a couple of mules down to Phantom Ranch and stay overnight there in one of the most memorable trips of a lifetime. The Canyon is a sacred place but the only company with the right to take visitors down to Shangri-la by mule was the Fred Harvey Company. Waiting times for a place on the mule train is over one year. Think about it—no competition by fiat (i.e., by dictat or edict of the National Park Service), long waiting times, total price setting control, a seller’s market, what more could you want.
If you are the Emperor of Japan, head of the House of Windsor (aka, the Queen of England) or head of the Holy Roman Catholic Church (aka, the Pope), you have a different type of concession but ones that have proven to be hugely long lasting. But maybe they aren’t quite so different after all—their fortunes are based on real estate as well as hereditary or faith based positions of power. The Queen is a huge rentier (basically, a landlord with residential and commercial properties as well as broad acres for lease); the value of the Emperor’s estate in downtown Tokyo (the Imperial Palace) is incalculable and the Church has developed one of the greatest portfolios of property on the planet by colonizing some of the best sites in every city and town where the Church was represented. Astutely, they almost never sell their property, calculating, correctly, that land leases of 49 or even 99 years were the right way to produce income for an institution with a time horizon measured in millennia. They can enjoy income from their properties without having to give up long term control over their lands. After the completion of a land lease, the property reverts back to the Church and the process begins all over again—perfect inflation protection and, since they are tax exempt too (in most instances), the Church has one of the most stable financial platforms imaginable. In my view, the Queen seriously eroded the long term stability of the House of Windsor in the last decade of the 20th Century by voluntarily giving up the Crown’s tax-exempt status in an attempt to appease her critics. It was very democratic of her but certainly will have adverse consequences for the future of her heirs.
There is no better business to be in than the Government business—they keep all the best businesses for themselves. For example, there is no higher margin business than the Casino or lottery business and governments everywhere seem to either keep the business and operate it themselves (as they do in Canada) or regulate it and tax it heavily. They dole out other choice concessions to their friends or influential people who can help them get re-elected. If their costs go up, they simply increase their prices (aka, taxes) and, if you don’t pay the higher prices, a) you have no where else to go for service anyway (e.g., for your water and sewer connection) and b) they can force you to pay either by taking away your property, your liberty or both.
Governments love the liquor business too—again, either they control it and operate it themselves or they simply control it and hand out concessions to private operators and tax them to the max. Yesterday’s bootlegger is today’s protected oligopolist.
Just how important are these types of ‘concessions’? Well, look at what the professions do. Professional Associations (for Architects, Engineers, Lawyers, Accountants, even Real Estate Agents, etc.) are based on the tradition of guilds made up of artisans who band together to: a) raise prices and b) restrict or otherwise raise barriers to entry for newcomers. They always cover their tracks (it’s called political cover) by claiming that they are raising standards to protect the consumer and the public interest which no doubt they are doing at least in part. Not to be too facetious about it but self-interest is a top consideration for these organizations. Unions (like, say, the NHL Players’ Association) perform exactly the same function for their members BTW.
In Canada, the Canadian Radio, Television and Telecommunications Commission, the CRTC, was formed to dole out concessions to industry players in one of the most profitable sectors of the Canadian economy. Their so-called mission is to protect Can-Con (Canadian Content, aka Canadian Culture) but there is no doubt that the regulator of Canadian airwaves (i.e., the CRTC) has been captured by the major firms that are ‘regulated’ by the Commission. The proof is that when new licenses are issued, they invariably go to established players. New entrants need not apply. The final proof is just turn on any Canadian TV channel in prime time so you can watch Friends reruns, Everybody Loves Raymond and see Will ‘Fresh Prince’ Smith in his endless turn as a hip teenager in Belair.)
Now let’s just look at some numbers; let’s say someone controlled the early Beatles catalogue (say, someone like Michael Jackson, now the heirs of MJ). Mr. Jackson is reputed to have bought the catalogue in 1985 for $47m (but he lost his friendship with Paul McCartney along the way). By 1993, MJ’s company was reportedly earning $30m from it (albeit, MJ had added other songs by other artists by that time but let’s ignore this for the moment) and it was estimated to be worth $300m at that time. This yields a cap rate (capitalization rate) of 10, which is pretty typical for this type of privately held asset. No one knows what kind of income stream he gets from this now but it has a rumored value of $1 billion today. MJ still owned 50% of it, the balance was owned by Sony.
With a cap rate of 10 and given that MJ owned half of the catalogue, we can guess that MJ got $50m a year in income from his ownership. Plus the Beatles made a huge comeback—just ask my daughter, Jessica, who when she was 12 only wanted Beatles CDs for her birthday and knew just about every word to every tune the Beatles ever recorded. So it wouldn’t surprise me if MJ’s income went up every year from this source. This is called wealth. However, let’s say that MJ needed some quick cash and sold his interest to Sony for $500m. Now MJ would have been rich (for a while) from selling his interest in the catalogue but he would no longer have been wealthy because he had lost the ability to renew his wealth every year by producing an income stream from control over this particular factor of production.
But what’s that you say? He could have invested the proceeds in T-Bills, Muni Bonds and GICs (Guaranteed Investment Certificates). Sure he could, but they produce puny 1.7% to 4% rates of return. If MJ had paid $100m in taxes, he would have been left with $400m, which would have given him an income stream of $6.8m to $16m a year with no inflation protection. I mean if MJ continued to control the catalogue, he could always have increased the price (aka royalty) paid for each tune if inflation takes off and starts to bite into his revenue stream. But even ignoring inflation, why would MJ trade an income stream of $50m a year that made him wealthy to become a remittance man getting $6.8m to $16m a year? MJ turned down many offers to sell; presumably he understood the Chris Rock difference between becoming rich and being wealthy*.
(* Somehow I doubt whether Lisa Marie Presley ever read this piece. In December 2004, it was announced that Lisa had sold her father’s image and name as well as 85% of Elvis Presley Enterprises Inc. to Robert Sillerman-controlled SFX Entertainment for a reported $100 million, which included some stock in a new SFX controlled business. So not only does Lisa no longer own, control and direct a valuable franchise (her father’s estate, which brought in $45 million in 2003), she didn’t even get all her compensation in the form of CASH. As any entrepreneur knows, cash is KING. (Pardon the pun, Elvis). Now compare that with J.K. Rowling’s absolute and tight control over her creation (the Harry Potter series)—not only the publishing rights but also the film rights and other media rights as well. It has made her the richest woman in the U.K., worth more the Queen).
Did you know that many, maybe most, lottery winners blow their entire wad in less than five years? By that point, their spouses have left them, they are alienated from their old friends, they have got a whole new set of ‘friends’ who are only around while the money lasts and they don’t even have their old job to go back to. Many of them have picked up nasty habits along the way like taking drugs. It’s absolutely amazing how many of them end up in bankruptcy. They are much worse off for their ‘good fortune’.
People are meant to work. They are built for it. If you have built a good business, control a great concession, own a valuable franchise, possess a ‘secret’ formula, whatever, hang on to it, fight for it*—it is your security against creditor phone calls in the middle of the night asking you: “Mr. Jones, when can we expect payment?”
(* I was doing some work recently with a mega real estate agent. He is a salesperson for a large brokerage and is vying for one of the top national spots in terms of sales volume. He has developed a team approach to selling residential real estate and will sell more than 120 homes this year (2004).
I was surprised to learn (and it surprises me that after a great deal of experience with the real estate industry that I didn’t already know this) that he has developed a long term and sustainable competitive advantage. Remember, this is an industry that has no minimum educational requirements, not even a high school diploma is required to get your license. After successfully completing a three phase course in Ontario, virtually anyone can become a real estate agent. So the ‘barrier’ to entry is pretty low. (If you can’t be real estate agent, you can always be a homebuilder. If there is absolutely nothing else you know how to do—not even sell real estate or used cars, then just pick up a hammer and saw and become a builder.)
There are more than 40,000 real estate agents (more properly called ‘sales representatives’; technically, ‘agency’ is a term reserved for the relationship between the broker and the client.) in Canada. Many of them are very hard working and smart people. How in the world would anyone ever develop a sustainable, competitive advantage in such an industry?
Well, first of all, John (not his real name) treats his position as a salesperson as if it were a stand alone business. It is my personal belief that every salesperson in every industry should consider himself or herself as a quasi-independent entrepreneur.
John has a business model for himself and his team of sales assistants. He views his broker as one of his suppliers—the broker supplies John and his team with office space, holds his license, manages the trust accounts, pays the phone bill and keeps the lights on. He doesn’t really expect much more from his broker although he counts on the firm (which is a nationally known company) to burnish its reputation so, at a minimum, his association with the firm is not a net negative. Trust in this business is hard earned, important to his success and easily lost. But what freedom—you don’t have to worry about keeping the lights on, paying the phone bill, staff or what have you—you get to concentrate on your own core competency (i.e., selling) and there is no upper limit on what you can make. If more people thought this way and they treated their sales as a personal business for life (PB4L), then we would have a lot more high performance and happier sales reps.
As a supplier, the Broker represents John’s major COGS (Cost of Goods Sold), taking a 30% bite out of his commissions. John is responsible for his own marketing and sales, personnel selection and HR policies as these relate to his own team.
By thinking strategically about himself as a separate business unit, John and his team have experienced tremendous sales growth. But all of this would not have been possible without a bit more ‘pixie dust’—John has spent the last 15 years ‘farming’ a specific geographic area—he now controls more than 20% of all listings and sales in ‘his’ area.
Now I realize this is an old real estate trick—i.e., concentrating your marketing effort in one target area. In the real estate business, listings are everything. If you control a listing, then buyers or buyers’ agents have to come to you. Eventually, if you control enough listings within a designated area (probably around 20%), you become the market maker—sellers have to come to you to get their properties listed and sold because you have so many buyers coming to your (already) listed properties that if one isn’t just right for Harriet and Albert Smith, you probably have another one that is just perfect for them…
John has so many of his signs in his designated area that: a) it discourages other agents from trying to set up (poach) in that neighborhood and b) people who want to list and sell would be think twice before listing with anyone else. The awful thought in the minds of potential buyers if it isn’t listed with John’s team might be: “What’s wrong with this house?” and that is the kiss of death in residential real estate. Perception is everything.
It turns out that farming a neighborhood and becoming its market maker are sustainable competitive advantages in an industry that really shouldn’t have any, given its fundamentals. So think about it—it took John 15 years of incredibly hard work to get to this position. He sells over $30 million worth of homes a year. He does this with an average house price still in the $200,000s as compared with other agents in larger, wealthier markets where average home prices are in the $700,000s or higher and he still manages to make it into the top 1% of agents in his firm. Now if decides to cash in his chips and sell his PB4L, what would he get for it? Well, nada, nothing. That’s why it’s called a Personal Business for Life.
Postscript: John could, of course, explore a way to perhaps pass on the value he has created. He could take his broker exams and set up his own shop. In that way, his clients’ loyalty would be to the Brokerage (his Brokerage) and not necessarily to John. So when it comes time to sell, John has (maybe) something to actually sell—the Brokerage’s client list and existing listings. But there are obvious problems with this approach—a) the clients may not port over to a new, unknown and untested Brokerage, b) maybe after John retires, the clients that have followed him to the new enterprise might drift away because they followed John and like and prefer working with him and c) having a national brand is important in building trust amongst clients and trust creates sales. Not having a well-known brand could then crater John’s sales. I am not sure that there is any simple solution to this problem because surely one of the objectives of entrepreneurship is to create something that has a life beyond your own; in that way, you would have created something that can make money for you ‘while you are lying on a beach’.
For real estate salespersons and entrepreneurs, this remains a challenge that requires more thought. What John has created, so far, is a PB4L that remunerates him richly. This is only half the equation in entrepreneurship. He and I haven’t (yet) solved the other half and, unless we do, what he has done is basically create a J.O.B. for himself, albeit, a highly paid one. Whatever John does though, he should clearly and doggedly keep what he has so dearly created—Build and Hold, Friend.
Innovate and Execute
Let’s return to the ten things you need to do to create a successful PB4L. Let’s work through the list, one at a time.
Selecting the Right Idea
If you ask me, the big idea is LESS important than good execution which obviously includes staff training. Most of my students think that the big, NEVER BEFORE TRIED, idea is most important but there are lots of companies that do very well with a good execution of fairly mundane things.
I am pretty sure that the only thing that is in infinite supply is ideas; numbers, for example, represent an idea and they are infinite. There are probably more than 25 million smart Americans in their basements at any one time trying to come up with the next big idea (like, say, Google). Ideas are being generated in huge volumes; that tends to suggest, in economic terms, a surplus of ideas while the skills to implement them are in much shorter supply and, hence, the latter will generally attract a higher price.
The market for new ideas, such as it is, tends to put a low price on them (just try to sell your BIG IDEA at a business model stage and you will see: a) how hard it is to do that and b) just how little you will get for it). Obviously, a startup that combines some type of innovation with good execution is better off than one with just sound execution. Fred Smith, when he started Fed/Ex, brought the hub and spoke system to the overnight package delivery business, essentially creating that industry.
Before that, it was thought to be an impossible challenge—if you had 60 cities as both origins and destinations in your US network that would have meant that you have 1,770 unique pairs of cities ((60 x 59)/2) and you would need to make 3,540 overnight flights to connect them all, an obvious impossibility. If you had instead five hub airports within easy trucking distance, you would have ten unique pairs of cities and, hence, could get by with just 20 overnight flights to connect continental USA …
However, most successful startups do not create new industries or are not necessarily first movers. Google wasn’t the first search engine; however, they did bring significant innovation to the table including: neutral search rankings, search rankings that reflected traffic loads on and links to a site, paid search links and auctioning off of paid search links. GradeAStudent.com, now GradeATechs.com, was not the first at home computer repair service but their execution was good and they used a back end system (GASnet) to automate their appointments and their billing systems.
Creating Business Models for the 21st Century
Digg.com’s founder, Kevin Rose made $60 million in 18 months. Kevin was just 29 years of age so there is still time for you!
A Happy Kevin Rose
While I do think great execution is really important, having some type of innovation in your business model can help you to create a sustainable advantage; i.e., you need to have some type of ‘pixie dust’ or differentiated value in your organization’s business model. This creates a franchise or concession for you that is hard for others to copy.
Let’s look at the Digg.com model. What makes it different? What is its differentiated value?
1. It is a new model for a newspaper uniquely adapted to the Internet.
2. It is not simply the online version of the New York Times or some classified advertising page transferred to the Internet.
3. It is a digital community made up of a fairly homogenous demographic: 80% are male, mainly young techie readers.
4. Readers are also contributors.
5. Readers dig up interesting stories from all over the web and post brief synopses to the site and links to them whereupon other readers vote on them—the most popular ascend the page.
6. The site harnesses the competitive instincts of the readers/contributors to compete to see whose story will lead.
7. The site works because of its homogeneous demographic—contributors only post stories that will be of interest to the group.
8. The site is dynamic—leading stories change by the minute or hour.
9. Digg.com’s cost for headline writers = ZERO.
10. Digg.com’s cost for journalists = ZERO.
11. Digg.com’s cost for editors = ZERO.
12. Digg.com’s cost for distribution = ZERO (at least, the marginal cost is practically zero).
This is a lot of pixie dust. I think Digg.com is important for another reason—I believe that it is important for communities that are working together to be reading the same things, to share a common culture. If you think about it for a moment, many of the communications you have in a given day are made much easier by possessing a common culture; you don’t have to explain where you are coming from and the context of what you are saying in every conversation you have.
Now the innovative nature of Digg.com would be pretty useless without good execution so creativity is a necessary condition for the kind of success Mr. Rose has had, though not a sufficient one.
Add Differentiated Value, Innovation and ‘Pixie Dust’
To build sustainable business models, you need to have control over some type of ‘factor of production’.
When my wife and I took the mule train to the bottom of the Grand Canyon to visit Phantom Ranch, I realized how valuable the concession was to operate the service. First of all, it’s a monopoly service. Second of all, it operates in one of the seven wonders of the world, a sacred place. Thirdly, there is practically unlimited demand– you need to book ahead many months or you won’t be going.
Phantom Ranch Canteen
How would you like to control the bridge from Windsor to Detroit which in the first 11 months of 2005 carried 8.9 million vehicles and is one of North America’s most congested choke points? And every one of those vehicles paid a toll to Manuel Moroun’s company. Now it appears that Mr. Maroun has negotiated a 90 year agreement with the Wayne County Port Authority to build another bridge. The Port Authority is rumored to get a 2.5% royalty. Sheesh. That means that Mr. Maroun gets 97.5%. Seems like a pretty good deal for him.
Business models that work need to have some kind of differentiator; some type of ‘pixie dust’, the magic that makes a business work. For a National Football League franchise, it is the right to operate an exclusive franchise within a defined geographic area and exploit all the revenue rights within that area– tickets, merchandise, suite rentals, sponsorship, signage, parking, etc. and to share in national television revenues.
Most entrepreneurs who don’t have some type of value differentiator either can’t build sustainable businesses or the ones that they do build produce no more value for them than if they just went out and got a JOB.
The role of an entrepreneur, in my view, is to build a business that creates more value than that, one which can take on a life of its own– i.e., survive the passing from the scene of its founder or make money for its owner while she/he is lying on a beach. The latter is the preferred option, obviously.
A spa, for example, might have some pixie dust because of its high end location or because it has some highly sought after hair stylists or because it has some sophisticated software that runs its appointment calendar and inventory of products and reverses out some of the work to its clients (e.g., they can self book online).
A friend of mine, Rob Hall, runs Pool.com, a business that revolutionized the backordering of domain names. Instead of paying $60 to backorder a domain name that may never delete, Pool.com allows you to register your backorder FOR FREE. You only pay if Pool.com is successful in getting the name for you. Guess which site gets most of the backorders now? (BTW, over 5,000 dot-COMs delete every day).
Pixie dust/value differentiation– think about it, see how you can add some to your business and watch your revenues and margins grow.
Creating a Compelling Value Proposition
Demonstrating your value proposition from your client’s point of view is a powerful tool in sales and I don’t care if you are selling vacuum cleaners, architecture services or hockey tickets. Clients and customers don’t really care what cool technology you are using or incorporating in your product or service or what, in general terms, it can do. What they want to know is, what can it (you) do for me? And usually, that means, what can it (you) do for my bottom line?
Recently, I ran into Yoga Specialist, Heather Moore, at Mountain Goat Yoga Centre in Kanata. Heather is in her first year of training Ottawa Senators players who are trying Yoga for the first time and I wanted to know how it was going. She told me that the European players, especially her Russian players, were really into it. They were seated at the front of the class. Some of her North American players tolerated it and some thought Yoga training is for sissies.
She thinks things will go better when they get their own Yoga mats with their names on it (she admitted that she wasn’t the biggest hockey fan before and didn’t know all their names). Knowing their names will mean she can call out recalcitrant players and encourage others.
Yoga uses your own weight to improve your flexibility and core strength and, at advanced levels, is hellishly hard. It makes sure oxygen gets to all parts of the body and promotes faster healing. It gets stress levels down and, if you don’t think stress levels are high for professional athletes, you don’t know much about sports. How would you like your on-the-job performance rating done every day and on the front page of your local newspaper too?
More core strength, more flexibility, greater agility, better balance, faster healing and lower stress levels are sure to be good for hockey players. They need tremendous levels of dexterity to play in the National League. They need strength too but not brute strength like NFL players do. Long lean muscles will beat muscle mass in the NHL.
It turns out that, in all probability, a very small investment in Yoga training will result in very large benefits for the Sens by reducing the number of player days lost to injury.
Check out the spreadsheet (http://www.dramatispersonae.org/ValuePropositionOttawaSenatorsMountainGoatYogaCentre.xls) I did on this which I have uploaded to my server in .xls format so that you can download it and save it as a spreadsheet and fool around with it yourself on your PC.
(For an investment of just over $7,000 in Heather’s Yoga instruction fees, the Sens reduced team injury costs by over $350,000 in the 2006/2007 Season according to my rough calculations… a pretty dram good ROI.)
See if you can adapt it for your product or service or create one like it from scratch. Try to show how one single customer or client benefits in terms of cold, hard cash by using your products or services…
There are other benefits too for the Sens*. For example, if the team earns more points during the regular season and, as a result, attracts more fans, revenues will increase. Further, if the team has, say, one more home playoff game as a result of a stronger, healthier team then benefits from Yoga training climb astronomically.
(* The year the Sens started doing Yoga they also went to the Stanley Cup Finals…)
And lastly, hockey players are human beings so reduced injury means reduced human suffering, and that is a good thing…
Self-capitalizing (Bootstrapping) the New Enterprise
I have felt for a long time that VCs are heading in the wrong direction; they should NOT fund startups. Rather, they should wait until startups have proven themselves in the marketplace. It’s kind of like watching for tall shoots in a field of grass. Those are the ones they should fund. It’s better for VCs, better for the national economy and, interestingly, better for startups too.
It’s better for VCs because they will fund more winners and fewer losers and generate better returns for their investors. This, in turn, will attract more capital to the industry which is good for innovation overall. It’s better for the national economy since careful rationing of scarce capital will provide higher overall growth rates. And finally, it’s better for startups, in my opinion, to focus on: a) building a sound business model, b) self (bootstrap) capitalization, c) using smart (guerrilla) marketing to capture customers inexpensively and d) generating real cashflow from real clients and customers.
The founders of these businesses will find it much faster and much less frustrating to find customers first rather than spending nine months or more hoping to attract VC funding or going after government grants. They will also get help from clients in other ways such as designing the final product or service. It’s like a war plan—as soon as your contemplated business model comes into contact with customers, it will change; they will force changes that YOU CAN NOT PLAN FOR.
Finally, the founders of these businesses will get to keep more of the equity in their businesses if they do a deal with a VC firm later when their business is more mature and, frankly, they are more mature. Nothing gives you more leverage in negotiations with VCs than the fact that you have enough cashflow to fund the business without them.
Is lack of access to capital really the main barrier to entry for most entrepreneurs? I believe that the stated lack of access to capital by many would-be entrepreneurs is more of an excuse than anything else. Here is my (absolutely unscientific) bar chart of what I think are the main sources of capital for startups. (I leave it to a future grad student to prove it or disprove it.)
Home Equity Loans
Soft Capital #
Deposits, Retainers ##
Government Grants/Tax Credits
Patents and Royalties
# Mom, Dad, Rich Uncle Buck, co-guarantors
## Plus Progress Payments and Draws
### Investment by competitors, near competitors, future clients and future suppliers
### Employee Stock Ownership Plans
This is just my experience talking—who knows I may be wrong but most entrepreneurs are, by definition, people without money. Again, in my experience, people with money are not entrepreneurs, they are called ‘old money’ and old money anywhere, tends not to do very much—it sits around collecting coupons not starting high-risk new enterprises.
I always laugh when my students in entrepreneurship at the Telfer School of Management at the University of Ottawa go to a bank for the first time and ask for a loan to star a business—Canadian banks only want to lend to people with collateral; i.e., people who already have money. It took 2006 Novel Peace Prize winner Muhammad Yunus of the Grameen Bank to realize that a bank’s real job is to lend money to people who need it—a completely novel thought, it turns out.
Dr. Muhammad Yunus, Nobel Peace Prize Winner 2006
Dr. Yunus also realized that the way out of poverty for the vast majority of people on this planet is to become (at least at first) micro entrepreneurs. In fact, Grameen Bank lends on a priority basis to people who have the greatest need and the least money! And you know what? Their loan loss ratio is tiny and they make a profit too.
It takes very few bank resources to approve a home mortgage, give out a credit card or make an auto loan. Banks think nothing of approving a $350,000 home mortgage—if your credit score (your Beacon Score) is high enough—in minutes. But go to the bank for a business loan of $100,000 and you will find that: a) they need a large amount of data from you and b) they need an expensive infrastructure in terms of on-the-ground bank managers, loan officers and back office types to approve your loan application. I believe if it weren’t for the fact that successive Finance Ministers lean on the Chartered Banks in Canada, they would choose to turn down every small business loan request.
Other students will tell me that they want VC funding. I believe that most startups have about as much chance of attracting VC funding as they have of winning the annual Ottawa Hospital Lottery and probably less. First of all, most business startups don’t have the growth prospects to attract VC funding. Secondly, most startups are in industry sectors that don’t appeal to VC funds anyway. Thirdly, most startups should be much further along in their development before they go after VC funding, if they ever do.
If your business has real cashflow and real customers and clients, you are on a much more even footing with respect to negotiating a fair agreement with VCs, if that is what you choose to do. 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.
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, learn everything you can about self capitalization—you are going to need it.
Use Smart Marketing (Guerrilla Marketing and Social Marketing)
You have to give credit to KFC for some terrific Guerrilla Marketing. I realize that GM is all about ‘substituting brains for money’ in the marketing wars but KFC used brains AND money in this.
To tackle households that are zapping their ads using TiVO or their PVRs, KFC ran an ad with a hidden message that could only be deciphered if you play it back in slow mo. If you could figure it out, you could then go to KFC’s website and get a coupon for a free sandwich. The traffic on their site went up by 40%. (Business Week, April 17, 2006).
So they got people to watch their commercial (over and over again), boosted traffic on their website AND in their stores. I still think this example meets the test of what is (and is not) GM since you could look at it this way: how much money would they have had to spend in conventional marketing to get this kind of boost in terms of CPM (thousand pairs of eyeballs on their marketing message) and customers in their stores?
There is another form of GM that is taking hold today too—a huge expansion of social marketing.
In the past, most GM has been about some kind of stunt that attracts the attention of the established media—they hear of a neat story and it then gets a lot of play on the local or national news, in the local newspaper or gets you a few interviews on radio. This is called ‘earned media’. Nothing wrong with that—you can certainly do a lot more with earned media than a ton of paid advertising.
But social marketing is playing a much bigger role in helping startups grab attention and market share. A former student of mine, Ryan Anderson, former Director of Communications at FuelIndustries.com and now owner of Fat Canary Communications, gave a wonderful lecture on the power of social marketing. Ryan uses the term ‘Social Startup’ to designate an enterprise that uses social marketing to get traction in its marketplace.
This is not to be confused with a Social Enterprise; the latter can be a not-for-profit, a charity or a NGO (Non Governmental Organization) that performs good works. They too can use social marketing to further their goals.
You can read more about social marketing on Ryan’s blog at: http://www.ryananderson.ca/.
In simple terms, the Internet has changed the media equation—instead of limited bandwidth (a few TV channels, a few newspapers and a handful of radio stations in most local markets a generation ago), today we have millions of bloggers, Twitter users and Facebook or MySpace profiles plus hundreds of TV channels.
Social marketing allows you to disintermediate the established media—to go around them to talk directly to and with your customers. I build my own PWSs (Personal Web Sites (it shows)) but at least I disintermediate the techies—I can communicate directly with my students, clients, friends. There isn’t much in the form of two way communication because I am so pressed for time. But social marketing really requires that you should build-in a way for a conversation to take place not only between you and your audience but between audience members as well.
An example Ryan used in his lecture demonstrates the power of social marketing—a small South African winery (BTW, it makes good wines, otherwise this wouldn’t work and, in fact, would probably result in reverse marketing if the wines actually sucked) sent a case of their wines to an influential blogger in California and told him they wanted to sponsor 100 Geek Dinners in Santa Clara County—no strings attached. They didn’t have to blog about the company or their wines, they just wanted people to try them.
He wrote about the offer on his blog and the winery sent out 100 cases of their wines. Even though they didn’t ask for it, they got huge exposure on blogs everywhere in Nocal.
Their sales went up by a factor of six (!) in less than two years. The total cost for the campaign—around $40,000. That represents less than half a second of the cost of a 2008 Super Bowl ad. But even assuming that the NFL and its broadcaster would give you a 30 second Stupid Bowl ad for $40,000 (trust me they won’t), would it have resulted in a 500% climb in sales? I doubt it.
Social marketing (in this case, harnessing the power of the blogosphere) is about engaging your customers in a dialogue, having a two-way authentic conversation with them, listening to them and making changes as you learn from the conversation. Ryan told us another quote: “If people talked to people, the way that marketers talk to people, they would punch you in the face!”
(Note: Ryan said that he doesn’t hire anyone who doesn’t have their own blog. He told our class that a CV is fine but it is pretty static. A Blog that you have been keeping for a few years tells him a whole lot more about you. Are you smart, creative, hard working, have good values, etc. You can get a free blog and set up one for yourself in less than a minute, so do it! I use WordPress.org but you can find many sites that will help you with this.)
Mass Customizing Products and Services Using the Internet
Nothing has shaken our world quite like the Internet revolution that has taken root in our culture and economic life in a massive way since 1993. It is continuing at a fantastic pace—the changes are still happening though with less hype since 2001and more substance. Much of this activity is occurring below the waterline, so to speak, and will profoundly affect our world in the next half century.
Jack Welch said that in his 40 years at GE nothing matched the Internet in terms of its technical or technological impact and Jack saw a lot during his career as a CEO.
Professor John Callahan, at Carleton University’s Sprott School of Business and his research partner, Mr. Scott Mackenzie, have created an important contribution to understanding the impact that the Internet is having on how we conduct business-their curve shows that it is now possible for the first time in history to get custom outputs from standard inputs and processes.
Getting Custom Outputs from Standard Inputs
What this means is that we have transitioned from the days of an artisan or guild worker (now called a ‘consultant’) who produced one off creations to order (made to measure suits, for example) through to mass produced products (Henry Ford’s automobile assembly line) and now to made-to-order, custom products created from standard processes and inputs (like the way Dell’s web site or call centre allows each client to customize their PCs to their specifications using only standard Dell inputs and processes).
By reversing out the design work to the customer, Dell has created a powerful position in the marketplace and become one of the largest PC makers on the planet.
The internet is all about automation and reversing out the work. Doesn’t apply to me and my business, you say? Well, it turns out that most of us have the ability to move up the value chain by using some of the revolutionary aspects of the Internet in our businesses.
Let me give you another example. We have a number of home builders who are figuring out that they are soon going to be in the web site operating business and not the home construction business at all.
Today, with all due respect, the home building business is still largely a craft-based endeavour which, were it compared to the computer industry, would still produce five function calculators that look like primitive World War II vintage Turing machines (used for breaking Japanese and German codes)—big, clunky and expensive.
Ultimately, a home builder’s web site will allow consumers to ‘goggle’ in to the site in three dimensions, to choose the model that they want, the lot that they want and then to load up their shopping carts with the features they desire. As they make changes to their design and add and subtract amenities, the calculator will tally and show them their costs.
Visa and MasterCard are moving upstream—their credit cards will be used for everything including buying a new car or buying a home. There is a small but fast growing market for power cards that carry credit limits in the hundreds of thousands of dollars.
This home buying e-commerce transaction using a credit card is only the tip of the iceberg. In all probability, it is the e-business applications that will have the most dramatic impacts on home building. Pre-authorized suppliers and sub-trades will log on to the builder’s web site to estimate the volume of work required and to bid on it.
Scheduling, based on just-in-time delivery, will be net based. Payments will flow business to business via e-payments. Municipal inspectors will log on to see when they are required for inspections.
Municipalities will recognize that home builders are their clients. The number of separate subcontractors and trades will fall from 25 or 30 today to perhaps just 8 or 9.
If former Russian President, Boris Yeltsin in his early days as a construction boss in Sverdlovsk (1,000 miles east of Moscow) could build five storey, wood frame apartment buildings in five days (albeit with a huge crew), surely we can learn to build houses in 45 days or less at higher levels of quality, with fewer defects, higher margins for the industry and lower prices for consumers.
The home builder will become a web site operator. Legal closings, land registry documentation, mortgage financings … all will be web enabled. And what does this do to profitability? There is no doubt that efficiency will climb, productivity will increase and in every instance where this has occurred, more wealth is created for all to share.
Americans are early adopters of technology and none is more earth shattering than their embrace of the internet. As a result, the Internet is eating an enormous hole in the world’s economy. After all, it does not matter how little someone is paid in the third world, the Internet can do it faster and cheaper.
Old-line industries are going through incredible re-engineering.
A national advertiser who wanted to launch a national billboard advertising campaign just five years ago went through a six to twelve month process. They drew up a campaign theme, got the creative done by an agency, had the agency contract billboard locations with up to 25 regional billboard companies, sent the artwork out to all of them by courier, received back the proofs from all 25 for approval, made the necessary changes to get consistency in the artwork, sent them back, checked them again, signed off finally. The images were then often hand painted on huge strips and, at last, a crew went on site and glued them to the board.
Today, billboard companies can put their inventory of available billboard locations on their web sites and agencies can book and pay for that inventory on line. Agencies then can download their artwork over high speed lines and, as billboard companies merge and become national and as they move towards replacing conventional billboards with high definition video boards, an agency can place a national campaign in a matter of hours or days. It does not matter how little a third world labourer is paid; the web can do it faster and cheaper.
Harnessing the Internet effectively means:
a. you can ‘make money while lying on a beach’—i.e., your enterprise can run without you being there every second to manage it;
b. the enterprise is scalable—outputs grow non-linearly with inputs—i.e., more hours worked will produce way more money for you;
c. you have reversed out the work—let your suppliers and customers do the work for you like, say, Digg.com does;
d. you can mass customize products and services for clients in a cost effective manner;
e. you can connect with new clients and customers in a cost effective manner using things like social marketing!
The entire global economy has to move up the food chain and the only way to do this is to invest in education, medical care and social order, which happen to have been Canada’s priorities for the last 50 years. We have it right, now we just need to execute the plan.
Find Pre-launch and Launch Customers and Sell, Sell, Sell
Business Week published (Seton Hall University, Stillman School of Business study, August 25, 2003) their take on why most businesses fail. I’ll bet you that their 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.
To me, a business that does not generate enough revenue is probably (by far) the biggest cause of business failure. Perhaps, 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. In other words, they may not be interpreting their stats in quite the right way in as much as their independent variables are not truly independent and, hence, their take on causation might be wrong.
What are the three most important things for a startup to focus on? SALES, SALES, SALES. The focus on sales is also an important requirement for established businesses. I mean how long do you think mighty IBM would last if it didn’t collect its receivables? IBM sells around $85 billion worth of goods and services a year (one customer at a time, btw) so that means around $7 billion a month. If they don’t collect for two months that means that they would have a cashflow shortfall of $14 billion so my guess is that even IBM would be in serious trouble in less than 60 days.
Today, if you have enough revenue, you will get financing, not the other way round. This is the lesson of the false boom of the late 1990s when VCs and others financed startups with interesting business models but no revenue prospects. This has never worked, in any age.
If you have enough revenue, you can meet the cashflow demands of debt servicing costs so a focus on revenue growth is vital. One needs to not only generate the revenue but collect it too. This seems self-evident but a lot of startups don’t do billing, invoicing and collections very well and many don’t do selling or pre-selling very well either.
In my experience, the number one reason for failure is the absence of buoyant revenues. I mean how many businesses have you heard of folding if their revenue numbers are going up and up?
Remember the Golden Rule: “He/she who has the gold, rules.” Put another way: “Cash is King (or Queen).” If you have real customers and real clients and real cashflow, you have POWER.
Another thing you have to do is find launch clients.
As soon as you come into contact with a real customer, your business model is likely to change (for the better). Clients who plunk down their money (this is called a deposit), are giving you additional confidence that you are on the right track.
NHL hockey fans in Ottawa gave us $22 million in cash (deposits on season tickets and sponsorships (signage, media rights, pouring rights, product rights, etc.)) for the expansion Senators in December 1990, some 22 months before the first game was played (in October 1992)!
Executing Expertly, Showing Leadership and becoming a Trusted Member of your Community and Business Ecology
Jack Welch and Suzy Welch in a Business Week article (Feb. 4, 2008) state that a CEO (and a prospective President of the US in this an election year in the US) need five basic leadership skills:
1. They need to be authentic and, hence, trusted;
2. They have to have vision as well as be able to communicate it effectively;
3. They have to be able to hire great people and sometimes fire them too;
4. They need to be able to bounce back from a setback;
5. They need to be able to “see around corners”; notice changes in their markets pretty much before anyone else does.
They also mention another requirement which I would put under the category of management rather than leadership:
6. They have to be able to execute.
These are pretty good guidelines. I would think that they also apply to entrepreneurs but I think entrepreneurs need a few more:
a. They need to be able to sell;
b. They need to be able to control costs;
c. They need to be able to make up their own rules as they go along;
d. They need to be creative in many of the things they do;
e. They have to bring a sense of urgency to each day;
f. They don’t take ‘no’ for an answer;
g. They need to buck the system and be comfortable doing it;
h. They have to be self reliant;
i. They need to be able to deal with risk and uncertainty;
j. They have to be able to set and achieve goals but be flexible enough to change their plan in an instant;
k. They need to be able to borrow best practices from wherever they find them;
l. They need to know when it is time to give up on a business and start something else;
m. They need to be able to work long hours and to be effective during that time;
n. They have to set priorities;
o. They have to see their whole business ecosystem as part of their TEAM;
p. They have to understand human psychology: the psyche of their employees, their clients, their suppliers and they have to be better poker players than they are chess players- they need to be sympatico;
q. They need to be humble, learn from their mistakes and never make the same mistake twice;
r. They never try to go back and revisit something that didn’t work already once- they just move on;
s. They can cope with high levels of stress.
I am sure there are a ton more characteristics of successful entrepreneurs but this a pretty good list to start with. If you get 70 or higher on our ECQ Test, you probably have what it takes to be an entrepreneur.
Take the Test:
There is nothing more important for you and your career than your ethics and your reputation.. When I was just starting out in business in 1982, a wealthy lawyer by the name of Kent Plumley (he made a lot of his money as an early stage investor in Mitel and later in Newbridge) told me: “Bruce, the number one thing you have to remember is: protect your reputation.”
I thought that was easy for Kent to say, given that he was sitting on millions. But as I grew older I realized he was right. Do you know why?
Well, here is how it works:
1. You work hard (for years) to establish a reputation for good work, high ethical standards and trustworthiness.
2. Trust creates an environment for you where clients will send you more and more of their work.
3. Trust creates an environment where your clients will refer other clients to you.
4. Trust gives you breathing room when you do make a mistake—people will cut you a lot of slack even then because they trust you.
5. Trust creates a personal brand for you individually, independent of your law firm or accounting practice.
6. If you change firms, your clients will follow you because of their trust in you and because they have confidence in you.
7. Trust creates a brand and a brand creates a marketing opportunity which you can turn into sales or as my wife, Dawn likes to call it ‘IGA money’—money that you can touch, feel and spend.
One of the best recent examples I have seen of this process at work is the current marketing for Clarica. Their television ads are done with a sense of humor and have made a lasting impact on the marketplace I am sure. But why would Clarica have invested hundreds of millions of dollars in a marketing campaign like this? It is instructive to find out why.
First, let me ask you another question. How many of you have wanted to get up off the couch after watching one of their commercials and place a call to a Clarica agent to buy some life insurance? I don’t think there is even a call-to-action at the end of theses commercials; selling life insurance is not like selling K-Tel slicers and dicers: “Call now; operators are standing by to take your order at 1-800-555-5555!” Well selling legal and accounting services isn’t like that either (or at least, mostly, they’re not. You have to ignore the later night commercials by lawyers asking if you have recently been injured in an accident.)
So why does Clarica do it? If you look at the diagram above, they market through a marketing process to build their reputation and brand. A good reputation and solid brand creates trust in Clarica in the minds of the public. So when a life insurance salesperson sits down with John and Sally Smith in their living room to sell them life insurance, John might say: “Oh, I have heard of you!” John and Sally already trust the salesperson before their meeting ever takes place.
They trust Clarica a heck of a lot more than they trust, say, the Pirate Insurance Company of Kinakuta*, who they have never heard of before and who hasn’t spent a ton of money creating their brand and a reputation.
(* Thanks to Neal Stephenson for inventing this country.)
Note that Clarica doesn’t sell a thing through their marketing; they have established a separate sales process (having thousands of life insurance agents out there, making meetings and actually doing the selling.) Lawyers and accountants can learn a lot from this example I think.
Note that a sale, any sale, actually gets completed because of trust—the client trusts you and, therefore, are willing to buy from you. That’s the real secret to selling—creating trust. Remember, people like to buy from people they like and trust.
When I was starting out, one of the real estate lawyers who helped me also helped herself. We noticed that whenever we were closing on a property, another developer always seemed to be in the same area, sniffing around. It wasn’t long before we figured out there was a leak in the law office we were using at the time and, with the help of the senior partner, we set about trying to prove it. Unfortunately, it turned out to be the case. It was a devastating blow to the firm and the lawyer involved was summarily dismissed. She was never a significant player after that in the real estate business in Ottawa.
I don’t care what city you practice in a small city like Ottawa, a mega city like NYC or a city like Buenos Aires, the Paris of South America. Every city is controlled by a small number of business and political leaders. In Ottawa, the number of real movers in tech or real estate or any other major economic engine probably numbers no more than 500. In NYC, it’s more but probably not more than 1,500. So it’s a small number really.
What that means is that if you muck up your reputation, you probably have to move. Better to keep it in the first place, right?
Make Your Own Rules and Set and Achieve Your Goals
One of the hardest things for my students to learn is that there are no rules in the field of entrepreneurship. By that I don’t mean that you go outside the Law; I am not talking about those kinds of rules. You always obey the Law and protect your reputation; the latter is the most important thing you own BTW.
But how many times have you heard: ‘We don’t do it that way because it isn’t done like that and, anyway, no one else does it that way either’?
Entrepreneurs are constantly asking BIG questions and thinking of ways to do things differently. It is usually this kind of creativity in EXECUTION that creates the most value for entrepreneurs. Fred Smith’s brilliant insight that he could develop an overnight package service (Fed/Ex) by reducing a 50 by 50 matrix of origins and destinations (with its impossible requirement for 2,500 overnight flights) to a handful of flights by developing a hub and spoke system was responsible for one of the great startup success stories of the late 20th Century.
Let’s remember what Gino Rossetti from Detroit asked the owners of the Detroit Pistons on a visit to Joe Louis Arena: ‘How come the people who pay the most (i.e., suite holders) are the furthest away from the floor?’ Joe Louis only has one ring of suites, which are located at the nosebleed level.
The answer was that all arenas are built that way; it’s just the way it’s done. But Gino whipped out his sketch pad and said: ‘What if we had two lower rings of suites– the first one just 12 rows from the action on the court?’
That single insight revolutionized arena design and economics. It not only increased the number of suites in these buildings, but people also paid more (a lot more) for private suites close to the floor or ice surface. Plus it gave the ownership committed revenues (because they signed 5 and 10 year deals with leaseholders) and it gave them the ability to finance new arenas on a commercial basis.
It created the opportunity to bring all the seat holders closer to the action because the balconies created by the lower rings of suites could be stacked closer to the arena level much as in an Opera House with rings of private boxes.
Less volume in the building creates a less expensive but more intimate structure which benefits not only the fans of major league sports but concert goers too. So Gino gave the world not only a much higher revenue-generating sports facility but there is a qualitative improvement too.
Students often ask me how prices for new products or services are arrived at. They seem to feel that there is some form of government control or other, officially approved, algorithm that generates a price. I tell them the story of Butch Cassidy (in the film BUTCH CASSIDY AND THE SUNDANCE KID) when he was challenged for the leadership of the gang in a knife fight. Butch says: “Before we fight, I have to explain the rules.” His opponent, a giant of a man, says: ‘Rules, in a KNIFE FIGHT?’ Butch then walks up to him and kicks him in a vulnerable spot and then stomps him into the ground saying; “Rules? There are no rules in a knife fight.’
Pricing is a bit like that. In a competitive marketplace, you can charge whatever you like. It may be above your cost (often way above, in, say, the marketplace for baseball players), at your cost or even below cost (these are called loss-leaders; e.g., selling below cost milk to get folks into your supermarket. Ever notice how the milk is always furthest from the door in every store– that’s to get you to impulse buy when you are walking through the facility.)
Rules? There are no rules in entrepreneurship; you get to make up your own. You just have to hope the set of rules you choose, works; i.e., they underpin a viable business model.
Lastly, I am not a big believer in detailed planning.
I am a big believer in having great business models as you know from reading this essay but plans, well, they are usually out of date shortly after you finish writing them.
Good Generals know that war plans are out of date the moment you make contact with the enemy. Your enemy is not just going to sit there with large KILL ME signs taped to their backsides. They are going to move and react to what you are doing so if your troops can’t show some adaptability in the field—they are likely to wind up dead.
Entrepreneurship is like that. Your competitors want to kill you; don’t kid yourself about that. They want to buy you out by taking your customers away from you, one at a time. As Tom Cruise said in the film Jerry McGuire: “We live in a cynical world. A cynical world. And we work in a business of tough competitors.”
One way to counteract that is to set goals for yourself and your team, both near term goals (like monthly sales targets) and longer term goals (we will get x% of the market by year’s end). Tell your goals to your staff, put them up where everyone can see them—democratize information!
Also, get rid of negative language. Never say: “I’ll try.” Say and think to yourself: “I’ll do it.”
Humans are uniquely able to visualize, self actualize and internalize goals. If you can see yourself doing something, your chances of doing it are much improved. When I was 11, I was the youngest member of our gymnastics team but I had a hard time doing one particular flip off the springboard and over the high horse. Our gym teacher, a tough task master by the name of Major Anderson told me on a Thursday that if I couldn’t do it by the following Tuesday, I was off the team.
I practically cried when he told me that.
I practiced and practiced but could never get it right. I knew on Monday I was cooked but that night, I had a powerful dream—I saw myself hammering that springboard and doing a perfect flip. The next day I went into gym class and a couple of the guys were sniggering as I lined up to attempt the flip. I executed it perfectly and made the team.
In my experience, there are a number of reasons why entrepreneurs choose the life of an entrepreneur. They include:
a. They feel they can make more money or they see the need to make more money.
b. They believe they can have more flexibility in their schedules.
c. They think that they don’t have other viable choices; e.g., they get laid off or can’t find a JOB.
d. They want to provide a legacy for themselves and their families and kids.
e. They want the fame that goes with success.
f. They want to prove to themselves and others that they can do it.
g. They want to be their own boss.
h. They want more responsibility sooner in their careers than they could get in a typical JOB.
i. They don’t like bureaucracy and rules—they want to make up their own rules.
j. They want to belong to a team and to feel like they are part of something that is bigger than themselves.
k. They want to give back to society—if they have success, they can better help their fellow human.
l. They don’t want to become a burden on society.
m. They want to be responsible for themselves and make their own decisions.
n. They feel that they can create more interesting work for themselves than others can create for them.
Of all of the above, I believe, after thousands of interviews with entrepreneurs, that the last reason is the most important.
We are driven to be creative. We have these huge brains and dexterous hands with opposable thumbs and there is a deep seated drive to use both.
Humans are constantly tinkering with their environment. Living in Dilbertville is not very satisfying and, notwithstanding all the risks, effort and heartache that can come with an entrepreneurial lifestyle, it is still the choice of many, many creative people.
The kids who took over the Internet from DARPA, the DOC and ICANN in the 1990s wanted to move there—to a fantasy place where there were few rules and abundant territory to be explored and developed. Remember, poets, artists, architects, writers, sculptors, musicians, videographers, software architects and novelists are entrepreneurs.
They come to study with me too because they want to be rewarded for their creativity, they don’t want death to be a career move and they want to learn to get rich while they are still alive.
Postscript: I often get asked about how I got my start in real estate. Answer: I bootstrapped it. In many ways, real estate ownership is PB4L creation for DUMMIES. In any event, I reproduce for you below, the slides I put together for a speech on:
HOW I BOOTSTRAPPED A $100 MILLION REAL ESTATE BUSINESS IN LESS THAN TEN YEARS
Bootstrapping and Trust
1025 Merivale Road, Ottawa ON: Lipstick Job, Real Estate Flip
1025 Merivale Road, Ottawa ON: Flip Spreadsheet
Bob Compeau: Standing Your Ground
He/She Who Has the Gold, Rules: Golden Rule
Getting Into Bed with a Whale Can Lead to Extinction for the Minnow
Campeau Corp Buy-Out Spreadsheet
Buy Low/Sell High: Easy to Say, Hard to Do
Brookstreet Hotel/Marshes Golf Course Spreadsheet
Villager High Ranch Bungalow
Villager High Ranch Bungalow: Ground Floor
Villager High Ranch Bungalow: Lower Level
The Granny Flat in Sanata Cruz, California
In-Home Suites and Apartments
Making Housing More Affordable
Failure Because You are Not the Market
Blue Heron Mini Storage: Go Under the Market
Stay out of the Way of the Whales
Develop Some Type of Competitive Advantage
Be a Good Neighbour
I’d Rather have a 100 clients in a Building than 1; If 1 Leaves, You Still Have a 99% Occupancy Rate
PETA, Presidential Executive Travel Apartments
PETA: Add Some ‘Pixie Dust’
Maple Leaf Design and Construction: Bootstrapped
Borrow Your Clients’ Credit Scores
Invest in Distressed Areas Close to Major Infrastructure
Don’t Follow Everyone Else Off a Cliff
Triole Street Spreadsheet
Going for Broke: The Return of the Ottawa Senators
Bootstrapping the Ottawa Senators
Trying to Make $50,000,000 in a Land Flip to Pay for the Team
Make a Profit
You’ll Never, Ever Get a Franchise for Ottawa
Young People Have a Lot to Contribute, Especially Sweat Equity
Appendix I—The Impeccable Warrior
Ever wonder how Actors get Shakespeare right? How do they memorize all their lines and deliver them so eloquently and profoundly?
They practice. A lot.
I worked for a really tough guy in the 1980s—he was a PhD in Engineering Economic Systems from Stanford and that is one tough degree to get at one of the world’s top universities.
He didn’t brook shoddy performances and, frankly, was no different than the toughest Director—he wanted the best from his employees (actors) and demanded that from everyone, including himself.
Everyone I knew who worked there kind of feared him. One day, we were expected to make a presentation to a senior member of the GOC (Government of Canada) and he asked me: “Did you practice your presentation?” I told him not to worry, I am a natural, a good presenter and it was in the bag.
Naturally, I flopped badly. I was embarrassed and promised him it would not happen again and it never has.
Ever since that day, I prepare for every meeting, presentation, lecture or speech I give. Always. No exceptions.
(* In his book: Outliers: The Story of Success, Maclom Gladwell (Little, Brown) posits a 10,000 hour rule: if you want to be a top performer in anything, you need to put in at least 10,000 hours of practice. That is about five years worth of normal 40 hour work weeks. I suspect that Gladwell is bang on. My PhD Thesis supervisor, Professor Max Neutze (now deceased) was a rather demanding person. He told me one day: “Don’t worry Bruce, the first million words are the toughest.”)
It takes me at least two hours to prepare for a three hour lecture and this is for a lecture in which most of the material is original to me. I still need time to prepare, to organize and to ensure that I will give my students full value for their time in my classroom. It is a performance and the students are my paying clients. I respect them, their time and the commitment they have made to come to the University, both financially and in terms of giving up years of their lives to be there.
When I first started teaching at Carleton’s School of Architecture in 1994, I noticed how committed the profs were—if they had a lecture coming up in a couple of hours, they always excused themselves and prepared. They would stop, sometimes mid-sentence, remember what time it is and, poof, they were gone to prepare. They earned my respect, for sure.
That is why I am so concerned about some of the business executives I meet and some of the students I teach who don’t know what it means to be prepared.
Even if it is only gathering my thoughts for five minutes, I know if I scribble down a few questions for an upcoming meeting, that meeting is likely to be far more productive.
Last week, I briefed the VP of a local property management firm on a potential client for his firm. I told him a bit about the client, the five buildings he owned, how many units there are in each building, what the vacancy rate was like, etc. I gave him a thorough briefing and organized a conference call for him to speak with the client who lives out of town.
About an hour before the con call, one of my staff told me that the President of the firm wanted to take the call—he felt that an important new client should have the benefit of speaking with the Pres of the company. So, fine, no problem. Or so I thought.
An hour later, we connect on a 3-way call and the first thing out of the President’s mouth is: “OK, so what’s the deal here?”
He knew NOTHING about the client, the properties and the job at hand. I was embarrassed for him but also for me. I recommended his firm after all and I was looking pretty stupid in the client’s eyes.
Now in my experience, if this was an American firm, he would have known everything he could about the guy on the other end of the line; he would have found out if they had any friends in common, whether they like the same sports, he would have been all over the guy’s website, he would have visited the guy’s five properties and he would have had a specific plan on how to improve the properties, their look, their management, their lease up, their rental rates, their landscaping, their maintenance, etc.
He would have found out ways to improve the guy’s bottom line. He would have convinced the potential client that hiring his firm and paying his management fees would represent a NEGATIVE COST. That is, the cost of hiring his property management firm would be more than offset by: a) reductions in vacancy rates, b) reduction in maintenance costs, c) increases in rents for each apartment, d) finding new revenue streams—like paid parking, paid laundry, maybe telecommunications towers or billboards added to the properties…
He would have had a spreadsheet prepared and ready to send the client. He would know the market and how to market the empty apartments in a cost effective way. He would have projections!
The company did not get the contract; I apologized to the client. I need to spend more of my time finding an alternative and I will never, ever refer anyone to that company again.
This is, I am afraid to say, very typical of Canadian Managers and one of the reasons why we have so few world class firms.
I have a kind of informal score that I keep in my head. On a scale from 1 to 10, firms that I have some familiarity with like, say, the Disney Company operate at around a 9.8 out of 10. That is about as well as you can possibly do. Anyone who has ever been to a Disney run Theme Park can see what they can do. It isn’t as easy as it looks. Trust me. They call their clients ‘guests’ and treat them that way—just like you do when folks come to visit with you in your home—and they call their employees (even their street sweepers and cleaners) ‘performers’, who must go to Central Casting every day to get into ‘costume’ (not ‘uniforms!) If you ask anyone at a Disney Park, even the most menial worker a question, they will know the answer or they will immediately stop what they are doing and help you until your problem is solved.
You know what many Canadian companies think about customer service? It’s a cost centre! That is why they are usually so bad at it. (It is obviously a profit centre, if you know what you are doing.)
In my home town of Ottawa, the organization that probably comes closest to working at a world class level is the Ottawa Senators. Now I founded the Sens so I am biased but the heavy lifting has all been done by others. In a small market like Ottawa, the Sens are in the top five or six in just about every revenue category. (They compete with 29 other National League Teams.)
I give the Sens around a 7.5 out of 10 which is about as high as you can achieve in a place like Ottawa. No local company has the depth to compete with a Disney but 7.5 is darn good anyway.
Now I am a Broker in the real estate industry and I can tell you that most firms in this industry in Ottawa probably operate around .5 to 1.5 based on my informal and completely unscientific scale. In other words, we are terrible.
Sometimes, REALTORS may put commissions ahead of clients’ interests; they may do a lousy job on their information packages and websites; they may hoard information; they may compete with each other in inappropriate ways; they may be lazy and unprepared; they may do little in the way of marketing unless pushed by our clients; they may get a listing and then practically never talk to a client again; they may pick the low hanging fruit; they may try to get the list price down for a fast sale; they may promise to do open houses and then don’t; they make the same mistake over and over again…
Part of my job is to get the folks to do what they should be doing—if you put clients’ interests first, I believe you will come out far ahead. One satisfied client will lead to two more. But trying to get REALTORS to change is proving harder than I thought.
Postscript: One of my pals runs Wilderness Tours (he is an expatriate American from Philadelphia) in Beachburg, Ontario. I think WT runs at around a 7.5 level too. It provides a fantastic experience for its guests. Joe told me that he works on “TPO”, Touch Paper Once. He tries to do everything just once—get it right the first time and never, ever have to go back and re-do it. I hope my current organization will get to that level some day. Right now, we do stuff over and over again until we get it right. But it would be a lot better if we could learn to do it right the FIRST time. Since paper is less a factor in today’s world, maybe Joe’s slogan should be “TAO”—Touch Anything Once. I also like the Tao analogy—it will certainly lower my blood pressure if my staff can learn the Tao.
(Taoism has to do with the ancient Chinese concepts of Yin and Yang (plus a lot more)—that is, every action begets a reaction. It is actually quite relevant to this essay because, if you think about it for a few seconds, if you do a bad job as a REALTOR, for example, that is likely to bring quite a negative reaction from your clients and the marketplace and the reverse is also probably true. So doing things right in the first place is synonymous with doing things once; if you practice TAO (as we have defined it here) you will become more proficient and efficient and effective, you will bring about positive reactions to your work, you will create positive energy around you, reduce your frustration and the frustration levels of those around you and be more in harmony with life in general. You will also probably make more money too and that can’t be a bad thing for you and your family.
I read Carlos Castaneda’s books on the Yaqui Way of Knowledge when I was a teenager hanging around UCSC. (A beautiful girl was involved naturally—it was the late 1960s after all.) In his books, Castaneda talked about the Impeccable Warrior and it had a profound influence on me. Now many people believe that Castaneda’s books are a fable rather than what he claimed them to be—first hand research of ancient Mesoamerican Shaman practices in the deserts of Mexico.
But be that as it may, I have told my students that to be successful at ANYTHING, they need to assert control over themselves and they need to develop patience. If you drink too much, stop drinking*. Not getting enough exercise, change your personal routine. Smoking and toking interfering with your health, memory and productivity, stop smoking and doping yourself. I like what Jack Dawson (Leo DiCaprio) said in the film Titanic: “Make each day count!” Life is so much richer if you are not hung over or under the influence of other substances…
(* There is an apocryphal story about a well known, New York-based developer who has a tendency to put his name on his projects. He inherited a number of residential apartments in the New York area from his Dad and then proceeded to build a fantastic real estate-based empire with signature buildings, casino interests and, later on, a hit television show. But there were some hiccups along the way. The story goes something like this: he was a teetotaler, a workaholic and a family man with a lovely wife and kids. For some reason, he got involved with another woman, installed her in a condo around the corner from his office and started taking long lunches and coming back to the office in mid-afternoon smelling of booze. Now how long do you think it took to ruin his family, his business and his reputation? Incredibly, he accomplished all of this in less than a year. Tenants were calling, bankers were calling, suppliers were calling and he was nowhere to be found. Once confidence and trust in you goes, the rest follows in a hurry. A few years later, he stopped drinking again, he dumped the other woman and got his personal and professional life back on track and is enjoying immense success again. NEVER DRINK AND THINK.)
I am certainly no impeccable warrior. I am a flawed person, for sure. In fact, I always wanted to be Gregory Peck’s character in To Kill a Mocking Bird, Atticus Finch. Finch was described by author Harper Lee as the same type of person at home as he was in public. This is one of the highest accolades that you can ascribe to any person. In other words, he wasn’t a phony.
But I can point to a few things I have done that helped me get closer to the standards set by my heroes (both real, my Dad and my mother-in-law and fictitious, Atticus Finch and possibly fictitious, Sorcerer Don Juan): a) got my PhD, b) had five kids, c) brought back the Ottawa Senators, d) wrote more than two million words of hopefully decent research material, articles and essays, e) taught some great students who have gone on to create some really neat things, f) went back to school in my 50s to get my real estate broker’s license, g) took up Yoga in my 50s after all the sports injuries I suffered took away the things I like to do like play hockey, tennis, go skiing and windsurf, etc, h) stopped biting my fingernails because one day I just decided to stop doing that (it’s really bad for your health (imagine the number of bacteria you transmit from under your fingernails into your digestive system by way of your mouth) and looks like heck) and never did it again.
I have developed a kind of patience too—I can now understand what Don Juan was trying to teach Castaneda by making him push a piece of dung around Juan’s modest desert home with a stick for a day and a night and a day without ever knowing when Juan would tell him to stop. I can pick up a spilled can of peas with chop sticks if I have to. I am not kidding. I could do it.
When Ottawa had that terrific storm last year that dumped a huge amount of snow on us, I went outside with my kids and my wife and we started shoveling. We were out there because the contractor we had hired for the season had quit on us—there was too much snow. He had used up all the money his clients had paid him and so he couldn’t pay for the gas or operator time he needed to continue. So he kind of held us up—“Pay me more money or I won’t show up” is basically what he said. He probably had that right in his contract to do that—most contracts drafted up by lawyers have weasel words in them that protect their clients.
Well, he was protected alright. But to us, it sure didn’t feel right so we said: “To heck with him” and just got the whole famdamily out there, some with really tiny shovels, and we shoveled for the next seven hours.
(I notice this year, that no one on our block has rehired that guy. So his lawyer sure protected him alright—so much so that he is now OOB, out of business.)
Now one of our kids had a friend over. He was probably the strongest of all of us and, at just 18 years of age, he should have been able to shovel FOREVER. But he is a bit lazy (well, actually really lazy) and he had an idea—he could call up one of his contractor friends who had a truck with a plow and get the thing done for us with no work at all! Great idea, right?
Wrong. Don’t you think that during the greatest snow storm in a generation, his friend would be out there making some money with his truck and unlikely to get around to us for DAYS. No way was I going to be stuck, at someone’s mercy for days. If anything happened, an emergency or whatever and we needed to be mobile, I was getting our vehicles on the road. To heck with waiting.
The night of the big storm, I and my two boys were out at 3 and 4 and 5 am digging one of our vehicles out of a snow drift on the main road. One of our kids had stranded it there. It couldn’t be left there—the Mayor had declared an emergency and if a vehicle is blocking a major road, well, the plows will just shove it out of the way. Bye, bye family van.
Now I have all the equipment to get just about anything out of snow bank so we just went out there and did it—and at the same time got a few of our neighbors’ cars unstuck too.
But I can tell you, it was scary out there. I can see how glaciers can form in a hurry after that night. It’s one thing to see a film about it (like, The Day After Tomorrow), it’s another to see it in one night in your hometown. I can tell you if it ever snows year round, Canada would be uninhabitable in no time.
But the point of all this is: develop some patience. I like to rely on myself, I don’t like free stuff and I have patience and determination to do things, to get things done, to finish and complete things.
When I was a kid and attending McGill University in Montreal, I had my own apartment but I couldn’t afford a vacuum cleaner. I also couldn’t afford any furniture. (I solved this by raiding the Engineering Department for milk crates and Styrofoam (my dining room table and work table) and the Sally Ann for cushions, foam mattress and dishes.)
I also liked to entertain (a girlfriend or two) and it wasn’t lost on me that they tended to like things neat and clean. I also happen to believe that being reasonably well organized and living in a clean environment is a good thing. So I re-learned what my mother’s people knew—they came from Russia and if they had to clean their carpets, they swept them with a broom. Not too many Russian peasants had vacuum cleaners, circa 1909. Ha. Ha. None of them did, of course. And if the broom couldn’t get all the dirt, I would get done on my knees and pick up lint piece by piece, no problemo. Don Juan would have been proud of me.)
I have been asked over the years if I can come up with some ‘rules to live by’ in order to become a successful entrepreneur. I think those ‘rules’ might also apply to anyone in any field of endeavour. So I put together my 30 Guidance Rules which are a mixture of new age philosophy and ideas as old as civilization. I am not claiming originality here.
[I have also argued that, in entrepreneurship, there are no rules but in that I am essentially referring to something else. That is, as an entrepreneur, you are a pioneer and, as such, you make up the rules as you go along. But that does not mean that you forsake your ethics along the way.]
1. Be someone others can have trust in. Trust is the foundation of a successful life in business and in your personal situation.
2. Under promise and over deliver.
3. Have a belief in something greater than yourself.
4. Develop some self-knowledge. Be in touch with your gut (instincts) and your subconscious.
5. Be the same person in private as you are in public—don’t be a phony.
6. Behave ethically.
7. Don’t place your trust in false prophets.
8. Live a healthy lifestyle—all things in moderation. Don’t drink and think. Get some exercise. Don’t take drugs. Don’t smoke. Eat reasonably. Enjoy the life you have been given and enable your body and your mind to work to their full potential unclouded by substance abuse. Exercise some self-discipline. Get enough rest.
9. Try not to swear.
10. Try to find some time for yourself and your family every week.
11. Honour your elders—don’t throw people away because they get older.
12. Do unto others as you would have them do unto you. (The Golden Rule.)
13. Avoid the Seven Deadly Sins of pride (vanity), envy, gluttony, lust, anger, greed and sloth.
14. Give people including yourself, a second chance (but not a third chance). Forgiveness is blessed.
15. Be a Good Samaritan and a good citizen and a volunteer.
16. Make no acts of commission but forgive yourself and others for acts of omission, everyone makes mistakes.
17. Don’t hurt anyone.
18. Be faithful to and love your spouse and your family.
19. Be humble—walk a mile in someone else’s shoes. Be merciful. Don’t live an extravagant lifestyle. Be modest. Live modestly.
20. Take care of our planet.
21. Don’t steal. Don’t take what doesn’t belong to you.
22. Seek education, experience and wisdom. Work smarter. Enhance and embrace your creativity.
23. Don’t lie.
24. Love thy neighbour as thyself. Stand up for others who need your help. Help others and be generous. If you want something done, ask a busy person. Manage your time—make each day count.
25. Be positive. Do not fear success. Fear failure. Don’t be afraid of competition—it will make you better. Don’t engage in self-pity when things go wrong. Look in the mirror first before you blame others for your failures. Don’t get too high or too low. Compartmentalize—try to keep going even if parts of your life are not working well.
26. Be patient. Success takes years of effort. The harder you work, the luckier you get. There are no shortcuts.
27. Lead by example. Be committed. Focus. Be competent. Show up every day for work—the ‘show’ must go on. Do things in parallel. Be a good team member and friend and colleague.
28. Seek out others who share these characteristics—surround yourself with good people.
29. Take care of your business so it can take care of you and your family—don’t become a burden on your fellow human. Take responsibility for yourself. Pull yourself up by your bootstraps and help others to do the same. Accept help if offered and seek it when you need it. When something isn’t working, change.
30. Stick together and reach out to others.
Appendix II—The Moral Underpinnings of Entrepreneurship
Optimal Production of Goods and Services for the Maximum Number of Persons
Capitalism is under attack today for the abuses of a few ambitious, unscrupulous executives who have either perpetrated massive frauds upon the public or enriched themselves at the expense of others without providing value in return. We have laws against the former (it’s called fraud) and we weed out the latter through a process in which people refuse to buy from or sell to the latter.
Not for a minute should the reader think that such miserable examples of humanity are any more prevalent in a mixed capitalist economy than they are in, say, a socialist society, a communist one, a feudal arrangement, a dictatorship, a religious hierarchy, a co-operative, a kibbutz, a kingdom, anarchy, tribe, a family or any other type of social system. Extreme cases make for bad laws—if someone in your company misuses access to the Internet, banning access for the 19 out of 20 employees who use it as a valuable resource, is wrong for the corporation, bad for company morale and will lead to a catastrophic loss of competitiveness.
A Ponzi scheme (a pyramid scheme) is not a new device. Fraudulent investment products have been around forever. Products of dubious value and extravagant claims have been peddled to the unwary for centuries upon centuries. Humans have been trading for about 100 centuries and, for most of that time, this has led to a huge increase in wealth. Humans are by far the most dependent creatures on the planet—we specialize and then we specialize some more—this is as true of individuals as it is of nations.
Adam Smith in the WEALTH OF NATIONS notes that a seemingly simple overcoat is the product of “the joint labour of a great multitude of workmen …without the assistance and co-operation of many thousands the very meanest (poorest, ed.) person in a civilized country could not be provided…”
When individuals pursue their own self-interest, they are, in effect, self-organizing to produce the optimal amount of good and services for the maximum number of persons in their society. This, of course, assumes that a competitive market exists for those goods and services and that individuals are prevented by their competitors from over-charging for their products or services by their desire to maximize individual profits.
Obviously, governments have a role to play in ensuring competitive markets and enforcing laws against fraudulent behaviour. But beyond that, it is clear that governments cannot be counted on to produce goods and services efficiently through any form of direct government action. There is abundant evidence that the private sector can do this much more effectively.
The Tyranny of the Commons
The City of Ottawa wanted to bring in a new By-Law regulating the private use of private wood lots. Wood lots in private hands that had been reliably producing logs and firewood since the early 1800s were suddenly clear cut in anticipation of the By-Law’s introduction. Owners who were good stewards of their lands for generations—replanting and tending to their forests—suddenly became Paul Bunyans. They feared that their property rights were about to be taken away and they maximized their immediate return by felling every stick on their properties.
Of course, the local market was flooded with firewood, prices dropped, lands looked like Dresden after the firebombing in WWII, streams were contaminated with runoff, wildlife lost whatever habitat they might have had and future generations lost any income they might have had from these wood lots.
This is the difference between optimization behaviour and maximization of the objective function and the difference between the use of a commons and the use of a private domain.
Lake Baikal, one of the natural wonders of the planet, contains more water than all the great Lakes of North America. It is the deepest lake in the world. It was also a dumping ground for spent Soviet nuclear reactors, literally dropped there—out of sight, out of mind.
If no one owns something, no one cares for it, no one nurtures it, no one looks after the best interests of its stakeholders or the large scale ecosystem, of which humans are a part.
Efficiency and the Environment
No society has ever existed that left no footprint on their environment. All societies pollute. Some more than others as we have seen.
But it is ludicrous to assume that efficiency and environmental protection are mutually exclusive. If producers can find more efficient ways to deliver their products or services, this, by definition, lessens their impact on the environment. Fewer materials, labour and management as well as less energy in the delivery of a product or service is obviously better for the environment.
And private sector initiative is the only way to obtain higher levels of sustainability.
Surely, newspapers, if they are to exist at all by the end of the 21st Century or maybe even by the quarter century mark, must find new business models. The idea that we should clear cut forests, expensively transport logs to mills, turn the logs into pulp and paper using chemical processes that are devastating to air and water quality, ship the newsprint to printing plants, print huge volumes of newspaper, to be transported by trucks, planes, more trucks and finally automobiles to your front door, to be consumed in 20 minutes with your morning coffee, to be thrown in the recycle bin, to be scooped up by truck and then shipped to a recycling plant in China to be re-shipped across the Pacific to the printers to be…
This is an insane industry in sunset for sure.
Devices like the Kindle 2 will almost certainly be used for the delivery of the daily news and not just for downloading e-books.
(This is not an argument against the concept of the local or national daily. Daily newspapers are an important part of creating a cohesive society. We need a common language and jargon—if everyone becomes an island with his or her own niche RSS feed, we will find it increasingly difficult to have national conventions like, in Canada, the pursuit of peace, order and good government, which are of paramount importance in terms of producing a civil society. It isn’t intervention by the police or the threat of prosecution that keeps the great majority of people honest—it is the voluntary buy-in to national conventions and accepted standards of behaviour. National news organizations, national broadcasters have a vital role to play—but they need to adjust their business models and soon.)
Peter Patafie, a guest speaker a few years ago at the University, shocked a group of B-School students by saying his priorities were:
1. First, take care of your business;
2. Second, take care of your family;
3. Thirdly, take care of yourself.
One student asked Mr. Patafie if he had somehow got the first two in the wrong order. He said: “No.”
“Do you know what the number one cause of divorce is in Canada? It’s not that you have fallen out of love with your spouse. It’s not that you are arguing about the kids. It’s about finances or lack thereof. If you have creditors calling you in the middle of the night, well, that puts a lot of stress on the family.
If you take care of your business first, it will sustain you and your family, sometimes for generations. That is how you take care of your family and yourself.”
The morality of capitalism is based on the notion that if you, first take care of your family and yourself, then you will not become a burden on your fellow human. That is a moral imperative.
And once you have achieved that, you are in a position to do good works for others, another moral imperative.
To summarize then, the moral underpinnings of capitalism are:
a. Self organization to achieve optimal production of goods and services;
b. Efficiency and environmental sustainability are linked;
c. Private ownership of the commons also means careful husbandry of resources;
d. Take care of your business;
e. Take care of your family;
f. Take care of yourself;
g. Don’t become a burden on society;
h. Look out for the interests of others once you have first taken care of your family and yourself.
Perhaps Sir Winston Churchill said it best: “Indeed, it has been said that democracy is the worst form of Government except all those other forms that have been tried from time to time. (Speech in the House of Commons, November 11th, 1947.)
Appendix III—Sponsorship can be a Useful Form of Bootstrap Capital
Even for SMEEs
The Sens and Sponsorship
When we were trying to Bring Back the Ottawa Senators in 1990, a team that hadn’t played a game in the NHL in nearly 60 years, we had a lot of help. We signed up 500 Corporate Sponsors at $500 each plus 32 Original Corporate Sponsors at $15,000 each for the Ottawa Senators before the franchise was even awarded. Perhaps more impressively, we sold 15,000 PRNs (Priority Registration Numbers—reservations for season tickets for a team that did not yet exist) to the public for $25 per PRN, non-refundable.
Of course, no one buys one season ticket, so these were sold in groups of two. For their $25, potential season ticket holders got a nice form signed by Cyril Leeder (now President of the Ottawa Senators and Scotiabank Place) and a bumper sticker. PRNs were sold in twos and fours, mostly to individuals and SMEEs.
Jim Steele (now head of Sens broadcasting) told me he got into an argument with a guy on the phone late one night in November 1990 (the team was awarded by the NHL on Dec. 6, 1990), got dressed, went down to the bar where the guy was, convinced him of the merits of supporting the cause and came away with 50 bucks for 2 x PRNs.
What that should tell you is that sales is not about somehow pushing a button and all of sudden, hundreds or thousands of clients line up to give you their money. This is about down-in-the-trenches street fighting for each sale, one by one. That’s just as true for IBM as it is for the most modest business person like the very successful middle-aged guy who sells Polish sausages on Laurier Avenue in Ottawa outside the University building where I work.
When Kevin Rose and his co-founder wanted to populate their news agglomeration site (the hugely successful and delightful Digg.com), they didn’t try to send out a mass email or advertise on TV, they called 1,000s of people themselves, one at a time, and asked them to participate in the launch.
There is still no substitute for ‘shoe leather’.
In the case of the Sens, we raised more than $1.1 million from sponsors and another $5.4 million from land owners in the form of Seller Take Back Mortgages. STBs are another form of bootstrap capital—essentially, the landowners who sold us about 600 acres for what would become Scotiabank Place and associated development, provide some of the financing for us to acquire their holdings.
The total campaign including the cost of visiting with all the Members of the NHL’s Board of Governors, preparing the bid, participating in meetings, buying the site for a MCF (Major Community Facility) and so forth was about $9.7 million but sponsorships and STBs significantly reduced that to about $3.2 million in cash.
Oct. 10, 2009 Sens Sponsors: Bring Back the Ottawa Senators Campaign
Corporate Sponsors $ 250,000.00 500 $500 each
Original Corporate Sponsors $ 480,000.00 32 $15,000 each
PRNs $ 375,000.00 15,000 $25 each
Total Sponsorship Raised $ 1,105,000.00
Scotiabank Place Site and Lands ($7,200,000.00) 600 acres $12,000 per acre
Campaign Costs ($2,500,000.00)
Sub-Total Campaign Cost ($9,700,000.00)
Seller Take Back Mortgages $ 5,400,000.00 75%
Net Cost of Campaign $ (3,195,000.00)
Now I hear all the time that this is fine for larger businesses like a NHL hockey team but that it doesn’t apply to a small startup. But I find that if you think about it for a minute, you can apply this practically anywhere.
Curved Golf Shafts
A couple of guys I know were in my office last week—they have a series of products they are trying to get off the ground—a curved golf club, a curved hockey stick, a curved walking stick and a curved ski pole. Their company (pleasantly called WOW) believes that, for example, their curved driver helps duffers hit the ball straighter while their curved hockey stick they say helps make a player’s shot ‘heavier’. (I wrote a piece of the science behind a hard versus heavy shot in hockey: http://www.dramatispersonae.org/HeavyHardShotsVersusFastSlapshot7December2006.htm).
I cautioned them against a GO-BIG-OR-GO-HOME strategy; it almost never works for these types of gadgets. I told them to use a go slow approach. Build a 10 cent website using a platform like Yahoo! Small Business (http://smallbusiness.yahoo.com/ecommerce/), go to a few trade shows, ask a few high profile folks to try their wares and endorse them if they like them (but don’t offer them any money because they don’t have any to give away), trade links with some friends on the web to boost their Google page ranking, basically, do stuff that is inexpensive.
Their goal (which I set for them) is to build a sustainable PB4L (Personal Business for Life) that within a few years will earn $120,000 per year PROFIT, spilt between the two of them. If one of their gadgets takes off terrific. If not, a PB4L that produces some income will be better than nothing and they will take great satisfaction from it.
Their idea when they walked in the door was to raise $10,000 to $20,000 from, say, 30 people and then blow it all on big product orders from China, an advertising campaign, a presence in major retail chains, investment in celebrity endorsements, getting major distribution players to back them and so forth.
This approach usually spells disaster. If you have a game you have invented or a gadget of some kind, the established players in those industries don’t want to hear from you. Parker Brothers, Milton Bradley, Nike, what have you, don’t want unsolicited proposals—they will simply return them to you unopened with a form letter saying ‘we didn’t look at them and don’t send us any more’. The reason? They are deathly afraid you might claim later that your product is similar to one they were already developing. They have found juries only too willing to believe (often justifiably) that a large corporation has essentially stolen an idea from a small scale inventor and damages (especially in the US) can be huge.
Plus these established players hog all the shelf space and don’t want to share it with you.
For every Air Hog or Trivial Pursuit there are millions of ideas, concepts and patents that never amount to anything and often cost their inventor everything. For every Robert Kearns, the inventor of intermittent windshield wipers who won a multimillion-dollar lawsuit against Ford, there are hundreds of thousands who gave up.
I believe you have better odds of making a fortune by buying a Lotto 6/49 ticket than you do with most gadgets or gizmos.
So aim low, go slow, don’t risk too much money and you may get a pleasant surprise on the upside.
The guys also asked me if they could sell their ideas to one of the established players. To those of you who follow my writings, you already know the answer to that—no. Ideas are abundant and cheap. Large players buy cashflow and market share; in my experience, they won’t pay a farthing for just an idea.
Another thing that can really assist these guys is for them to get some sponsors. This was a new idea for them and we discussed how it might work:
1. They believe, and I agreed, that the curved driver was probably the best gadget to start with.
2. I told them that the golf audience is a highly desired one by advertisers but hard to reach.
3. What if they put the logos of a few sponsors on the shaft of each driver?
4. Law firms and accounting firms want to reach this audience and they have (at least in Canada) restrictions on how they advertise. Adding their logos and website URLs on the shafts of these drivers would suit them perfectly.
5. Other potential sponsors might include high end autos, a beer company and purveyors of luxury goods, maybe even resorts and hotels.
6. Every time a golfer drags that driver out of his or her golf bag, they see these logos—they aren’t zappable like TV ads.
7. They continue to work for the life of the club—maybe five or more years.
8. The clubs might retail for $200 and cost about $60 each. Perhaps they could put five logos on their drivers for, say, $6 per club so half their costs are covered by sponsors!
9. If the average golfer plays 12 rounds per season and brings his or her driver out 18 times, then the cost to the sponsor for 1,000 clubs is $4.63 per thousand views. This is the fundamental measure of advertising efficiency, known as CPM (Cost per Thousand, the ‘M’ in the Roman numeral for thousand).
10. That is a very reasonable CPM; CPMs can vary from $5 for newspapers to $15 or more for glossy magazines to as much as $60 for highly targeted web ads. Mail drops in Canada can cost 15 cents each when delivered by CPC (Canada Post Corporation) which obviously works out to $150 per thousand. So $4.63 to deliver a highly valued audience is a pretty good value proposition.
11. Co-op advertising is the way of the future—more brands will be sharing the same space. If you are selling a high end car why not have an attractive person modeling top end clothes and jewelry to help defray some of the costs. That is, sponsors can have sponsors! Firms will pay to have their products placed in other ads!
Here is how you calculate CPMs:
Oct. 10, 2009 CPMs for Golf Driver
Average 12 rounds per year
No. of Holes 18
Use of Driver 18 100%
Views of Driver 216 per year
Life of Club 6 years
Views of Driver 1296 during life of club
Cost of sponsorship $6
Cost of sponsorship $6,000 1,000 clubs
Sponsors dollars help defray your costs but sponsors can become delivery channels too. When the guys from WOW sign up a sponsor, the agreement might look like this:
A. They sponsor 1,000 clubs at $6.00 each.
B. They agree to sponsor another 1,000 clubs after the first 1,000 are sold.
C. They agree to buy (at a reduced price, say, $175 instead of a retail price of $200), 20 clubs per year for the next three years.
D. They have to pay 50% of their sponsorship on signing and the balance within 6 months.
E. They pay for their first 20 clubs—50% on signing the Sponsorship Agreement and the balance within 30 days of receipt of their order.
F. They agree to feature WOW on their Partners Page of their website and all of the co-sponsors too. They link to all of them and WOW and their co-sponsors link back to them—they cross promote and raise everyone’s page rankings in Google.
If you look carefully at the above, you will see that there is an emphasis on cashflow. Under this model, if they sign up five sponsors, they will end up with $23,750 right up front—enough to pay for their first order of clubs, go to a few trade shows, set up a simple website and have some money left over. They will also be expecting another $23,750 after they deliver the clubs to their sponsor and collect the balance of their sponsorship.
Here is their simple cashflow model:
No. of Sponsors 5
No. of Clubs 1,000
Cost per club $6
Cost of Sponsorship $6,000
Deposit $3,000 50%
Purchase of Clubs 20
Purchase Price $175 per club
Purchase Price $3,500 for all clubs
Deposit $1,750 50%
Cash on hand $4,750 per sponsor
Cash on hand $23,750 total
Just as important, their sponsors will do something with the 20 clubs they have been ‘forced’ to buy—they will give them away at golf tournaments that they host, they will give them to favored clients and, guess what, they have now become powerful distribution channels for WOW.
Zero Cost Goodwill Marketing
I find sponsorship opportunities everywhere. A couple of young fellows came to see me recently and I sketched out a plan for them to do some ZERO COST GOODWILL MARKETING for their new business, Acme Enterprises in Nashville (the names and places and numbers have been changed).
They wanted to do a food drive for the Nashville Food Cupboard and they wanted to offer as an incentive to get people on board a draw for tickets to a Titans game. They had arranged to get a private suite from the Titans for $2,000 (a reduced rate from what the normal commercial value would be) subject to their being able to find the money. They had 30 days to come up with the dough.
Here is the program we set out for them:
1. They decided to support the Nashville Food Cupboard, a worthwhile cause.
2. It would not only help the Food Cupboard which was experiencing a shortage of food and a simultaneous increase in demand as the economy worsened but it would also help build their brand and that would help Acme earn the trust in the community and that would mean that Acme could better compete in a tough marketplace and sell more of their services.
3. They got a favourable rate from the Titans for a suite ($2,000) but still had to find the money to cover it—they just didn’t have it in their budget for this year but knew they needed to do something to help the community and to help themselves.
4. Everybody who brought in food donations would get one ballot for every item—you bring in ten cans and you get ten ballots.
5. They would hold a draw and the winners (there would be four of them) each get a pair of tickets to the suite.
6. Then they would go out and sign up four other local businesses to co-sponsor the food drive.
7. Each sponsor would throw in $500—for that, they each got the right to accept food donations in their place of business (driving more traffic to their stores and offices). Plus they each got two tickets to the suite.
8. The suite holds 20 people—four winners of the draw would use 8 seats, the four co-sponsors would use 8 seats and the two owners of Acme would each get one. Plus they held back two seats for the Nashville Food Cupboard—one for the Executive Director and one for a guest of the ED—presumably a key sponsor of the Food Cupboard would also like to attend.
9. Donations would be accepted at Acme and the other four locations for three weeks prior to the game.
10. Every Friday would be dress down day and every employee would wear a Nashville Food Cupboard t-shirt. On the back would be the names of the four sponsors and Acme.
11. The employees would receive these really well designed t-shirts for free.
12. Each co-sponsor would pay 125% of the cost of the shirts—Acme would pay nothing—since they are putting in their share in the form of SE, sweat equity. After all, they are organizing the whole thing, putting in lots of hours including helping the Food Cupboard’s truck make the rounds and pick up the donated items. Plus they are driving a lot of new customers to the four co-sponsor locations.
13. It would be a fun afternoon at a Titans game, hoping they can win a game this season (the Titans are off to an 0-4 start in 2009).
14. They would also put out media releases—announcing the food drive and later the winners with happy smiling faces everywhere.
Here is the model we sketched out on a piece of paper for the guys:
Zero Cost Goodwill Marketing
So sponsorship applies not only to large businesses like pro sports teams but to startups and SMEEs as well.
Postscript: please also read, How to Get Sponsors for Practically Anything, http://www.eqjournalblog.com/?p=1649.