Man of Mystery
Posted on
Saturday 9 May 2015
(This article first appeared in Ottawa Business Journal, https://www.obj.ca/Opinion/Bruce-Firestone-5444)
We all know Mark Sutcliffe—the ubiquitous presence on Ottawa’s media
spectrum—via his CFRA radio talk show, through his Ottawa Citizen
column, as owner of Great River Media, Ottawa Business Journal (OBJ) and
the Kitchissippi Times, as host of his Saturday morning Running Show
and a national political show, The Week, on CPAC, his tireless work for
charity, his Q+A style-hosting of celebrities such as Malcolm Gladwell
at the National Arts Centre. But I felt it was time to turn the lens
around, and find out more about Mark the person. I only partially
succeeded.
What did I find out? Well, Mark is a handsome, super fit 46-year old
with three children—two girls and a boy. He lives in West Wellington so
all his commutes to the radio station, for example, are short. He works
60 hours a week and says he still manages to have family time since much
of his writing and some management obligations can be taken care of
from home. He will be participating in this year’s Boston Marathon (his
17th marathon) so he walks the talk when it comes to running. He loves
everything about Ottawa except its winter weather. He’s a Senators fan
and his secret dream as a younger man was to be a sports announcer, but
it wasn’t conducive to being a family person so he abandoned that.
Even after spending more than an hour interviewing him, I wasn’t sure
I was any closer to solving the enigma that is Mark Sutcliffe. Perhaps
the closest I got was when he acknowledged that his many different
professional interests were motivated by a fear of financial failure.
As a host who talks to people involved in breaking news (the most
interesting part of his job he says), Mark understands, in a way most of
us can’t unless we ourselves are part of the news cycle, how dangerous
and unpredictable the world can be. He was on air last October when
terrorism struck in the heart of Ottawa. So he views CFRA, the Ottawa
Citizen, OBJ and his other interests as his clients; thus, his sources
of income are diversified. If one goes down, the others may take up the
slack.
He is, perhaps, the consummate, telecommuting knowledge worker—the future of employment many believe.
As a prelude to asking about the future of his media interests, I
mention Aloe Blacc, the marvelous singer-songwriter, who penned and
performed on Avicii’s 2013 tune Wake Me Up!, which was streamed 168
million times on Pandora and Spotify, yet generated less than $4,000
nationally in the US for Mr. Blacc. No one, other than Taylor Swift, can
actually make any money writing and recording songs, and Ms. Swift had
to remove her catalogue from Spotify before she could manage the trick.
Both the music and publishing industries are going through calamitous
times.
“I feel good about OBJ,” Mark says. “I’d rather be in this (free
publication) niche than be a paid subscription daily newspaper, which
has many more challenges.”
When I ask him to elaborate, he says, “Look paywalls, with rare
exceptions such as maybe the New York Times, won’t last. The future of
the Internet is free. They have to look for more innovative solutions.
Our job at OBJ is about organizing a community—a business community,
which wants to present their ideas to their stakeholders. We help with
that. Events are also a big part of our future, as is providing
end-to-end marketing solutions and custom publishing for clients.”
I ask him whom he admires and, without a second’s hesitation, he
mentions former astronaut Chris Hadfield. “I learned from him the
perspective one gets by leaving this planet. But Chris is also a
marketing genius. What he did from the international space station with
twitter, video, music and personal branding was amazing. I could not
name a single other astronaut or cosmonaut who has been to the ISS.”
He feels that Ottawa’s future is a good one, but the city should
focus on what’s realistic for a second tier place that can’t compare to
other G8 capitals that are older and much larger. Areas to focus on?
Tourism, building around a few fast growing tech companies like Shopify,
what a great place it is to bring up a family, it’s a manageable city
to get around in, create some new events.
“It’s great that we are getting the Grey Cup, the Brier, FIFA and we
hosted the World Juniors. But I’d take Ottawa Race Weekend over hosting
five Junos anytime. The former is an Ottawa event, it’s sustainable and
repeatable, and it fills every hotel room in the city. In fact, one of
the bands we booked for the event had to stay in Kingston. That’s good
news in a way.”
Mark believes that the current LRT system under construction is a
colossal boondoggle and, like Andy Haydon, the city would have been
better off finishing and expanding its bus transitway system rather than
building a costly stub of light rail. Having said this, now that LRT is
a fact, the city ought to go on to the next phase immediately. He also
believes that downtown Ottawa can and should be an amusement park,
complete with way finding signage and multiple attractions.
As a hockey fan, I ask Mark this, “If you were NHL commissioner for a year what would you do?”
“I’d get rid of fighting. It’s time. The League’s values are out of
line with society’s. Look, after one girl was killed, in Columbus I
think, by an errant puck, the League strung up nets in 30 arenas. It’s
only a matter of time before a player dies in a fight. Why wait for
that?”
Does he ever worry about his personal safety or take some of the
criticism inevitably aimed at a high profile person like him to heart?
“Well, the meaningless murder of Ottawa broadcaster Brian Smith does
cross my mind from time to time. As for criticism, I never read anything
that is anonymous, but I will engage in debate with people who will
stand behind what they say and, most of the time, public discourse in
this country is pretty civil. But sometimes people do forget that public
figures are human beings and have feelings too.”
Bruce M Firestone, PhD, Ottawa Senators founder, Century 21 Explorer Realty broker. Follow him on twitter @ProfBruce
Prof Bruce @ 12:14 pm
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Henry Ford is Alive in… Morewood, Ontario
Posted on
Saturday 17 January 2015
(A VERSION OF THIS ARTICLE FIRST APPEARED IN OBJ)
Henry Ford wasn’t actually present when I visited modular homebuilder
Guildcrest’s 120,000 sf plant about 45 minutes south of Ottawa, but his
spirit was. Watching 12,000 sf of factory-built homes roll down their
assembly line each week in this giant hive of activity where more than
120 highly-motivated employees swarm over formative shapes that
eventually turn into finished homes is inspiring. Then they are removed
from their plant sideways through a giant door, loaded onto flatbeds,
trucked on site, placed on footings and foundation, et voilà, you have
your new home.
They have solved problems like how to keep their load height to about
13’—their gang nail roof trusses are hinged so they unfold upwards
after delivery and lock in place. My tour guide at the plant, 12-year
effervescent veteran George Tierney adds, “We’re pretty sure that if a
woodframe building comes into contact with a concrete overpass at 100
kph, well, we know who’d win.”
They have solved technical problems like this through innovation.
They also appear to be able to deliver consistent quality and on time,
two issues that bedevil the stick-built mainstream homebuilding
business. Whether it is a tract builder or a semi-custom homebuilder,
fabricating a home onsite, out in weather and using more than 25 trades
to do it, is a recipe for late delivery and shoddy work. How would you
like to be framing a house in a northern shelf city like Ottawa in
January? Make a quick job of it I suppose…
Why do you think Tarion (the Ontario new home warranty program)
exists? To make the premier look good? Well, of course, in part, but
also because it’s not unusual to have 30 or more unresolved building
issues when a new stick frame house is completed. Every new homebuilder
selling to the public must be Tarion-registered and Tarion officials
keep builders’ feet to the fire until they fix problems like uneven
settling, cracked foundation walls, lack of insulation in wall cavities,
poor ventilation (such as a bathroom fan venting into the attic causing
mold problems), failure to sheath the home properly (water damage is
the quickest way other than fire and flood to ruin a home), improper
site grading leading to water pooling and infiltration, no vapor barrier
on concrete walls (which sweat), poorly installed flashing, lack of
weep holes in brick walls, missing attic insulation, no fire stopping
around all pipe penetrations in basement, GFI (ground fault circuit
interrupters) missing for electrical outlets in wet locations…
A lot can go wrong when building a new home. It’s complicated. But
assembling them in a controlled environment as Guildcrest does at the
rate of about 1/day should mean that they can deliver on time and with
fewer problems. Their Tarion record seems to bear this out—in 10 years,
Guildcrest has delivered 418 possessions in Ontario and had just one
chargeable conciliation. Tarion defines a chargeable conciliation this
way: “[it] occurs when (a) Tarion determines that one or more items
reported by the homeowner are warranted under the Ontario New Home
Warranties Plan Act and the builder failed to repair or resolve the
items during the applicable repair period, and (b) no exceptions to
chargeability as set out in Builder Bulletin 20 apply.”
8091 Iveson drive, Ottawa ON slideshow, https://www.christineaubrey.com/8091iveson/
Just as vexing a problem in this industry is that builders are
chronically late. If you’ve sold your home or condo or given your
landlord notice because your builder said, “Don’t worry it’ll be ready
by [insert date here]” start worrying. Every builder has weasel words in
their contracts giving them flexibility in terms of delivery. So expect
to be couch surfing with your things packed away in a moving van—for
anywhere from a few days to as much as four months, in my experience.
George Tierney adds, “I heard somewhere that 7 out of 10 people who
buy a lot never actually build on it.” I believe him. In fact, when
consumers buy a lot, they’ve bought a problem. When they buy a house,
they’ve bought a solution, which brings its own problems with it.
Guildcrest has an interesting history. It started out as Dutch Sash
and Door, created by a legend in this part of Ontario—Adrian Huef. It
was sold to a Toronto-based company that had it in bankruptcy within 18
months, whereupon it was purchased by Bob Egan, David Poupor, John
Coppens and two others transitioning it to the Guildcrest brand and
name. It’s also been known as Morewood Homes. Today, it’s owned by
Saint-Apollinaire, Quebec-based modular home manufacturer Pro Fab, which
in turn is owned by an enormous private equity firm, Wynnchurch
Capital, out of Chicago.
Wynnchurch has been assembling modular homebuilders across North
America with a view to driving down costs and increasing market share.
If it succeeds, it could revolutionize an industry that clearly needs
updating. What stands in their way? First, the conservative nature of
the industry itself—an unwillingness to embrace change in what is a very
inefficient system. Second, what works in Quebec, Michigan, New York or
New England doesn’t necessarily work in Ontario and vice versa. So a
one-size-fits-all-approach to design and construction won’t work. Third,
a significant part of the traditional new home marketplace mistakenly
thinks of modular homes as unimaginative in terms of design and coming
with few options.
Tall, powerful, Guildcrest lifer and sales chief Roy Mills says,
“That stigma is gone. We build big homes, small ones, towns, side by
sides, duplexes, triplexes. We fire rate them vertically and stack them
side by side. We do in-fill housing now. Plus from start to finish, we
deliver in just four months.”
They have three sales channels—retail (sales to consumers who have
their own lots), authorized builders (a wholesale channel) and
developers (who are bringing an entire subdivision online). Guildcrest
is in the solutions business—they are able to do more than just sell a
consumer a modular home. They’ll do the whole project from excavation,
footing and foundation to occupancy permit.
They are a big exporter to the US, and secretly cheer for a muscular
USD. When the Canuck buck sank to 63 cents, Mr Mills recalls fondly, “We
made a killing, especially in upstate New York where Guildcrest is a
licensed builder.”
They compete with double-wides in Massachusetts, Maine, Vermont and
New Hampshire, and they exploit the land-lease recreational market in a
big way—their largest customer is Parkbridge, which has about 300
retirement communities, cottage and RV resorts in their portfolio.
One of their competitive advantages is a stable, experienced
workforce. At one point during my tour, Mr Tierney points out a 75-year
old man walking slowly but with purpose up and down the assembly line in
a blue, knee-length winter coat with a safety vest over top and
equipment of unknown purpose hanging off his person. “I have no idea
what [name withheld] does here but he’s never worked anywhere else in
his life.” It’s that kind of loyalty (from employer to employee) that
spawns intense commitment from everyone I meet there.
Maybe one day, we will build homes via 3-d printers or perhaps simply
plant a seed and let untold numbers of tiny nano machines build them
for us. But until then, Guildcrest and other modular homebuilders are
trying to provide some type of better way forward for an archaic,
frustratingly hidebound industry.
Bruce M Firestone, PhD, Ottawa Senators founder, Century 21 Explorer Realty broker. Follow him on twitter @ProfBruce
Prof Bruce @ 11:29 am
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Real Estate Entrepreneur Shortage
Posted on
Sunday 28 September 2014
(A version of this article first appeared in Ottawa Business Journal)
The term “real estate entrepreneur” may become an oxymoron in Ottawa
as some great figures from the last generation reach retirement age or
pass from the scene. Who will replace Bill Malhotra, Claridge’s founder,
Irving Greenberg, the genius behind Minto’s rise to prominence and his
nephew, Roger Greenberg, the man most responsible for getting Lansdowne
Live off the ground, Kris Singhal, Richcraft owner, John Doran, one of
the two founding partners at Domicile or Doug Casey at Charlesfort?
For the last two generations, the economic engines of Ottawa have
been—government, education, technology, tourism, health, real estate and
construction. Bright, talented young people are attracted to all but
the last two. It’s real estate and construction, an important sector,
that is suffering from a shortage of entrepreneurial minds despite the
presence of talented younger people like Alan Whitten at Huntington or
Windmill’s Jeff Westeinde.
Lansdowne Live Before
Lansdowne Live After
There is a 177-acre property about
an hour and 15 minutes northwest of Ottawa with more than 4,000
frontage feet on a great fishing lake. Its owners wish to retire to
their Toronto condominium. It has not 1 but 3 houses on it, 3 cottages, 8
RV sites (with room for many more), 3 docks, stainless steel outdoor
boiler, its own island and peninsula plus 50-acres of tillable land,
boats, fishing hut and gear. Its price? $740,000. Number of offers in
the last year—zero. Now why is that?
It’s because we aren’t seeing enough entrepreneurs like Joe Kowalski,
Wilderness Tours founder and Mount Pakenham owner, who originally came
from the great state of Pennsylvania, decide to live and work in this
area, more particularly in Beachburg, Ontario. Beachburg is a village of
900 people. The impact Wilderness Tours has had on it and the area can
hardly be understated—Wilderness Tours grows to a town of about 3,500 on
most summer weekends as guests come to whitewater raft, bungee jump,
and kayak.
Invest Ottawa President and CEO Bruce Lazenby is right—we don’t want
more “economic development” like Dell’s Ottawa experience. Sir Terence
Matthews’ group (Kanata Research Park) built two new shiny towers for
Dell only to see them left vacant two years later. Instead, Mr Lazenby’s
prescription is to attract, train, support and keep entrepreneurs in
this community. He figures if they live here (and not, say, in Austin
like Michael Dell does), they will be less likely to cut and run when
times change.
Why aren’t more young people attracted into real estate? Frankly,
Ottawa’s other sectors look more promising. It doesn’t help that
development in Ottawa is seen as an anachronistic and adversarial
process, which takes an extraordinary amount of time to complete and
comes with a high risk of failure. The NCC (National Capital Commission)
has long been viewed as an organization that studies problems until one
of two things happens—the proponent runs out of money and time and
gives up or s/he dies, whichever comes first. The City of Ottawa is not
far behind the NCC in the public’s view.
It took Doug Jones and his family more than 4 years to get his new
facility in west end Ottawa approved and built. Mr Jones’ family ran
PlayValue Toys (PVT) out of rented accommodation for a generation,
paying landlords more than $3.5 million over that period. As the
business passes to the next generation, his goal was to see PVT owning
its own premises.
Ottawa has some excellent development companies like Colonnade and
Canderel, but their business models are focused on triple or double A
covenants and a build-to-suit to lease formula. They prefer to keep
buildings in their portfolios or sell them at very low cap rates to
pension funds and others with an appetite for close to risk-free
investments. Finding a development partner who will lease space may not
be an issue. But if an entrepreneur wants to own her/his own building,
it could be.
Why did it take 4 years for PVT (and nearly 2 more for John Deere’s
new project currently under construction next door) to get approved by
the City? Firstly, Ottawa believes they have enough industrial land for
50 years. Of course, they have a study, which “proves” it. The facts
that most of the land is owned by a few major players who won’t sell any
or is in the wrong location or is owned by the NCC (whose nickname in
the industry is “No Commitment Club”) are not taken into account.
Secondly, the City has an official plan that is supposed to guide
development in Ottawa, but really places a straightjacket on it.
PVT is emblematic of a new hybrid—they sell toys in their showroom
and on the Internet. The latter (which is by far the fastest growing
part of their business) requires warehousing and fulfillment plus access
to truck transports and highway interchange. Unfortunately, there is
nothing in the City’s OP that permits such a building so Doug and his
advisers had to invent it. City planners opposed the development at
every stage. ARAC, a 5-member committee of Ottawa Council, unanimously
approved it.
Tech companies 20 years ago did not want to own their premises, but
as some of their founders age, they’ve come to realize that
diversification of their own investment portfolios might be in order.
Still, they face the same issues owning their own premises as PVT and
John Deere.
For tech startups, the lack of an entrepreneurial culture in real
estate can also cause problems for them—conservative landlords (many of
them now REITs, pen funds, insurance companies, banks, publicly traded
firms) don’t want to lease to them. For non tech startups like locally
owned restaurant chains Busters, Barley Mow, Don Cherry’s, good luck
competing for landlord attention against national covenants like Swiss
Chalet, McDonald’s, Keg Steakhouse & Bar.
The corollary to all this is that for any young person willing to
bring his/her entrepreneurial talents to real estate development and
construction, there is an enormous vacuum to be filled.
Bruce M Firestone, PhD, Ottawa Senators founder, Century 21 Explorer Realty broker. Follow him on Twitter @ProfBruce.
Prof Bruce @ 7:42 am
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What’s in a Name?
Posted on
Saturday 2 August 2014
(A version of this article first appeared in Ottawa Business Journal)
What’s in a name? Well, if you are Syfy channel, creator of
masterpieces like Sharknado, Sharknado 2, Mansquito, Sharktopus,
Dinoroc, Dinoshark, and Supergator, title is everything. That’s what
they start with and a script comes later. They make their films at an
average cost of $1.5 million, less, a lot less it turns out, than what
it cost five founding partners to fit up their first Big Rig restaurant
and brewery in a tiny mall hidden behind a gas station in suburban west
end Ottawa, which was $5 million. It was financed half equity and half
debt with TD Bank providing the debt portion. The restaurant and
microbrewery fit up took 4 months to complete.
Big Rig Restaurant and Brewery 1
What do Chris Phillips, Angelis Koutsos and Lon Ladell, three of the
five founders of Big Rig who sat down with me recently for an interview
(the other two are Pierre Cleroux and Jimmy Zourntous), share in common
with Syfy? A strong name and brand. “Big Rig” is Ottawa Senators
defenceman Chris Phillips’ nickname. “My name is above the door so it’s
tied to my image in the community and vice versa. It’s not just a
business or a job. Staff are representing not just themselves but me,
and together we are building a lasting brand.” Mr. Phillips says.
Ottawa Senators Defenceman Chris Phillips at the Big Rig
When asked what revenues are, Mr. Koustos discloses, “We did $6
million in our first year and north of $5 million now.” In a small town
like Ottawa, these are big numbers. Part of their revenues comes from
licensees, other restaurants who sell Big Rig brewery product, and
another part is made up of sales in LCBO outlets across the province of
Ontario. “LCBO has been stocking Big Rig Gold for about a year now,” Mr.
Ladell, their brew master, says proudly. Mr. Ladell worked for
Spinnakers Brewery in Victoria B.C., one of the first tied-house
breweries opened in 1986, before moving to Ottawa because his wife’s
family is there. It was his availability that made Big Rig possible.
Before opening Big Rig, the partners considered opening a Brazilian
steakhouse downtown but, fortunately for beer lovers, their real estate
deal fell through and two days after that Mr. Ladell appeared on scene.
“Lon fell in our lap and we went from there,” Mr. Koustos adds.
One of their biggest problems so far has been handling the volume of
people coming in the door—2,300 visitors just in their first three days
of operation. Mr. Phillips says, “I got my hand slapped. I was inviting
members of the media to come to the pub for a tour, doing interviews in
the building and in studio and Angelis (he is the founding partner with
restaurant operations experience) asked me to STOP.”
The other challenge they have is brewing enough beer to meet not only
their own demand but their licensees’ and LCBO’s as well. Big Rig has
recently leased 16,000 sq. ft. of warehouse space in the Kanata North
Business Park (at 103 Schneider Road, just off Carling Avenue) where
they plan to brew beer, launch a tall can, do taste tours, retail
merchandise as well as beer, and, if they can successfully navigate
Ottawa’s byzantine zoning rules, host events and serve food. Increased
production is also required because they are opening a second restaurant
in the Gloucester Centre where they’ve just signed a lease.
They currently employ 70 people in their restaurant and will add a
similar number once their second location begins operating in Ottawa’s
east end. The Brewery employs 8 more and this will grow depending on
what Ottawa planners decide to let them do in their new warehouse
location.
“Some restaurants, a few, have told us that they won’t take our
licensed products because we compete with them with our location,” Mr.
Koutsos says. “But I can’t see how one west end location can have any
impact on a pub downtown except a positive one. We are extending an
opportunity to bring some of the Chris Phillips and Lon Ladell magic
into their own stores, what can be wrong with that?”
Mr. Ladell adds, “We won 9 awards at the Ontario Craft Brewing
Awards, the most of any microbrewery. We won a gold medal at the
Canadian Craft Brewery Awards and took home the 2013 Best New Brewery in
Ontario award.”
Asked if they have 5-year goals and a written-out business plan, they
answer that each of the five partners is consulted on everything, but
they mostly stick to their own specialties—operations, brewing,
marketing, finance… i.e., they don’t have a business plan. They are
proceeding based on their experience and pushed by demand, which, it
could be argued, is better than a 30-page document full of
unsubstantiated assumptions, tables, spreadsheets and graphs.
Plus it doesn’t hurt that they have the on-going endorsement of the
Senators current longest-serving player who clearly understands how
important Big Rig could be to his after-hockey career. When asked if he
would like to play his entire career with one team, having just signed a
new 2-year contract, Mr. Phillips says with a smile, “That’d be pretty
cool.” Asked if he will be the next team captain, Chris just smiles.
Bruce M Firestone, PhD, Ottawa Senators founder; ROYAL LePAGE Performance Realty broker. Follow him on Twitter @ProfBruce
Prof Bruce @ 7:32 am
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Duty of Care
Posted on
Sunday 18 May 2014
(This article first appeared in Ottawa Business Journal)
Steve Edgett is an Ottawa 40 Under 40 winner so it’s not surprising
to find him involved in another startup at age 42. This one (called
Knowmadics) is focused on collecting data from cameras, UAVs and other
remote surveillance systems then turning it into useful information.
Steven R Edgett, VP BD & Strategy, Knowmadics Inc
If this is a bit obtuse then think of it this way—Steve was able to
pre-sell their system to a large petro-company in a NAFTA partner
country after demonstrating to their satisfaction that real time
information from surveillance cameras could effectively stop what is
known in the trade as “milking the pipelines”. This company alone
experiences $2 billion per year of oil theft, mostly by their own
employees. Knowmadics expects its system to provide a ROI within three
months of implementation.
Paul Maguire, a former US navy intel guy now CEO and co-founder of
Knowmadics as well as former president of Ultra Electronics and
Strategic Programs Autometric Inc, says this about Mr Edgett, “Steve
ended up being a godsend for us in that he was becoming available just
as we were looking for someone to manage our Canadian, Halifax and
Ottawa opportunities. We wanted someone who would be comfortable
operating remotely (their HQ is in Chantilly, Virginia) and growing a
plan from $0. We also wanted someone who had an international business
development background. Steve ticked both of those boxes and got us our
initial sales, six months ahead of schedule.”
Steve earned his stripes spending years in defense posts—first
modernizing SAR (search and rescue) information systems for the Canadian
military just after leaving university. He took them from grease
pencils and flip charts to a world-class system called “SAR Master”. The
armed forces decided to market this worldwide on a cost-recovery basis
but it wasn’t long before they realized that they should not be in
business. So Steve licensed the IP (giving the GOC perpetual rights to
it) and went out on his own. His first customer? The USAF.
Mr Edgett says, “If you can get a contract with the USAF and get paid
for it, you’ve just won the lottery.” Then he asks, “Do you know who
EDC’s (Export Development Canada’s) biggest credit risk is? It’s the US
government because getting such an enormous bureaucracy to approve
anything including paying an invoice is very complex.” So it’s not
enough to get a contract, you also have to work just as hard or harder
to actually get paid…
At that time EMS was his main competition so like many large firms it
proved less costly for them to buy Steve’s company than build it
themselves. They also brought in Mr Edgett to run the division since he
was beating the bejesus out of them in the marketplace anyway. EMS paid
$2m for the firm, 2 times revenue in December 2000. Mr Edgett’s timing
was fantastic—three months later the dot-bomb crisis hit and tech
valuations crashed.
After that, Steve found himself building a sensor network in Iraq and
Afghanistan, one which tracked soldiers in harm’s way. It was part of
their duty of care to help personnel in places where there was no help.
Mr Edgett built PRCCs, Personal Recovery Coordination Centers, which had
to collect, analyze and transmit data after being alerted by small,
secret tracking devices on their persons (activated by isolated US or
Canadian military personnel) that they were in trouble. “We saved more
people in our first two years than all other technology combined,” Mr
Edgett says. “After an isolating event, you have maybe 60 minutes to
spin up special ops personnel or that guy is probably lost. That’s what
we did with our PRCCs.”
Asked if he was ever in danger, he says, “In 2005 in Iraq, I was
woken up at 3 am when the windows of my trailer were blown out by an
RPG. But, frankly, this was routine. I was more concerned driving the
Highway of Death where more than 100 IEDs exploded daily.”
EMS was eventually bought by Honeywell, which is a Fortune 50 company
for a reason—it is incredibly process driven, which suits an enormous
business but not necessarily Mr Edgett who says, “EMS got
Honeywell’ized. Our division alone (ACS, Automated Control Systems) had
75,000 people and $17 billion in revenues. That’s just a division.
Getting anything innovative approved or even getting Honeywell to invest
in our product was next to impossible. They wanted to milk the
technology for cashflow not growth. In fact, the only innovation I could
see going on was either in finance or acquisitions and neither
interested me much.”
So Steve left the low-risk-tolerance culture of Honeywell to join
Paul Maguire and president and co-founder Claire Ostrum, just after Paul
had raised $2 million to start Knowmadics. Mr Maguire says about the
raise and startup, “It was a combination of luck and timing. The idea
behind the company is pretty simple and our slavish adherence to a lean
start enabled us to stay relatively focused during our formative months
when a lot of companies flounder trying to chase everything they see.”
These guys get the idea that the three most important things for every
startup are sales, sales, sales.
Technology-wise, Knowmadics is not that much removed from their
competition but their philosophy is different—they based it on an open
architecture instead of proprietary systems and they widely distribute
their API. “Governments and business are fed up with proprietary systems
and tied selling,” Mr Edgett says. “We use Amazon cloud services, which
allows rapid deployment by us but, along with open standards, permits
our clients and maybe even our competitors to become part of the
Knowmadics ecosystem.”
Steve is married with two kids and is an investor in the Ottawa-based
Barley Mow chain of restaurants so technology is not all he knows.
Asked where he thinks Knowmadics will be in five years, he answers, “$50
million per year in revenues and active in Kuwait, Abu Dhabi, Dubai,
Mexico, Nigeria, the US and many other nations, maybe even Canada! We
have deals on the table for companies like Royal Dutch Shell, Pemex and a
lot of other firms so wherever they operate, you’ll see us too.” That
is a very large number of countries.
Then he adds, “Longterm, we think Knowmadics can be very big—we see
our ecosystem being used to do really new things like creating a
platform for, say, crowd souring crime-solving. Imagine if all the
remote surveillance data together with citizen video of the Boston
Marathon bombing was available in real time not only to law enforcement
but everyone. Could they have found the bombers sooner? It worked in
Iraq and should work here.”
Dr Bruce M Firestone, Ottawa Senators founder; ROYAL LePAGE Performance Realty broker. Follow him on Twitter @ProfBruce.
Prof Bruce @ 6:39 am
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Pre-selling, Finding New Clients, Keeping Existing Ones
and
Rules? There are no rules in entrepreneurship.
and
Value Differentiation and ‘Pixie Dust’
and
Value Proposition
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Your Car is Your Wallet
Posted on
Monday 2 December 2013
No one knows what the platform will ultimately look like but it may
surprise readers to learn that your car could be your wallet, fob and
access card at least if the parking industry has anything to say about
it. Starting with 700 pay and display machines (each costing more than
$10,000) installed under a ten year agreement with the City of Ottawa,
national firm Precise ParkLink and its Ottawa-based director of business
development Tom Keeley are in a unique position to know.
“We really are a tech solutions company. Right now pay and display is
the leading edge of technology in our industry but it is only a matter
of time before your smart phone’s digital wallet combines with RFID, NFC
(Near Field Communication) and HID (the successor to Hughes
Identification Devices) to not only gain access to parking lots or
spaces and pay automatically but also to go to, say, a Tim Hortons’
drive through and never have to worry about carrying cash, a tap-and-go
fob or debit card. But you’ll still have to wind down your window to get
your coffee,” Mr. Keeley concludes wryly.
His vision is a city where your vehicle talks to pay and display
machines, access control gates, bank/restaurant/store/gas station
payment systems and automated tellers, parking lots in condos, office
towers and at entertainment facilities like Canadian Tire Centre, toll
gates and roads as part of the coming wave of machine-to-machine
Internet. You’ll never again have to stop to pay for anything or roll
down your window to gain access.
Former Telfer MBA student and now local Ottawa entrepreneur Abdul
Haseeb Awan hopes to be first out of the gate with ChipTag.ca, his
system to turn your car into (at least part of) your digital wallet. “I
saw cars getting stuck trying to get out of or into parking lots and
garages. Drivers were rolling down their windows in terrible weather or
they were too far for their fobs to work and I thought, hey, we can do
better.” His low cost solution allows parkers to monitor their spending
across various parking lots and spaces while giving parking lot owners
similar access to real time data about their revenues and capacity
utilization. The latter, Mr. Haseeb Awan believes, will allow owners to
direct cars to unfilled spaces reducing delays for parkers and
increasing revenues for them.
Mr. Keeley, when asked how he got into this business, replies with
another smile, “I call it my no-plan, plan. I thought I was going to be a
lawyer but instead my part time job during my university days was with
the City of Nepean (as a by-law enforcement officer) which led me to a
full time position with the City of Kanata. I was head of Kanata’s
by-law enforcement group at age 23. The pay was amazing so I never
bothered being called to the bar.” So much for a law career.
Next he moved into a role with the City of Ottawa as their manager of
licensing and enforcement. After the province amalgamated 11
municipalities and townships into the City of Ottawa, Tom spent the next
18 months harmonizing myriad parking by-laws. After that, he was
looking for a new challenge and it came along in the form of AutoVu’s
LPR (automated License Plate Recognition system) which made chalking
tires by parking enforcement officers redundant. They also sold the
system to police forces including LAPD and Dallas so their cruisers
could recognize and run plates even when both vehicles were moving at
high speeds.
When AutoVu was sold to Montreal-based Genetec, Tom left. It was 2006
and he knew that there was an opportunity to propose a pay and display
system to the City of Ottawa. Mr. Keeley met with owner of Precise
ParkLink Peter Groccia and they talked about the Ottawa situation—a
place where Precise had no presence.
Under former mayor Bob Chiarelli, the City of Ottawa started allowing
proponents to come forward with innovative ideas and have their IP
protected—they’d get to bid on City contracts as part of the normal
procurement process that arises out of their idea like everyone else.
What isn’t like everyone else though is that they have the right to
match the low bidder on their idea. It’s called the “Ottawa solution”.
Today, Precise manages, in addition to their pay and display
city-wide system, two City of Ottawa owned garages in the Byward Market
and 30 other facilities including surface parking lots, office parking
lots, hotel lots and the Ottawa International Airport’s lots. They
employ 27 people locally.
Precise is a cross-Canada company with more than 400 employees so
they are in a position, Mr. Keeley feels, to be part of a national
solution turning vehicles into moving payment platforms. It’s exciting
and part of his continuing no-plan, plan.
Dr Bruce M Firestone, founder, Ottawa Senators; broker, Century 21
Explorer Realty; executive director, Exploriem.org. Follow him on
Twitter @ProfBruce.
Prof Bruce @ 12:09 pm
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How to Calculate the Capitalization Rate
Posted on
Friday 30 August 2013
The Cap Rate
Most real estate professionals do not use the IRR, Internal Rate of Return
(but probably should)—they use Cap Rates to compare one project with
another. The Cap Rate (‘Capitalization Rate’) is an approximate measure,
as all financial measures are anyway. But they are way more approximate
than the IRR is. Nevertheless, it’s a handy first order of magnitude
measure. The Cap Rate can be determined by simply dividing the Gross
Operating Income of a property by its Selling Price.
One way to look at the inverse of Cap Rate is that it is an
approximation for the number of years it will take you to earn back your
capital. It is widely used in the commercial real estate sector. The
higher the Cap Rate, the better it is for the Buyer and the worse for
the Seller.
Another way to look at the Cap Rate is that it is a rough measure of
your rate of return on the project—it measures the rate of return on the
overall project not your equity (unless you finance 100% of the
property with equity).
For a project with financing that is provided by both equity and first mortgage, we can determine the Cap Rate as shown below.
Cap Rate = ROR, where ROR is the Rate of Return for the entire project.
ROR = (NOI + CRF (i, A) x (Selling Price or Purchase Price–
Equity))/Selling Price or Purchase Price, where NOI is the Net Operating
Income, CRF is the Capital Recovery Factor, i is the cost of borrowing
and A is the amortization period.
Thus,
Cap Rate = (NOI + CRF (i, A) x (Selling Price – Equity))/Selling
Price. Basically, the NOI + CRF (i, A) x (Selling Price – Equity) is the
Gross Operating Income for the project.
If the Amortization period approaches infinity, the CRF = i. In this
case, we can say that the Cap Rate can be calculated as follows:
Cap Rate = (NOI + i(S.P. – E))/ S.P., for A à infinity.
As the Equity in a project approaches zero (100% of financing is debt), we can calculate the Cap Rate as follows:
Cap Rate = (NOI + i x S.P.)/ S.P., for E à zero.
But NOI will be zero if E = 0 assuming that the selling price is
jacked up to the point where all income is used to support debt. In that
case, we have:
Cap Rate = (i x S.P.)/ S.P., for E approaching zero and NOI approaching zero or Cap Rate = i. Q.E.D.
What we have done in typical engineering fashion is to look at the
boundary conditions for our formula and discovered that under certain
circumstances, the Cap Rate is simple equal to the cost of borrowing.
This gives you a first order of approximation for determining a Cap Rate
for a project and explains, in part, why real estate is so sensitive to
changes in interest rates.
The higher interest rates are, the higher the Cap Rate will be and,
hence, the lower selling prices will be. The opposite is also true.
Obviously, Buyers want to purchase property with the highest possible
cap rates and Sellers want to sell at the lowest possible cap rates.
Real estate is highly cyclic and moves largely with interest rates.
As we found out above, higher Cap Rates imply lower Selling Prices but,
by definition, it also means lower Purchase Prices.
Do you want to make money in the real estate business?
Then buy when everybody else is selling (i.e., when Cap Rates are the
highest and interest rates are the highest) and sell when everyone else
is buying (i.e., when Cap Rates are the lowest and interest rates are
the lowest). A simpler way to put it is: “Buy low, sell high.”
Now this is easier said than done. People are very sheep like. We
like to buy what everyone else is buying. Ever bought a suit and had the
sales person tell you: “This is really in this season—everyone who is
anyone is buying this.” They tell you this because it works.
It’s hard to buy real estate when no one else is and interest rates
are high. Everyone will tell you not to—your CFO, your auditor, your
bank, your spouse, your BOD (Board of Directors), your CAO, COO, even
your CTO (Chief Techie) will not want you to—she or he will want more
dough for their department instead—it’ll have a better ROR, or so they
will tell you. But you are the CEO and, at the end of the day, the
decision is yours.
The best deals I ever did (and if only I had stuck to Real Estate and
not got into hockey and other distractions) were when the real estate
markets were depressed. I bought some land in Ottawa near a major,
east-end shopping centre in 1983 when interest rates were 19%. The land
cost me $1 per square foot for ten acres. In 1984, I got an offer for
the land at 50 cents a square foot—I thought I was in real trouble. But I
went to my Dad and he reminded me about rule number 1—buy low/sell high
and I declined the offer.
By 1985/86, interest rates were down by half and I sold four acres
for $10 per square foot to an auto dealer and the other six acres to an
industrial company for $12. We made about $4m in three years on an
investment of $450k; you don’t need to do an IRR calculation or ROR or
ROE on deals like this—they are good deals. (That money too later found
its way into the Sens, ugh. Money in NHL hockey seems to go on a one way
trip—in, but never out.)
In 1994, the real estate biz was again in a slump. (These down cycles
seem to come about every seven years and real estate tends to lead the
national economy into a recession and lag it coming out which means it
usually lasts longer than the general recession. But when real estate
bounces up, it bounces in a hurry and you have to start selling right
away if you want to time the market). I bought 60 acres of industrial
land in Kanata for just 15 cents a square foot. I couldn’t believe
it—people were just giving the stuff away—prices were lower than at any
time since the Depression of the 1930s for goodness sake. By 1999, in
the tech boom, serviced industrial land in Kanata was selling for $6 to
$8 per square foot, if you could find it.
A client of mine is looking at buying a building in Ottawa for his
packing supplies business. He is following my advice—own your own real
estate. The SodaPop Building is selling for $4.8m. His biz will occupy
about half the premises and the other half he will rent out. The Cap
rate for his acquisition is:
Cap Rate (SodaPop Building) = (NOI + CRF(I, A) x (S.P. – E))/ $4,800,000 = ($301,736 + $313,864)/ $4,800,000 = 12.825%.
From his point of view (as the Purchaser), this looks pretty good.
Cap Rates for industrial property can easily climb to 9, 10, 11, 12 or
even more which would mean a much lower cost of acquisition for Paul
(not his real name).
As discussed above, another way to look at the inverse of the Cap
rate is that it is a rough measure of how long it takes to get your
money back. Another useful engineering approach to problems is to check
your units, viz:
Inverse of Cap Rate units = $/($/yr. + $/yr.) = $/$/yr. = yr.
So Paul’s new project will take 7.8 years to return all of its
capital back to Paul (his equity) and to his debt holders. That is
pretty fast if you think about the average homeowner taking 20, 25 or 30
years to pay off their home mortgage which many actually never
accomplish.
But Paul should be much more interested in when he gets back his
equity—this means he can turn around and do something else with his
equity—buy more real estate, buy more equipment for his packing supplies
biz, go on a nice holiday, buy a boat, whatever.
You get an approximate time for Paul to get his money back by simply
dividing his Equity by the NOI. This works out to $1.2m divided by
$301,736 or roughly 4 years. The IRR is a much more precise tool but it
seems that the industry is just much more comfortable with a ‘rule of
thumb’ cap rate approach.
Now let’s look at the cap rate for a small investment property. Let’s
use as a n example, a multi-residential building, “Langlier Place”
which has 12, 1-bedroom units and 36, 2-bedroom units. Note that it is
important to know whether the cap rates you are using are effectively
net or gross cap rates. The cap rates calculated above used gross
operating income; for small investment properties it is typical to use
net operating income where NOI is found by subtracting operating costs
that the owner must pay from revenues received. The operating costs do
not include either depreciation or mortgage interest. This is because
cap rates remove from their calculation the debt structure of the owner.
Obviously, a large well funded REIT, Pen Fund or Insurance Company will
have a lower COF (Cost of Funds) than a typical private investor.
Therefore, for cap rates to be useful to compare one property with
another similar one (similar in terms of quality, location, age, etc.) ,
you need to remove the impact of different capital structures.
Langlier Place—Owner’s Pro Forma Langlier Place—Appraiser’s Pro Forma
Revenues
YEAR 1 YEAR 2 YEAR 3
Rent $688,000 $694,000 $698,000
Parking and Laundry $ 24,000 $ 24,800 $ 26,400
Total $712,000 $718,800 $724,400
Expenses
Realty taxes…………………………………………………… $ 52,800
Water………………………………………………………….. $ 9,800
Hydro………………………………………………………….. nil*
Insurance………………………………………………………. $ 7,800
Maintenance and Repairs……………………………………… $ 5,500
Painting………………………………………………………… $12,000
Supplies………………………………………………………… $ 1,300
Elevator maintenance…………………………………………… $ 1,100
Accounting and Legal…………………………………………… $ 3,000
Superintendent…………………………………………………. $ 22,000
Mortgage Payments** (Principal and Interest)………….………$404,186
Total Operating Costs…………………………………………. $519,486
Potential Gross Income
12, 1-bedroom units @ market rent of $900 each……………. $129,600
36, 2-bedroom units @ market rent of $1,325 each………….. $572,400
Sub-total……………………………………………………… $702,000
Additional Income
Parking, 42 spaces @ $55 per month………………………… $ 27,720
Laundry, 5 w/d @ $30 per month…………………………….. $ 1,800
Total Potential Gross Income………………………………… $731,520
Less vacancy allowance of 6%………………………………………….-$ 43,912
Effective Gross Income………………………………………. $687,628
Operating Costs
Realty taxes…………………………………………………… $ 52,800
Water………………………………………………………….. $ 9,800
Hydro………………………………………………………….. nil*
Insurance………………………………………………………. $ 7,800
Maintenance and Repairs……………………………………… $ 5,500
Painting………………………………………………………… $12,000
Supplies………………………………………………………… $ 1,300
Elevator maintenance…………………………………………… $ 1,100
Accounting and Legal…………………………………………… $ 3,000
Superintendent…………………………………………………. $ 22,000
Property Management (3% of Effective Gross Income).…….… $ 20,629
Total Operating Costs…………………………………………. $135,929
Net Operating Income…………………………………………. $204,914 Semi-Net Annual Operating Income………..…………………. $551,699
Selling Price…………………………………………………. $6,500,000
Cap Rate…………………………………………………….……..8.49%
(* Paid by Tenants.)
(** Mortgage is a Canadian mortgage of $4.2 million with an interest rate of 7.25% and amortization period of 20 years.)
You will notice that the Cap Rate for Langlier Place is calculated
using a ‘semi-net’ operating income. This shows how difficult and
seat-of-the-pants Cap rates can be. As long as you know how the cap rate
you are being quoted was used, this can be a useful way to compare one
property with another. But what if someone is using NOI and someone else
is using a semi-net number and someone else is using gross income? Use
cap rates carefully.
@profbruce
@Quantum_Entity
Postscript: For more on ROE, Return on Equity, please read: Why Invest in Real Estate?
Dr Bruce M Firestone, B Eng (Civil), M Eng-Sci, Phd. Founder, Ottawa
Senators; Author, Quantum Entity Trilogy, Entrepreneurs Handbook II;
Executive Director, Exploriem.org; Broker, Century 21 Explorer Realty
Inc; Entrepreneurship Ambassador, Telfer School of Management,
University of Ottawa. 613.566.3436 X 200. bruce.firestone @ century21.ca
Follow Prof Bruce on Twitter @ProfBruce and @Quantum_Entity and read his blogs at www.EQJournal.org and www.dramatispersonae.org.
You can find his works at www.brucemfirestone.com and also at LearnByDoing.ca.
You can engage with him on Facebook via https://www.facebook.com/QuantumEntityTrilogy and https://www.facebook.com/Exploriem as well as via LinkedIn at https://www.linkedin.com/in/profbruce.
His real estate interests are summarized at www.ottawarealestatenews.com and www.thelandstore.org.
YouTube channels include https://www.youtube.com/user/ProfBruce and https://www.youtube.com/user/quantumentitytrilogy.
You can also read the first four chapters of Quantum Entity Trilogy or send it to your friends for free from: https://www.old.dramatispersonae.org/images/QuantumONE_CS_Third_Edition_First_Four_Chapters.pdf
You can read the first two chapters of Entrepreneurs Handbook II or send it to your friends for free: https://www.brucemfirestone.com/wp-content/uploads/2013/03/entrepreneurs-handbook-2013-edited-first-two-chapters-withCovers.pdf
Prof Bruce’s current motto is: “Making Each Day Count”
Prof Bruce @ 10:11 am
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Why VCs Don’t Buy Ideas or Invest in (Most) Startups
Posted on
Friday 30 August 2013
And Why Large Firms Aren’t Really Interested in Hearing from Entrepreneurs Either
The role of investment banking firms, venture capital companies, law
firms, commercial banks, public financial markets and securities firms
is limited in the startup process. In Fool’s Gold, The Truth Behind
Angel Investing in America (Oxford University Press, 2008), Scott Shane
estimates that approximately 600 (pre-revenue) tech startups were funded
in the US by VCs in 2004 while about 35.5% of all Angel-backed startups
were pre-revenue. This works out to approximately 16,000 startups
funded by Angels each year during this period (J Basil Peters, https://www.angelblog.net/Angels_Finance_27_Times_More_Start-ups_Than_VCs.html).
The US Census Bureau’s BDS data base suggests that an average of
198,000 tech startups (defined as those with 100 employees or less) were
created per year in the five year period leading up to 2010 in the
United States. Taken together, these figures imply that 91.6% of all US
tech startups during this time were self-funded or bootstrapped, 8.1%
were Angel-backed and just 0.3% were VC-funded.
So it is apparent that VC-funding, even angel-funding, of tech
startups in the US is quite limited which means they are probably even
less of a factor in Canada and other nations. VCs and angels are
probably still less involved in all other sectors of the economy which
means that the vast majority of all startups are self-funded or
bootstrapped.
Now why is it that VCs and angels are not more interested in startups
and even less so in ideas? The answer is that this is a rational
decision on their part and may in fact be good for most startups to be
so ignored. It may also be good for the national economy by making
better use of a scarce resource– investment capital.
The reasons most VCs aren’t interested in most startups (or ideas/concepts) are as follows:
1. Most business startups don’t have sufficient growth prospects to attract VC funding.
2. Most startups are in industry sectors that don’t appeal to VC funds anyway.
3. Most startups should be much further along in their development
before they go after VC funding, if they ever do. If their business has
real cashflow and real customers and clients, they are on a much more
even footing with respect to negotiating a fair agreement with VCs, if
that is what they choose to do. In the end, founders are more likely to
get higher valuations and retain control of their enterprises longer if
they wait.
4. Finally, it is much more efficient for Canada if VCs fund more mature
companies that are at a stage where large capital injections are: a)
less risky, b) more inclined to be put to wise use by (now) experienced
entrepreneurs.
Of course, startups may be thinking of an alternative. Why not go
instead to large companies and get them to buy their idea or concept
instead. Saves a lot of time and cuts out a lot of risk, right?
Except large (non-venture) firms don’t much like startups either because:
1. They might be funding a competitor.
2. If an upstart competitor does arise, they might be able to buy them
out one customer at a time; i.e., they can lower their prices and take
away a startup’s clients anyway.
3. Even listening to an idea pitch is dangerous, especially in the US
with an over-supply of expert litigators. Large companies know that if
they are already working on something similar and they launch it after
listening to a startup’s elevator pitch, they can get sued.
4. They are married to their existing business model and don’t want to embrace change.
5. It is more efficient for them to simply wait for the tall poppy to
appear then buy them. This can often be via a friendly buyout offer or,
better yet, through a bankruptcy trustee. Even very fast growing
startups can experience a cashflow crunch due to their inattention to
runaway costs or due to a poor cash conversion cycle
inherent in their biz model creating the perfect opportunity for a
larger firm to swoop in and take advantage with a lowball offer.
So many large firms prefer to buy cashflow not invest in ideas,
concepts or startups. With their superior access to low cost capital,
they can, if called upon to do so, pay extraordinarily high prices and
still make sense of an investment. If they buy, say, at a p/e
(price-earnings) ratio of 20:1 it implies a 5% capitalization rate which
sounds horrible. But if they leverage 95% of the purchase price with a
cost of capital that is, say, around 150 basis points above the current
3-year t-bill rate (0.79% on August 30, 2013), they have a cap rate
on their equity which is 20.4% p.a. which is right about where most
large firms wants it. Cap rates don’t take into account future growth or
paydown of debt by customer-supplied cashflow so the truest measure of
rate of return is probably measured using Internal Rates of Return.
For fast growing divisions of large companies, their IRR is almost
certainly going to be higher than their cap rate so you can see it makes
sense in many ways for large firms to wait. In this sample case I am
using, the IRR is a whopping 83.7% p.a. (ignoring transaction costs but
using a growth in value of just 14% p.a. which for fast growing
divisions might be far too low.) I have put the spreadsheet in .xls
format
(Why-Large-Firms-can-Afford-to-pay-High-Prices-for-Promising-Competitors.xls)
in a public dropbox you can access from: https://t.co/9dQs58FVQI. You can safely download it and use it as a model. It is also included as an appendix to this post below.
So if you plan to start a business and you don’t want to give up
control and a ton of equity to VCs and Vulture funds or go begging to
large firms who really aren’t interested in hearing from you, learn
everything you can about self capitalization—you’re going to need it.
And instead of just talking about doing something, go out there and
start your new enterprise and, once you’ve built it, hold onto to it.
@profbruce
@Quantum_Entity
Postscript: For more on self-capitalization, please read: Things Every Tech Startup Needs to Know about Self-Capitalization.
Dr Bruce M Firestone, B Eng (Civil), M Eng-Sci, Phd. Founder, Ottawa
Senators; Author, Quantum Entity Trilogy, Entrepreneurs Handbook II;
Executive Director, Exploriem.org; Broker, Century 21 Explorer Realty
Inc; Entrepreneurship Ambassador, Telfer School of Management,
University of Ottawa. 613.566.3436 X 200. bruce.firestone @ century21.ca
Follow Prof Bruce on Twitter @ProfBruce and @Quantum_Entity and read his blogs at www.EQJournal.org and www.dramatispersonae.org.
You can find his works at www.brucemfirestone.com and also at LearnByDoing.ca.
You can engage with him on Facebook via https://www.facebook.com/QuantumEntityTrilogy and https://www.facebook.com/Exploriem as well as via LinkedIn at https://www.linkedin.com/in/profbruce.
His real estate interests are summarized at www.ottawarealestatenews.com and www.thelandstore.org.
YouTube channels include https://www.youtube.com/user/ProfBruce and https://www.youtube.com/user/quantumentitytrilogy.
You can also read the first four chapters of Quantum Entity Trilogy or send it to your friends for free from: https://www.old.dramatispersonae.org/images/QuantumONE_CS_Third_Edition_First_Four_Chapters.pdf
You can read the first two chapters of Entrepreneurs Handbook II or send it to your friends for free: https://www.brucemfirestone.com/wp-content/uploads/2013/03/entrepreneurs-handbook-2013-edited-first-two-chapters-withCovers.pdf
Prof Bruce’s current motto is: “Making Each Day Count”
APPENDIX:
Why Large Firms can Afford to pay High Prices for Promising Competitors
Sample Case– Cap Rate/ROE
Cap Rate for Buyout Offer 5% p.a.
3-year t-bill 0.7900%
Basis points over t-bills 0.1500%
Cost of Capital for Large Co 0.9400%
Earnings of Competitor $500,000 p.a.
p-e ratio 20
Buyout price $9,500,000
Leverage 95% 25 year amortization
Debt added to b/s $9,025,000
Equity $475,000
Cost of servicing debt ($402,975.67) p.a.
Accretive earnings $97,024.33 p.a. cash on cash
ROE 20.4% p.a.
Sample Case– IRR
0 ($475,000)
1 $97,024.33
2 $97,024.33
3 $97,024.33
4 $97,024
5 $7,723,272.57
irr 83.7% p.a.
Growth in value 14% p.a. inflation effect
Value of new division $18,291,438.53 after 5 years
Paydown of principal on debt
1 ($321,928.64)
2 ($324,954.77)
3 ($328,009.34)
4 ($331,092.63)
5 ($334,204.90)
Total paydown of debt ($1,640,190.29) wealth effect
E&OE
Prof Bruce @ 9:01 am
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and
Future Vision and Technology
and
Intellectual Property
and
Investing
and
IRR
and
Leverage
and
Litigation
and
Political Economy
and
Product Management
and
Rules? There are no rules in entrepreneurship.
and
Value Differentiation and ‘Pixie Dust’
and
Why Businesses Fail
No Comments
How to Get Rich, Slow
Posted on
Tuesday 27 August 2013
Register now for ‘Real Estate Investing Made Simple, How to Get Rich, Slow’, a 45 minute FREE webinar with Bruce M Firestone,
B Eng (Civil), M Eng-Sci, PhD, real estate guru & broker at Century
21 Explorer Realty Inc in Ottawa, Canada. You can log into the webinar
or call in toll-free.
This intimate seminar is limited to just ten people during which
Bruce will walk you through four simple steps that you can take to
provide for your own and your family’s future. Note that of the 100
wealthiest families in Canada, 62 of them have substantially all of
their wealth invested in real estate.
If you are fed up with the stock market, mutual funds, tech bubbles,
option trades, day trading, fund and financial advisors, GICs, t-bills,
money market funds, savings account interest, bank fees, life insurance
investments and other types of investing save and except your own small
or medium sized enterprise, one you own and control, this seminar is for
you.
Bonus—
If you register for the seminar, you will also receive a free PDF copy of Bruce’s booklet Real Estate Investing Made Simple, How to Get Rich, Slow and a copy of Bruce’s monthly real estate newsletter.
More about Bruce M Firestone—
Bruce applied to go to McGill University in Montreal at age 14,
arrived after turning 15, and graduated as a civil engineer before
legally becoming an adult (then, age 21). Bruce worked for the New South
Wales government, doing operations research and building mixed integer
programming models while continuing his education at the University of
New South Wales, where he obtained his Masters of Engineering-Science
degree, and then at the Australian National University in Canberra,
where he received his PhD in urban economics.
He has been, at different times, an engineer, a real estate
developer, a hockey executive (founder of NHL team the Ottawa Senators,
Canadian Tire Centre and the Senators Foundation—a children’s charity), a
university prof, a consultant, an art collector and benefactor, a
writer, a columnist, a futurist, and a novelist as well as Executive
Director of not-for-profit Exploriem.org—an organization dedicated to
assisting entrepreneurs, artpreneurs, and intrapreneurs everywhere.
Bruce went back to school in his 50s, completed eight real estate
courses and is now a real estate broker with Century 21 Explorer Realty
Inc.
He is a well-respected real estate coach with abundant practical
experience and training. He is married to a most wonderful girl, Dawn
MacMillan. They have five great kids and one fine grandson.
Follow him on Twitter, @ProfBruce.
For more information, please visit www.brucemfirestone.com or contact Ms Nina Brooks, ninabrooks @ rogers.com.
Prof Bruce @ 12:36 pm
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Filed under:
Affordable Housing
and
Build and Hold
and
Business Models
and
Cap Rate
and
City Building
and
Coaching
and
Courses
and
Entrepreneur Skill Set
and
Future Vision and Technology
and
Home Building
and
Institute of Entrepreneurs
and
Investing
and
Leasing
and
Leverage
and
Livable Cities and Neo-Urbanism
and
Mentoring
and
No Money Down Real Estate Investing
and
Personal Business for Life, PB4L
and
Political Economy
and
Real Estate
and
Rules? There are no rules in entrepreneurship.
and
Spreadsheet Use
and
Urban Design
and
Value Differentiation and ‘Pixie Dust’
and
Value Proposition
and
Why Invest in Real Estate
No Comments
Take Responsibility Mindset (TRM)
Posted on
Saturday 27 April 2013
Guest Post by Gus Takkale. Excerpted from his book, THE ROAD: A Journey through the 5 C’s of Change, General Store Publishing House – Canada, 2011
People either live at “cause” or “effect”. Average people don’t live
at “cause”, they are living at “effect”. They blame situations or other
people for their lives. They feel sorry for themselves and focus on why
they fail in these circumstances. I am sure you know people who love to
feel sorry for themselves, they enjoy playing the victim and even get
vocal about it. They are blaming everyone and everything else for their
life – but not themselves. They are at “effect” of other people`s
actions.
The people who adopt TRM are the people who live at “cause”. They
cause everything – no matter what happens. These people work at a level
that no average person can understand. They believe that no matter what
happens, whether it is good or bad – they are responsible for it. Even
if they are not the ones who have created it, they still take
responsibility for it.
How do we take responsibility of things when other people’s actions affect us? It’s a three step process, the ALL approach:
Step 1 – Acknowledge: What did I do (or not do) to get this result?
Step 2 – Learn: What could I have done differently that could have improved that result?
Step 3 – Leverage: What will I do now to leverage this situation?
Put yourself in charge of everything that happens to you. You owe it
to yourself, there is no one in this world that knows you more than you.
So you are the best person to appoint for making things happen in your
life, right? Now, let’s go make it happen!
@GusTakkale
President & CEO, Bytown Sports & Entertainment Inc.
President, Gus Takkale International Inc.
CRAZY ABOUT CHANGE
Prof Bruce @ 11:51 am
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Filed under:
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and
Entrepreneur Skill Set
No Comments
Negative Cost Selling Solar Arrays
Posted on
Tuesday 9 April 2013
School Board Pays Negative Cost for new Solar Panel Installations
Rex Parris, Mayor of Lancaster, California doesn’t like to lose. It
must come from his class-action lawyer background where he won almost $1
billion in claims for his clients and himself.
Three years ago he decided to make the city where the sun (almost)
always shines the first on the planet to produce more electricity from
solar panels than the town as a whole consumes.
He tried to get the local school board onside but they called Mr.
Parris’ initiative unaffordable so the Mayor used negative cost selling
on them.
He created a city-owned micro utility which purchased more than
32,000 solar panels capable of generating 7.5 megawatts on school
property. In all, 25 schools got solar arrays.
Mayor Parris
He then sold it to the Lancaster School Board for 35% less
than they were currently paying for their electricity from the State’s
grid, i.e., they bought their solar panels at a negative cost.
That is an irresistible sales proposition. Everyone in sales should be using it.
If you know your client’s businesses nearly as well as they do (which
you should do anyway), you can use negative cost selling on them–where
you can truthfully say, the decrease in their costs combined with an
increase in their revenues from buying your product or service is
greater (hopefully much greater) than the cost of buying your product or
service. Or as one of my students put it, “I’ll pay you to hire me.”
Bruce M Firestone
Source/read more: Felicity Barringer, New York Times (April 8, 2013): https://www.nytimes.com/2013/04/09/us/lancaster-calif-focuses-on-becoming-solar-capital-of-universe.html?nl=todaysheadlines&emc=edit_th_20130409.
More examples of negative cost selling:
Best Of Kanata, https://www.eqjournal.org/?p=425
Maple Leaf Design and Construction, https://www.eqjournal.org/?p=482
Negative Cost Selling the Pro Sports team, https://www.eqjournal.org/?p=713
Negative Cost Selling a Mobile App, https://www.eqjournal.org/?p=2436
Jeff Hunt and the Ottawa 67s, https://www.eqjournal.org/?p=297
Negative Cost Marketing, https://www.eqjournal.org/?p=2585
@ProfBruce
@Quantum_Entity
Dr Bruce M Firestone, B Eng (Civil), M Eng-Sci, Phd. Founder, Ottawa
Senators; Author, Quantum Entity Trilogy, Entrepreneurs Handbook II;
Executive Director, Exploriem.org; Broker, Century 21 Explorer Realty
Inc; Entrepreneurship Ambassador, Telfer School of Management,
University of Ottawa. 613.566.3436 X 200. bruce.firestone @ century21.ca
Follow Prof Bruce on Twitter @ProfBruce and @Quantum_Entity and read his blogs at www.EQJournal.org and www.dramatispersonae.org.
You can find his works at www.brucemfirestone.com and also at LearnByDoing.ca.
You can engage with him on Facebook via https://www.facebook.com/QuantumEntityTrilogy and https://www.facebook.com/Exploriem as well as via LinkedIn at https://www.linkedin.com/in/profbruce.
His real estate interests are summarized at www.ottawarealestatenews.com and www.thelandstore.org.
YouTube channels include https://www.youtube.com/user/ProfBruce and https://www.youtube.com/user/quantumentitytrilogy.
You can also read the first four chapters of Quantum Entity Trilogy or send it to your friends for free from: https://www.old.dramatispersonae.org/images/QuantumONE_CS_Third_Edition_First_Four_Chapters.pdf
You can read the first two chapters of Entrepreneurs Handbook II or send it to your friends for free: https://www.brucemfirestone.com/wp-content/uploads/2013/03/entrepreneurs-handbook-2013-edited-first-two-chapters-withCovers.pdf
Prof Bruce’s current motto is: “Making Each Day Count”
Prof Bruce @ 7:55 am
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Filed under:
Bootstrap Capital
and
Bootstrap Entrepreneurs– Case Studies
and
Creativity and Value
and
Differentiated Value
and
Entrepreneur Skill Set
and
Environmentalism
and
Financing
and
Future Vision and Technology
and
Goal Setting
and
Investing
and
Livable Cities and Neo-Urbanism
and
Negative Cost Marketing
and
Negative Cost Value Proposition
and
Pre-selling, Finding New Clients, Keeping Existing Ones
and
Product Management
and
Sell
and
Value Differentiation and ‘Pixie Dust’
and
Value Proposition
No Comments
Things Every Tech Startup Needs to Know about Business Models
Posted on
Sunday 7 April 2013
By Bruce M Firestone, B Eng (Civil), M Eng-Sci, PhD
Abstract
The Business Model is supplanting the Business Plan in many
organizations. It not only describes the complete business ecosystem, it
is a mechanism to discover profitable new relationships amongst
stakeholder groups. The Business Model is more resilient than a plan and
harder for competitors to copy. The Business Model today has 12 main
elements—flow chart, value proposition, financial model, benchmarking,
effective marketing, talent acquisition, self capitalization,
differentiated value, cash conversion cycle, integration of the Internet
and Mobile Internet, leverage and social overlay. It is possible today,
for the first time in history, to make service businesses scalable and
mass customization possible due to the advent of the Internet and Mobile
Internet.
Introduction
The Business Model (BM) has come a long way in the last few years
from a one page pictogram (or flowchart) of the ‘engine of a business’
to a many faceted model that fully describes the ‘engine room’ of an
enterprise.
Recall what a basic BM is—clients are usually on the RHS (Right Hand
Side) of the page, the business is in the middle and suppliers are on
the LHS. Typically, products and services flow from left to right—from
suppliers to the enterprise where some type of value is added and then
through the organization to their clients and customers. Usually, money
flows in the opposite direction—from clients to the enterprise and then
from there to suppliers when they are paid. Occasionally, these
directions can reverse with money flowing to clients and customers, for
example, and information or marketing opportunities flowing in the
opposite direction.
There is an orthogonal dimension in every model—a marketing
dimension, which is where each organization demonstrates how they
acquire clients and customers in a cost effective manner.
A fuller picture of every enterprise is formed when at least two
dimensions on either side (and sometimes more) are included in the
model. That is, the clients of the company’s clients and who the
suppliers to the company’s suppliers also become known. In this way, new
relationships amongst players and stakeholders can be discovered and
creative new ways to enhance every organization can be found. Each
enterprise is now being looked at as part of an overall business
ecosystem and when they are able to secure place as a liked and trusted
part of an ecosystem, business longevity is likely to increase.
Steve Jobs insisted that AT&T provide Apple with a share of its
monthly subscriber revenues in return for exclusive access to the iPhone
for two years (Wall Street Journal, How Steve Jobs Played Hardball In
iPhone Birth, February 17th, 2007, https://online.wsj.com/public/article/SB117168001288511981-euxzmjNFZTZhA_2z8OBtD6GK900_20070224.html?mod=blogs).
With this single strategic move, Jobs revolutionized yet another
industry’s business model—cell phone manufacturers went from selling a
‘shrink wrapped’ gadget for a one-time payment in a brutally competitive
market that was racing to the bottom to an industry with multiple
sources of revenues, some of which are recurring.
Imagine how much harder Steve Jobs and Apple would have to work today
and how much lower their productivity as measured in terms of revenue
per employee would be without recurring revenues from iPhone app sales
and revenues, advertising revenues on their iOS platform, downloads of
paid content from iTunes and iBooks plus a share of their carriers’
subscriber fees? We estimated that Apple’s Internal Rate of Return on
the iPhone is an incredible 288% p.a. (https://www.eqjournal.org/?p=1714). But it wasn’t the iPhone per se that propelled Apple to becoming the most valuable company on the planet; it was the iPhone’s business model that did that.
Was this unprecedented move by AT&T (to give Apple access to a
share of its monthly subscriber revenues) worthwhile from the telecom’s
POV? Well, Wired.com (https://www.wired.com/gadgetlab/2012/01/iphone-att-q4-sales)
reported that the iPhone represented 80% of all AT&T smartphone
activations in the last quarter of 2011 during which they added 9.4
million new subscribers, 50% more than in any previous quarter in
company history.
Sam Palmisano, when he was CEO of IBM, told BusinessWeek (April 3rd,
2006) why he places a great deal of emphasis on the importance of
business model innovation, “… with product innovation, it’s a
certainty that your competition is shortly going to copy what you have
done. With business-model innovation, though, if you can come up with a
unique way of doing things, it’s much tougher to react to.”
The Complete Model
The complete Business Model is today made of a dozen elements—
1. A one page pictogram (flowchart) showing the whole business ecosystem (the
enterprise embedded in a network of relationships with clients,
clients’ clients, suppliers and suppliers’ suppliers together with an
orthogonal marketing dimension showing how the enterprise acquires
customers and clients in a cost effective manner.)
2. A spreadsheet which calculates the value proposition
for a single customer or client; it demonstrates in a clear and concise
way how a new enterprise/product/service/division creates either lower
costs or higher revenues (or some combination of both) for a single
customer. The corollary here is that organizations should insist that
their suppliers provide them with their value proposition too. They
should not expect less of their suppliers than they do of themselves.
3. A second spreadsheet develops a financial model for
the enterprise. From this model, each firm is able to measure the impact
each additional client has on the top line of the firm. The firm is
also able to test the sensitivity of its top line to, say, changes in
success rate in any of its marketing channels, changes in its COGS (Cost
of Goods Sold) and other variables. The value proposition for clients
and their impact on the enterprise (which is measured by the financial
model) are mirror images of each other. The business ecosystem is
complete when suppliers provide the organization with their value
proposition and they also have a financial model of how their client’s
organization impacts them. Why should any organization care if their
suppliers have workable financial models? Long term viability of every
firm depends, in part, on maintaining a sustainable and efficient supply
chain.
4. Each business model should be benchmarked against the best-of-breed in their industry. We developed a Business Model Scoring Test, https://www.old.dramatispersonae.org/BusinessModels/BusinessModelScoringTest.htm to assist in this regard.
5. Each enterprise will not be successful unless it can acquire clients
or customers in a cost effective way. If Super Bowl commercials are
needed before acquiring any launch clients, the new enterprise is
unlikely to be successful. If any new organization requires heroic
efforts to land clients, they won’t be around long. So Guerrilla Marketing, Social Media and Market Channel Development
have to be part of the marketing dimension in every business model.
This is just as true for NGOs, Not-For-Profits and Charities. These
types of enterprises need to have complete Business Models including
financial model, value proposition and other elements described here.
They have a fiduciary duty to be efficient and effective too.
6. Having a great business model without the ability to execute is not
very useful. That is, execution counts, ideas by themselves, even great
ideas, are not enough. We developed an online ECQ Test to test individual entrepreneurial ability: https://www.old.dramatispersonae.org/ECQTest/ECQ(ns)TestAuto.htm.
“Once a musician has enough ability to get into a top music
school, the thing that distinguishes one performer from another is how
hard he or she works. That’s it. And what’s more, the people at the very
top don’t work just harder or even much harder than everyone else. They
work much, much harder,” Malcolm Gladwell, Outliers: The Story of Success, 2008.
7. There are business models that do not easily lend themselves to
entrepreneurial startups. Typically, they require enormous amounts of
capital that simply cannot be raised by entrepreneurs. Business models
that use Bootstrap Capital and Self Capitalization
techniques to fund their new startups are usually more focused on
customer needs, customer acquisition and building cashflow. Strong
cashflow is clearly part of improving survivorship rates and low cost or
free bootstrap capital can lead to higher Rates of Return (both project
IRR, Internal Rate of Return, and ROE, Return on Equity, will likely
increase). Greater use of self capitalization techniques in early stages
of startup development will also reduce the need for either Angel or VC
capital which will increase the likelihood that original founders will
retain control for a longer period. Having launch customers and growing
cashflow improve valuations and improve negotiating positions of
entrepreneurs vis–à–vis sophisticated investors.
8. Most startups do not necessarily have to find a
never-before-tried-idea. Perhaps the reason it has never been tried
before is that it is a bad idea. There are very few startups like
Priceline.com (where each customer sets a price instead of the business)
or Fed-Ex (pioneer of the airline hub and spoke system that made
overnight package delivery possible). But at a minimum, each
organization requires something that differentiates it from existing
firms—there must be some type of innovation brought to bear on the
industry. Differentiated Value and the ability to be
able to succinctly explain it are essential. Imagine YouTube, for a
moment, having been around circa the latter half of the 18th Century.
Perhaps a video of Mozart’s last concert or Albert Einstein’s speech
when he won his Nobel Prize in physics in 1921 would now be available?
(YouTube actually has one minute and 22 seconds of Einstein speaking in
Stockholm, https://www.youtube.com/watch?v=aOAzNYVvaNc.)
What would such a video archive be worth today? What if Pinterest.com
had been around since the 1800s and you could see what else interested
James Watt (inventor of the steam engine)? Test and discover enterprise
differentiated value using thought experiments like these (by thinking
backwards as well as forwards).
“I’m actually as proud of the things we haven’t done as the things I have done. Innovation is saying no to 1,000 things,” Steve Jobs.
9. The Cash Conversion Cycle should be determined
for each business model. What use is a fast growing business if it goes
bankrupt in the process? This occurs when the CCC is too long which
means that it either takes too long to collect receivables or the
organization is paying for inputs too soon before being able to deliver
its products or services or inventories are too high.
10. Jack Welch when asked upon his retirement from GE, ‘What was the
single most important invention during his decades with GE?’ pointed to
the Internet and said it’s ‘the biggest change I have ever seen.’ The Internet (and the Mobile Internet) must be integrated into every business model. More on this later.
11. Building leverage into every model is essential;
this multiplies the force and effect of effort, time, brainpower and
capital. Leverage in business models comes from ten primary sources—i.
HR (Human Resources), ii. OPM (Other People’s Money), iii. forced
savings, iv. innovation, v. capital equipment, vi. location, vii.
network effects, viii. marketing channels that reduce a marketing
problem from one to many to one to a few, ix. branding, co-branding,
co-opetition and co-creation and, finally, x. inflation. Test your
business model by asking yourself do you have great Human Resources, are
you using Other People’s Money, benefiting from forced savings,
innovating, do you have a great location or brand, does your enterprise
benefit from network effects or marketing channels that allow you to
connect cost effectively with your clients or customers and reduces that
task from one to many to one to a few and is your capital equipment top
notch/best-of-breed & do you benefit from inflation? If so, you are
probably maximizing your leverage.
“In looking for people to hire, you look for three qualities:
integrity, intelligence and energy. And if you don’t have the first, the
other two will kill you. You think about it; it’s true. If you hire
somebody without [integrity], you really want them to be dumb and lazy,” Warren Buffett.
12. Business Models with a social overlay can create
a coherent community around each enterprise which make it difficult to
knock off. They also provide a platform for a separate way of giving
back to society often through a not-for-profit organization bolted onto the model. Such bolt-ons can become independent, self-funded marketing channels for the for-profit operation.
Case Study—Loose Button’s Business Model
Ray Cao and Aditya Shah are both young engineers from the University
of Waterloo. Now what can they possibly know about the beauty products
industry for a client base that is approximately 98% female and growing
fast? It turns out that Ray and Aditya and their small crew of hackers
and marketing mavens know a lot about their industry—they are reshaping
the way it delivers samplers to their consumers.
Previously, suppliers like L’Oreal, Moroccan Oil, Dermalogica and
dozens of others would employ agencies to go into malls and high end
stores to hand out samples to consumers picked out nearly randomly. How
much data did they collect? Almost nothing.
Ray and Aditya are highly analytical and believe in the value of
tracking metrics to help build an enterprise and make it smarter. So
they decided to do something about this part of the industry and, in
doing so, have created one of the most innovative business models yet
seen.
Their value proposition is, “We’re the Netflix of the beauty products industry but with e-Harmony for brains,” says Cao.
Every consumer who signs up is asked to complete a profile letting
LooseButton.com know what type of products they are interested in. Then
once a month, a Luxe Box is delivered to their door by CPC (Canada Post
Corporation) or USPS with travel-size samplers from suppliers they are
interested in. This is a form of mass customization—every Luxe Box can
contain different products matching individual consumer interests with
the right type of supplier products with a few surprises on the upside
thrown in.
Clients respond well to LB surveys and have independently started to
record YouTube videos of themselves receiving, using and experimenting
with Luxe Box products. Some of these videos are getting phenomenal
numbers of views (over 10,000) spreading the word for LB at no cost to
LB. Tribes of makeup evangelists are forming around the strongest
influencers in their ecosystem.
What’s also interesting is that clients are paying $12 per month ($10
if they sign up for a year) to receive their monthly try-before-you-buy
Luxe Box filled with samples that LB’s suppliers provide them for free.
There’s still more cleverness here. In addition to providing them with
free samplers, suppliers like L’Oreal and Moroccan Oil pay a rights fee
to be included in the Luxe Box which means that LB is in the enviable
position of being paid not only by clients but suppliers as well.
Ray and Aditya have also implemented some negative cost
marketing—organizations are paying them to market Luxe Box for them… The
Globe and Mail, Chatelaine and other publications, desperately trying
to hold onto their readers, buy Luxe Box subscriptions (at around 80% of
retail price) to give to their most loyal customers vastly extending
LB’s reach and increasing its growth rate as well. The Founders won’t
say exactly how many clients they have but it’s over 10,000.
Based in Toronto on Bay Street in shared co-worker space, their
Ottawa tie-in was they wanted to use By-ward market-based Shopify’s
platform but instead had to move to Recurly.com because the former is
not set up for recurring payments (aka, subscription billing). Shopify
is set up for dozens or hundreds of SKUs, LB has only one.
This is a tough business to knock off in the sense that until the
Internet can download mini portions of makeup or beauty potions and as
long as Canada Post Corporation and USPS keep going, they’re in great
shape.
Here is LooseButton.com’s business model circa 2012. See below. Ray
and Aditya have plans to change this model in 2013—adding product
sales—because their clients are demanding that.
When asked why they named their company ‘Loose Button’, Ray says, “Buttons are fasteners that connect two pieces of cloth. We intelligently connect consumers and brands.”
They started LB right out of University and have an Advisory Board
with luminaries such as Harry Rosen and Jagoda Pike (former publisher of
the Toronto Star) sitting on it. “Mentoring helped us a lot,” says Aditya. “We
decided not to go into the apparel space since it was already
saturated. We went into the market research and product discovery side
instead.”
Their biz coach comes in once per week and makes them set goals,
track metrics and live up to their word. Internet startups that track
their metrics grow 7x faster than those that don’t according to Startup
Genome Report 01, Max Marmer, Bjoern Lasse Herrmann, Ron Berman, 2011.
They are also part of Impact.org which focuses on fast growing
enterprises. Started out of Waterloo, it is now a national organization.
Both Ray and Aditya were part of the coop program at Waterloo and
they each had six tries to figure out that they wanted to do during
their course of studies. What it taught them was that they didn’t like
working for other people (Ray at a Wall Street firm and Aditya at a
large accounting firm and then various tech companies).
LB has plans for other Boxes—perhaps another line focused on Men’s
products, possibly a foodie version. They intentionally called their
first Box something different from their company name so they could
conquer other verticals later. It’s what RIM tried to do with Blackberry
and Playbook.
There wasn’t much to change in their biz model other than suggesting
that they might consider adding a social layer over the whole thing—the
follow/follower model is a powerful one which knits the community more
closely together and makes it even tougher to knock off. They might
integrate the Twitter API and allow customers and suppliers to follow
top influencers in their ecosystem on a more coherent basis than just
stumbling onto one of their YouTube videos.
Other changes might include adding a Qricket Code to each Luxe Box
(that’s a QR code where you can change the website it resolves to after
printing them) so that, like ET, each Box can call home. Maybe there
will also one day be a LooseButton.org to give back to their community
too.
Business models today are not just about making money—enterprises
that are all about the money seem to have none and those that are about
building insanely great products and services plus making a contribution
to society seem to have it all. This is a Gen Y (and Steve Jobs)
phenomenon. So bolting on to their existing model a standalone
not-for-profit dedicated to say health and fitness and with its own
sources of funding and marketing to their existing business model would
not only help LB, it would help the wider community cope with issues
like obesity, diet, lifetime fitness, abuse of drugs, alcohol and
cigarettes.
Their model as it exists today where they get paid by consumers and
suppliers plus other organizations pay them to market their product for
them while forming an intelligent community that is hard to knock off
is, frankly, amazing.
Integrating the Internet and the Mobile Internet into Everything You Do
The Internet is making it feasible to do things with business models that were never possible before including:
A. Create custom outputs from standard inputs
Unlike Henry Ford who said you can have whatever color of car you
want so long as it is black, the Internet allows an enterprise to
provide a nearly unlimited choice by combining standard inputs into a
myriad of customized products or services. Every experience with an
Internet-mediated entity can be wildly varied.
Mass Customize Products and Services
B. Reverse out the work to clients and suppliers
For example, a Spa could allow clients to pick and choose amongst
services and so tailor each visit to their individual preferences,
tastes and needs. Since they are doing all the work of customizing their
next visit (adding hair styling, massage therapy, pedicure, manicure,
dietary consultation, yoga class and hair coloring and then deleting
half the services because, say, they exceed current budgetary
constraints), the enterprise doesn’t care how many times they change
their minds before hitting the ‘submit’ button.
C. Embed each enterprise in a trusted, networked business
ecosystem made up of clients, suppliers, clients’ clients, suppliers’
suppliers and the organization itself
To show how this works, ask for example the question, ‘Who are the
clients of a Spa’s clients?’ Since most clients for most spas are
probably women, the clients of the Spa’s clients are likely to be men.
And what do men want? They want to purchase gift certificates from the
Spa. By examining the nodes and links in a business model, it is often
possible to discover new ways of delivering value in the ecosystem as
well as discovering new marketing channels and supply chains as well.
D. Matchmaking—directly connecting clients to suppliers making service industries scalable for the first time ever
Returning to the example of the Spa, their employees could be treated
not as employees but as suppliers. In this way, if a client wants to
have a manicure, pedicure, massage and hair colouring, the Internet or
the Mobile Internet allows the spa to create a backend system that
matches them up much as, say, eHarmony.com or PlentyOfFish.com do. Match
making is not a widely understood phenomenon. Service industries are
notoriously labor intensive and hard to scale; i.e., more output
requires more inputs in a more or less linear relationship or, worse,
the ratio of marginal output to marginal input might be less than one.
This happens when a service business is too complex to manage
effectively as it grows. In consulting, that size is often one person.
As soon as the enterprise grows beyond a single practioner, their
earnings per person may actually go down while the time to produce those
earnings goes up. This is not a happy event and explains there are so
many one person service firms in real estate, management consulting, IT
consulting, accounting, legal, plumbing, electrical, carpentry, the Mr.
Fix It industry, roof repair, mechanic, appliance repair, PC repair,
Network management and so forth. Internet matchmaking is likely to
change all of these industries by making them scalable. Industry
consolidation and larger average firm sizes are likely occurrences.
E. Mass communicate planet-wide through social media and other Internet tools at almost no cost
What is interesting is that some of these communication tools which
are free to use like social media powerhouses Twitter, YouTube,
LinkedIn, Pinterest and Facebook produce a powerful, newish form of
communication—the viral message. It’s newish (as opposed to new) because
the chain letter permitted something similar before. But it’s powerful.
F. Crowd sourcing (using the Internet as intermediary) means
relying on the wisdom of the crowd to, for example, pick and vote on
stories for news agglomeration sites like Reddit.com
Google can serve up ads to people who are searching for, say, digital
cameras. Facebook, on the other hand, by mining its d-base, can serve
up digital camera ads to new Moms in New Jersey who have never posted
any photos of their kids. FB can also advertise wedding photographers in
Vancouver to women who have just changed their status from ‘single’ to
‘engaged’. In ‘The Facebook Effect’, David Kirkpatrick points out that
Google’s style of advertising (providing information to people who
already know what they are looking for, at least in general terms) makes
up 20% of all advertising. The rest is brand advertising meant to
target people who have not yet made a buying decision or don’t know what
they are looking for. That is Facebook’s specialty and you can
understand why Kirkpatrick thinks FB will ultimately be a hugely
successful commercial enterprise.
G. Relational data base
Organizations mine their customer (or supplier) interactions for
intelligence. For example, Amazon asks questions such as, ‘Would you
like to see what other people who bought this (book, CD, video, etc.)
also bought?’ These suggestion engines result in significant increases
in average order size and volume of sales.
H. User generated content
This is another form of reversing out the work to customers and
suppliers. It underpins the business models of YouTube.com,
Threadless.com, Facebook, Twitter and many other new enterprises.
I. Network effects
Google is an example of network effects—the more people who use their
search engine, the better their algorithm is which brings more users
which brings more data which delivers greater accuracy which results in
more ads served in a self-reinforcing virtuous circle. It is more
difficult to produce network effects in a gated community which is why
Google+ is likely to struggle while Twitter flourishes.
Conclusion
Business modeling is a relatively new field of research and practice;
it will undoubtedly evolve extensively in just a few years.
Business modeling may be superseding business planning in many ways
because, as successful Generals know, the best battle plan ever created
changes the instant it comes into contact with the enemy. Business
models change too when they come into contact with the marketplace and
the supply chain and they evolve over time as each organization comes to
know and better understand the relationships implicit in their business
ecosystems. Also business models are much harder to copy than any
single product or service and, if an organization gets them right, they
can create amazing new (sustainable) enterprises.
As former student Daniel Beauchamp once said, “Your competitors can copy what you are doing now but what they can’t know and can’t copy is what you are going to do next.” Dwight D. Eisenhower said it a bit differently, “Plans are worthless, but planning is everything,”
Entrepreneurs, intrapreneurs and product managers with a solid
business model know that their implementation and execution of it will
test their entrepreneurial skill set and, while they set goals each day
and plan out each day and create To Do lists each day, they also know
they always have to be flexible as circumstances change and new
opportunities and challenges multiply around them.
The Internet is having a profound impact on the way business models
are designed and implemented. The more that the Internet and Mobile
Internet are incorporated in new or existing models, the more they are
likely to prosper. The Internet is just a teenager and is likely to
subsume everything in its path over the coming decades.
Business modeling and the integration of the Internet into Business
Models are key factors as entrepreneurs and intrapreneurs try to decode
the DNA of successful startups and product launches.
Bibliography
The $100 Startup: Reinvent the Way You Make a Living, Do What You
Love, and Create a New Future, Chris Guillebeau, Crown Business, New
York, 2012.
Blue Ocean Strategy, W. Chan Kim and Renée Mauborgne, Harvard Business School Press, 2005.
Business Model Generation, Alexander Osterwalder and Yves Pigneur, John Wiley and Sons, NJ, 2010.
Co-Creating Unique Value with Customers, The Future of Competition, C.K.
Prahalad and Venkat Ramaswamy, Harvard Business school Press, 2004.
Co-Creating Unique Value with Customers, The Future of Competition, C.K.
Prahalad and Venkat Ramaswamy, Harvard Business school Press, 2004.
Co-opetition’, Brandenburger and Nalebuff, Harvard Business School and
Yale School of Management. (See also Co-opetition Interactive).
Crossing the Chasm: Marketing and Selling High-Tech Products to Mainstream Customers, Geoffrey A. Moore, Harper, 1999.
Delivering Happiness: A Path to Profits, Passion, and Purpose, Tony Hsieh, Hachette Books, June 2010.
Good to Great, Jim Collins, Harper Business, 2001.
Guerrilla Publicity, Jay Conrad Levinson, Rick Frishman and Jill Lublin, Adams Media, 2002.
Inside the Tornado: Marketing Strategies from Silicon Valley’s Cutting Edge, Geoffrey A. Moore, HarperCollins, 1999.
Outliers: The Story of Success, Malcolm Gladwell, Little, Brown and Company, 2008.
Predictably Irrational: The Hidden Forces That Shape our Decisions, Dan Ariely, Harper-Collins, 2008.
Purple Cow, Transform Your Business by Being Remarkable, Seth Godin, Penguin Group, New York, 2002.
ReWork, Jason Fried and David Heinemeier Hansson, Crown Publishing Group, New York, 2010.
Seizing the White Space: Business Model Innovation for Growth and Renewal, Mark W. Johnson, Harvard Business School, 2010.
Success Made Simple: An Inside Look at Why Amish Businesses Thrive, Erik Wesner, Wiley, John & Sons, Incorporated, 2010.
The Black Swan, The Impact of the Highly Improbable, Nassim Nicholas Taleb, Random House, New York, 2007.
The E Myth Revisited: Why Most Small Businesses Don’t Work and What to Do About It, Michael E. Gerber, HarperCollins, NY, 1995.
The Facebook Effect: The Inside Story of the Company That is Connecting
the World, David Kirkpatrick, Simon and Schuster, NY, 2010.
The Ingenuity Gap: How can we solve the Problems of the Future, Thomas Homer-Dixon, Alfred A. Knopf, New York, 2000.
The Innovator’s Dilemma: The Revolutionary Book That Will Change the Way
You Do Business, Clayton Christensen, Harper Business, 2011.
The Tipping Point, Malcolm Gladwell, Little Brown and Company, 2000.
Author Biography
Bruce M Firestone, B Eng (Civil), M Eng-Sci, PhD
Bruce M Firestone is best known as a professor, entrepreneur and
founder of NHL hockey team, the Ottawa Senators and their home arena,
Scotiabank Place, as well as Author, Quantum Entity Trilogy,
Entrepreneurs Handbook II and Urban Nirvana (2015).
Firestone is Executive Director of Exploriem.org, a Canadian
registered Not-For-Profit corporation focused on educating and mentoring
entrepreneurs, intrapreneurs and artpreneurs in Canada and around the
world. He is also coaching and teaching via Learn By Doing School, an
organization dedicated to providing student entrepreneurs with access to
research, education and a network of high achievers not available
elsewhere. Prof Bruce is also an effective keynote speaker for
organizations with a positive focus on creating opportunity for their
stakeholder group.
Prof Bruce has launched or helped launch more than 172 startups in
fields including tech, real estate, design, art and services. He advises
clients on business modeling, self-financing, smart marketing, social
media, differentiated value, strategic selling and business development,
market channel development, harnessing the Internet and mobile web,
urban design, real estate development, design economics, product
management, sponsorship, fundraising and development economics as well
as issues related to entrepreneurial organizations including
not-for-profits, NGOs and charities.
In May of 2006, Dr Firestone joined the University of Ottawa’s Telfer
School of Management at as its first Entrepreneur-in-Residence. He
previously taught or studied at McGill University (Bachelor of Civil
Engineering), Laval University, Harvard University, University of
Western Ontario, University of New South Wales (Master of
Engineering-Science, Traffic and Transportation), Australian National
University (PhD in Urban Economics) and Carleton University. Prof Bruce
is now Entrepreneurship Ambassador for the Telfer School.
Dr Firestone has been an operations research engineer, real estate
developer, hockey executive, professor of architecture, engineering,
business and entrepreneurship, real estate broker (with Century 21
Explorer Realty Inc), writer, researcher, columnist and novelist. He is a
peerless husband and father of five great kids and one fine grandson.
You can follow him on Twitter @ProfBruce and @Quantum_Entity and read
his blogs at www.eqjournal.org and www.dramatispersonae.org. You can
find his works at www.brucemfirestone.com and at www.learnbydoing.ca.
You can engage with him on Facebook via—https://www.facebook.com/QuantumEntityTrilogy and https://www.facebook.com/Exploriem
as well as via LinkedIn at—https://www.linkedin.com/in/profbruce. His
real estate interests are at www.OttawaRealEstateNews.com and
www.thelandstore.org. His YouTube channels include—https://www.youtube.com/user/ProfBruce and https://www.youtube.com/user/quantumentitytrilogy. You can also send the first four chapters of Quantum Entity Trilogy to your friends for free from: https://www.old.dramatispersonae.org/images/QuantumONE_CS_Third_Edition_First_Four_Chapters.pdf.
His current motto is: “Making Each Day Count”.
…
@ProfBruce
@Quantum_Entity
Dr Bruce M Firestone, B Eng (Civil), M Eng-Sci, Phd. Founder, Ottawa
Senators; Author, Quantum Entity Trilogy, Entrepreneurs Handbook II;
Executive Director, Exploriem.org; Broker, Century 21 Explorer Realty
Inc; Entrepreneurship Ambassador, Telfer School of Management,
University of Ottawa. 613.566.3436 X 200. bruce.firestone @ century21.ca
Follow Prof Bruce on Twitter @ProfBruce and @Quantum_Entity and read his blogs at www.EQJournal.org and www.dramatispersonae.org.
You can find his works at www.brucemfirestone.com and also at LearnByDoing.ca.
You can engage with him on Facebook via https://www.facebook.com/QuantumEntityTrilogy and https://www.facebook.com/Exploriem as well as via LinkedIn at https://www.linkedin.com/in/profbruce.
His real estate interests are summarized at www.ottawarealestatenews.com and www.thelandstore.org.
YouTube channels include https://www.youtube.com/user/ProfBruce and https://www.youtube.com/user/quantumentitytrilogy.
You can also read the first four chapters of Quantum Entity Trilogy or send it to your friends for free from: https://www.old.dramatispersonae.org/images/QuantumONE_CS_Third_Edition_First_Four_Chapters.pdf
You can read the first two chapters of Entrepreneurs Handbook II or send it to your friends for free: https://www.brucemfirestone.com/wp-content/uploads/2013/03/entrepreneurs-handbook-2013-edited-first-two-chapters-withCovers.pdf
Prof Bruce’s current motto is: “Making Each Day Count”
Prof Bruce @ 4:58 pm
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25 Steps to Business Success
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Business Models
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Business Plans
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Differentiated Value
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Entrepreneur Skill Set
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Future Vision and Technology
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Guerrilla Marketing
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Human Resources
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Intellectual Property
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Internet– the Internet is Eating a Hole in the Global
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Intrapreneurs and Intrapreneurship
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Leverage
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Not-For-Profits
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Personal Business for Life, PB4L
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Pixie Dust
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Product Management
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Rules? There are no rules in entrepreneurship.
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Value Differentiation and ‘Pixie Dust’
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Value Proposition
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Why Businesses Fail
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