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To Patent or Not to Patent, Software
Posted on
Friday 17 June 2011
By David J. French, B. Eng, LLB
Second Counsel Services
Pretty much everyone in the software business hopes one day to come
up with something that they might be able to patent. After all, didn’t
patents make Bill Gates and Microsoft rich? Not true!
Many software shops do have intellectual property rights but their
rights reside principally in the code they generate. Protection for
software arises naturally under copyright law. This is its principal
advantage: software is automatically protected. No formalities
are required. The existence of this right arises on generation of
literary work constituted by code once it is written. The only
requirement is that the string of code be ‘original’, i.e., not copied.
Copyright prevents direct copying by another developer. But if the
software carries out some particular function and you want to control
that function, then you have to get a patent.
You can only get a patent on something that is new. That’s a big
issue and you will need a patent attorney to help you address it. The
problem is determining whether or not you have an idea that is new. To
determine this, your attorney will conduct a pre-filing, patent novelty
search.
The statute requires that you be able to demonstrate: “new and useful
art, process, machine, manufacture or composition of matter” or
improvements thereon.
So you do a search so that you don’t waste your time. A patent office
examiner will do it and if s/he finds your idea, they will reject your
application. If somehow they miss the reference that discloses your
idea, then your patent can still be canceled even after it has been
granted. Anything that was previously available to the public is not
patentable.
Searches are done at the Patent Office. But anything disclosed
anywhere in any way will count against you. That means if you spill the
beans to your local newspaper before you file for a patent, you’re
cooked. The irony about pre-filing, patent novelty searching is that:
even if you don’t find your idea in the public domain, your search is
never actually over. Your search is only over if you actually find your
idea. Sheesh.
Patent offices have taken care to index previous patents that they
have granted. This assists in searching. But searches should be
conducted everywhere that data resources are available and that includes
using search engines.
A patent attorney will help you with this search—it takes some skill.
Start by identifying a feature of your final product or process which
you think is new. As searching proceeds, you may have to modify this
feature as you find examples of something similar that’s been previously
disclosed.
Software patents were not known at the time that patent legislation
was originally drafted. They have slipped into the system on the basis
that software executes a process and a process is patentable if it
produces a new and useful result. There has been some jurisprudential
uncertainty over whether something tangible must be manipulated in order
for a patent to be granted. The law is still working itself out on the
issue. But there is plenty of scope for patenting software today, if it
meets novelty requirements.
Generally, in the field of software, there are three functions that can be protected:
1. The actual way coding works, e.g. checksum digits;
2. A logic flow manipulation, e.g. a video game presentation feature or how to play the stock market;
3. User interface functions, e.g. features of, say, scrollbars.
The art in preparing a patent application is to identify something
that is new and then define it in the context of a process in such a way
that the overall process will be new. At the same time, it is important
that the definition will guarantee that no one can achieve useful
results from the process without falling into the definition that has
been created.
It is the responsibility of a patent applicant to specify the things
and procedures that are thought to be new and which competitors must not
imitate. But if that specification and definition describe anything
that was previously available to the public, it is invalid. It will be
refused by a patent examiner or canceled by a judge even after a patent
has issued.
It is critical, if a patent is to have any value, that it block
competitors from competing. This is a collision of conflicting
objectives. Meaningful patent coverage is often difficult to reconcile
with the novelty requirement.
There is no point in getting a patent if there are other equally effective ways to achieve the same result.
David J. French
www.secondcounsel.com
Read more:
Protecting Your IP by Suing (A Cop) Is Probably a Bad Idea: https://www.eqjournal.org/?p=1884
“The empires of the future are empires of the mind,” Sir Winston Churchill: https://www.eqjournal.org/?p=1366
Ideas should be free: https://www.eqjournal.org/?p=63
Prof Bruce @ 7:45 am
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On Creativity
Posted on
Sunday 5 June 2011
My oldest son, Andrew, now living in Canberra, Australia was
asking me about ingenuity and creativity and how an individual might be
able to improve in that area. I believe ingenuity is really important
in business and in life and that you can improve in this area with
effort. (Professor John Callahan also recommends, a book called “The
Ingenuity Gap” by Thomas Homer-Dixon; get it, read it!) Here is my
answer to Andrew:
“Andrew, I like most of what you have said about the importance of
ingenuity with one notable exception. Many ingenious insights are a
product of a few moments of inspiration, maybe as few as 50
micorseconds. Now I agree that often those moments of insight happen
because: a) they are preceeded by a lifetime of study and thought on the
subject, and b) there is a focused effort on the particluar problem.
And what focuses human minds fastest? Why the thought of being “hung
in the morning”. That is why, the threat of war, war itself, fear of
failure, fear of peer review or review by your
boss/client/patron/audience, fear even of parental authority, mobilizes
most individuals to be at their creative best. Human beings are most
creative when their personal interests are threatened or at stake or
their personal interests can be ameliorated to a significant extent.
Creativity results from these factors (some stress is needed but not
too much) combined with periodic intense pondering of the problem
interspersed with time for the subconcious to work on it (i.e., when you
are asleep or playing or your attention is elsewhere). Other factors
that we have talked about as well as are the importance of physical well
being, which obviously includes enough rest, proper nutrition and diet,
adequate exercise and the absence of any type of drugs or alcohol.
When I was young in the 1970s, I worked on a farm picking apples. I
noticed that we left many apples unharvested on those trees because they
were in hard-to-reach places. So one day I went into the tool room on
the place and invented the ‘Firestone Apple Picker’!
Firestone Apple Picker, Circa 1975.
The Apple Picker had a metal collar with a V-cut (to snip off the
apples) and a mesh net with a choke point to slow their descent (to
prevent bruising) and catch them. I just used a sawed-off broom handle
and a shoulder strap to complete the ensemble.
Not only could we increase the harvest by about 6%, we reduced the
number of ladder movements around each tree: reducing tree damage and
improving yields in subsequent years. It also took less overall time to
complete the harvest.
The Apple Picker is in wide use to this day. A happy byproduct of
this simple invention is that anything that increases productivity for
farmworkers or other low paid wage earners is a step in the direction of
higher earnings for them.
More recently, Home Depot has made their store associates more
productive by giving them access to Social Media tools. Read more at: https://adage.com/article/news/home-depot-puts-a-spin-idea-sales-rep/227701/.
Lululemon turned selling into buying, increased employee productivity
and used Guerrilla Marketing to boost their stock price. Read more at: https://bit.ly/mr06vC.
How do you increase your sales force’s productivity using non-linear selling? Read more at: https://www.urbandictionary.com/define.php?term=Non-Linear%20Selling.
How could you give workers in the fast food industry a living wage?
The only way is to make them more productive. Here is my bash at that:
turn biz processes inside out. See my sketch at: https://bit.ly/hZLoDz.
Creativity comes, in part, out of necessity and opportunity. I would
never have invented the Apple Picker sitting at my desk in Kanata, ON.
Another Example: Dirt Becomes Top Soil
An Architect determines that a site needs to be cleared and that
there are 10,000 cubic metres of dirt that need to be removed and
replaced with engineered fill. “How much will that cost to excavate and
remove the material?” he asks the GC.
The GC says: “Hang on a minute. That’s good top soil. It isn’t how
much it will cost us, it’s how much will someone pay us for 100s of
truck loads of top soil?”
Here they are turning a cost centre into a new revenue stream.
Example: Gino Rosetti’s ‘Eureka’ Moment
Gino, a renaissance man and a great architect, was on the floor of
Joe Louis Arena with the owners of the Detroit Pistons. “Pardon me for
asking a stupid question. But why do the people who pay the most money
(suite licensees) sit the furthest from the action?” Gino asked them.
“Because that is the way all arenas are done,” they answered.
Rosetti immediately got out his sketch book and showed them how you
could put suites in two or three rings, many of them closer to the floor
or ice and, hence, much more exciting places to watch the action from.
The result was he revolutionized design of arenas, their economics and
he made them more intimate too by rotating and translating the balconies
in toward each other which makes his arenas more intense places to
perform for atheletes and rock bands.
Example: Local Architect Designs a Suite with Six Seats
In the renovation of the Ottawa Civic Centre circa 1992/93, local
architect George Nicol produced a plan for us to add two suites only 18
rows from the ice but with just six seats each. The seating capacity was
too low to justify the cost of installing these suites.
But by rotating the seats 45 degrees and creating a rake inside the
suites by stepping up each row (and taking advantage of the extra height
available in the building at those points), we were able to get 16
seats in each box and a much more valuable piece of real estate.
Example: Accretive Finance
A local festival organization with no surplus money, has a problem.
Their productivity is $100,000 in top line revenue per employee per year
for a 12-person organization. This is far too low. Consulting companies
of similar size (and they should be at least comparable to those
organizations) do at least $250,000 per employee per year and some do as
much as $500K. Their network is creaky and old. It doesn’t really
qualify as a network.
A computer network that allows: a) file sharing, b) email addres
sharing, c) library management of documents, d) integration of their
intranet and the web into work flow processes (reversing out the work to
suppliers (supply chain management or sponsorhsip agreements, for
example), e) e-commerce transactions (ticket sales, F&B, token
sales, gift certificate sales, sponsorship sales, patronage, sponsor
sales, merchandise), f) use of password protected spaces for schedule
management, management of volunteers, work on confidential documents
with sponsors, etc., g) d-base management to communicate with sponsors
and patrons and the public and much more, all this will double their
productivity.
The only problem is the new network spec’d, installed and with proper
software will cost around $15k per employee or $180k, money they don’t
have.
The creative solution is not to restate the obvious: that they need a
network ‘upgrade’ and this is a $180,000 ‘problem’ for them. They
already know this and they are frozen like deer caught in headlights
because it seems to be an insurmountable problem. The creative idea
isn’t that the lead consultants do the work for ‘free’ or that their
suppliers do it for ‘free’ too. It isn’t to ask for another government
handout either. The reality is that the lead consulting group needs the
client and needs to be paid. So what to do?
Well, the idea is that the lead consultants will spec the n/w and
their affiliated network people will implement it and manage it. The
latter is important because this is a sustainable business model with
on-going monthly cashflow. The way the festival organization would pay
for the whole thing is to have the lead consultants not only spec it,
budget it and finance it (i.e., spread payments out over time with a
bank or other fixed asset lender) but then get three sponsors to pay the
annual cost of this over a period of time (say, three years). That way
the Bank or fixed asset lender is not financing based on the covenant of
the festival organization but on the strength (and covenant) of the
sponsorship contracts tied specifically to the network financing
requirement. There are lots of ways to get sponsoors interested in this
type of deal: they will be promoted on the festival’s web site, at the
actual RL (Real Life) event; they may even use the festival as a
testimonial in their marketing campaigns plus they may get access to the
festival organization’s d-base. They will entertain potential clients
at the Festival itself. Festival performers might visit sponsors head
offices. The idea is that the Festival management will find ways to
drive sales for their sponsors not the other way round.
This is called providing client solutions à la entrepreneurialsist
culture: not only solve the client problem but also find a way for the
client to finance it at no cost to the organization. Another example of
entrerpreneurialist culture at work, n’est çe pas?
Example: Sprott Naming Rights
Eric Sprott, a 1965 graduate of the Carleton School of Business,
donated $10M to the School this past April 2001. The School was then
renamed the Eric Sprott School of Business.
Sprott created his wealth as a financier and was the Founder of Sprott Securities.
Sprott put a condition on the $10M donation to Carleton. The
condition was that the fund be managed by his firm. So Carleton signed
his cheque to the University back to his company! Therefore, Sprott
essentially ended up managing the same amount of money as before and he
got a tax receipt too!
A very creative way to help Carleton, his firm (financially and in terms of marketing too) and his taxes all in one*.
Steps to a More Creative You
Here is my list on how to be more creative:
1. creativity comes from an overarching need to be creative; a
financial crisis, for example, or a war can cause an explosion in
creativity;
2. creativity comes from a total mind and body focus on a problem, sometimes over an extended period of time;
3. an extended period of time will also allow your sub-conscious to work on the problem;
4. there are three kinds of thinking— linear, lateral and quantum thinking (https://www.eqjournal.org/?p=1973): only the latter two lead to ‘creative’ insights;
5. people need to avoid alcohol and drugs and get regular exercise to realize their maximum potential in this regard;
6. people need to be open to new experiences and life time learning— a
lot of creativity comes from observing how others are doing things and
then realizing that something you learned in a completely different
field of endeavour could be applied in a unconventional way to this
seemingly unrelated task at hand;
7. creativity comes from a deeply felt human need to be creative— it
is intrinsic to the species and is a powerful drive just like sex and
money and ambition and power and fear;
8. creativity comes from SEEING and QUESTIONING— it is a way of
training yourself not to accept what everyone else does simply because
that is the way it is done and the way it has always been done;
9. creativity comes from being able to reduce problems to their basic
building blocks— creativity comes from simplicity and clarity not
complexity: even Einstein’s theory of general relativity reduces to a
simple proposition (when explained by the right person);
10. creativity is contagious and is inspired by contact with others who are upbeat, positive, creative types;
11. however, creativity should not be confused with enthusiasm— truly
creative ideas are not full of holes; ideas are improved through trial
and error;
12. creativity is often enhanced by verbalization even if that
verbalization takes the form that it did in the film Castaway where Tom
Hanks has to verbalize his ideas to his ‘doll’, Wilson—Tom starts making
better and more creative decisions after he invents ‘someone’ to talk
to;
13. put things down in a written form— that can take the form of a
flow chart, a written description, a spreadsheet, whatever— the
discipline of writing something down and the formality of it helps
complete your ideas;
14. read a lot;
15. creativity has two dimensions—creativity that changes the
technology used in a product or service and creativity that affects the
technical processes of making or delivering a product or service—most of
us think only about technological changes but technical changes are
probably at least as important**;
16. remember that ideas are (relatively) cheap— there are around 35
million clever Americans in their basements at any one time thinking up
cool new ideas— so while creativity is important, so is execution.
“Sometimes I can’t recall my mental blocks, so I try not to think
about them,” Emily Greenfield, 5th year Architecture Student, Carleton
University, Ottawa, Canada. September, 2001.
Exactly right, Emily. Think hard about a problem; then if no solution
arrives, sleep on it. Let your subconscious mind work on it for awhile.
If no solution comes to mind the next time you turn to the problem,
repeat the procedure.
Dr. Bruce M. Firestone, Ottawa, Canada. 2002 and 2004.
Postscript: Where do ideas really come from? This is like asking what
is consciousness? No one really knows. What we do know is that ideas
are the only thing we are certain are in infinite supply. Every
number represents an idea; think about the number zero, or a negative
number or the square root of -1, how useful these concepts are. Of
course, numbers are in infinite supply. Q.E.D.
Where do my ideas come from? Dunno. But last night (I am writing this
postscript in the early morning of April 18, 2012) around 3 am (when
most entrepreneurs are awake and writing notes to themselves BTW) I woke
up and two little characters by the names of Quod and Qui were talking
to each other in my dreamscape which was called the Quadrangle. They
were talking about biz dev/politics and the law/science and
engineering/love/romance/mysticism, all elements in my novel, Quantum
Entity, We Are All ONE.
So I sketched them. Here’s what they look like:
Another image of Quod and Qui from the world of Quadrangle:
What’s going on? Again, dunno. But could be I’m worried about the launch of Quantum Entity in June of 2012?
* Submitted by Darcy McRae, Eric Sprott School of Business Graduate, 2001.
** For example, an entrepreneur I know in the moving and packing
supplies industry built the number one firm in his city in just six
years by being creative in an industry not known for creativity.
He did seemingly simple things like offering to deliver packing
supplies to the customers of all his moving company clients rather than
delivering it to them. In that way, sales people for moving companies
(who were previously re-delivering boxes, wrapping paper, tape, bubble
wrap, etc. to their clients) could spend more time selling moves and
less time delivering boxes to people who had purchased moves from them.
As a result of this innovation, 98% of all local movers became
clients within two years. Creativity applies to the processes of
business as much as to its technology.
Postscript:
In a review of Steven Johnson’s book, Where Good Ideas Come From: The
Natural History of Innovation, Harry Tucker identified seven key areas
that must be understood in order to maximize creativity:
1. The adjacent possible – the principle that at any given moment,
extraordinary change is possible but that only certain changes can occur
(this describes those who create ideas that are ahead of their time and
whose ideas reach their ultimate potential years later).
2. Liquid networks – the nature of the connections that enable ideas
to be born, to be nurtured and to blossom and how these networks are
formed and grown.
3. The slow hunch – the acceptance that creativity doesn’t guarantee
an instant flash of insight but rather, germinates over time before
manifesting.
4.Serendipity – the notion that while happy accidents help allow
creativity to flourish, it is the nature of how our ideas are freely
shared, how they connect with other ideas and how we perceive the
connection at a specific moment that creates profound results.
5. Error – the realization that some of our greatest ideas didn’t
come as a result of a flash of insight that followed a number of
brilliant successes but rather, that some of those successes come as a
result of one or more spectacular failures that produced a brilliant
result.
6. Exaptation – the principle of seizing existing components or ideas
and repurposing them for a completely different use (for example, using
a GPS unit to find your way to a reunion with a long-lost friend when
GPS technology was originally created to help us accurately bomb another
country into oblivion).
7. Platforms – adapting many layers of existing knowledge,
components, delivery mechanisms and such that in themselves may not be
unique but which can be recombined or leveraged into something new that
is unique or novel.
Prof Bruce @ 8:09 am
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Identity Theft Rampant In 2011
Posted on
Thursday 2 June 2011
Identity theft is a major problem today. The US Federal Trade
Commission received about 250,854 complaints in regards to identity
theft in 2010 alone. Florida has the highest per capita rate of reported
identity theft, perhaps predators are capitalizing on the fact that
Florida has a high proportion of elders and retirees. Arizona and
California also have comparatively high rates of identity theft.
There are various ways your identity can be stolen. Someone might
call you and ask for your personal details posing as a collection agency
or, say, an online merchant. Alternatively, they might ask you to
provide details for your bank account so that they can ‘credit’ an
amount that you ‘won’.
Your identity can be stolen if you lose your purse or wallet along
with your credit and debit cards or you lose your mobile phone which may
have details about your bank accounts along with passwords to online
services you subscribe to. You can also lose your identity via Facebook
or other social networking sites where you may have (inadvertently)
mentioned details about your finances.
Identity Theft Prevention Act
There have been talks about changes to the Identity Theft Prevention
Act in 2011. Discussions are on-going about amending title II of the
Social Security Act as well as the Internal Revenue Code of 1986 to
protect the integrity of Social Security account numbers issued under
this title.
There is a move afoot to prevent the US Federal Government from
issuing any kind of uniform national identifying number which could open
the door to even more identity theft. They may also prohibit Federal
agencies from imposing uniform standards for identification of
individuals.
But no changes have been made yet. The Obama administration has moved
to tighten global defenses against computer hacking—making such attacks
an act of war which could have much more serious consequences for
perpetrators.
The International Strategy for Cyberspace, unveiled recently at the
White House, requires the U.S. to work with the other countries on
standards for protection of intellectual property and prevention of
theft of private information. Their goal is also to ensure cooperation
among foreign agencies especially where a cyber crime is being
investigated.
Preventing Identity Theft
To prevent or at least minimize the chances of identity theft, you should regularly:
• Review all your monthly bank statements – Check monthly statements for your chequing, savings and other accounts.
• Review your credit card bills—Make sure there are no unauthorized transactions and report any that are immediately.
• Review your credit reports and history – Check your credit reports
from time to time in order to look for any suspicious activity
purportedly made on your behalf.
• Never give out personal information to a person or agency you don’t
know – If a person calls you up and asks you to provide your bank
account information, don’t do it! First, question the person calling
about their name and address, plus the contact number for their company.
Then, for example, find out if you really owe any such debt and if this
debt has been handed over to this agency for collection.
• Avoid using credit cards– Try to avoid using your credit cards at
places you are unfamiliar with. Identity thieves can steal your identity
through their swipe machines.
Identity theft can create havoc with your personal finances and
credit score, so it is better to prevent it in the first place. If you
somehow crater your credit score, it is not only difficult or impossible
to get a car loan or home mortgage, it can affect your ability to get a
security clearance or even a job—no one wants to employ someone who is
unreliable and, these days, a low credit score, fairly or unfairly, may
place you in that group…
Nancy Smith, Guest Contributor
For more on creditor proofing, please see: https://www.eqjournal.org/?p=1138 and https://www.eqjournalblog.com/?p=526.
Prof Bruce @ 3:57 pm
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Is Corporate Planning Obsolete?
Posted on
Friday 27 May 2011
I was recently asked about helping a fast-growing, local
tech company with their ‘corporate planning process’ as they prepare for
a possible IPO.
As readers of this blog will know, I am not a huge fan of Business
Plans or a Corporate Planning Process, per se—in my view, corporations
and their ecosystems are changing way too fast for most plans to be
meaningful for more than a very short period of time. In fact,
enterprises today have to be more like the US Marine Corps whose
unofficial motto is ‘show some adaptability‘.
So I would approach things a bit differently. I would recommend instead: Strategic Goal Setting made up of seven components.
1. Create and update the corporation’s business model(s)
so you know and understand your entire ecosystem including your
clients’ clients and suppliers’ suppliers (i.e. the corporation’s value
chain and supply chain) as well as how you can cost-effectively connect with customers and clients through a marketing process. New strategic directions and opportunities will become apparent as you go through this process…
2. You will also need to develop a one page spreadsheet showing how value is created for each individual client or customer.
You must be able to demonstrate in a clear and concise way how your new
enterprise/product/service/division creates either lower costs or
higher revenues (or hopefully some combination of both) for each
customer.
3. Create a financial model for your corporation including your CCC (Cash Conversion Cycle) so you understand how each customer affects both the top line and bottom line—it
will allow you to set goals and then understand how achieving those
goals will impact revenues and profits. Using your new model, your firm
will be able to test the sensitivity of your top line to changes in the
success rate of order capture, changes in your COGS (Cost of Goods
Sold), changes in your error rate and other variables.
Your value proposition to your clients and their financial impact on
your business (which is measured using your financial model) are mirror
images of each other.
Your suppliers should also show you that their value proposition is
and you should also insist that they have a financial model that shows
them how your business impacts them.
Why should you care if your supplier’s have a workable financial
model? Well, the long term viability of your firm depends, in part, on a
stable supply chain and it won’t be stable if your suppliers are
failing on a frequent basis.
4. Analyze your business model to determine how much ‘leverage’ is in it. Leverage comes primarily from eight principal sources:
i. HR,
ii. using OPM (Other People’s Money: debt and equity),
iii. forced savings,
iv. innovation,
v. capital equipment,
vi. location,
vii. branding &
viii. inflation.
Test your biz model: ask yourself do you have great HR, are you using
OPM effectively to increase returns, benefiting from forced savings,
innovating, do you have a great location or brand, is your capital
equipment top notch/best-of-breed & do you benefit from inflation?
If so, you are probably optimizing your leverage.
5. Next, write a Summary of your Business Model that is 2-pages or less that addresses:
a. Your value proposition including its ‘pixie dust’ (https://www.eqjournalblog.com/?p=9)
or differentiated value and how you can create a sustainable
competitive advantage. Make sure that you are abundantly clear about the
costs and benefits that you are creating for each customer.
b. How you can acquire customers and clients, including pre-launch
clients, in a cost effective manner through guerrilla marketing, social
marketing or direct marketing. Explain how you might use negative cost
selling to achieve this: https://www.eqjournalblog.com/?p=425.
c. How you integrated the Internet into your business model. (See: https://www.eqjournalblog.com/?p=1609).
d. How you can bootstrap your business and self-capitalize it (https://www.eqjournalblog.com/?p=1162).
e. How you will build cashflow and create a cash conversion cycle that is workable (https://www.eqjournal.org/?p=2257).
f. Why you and your team are the right people to execute this model.
6. From these come strategic goals and directions for the company made up of 3 to 6 month goals, 18 month goals and 36 month goals. Setting goals longer than three years out is probably futile.
7. Follow up and manage the goal achievement process. There are no ‘fire and forget’ missiles in the business world—goal setting without follow up is useless.
This is quite different from strategic and business planning as they
have been carried out for the last 40 years. Fast growing startups and
CEOs of established players like IBM spend large amounts of their time
on their business models out of which comes new strategic goals and
directions. This is also more like what product managers are expected to do to-day.
The juxtaposition of seemingly unrelated elements in your business
model can lead to new revenue channels, new marketing opportunities, new
ways to rationalize your supply chain, new strategic partnerships and
much more. But to see this, you will need to use all the
creativity in your possession. The good news is you can train yourself
to become more creative (see, for example, https://www.eqjournal.org/?p=1973 and https://www.eqjournalblog.com/?p=1967).
Also, you can, through your awareness of different types of thinking,
try not to be limited by your past or by past ways of thinking or doing
things.
Dr. Bruce M. Firestone, B. Eng. (Civil), M. Eng.-Sci., PhD.
Founder, Ottawa Senators
Executive Director, Exploriem.org
Entrepreneur-in-Residence, Telfer School of Management, University of Ottawa
Real Estate Broker and Mortgage Broker
Century 21 Explorer Realty Inc.
LINCOLN FIELDS SHOPPING CENTRE, 2525 CARLING AVE, SUITE 23, OTTAWA ON
K2B 7Z2 Tel.: 613.422.6757 ext. 250 Fax: 613.422.2807 Email:
bruce.firestone@century21.ca
Internet: www.OttawaRealEstateNews.com, www.century21.ca/explorerrealty and www.Exploriem.org
Blog: https://www.eqjournal.org
Twitter: https://twitter.com/ProfBruce
“Making Each Day Count”
References:
A financial model for a domain name backorder service: https://public.sheet.zoho.com/public/profbruce/backorderdomaincorpfinancialmodel.
Value Proposition of Residential Realtor: spreadsheet.
Value Proposition of HR Professional: spreadsheet.
Calculating the CCC: https://www.dramatispersonae.org/BusinessModels/CashConversionCycleMeasurement.xls.
Prof Bruce @ 8:58 am
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Creativity and Value
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Goal Setting
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Leverage
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Product Management
and
Rules? There are no rules in entrepreneurship.
and
Value Differentiation and ‘Pixie Dust’
and
Why Businesses Fail
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How to Establish a Sustainable Competitive Advantage
Posted on
Tuesday 24 May 2011
The Story of Paul Vallée and Pythian Group
Paul Vallée bootstrapped Pythian (pronounced ‘pith-ee-ann’) Group
beginning in 1996 when he left a contract consulting position in
Minneapolis that paid him $175 per hour and provided his family with a
lovely lifestyle to come to Ottawa and live the impoverished life of an
entrepreneur. His T4 for the next year proved it—his income was just
$1,000.
In fact, he did not get back on the payroll until 2000. But he
reminds his audience at the University of Ottawa that bootstrapping is a
race against time—if you only have three months worth of capital, you
can do a lot in those three months. And you can probably extend that
time by eating more Kraft Dinner and living like a student for a few
months or even years longer. Vallée also believes it is easier to start a
business today with all the free and near-free tools and support around
than it was even 15 years ago.
He notes that you have to be adaptable, persistent and a little crazy
to want to become an entrepreneur but it’s not about having a
genius-level IQ. It’s about grit, doggedness and discipline. He quotes
Calvin Coolidge: “Nothing is more common than unsuccessful men with
talent.”
While still a (self-admitted mediocre) student at the University of
Ottawa, Vallée started two businesses. Both were unsuccessful which led
him to look for: a) a BIG problem in an industry where all boats were
rising that was not yet solved and then solve it, b) a startup where he
was not wholly dependent on any other product or service or person for
his success—i.e., he could stand on his own two feet.
He found it by his fourth year—Pythian, which now has six offices in
five countries, provides d-base management services to Fortune 500
companies and others who are heavily dependent on data security and
integrity for their success. Organizations like CBS, Electronic Arts,
Boston.com, Telesat, Forbes, Toyota, TheStreet.com, Bridgewater,
Harvard, Western Union and Nordion cannot have their databases fail.
Pythian works with CIOs, VPs and CTOs and BIG computer systems.
Vallée believes that who you hire is crucial to the success of your
enterprise and he notes that Pythian, with an annual volume of about $12
million, has more Oracle ‘Aces’ (six) than $85 billion IBM (which has
one). In fact, one of the most important sources of sales leads for
Pythian is perusing job sites like Monster.com.
It turns out that future customers unknowingly tell Pythian that they
need the company by advertising engineering positions for folks with
Pythian-type characteristics. Paul and his team simply follow the chain
back to its source and convince CIOs or CTOs not to put those engineers
on their payrolls but to outsource the work and hassle and risk to
Pythian.
Imagine having potential customers pay to advertise that they need you! Works like a charm.
The other marketing channel they developed which is equally cheap and
effective—they wait for a technology to become obsolete (a legacy
computer system is a dream come true) and then pounce. Since no engineer
wants to work in a tech dead end, it’s fertile ground for Pythian to
find new outsourcing customers. Pythian provides a career path for techs
even if they work with legacy systems.
It wasn’t all smooth sailing though. There are still two chairs in
Heaven waiting for the first two partners to get there and still like
each other. The fact that the two founders of Pythian did not have a
partnership agreement going in meant that they paid more than $300,000
in legal fees when the time came for a business divorce and a separating
out of their interests.
But that wasn’t Paul’s worst day in business. September 11th, 2001
was. Their biggest client at the time was Sun Microsystems who were
located on the second floor of one of the WTC Towers. Sun Microsystems
suffered terribly that day after which there were many unknowns for
Pythian in the year following the tragedy.
Still, there have been no layoffs so far at Pythian in its first 14
years. They have become the employer of choice in their industry and
this combined with rigorous checklists (for everything), journaling and
quality assurance have given them a hard-to-beat, sustainable global
competitive advantage.
Pythian could probably be sold today for four times revenue—perhaps
as much as $50 million. But Paul, who is in his mid-30s, would miss the
action and his team and he presciently figures he would probably
re-enter the biz within a few years even if he sold it and putting
together another great company and another top notch team are tough, so
why bother selling it?
He looks at starting a business as a no-brainer. He tells the student entrepreneurs in his audience hanging on his every word:
“If you bet $10,000 on your next startup and you fail, look I realize
you’re down $10k. But if it works, it might be that you’re up $10
million. The startup game is a lot better than Casino Blackjack and, by
the way, the person who makes the most bets, wins.”
Professor Bruce M. Firestone, Entrepreneur-in-Residence, Telfer
School of Management, University of Ottawa, Founder, Ottawa Senators,
Executive Director, Exploriem.org, Broker, Century 21 Explorer Realty. Blog: www.eqjournal.org Twitter: www.Twitter.com/ProfBruce
Prof Bruce @ 1:39 pm
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Bootstrap Entrepreneurs– Case Studies
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Franchise and Concession
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Human Resources
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Pixie Dust
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Value Differentiation and ‘Pixie Dust’
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Prof Bruce’s Startup DNA Checklist
Posted on
Friday 6 May 2011
“Those mundane and tedious little things that, when done
exactly right, with the right kind of attention and intention, form in
their aggregate a distinctive essence, an evanescent quality that
distinguishes every great business you’ve ever done business with from
its more mediocre counterparts whose owners are satisfied to simply get
through the day,” Michael E. Gerber, The E Myth Revisited: Why Most
Small Businesses Don’t Work and What to Do About It, HarperCollins, NY.
1995.
If it is OK for pilots and astronauts, heart surgeons and nurses to
use them, it is probably OK for entrepreneurs too. What are we talking
about? Checklists!
Hospitals that introduce checklists for their OR nurses and Doctors
(for things as simple as: ‘Did you remember to wash your hands?’) have
found that their infection rates drop from around 10% to zero.
Enterprises that integrate checklists into what they do, day-to-day, may
avoid becoming 1-sigma businesses (see: https://www.eqjournal.org/?p=938
for more about this); they can witness remarkable increases in labor
productivity, improvements in customer satisfaction and reduced
litigation risks.
Entrepreneurs have little room for doubt and even less for mistakes*.
They need to be right almost all the time since their margin of error
is so slim—they usually don’t have the resources to recover from serious
error. So here is our Startup Checklist, 45 things you can do to improve the odds.
(* Most of this checklist will also serve the purposes on
intrapreneurs: people who are entrepreneurial champions inside
established firms.)
• First, find out if you are cut out to be an entrepreneur. Take the online ECQ Test: https://www.dramatispersonae.org/ECQTest/ECQ(ns)TestAuto.htm.
• Next, select the right idea for your business: https://www.eqjournal.org/?p=2137.
• Get your business model right: https://www.eqjournal.org/?p=692.
• Generate a business model: https://dramatispersonae.org/BusinessModels/BusinessModelGeneratorLandingPage.htm.
• Get a mentor. Be willing to learn…for a lifetime.
Bounce your ideas off him or her. Shine some daylight on your ideas—give
them a reality test. Verbalize: https://www.eqjournal.org/?p=771.
• Create a compelling value proposition with lots of differentiated value: https://www.eqjournal.org/?p=962.
• Self-capitalize/bootstrap your enterprise so you end up owning it not a VC. A chronic shortage of capital focuses the mind on the customer: https://www.eqjournal.org/?p=1162.
• Get as much trade credit and supplier credit as you can: https://www.eqjournal.org/?p=610.
• Use guerrilla marketing/social media to get earned media exposure: https://www.eqjournal.org/?p=643.
• Find at least three pre-launch clients: https://www.eqjournal.org/?p=1649.
• Remember if you can’t do three things (i.e., Sell, Sell, Sell), you can’t be an entrepreneur: https://www.eqjournal.org/?p=806, https://www.eqjournal.org/?p=1008 and https://www.eqjournal.org/?p=676.
• Make sure you can make great pitches and think-on-your-feet: https://www.eqjournal.org/?p=339.
• Set your goals, track your metrics* and remember to check, check, check everything: https://www.eqjournal.org/?p=2462.
(* Internet startups that track their metrics grow 7x faster than those
that don’t, Startup Genome Report 01, Max Marmer, Bjoern Lasse Herrmann,
Ron Berman, 2011. Full report: https://t.co/xxcxvu0. See also excerpt in postscript below.)
• Learn how to get sponsors for practically anything: https://www.eqjournal.org/?p=1649.
• Find strategic investors: https://www.eqjournal.org/?p=2406.
• Remember your competitors can be your allies too. This is called co-opetition: https://www.eqjournal.org/?p=104 and https://www.eqjournal.org/?p=66.
• Master the Entrepreneur’s Skill Set, A to Z: https://www.eqjournal.org/?p=1274.
• Three more things for you to do—Practice, Practice, Practice: https://www.eqjournal.org/?p=85.
• Find a ‘Magic Marketing Button’ that really works. Remember that pricing is an art not a science: https://www.eqjournal.org/?p=1146, https://www.eqjournal.org/?p=557 and https://www.eqjournal.org/?p=2525.
• Build a great team/be a team player. A meddlesome Board of Directors is not a substitute for a great team of entrepreneurs, technicians and managers: https://www.eqjournal.org/?p=862.
• Make sure you keep your costs down. Costs will always
rise to exceed revenues unless you are very, very careful. Everything
takes twice as long and costs twice as much as you thought: https://www.eqjournal.org/?p=96.
• Keep innovating. You can learn to be more creative: https://www.eqjournal.org/?p=72, https://www.eqjournal.org/?p=2504 and https://www.eqjournal.org/?p=1973.
• Be the best product manager you can be: https://www.eqjournal.org/?p=1410.
• Organize and exploit your supply chain with as much care and attention as your sales channels: https://www.eqjournal.org/?p=2012.
• Integrate the Internet into everything you do: https://www.eqjournal.org/?p=1609.
• Create an organization that suits your industry and give some
thought to how you set up and manage your personal affairs (this is
called: ‘creditor proofing’) in case things don’t go well: https://www.eqjournalblog.com/?p=526 and https://www.eqjournal.org/?p=1138.
• The most important decision you make other than to start your
business is who you hire and who you surround yourself with—so hire up. Remember, don’t be a dilettante; you need expertise in everything you do: https://www.eqjournal.org/?p=265.
• Pay attention to your cash conversion cycle, your cashflow and remember to collect receivables: https://www.eqjournal.org/?p=2257 and https://www.eqjournal.org/?p=1900.
• Build lots of leverage into your model: https://www.eqjournal.org/?p=2436.
• Take advantage of cheap or even free space and use all the
great (and free or near free) tools that are available to you over the
Internet: https://minioffice.org/.
• Remember ideas are fine but execution counts for more.
Don’t over plan, be flexible, be open to opportunity and pivot when you
have to but only when you have to. You need to remain focused; if you
try to keep all your options open by flitting from one business idea to
another and then yet another, you will, in all probability, fail at all
of them. Also, don’t try to skip steps in the process of going from
startup to growth company to mature enterprise. You cannot plan to go
viral: https://www.eqjournal.org/?p=2484 and https://www.dramatispersonae.org/UOttawaExecutionCounts/ExecutionCountsIdeasAreNotEnough.ppt and https://www.eqjournal.org/?p=431.
• Be someone that everyone can trust. Build a great brand.
A strong brand creates expectations of excellence and builds trust and
these provide the right conditions for you to develop sales. Pursue
greatness, the money will follow: https://www.eqjournal.org/?p=676 and https://www.eqjournal.org/?p=603.
• Be ethical: https://www.eqjournal.org/?p=755.
• Build and hold: https://www.eqjournal.org/?p=218 and https://www.eqjournal.org/?p=443.
• Create a personal business for life: https://www.eqjournal.org/?p=2020.
• Don’t fear success: https://www.eqjournal.org/?p=630.
• Join networking groups and participate in events: https://exploriem.org/ and https://ocri.ca/exploriem/.
• Get a Twitter account. Read Twitter Nation: https://www.eqjournal.org/?p=2080.
• Get a copy of the Entrepreneurs Handbook: https://www.enhandbook.com/.
• Write a blog: https://www.eqjournalblog.com/ and publish elsewhere: https://www.obj.ca/Opinion/Bruce-Firestone-5444.
• Build your own YouTube channel: https://www.youtube.com/user/ProfBruce.
• Start your own online store: https://ipstore.myshopify.com/.
• Expand the language/start your own UrbanDictionary channel: https://www.urbandictionary.com/author.php?author=Prof+Bruce and https://www.urbandictionary.com/author.php?author=ProfBruce.
• Give back to society: https://www.telfer.uottawa.ca/professor-directory/program-and-administrative-personnel/executives-in-residence/firestone-dr-bruce-m, https://dramatispersonae.org/StartupDNA/StartupDNAFrontPage.htm, https://www.dramatispersonae.org/EntrepreneurialistCultureFrontPage.htm, https://www.dramatispersonae.org/DesignEconomicsFrontPage.htm, https://exploriem.org/IOE5100AdvancedBusinessModelsCourseContentPlan.pdf and https://www.ottawasenators.com/.
• Need some inspiration? Read 1,000 Entrepreneur Quotes and Sayings: https://www.eqjournal.org/?p=2343 and https://www.eqjournal.org/?p=1084.
Prof Bruce
https://twitter.com/ProfBruce
Postscript:
Download this checklist as a PDF: https://www.eqjournal.org/Prof-Bruce-startup-checklist.pdf.
Prof Bruce @ 4:37 pm
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GTBMR
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Internet– the Internet is Eating a Hole in the Global
and
Leverage
and
Pre-selling, Finding New Clients, Keeping Existing Ones
and
Product Management
and
Receivables
and
Rules? There are no rules in entrepreneurship.
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Sell
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Social Media
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Value Differentiation and ‘Pixie Dust’
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Value Proposition
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Build Leverage into your Business Models
Posted on
Friday 6 May 2011
When you build leverage into your business model, you have
deployed a means to multiply the force exerted by your own efforts, time
and brains: you will also have a greater opportunity to succeed.
Leverage in your business model comes primarily from ten sources:
i. great HR,
ii. using OPM,
iii. forced savings,
iv. innovation,
v. capital equipment,
vi. location,
vii. network effects,
viii. marketing channels that reduce the problem from one to many to one to a few,
ix. branding, co-branding, co-opetition and co-creation,
x. inflation.
Test your biz model: ask yourself do you have great HR, are you using
OPM, 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.
Readers of this blog will know that I think that after your decision
to actually start a new enterprise, your next most important decision
arrives when you hire your first employee.
It’s talented people that produce revenue streams not assets so
always try to hire ‘up’. I look for people with the right set of skills
and experience but I am also looking for people with ‘good hearts’.
These folks won’t quit when the going (inevitably) gets tough. To read
more about this, see: https://www.eqjournalblog.com/?p=96.
Here is what the Oracle of Omaha had to say on the issue. It may take a few seconds for the lesson to become clear.
“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.
Leverage using OPM is increased when the project’s or business’ rate
of return is higher than money you borrowed. Or when you use bootstrap
capital, say, trade credit, where a supplier gives you credit at low
interest or no interest to buy from them or a customer gives you a
deposit on an order on which you pay no interest, you are then
leveraging your own efforts and capital with theirs.
You also get leverage when other people are paying off your debts.
This happens when, for example, you own rental property. Every time a
tenant pays their monthly rent and you pay off some of the principal
using their rent, you experience a form of forced savings and a wealth
effect.
I have spoken to the need to have some type of innovation in your
business model; as we saw above, Steve Jobs proved that you can think
your way to wealth a lot faster than you can work your way there. That’s
big-time leverage…from ideas.
It would also appear self-evident that having top notch capital
equipment provides greater leverage for your employees and means higher
productivity.
You also get leverage from your location and your brand. In real
estate terms, if you occupy a particular location, it obviously means
that no one else can, so make it a good one. I
Some people think that having a great brand is nice, actually it’s
essential. A strong brand creates trust and trust creates the
opportunity to sell. Think about it? Ever bought anything from someone
you didn’t like and didn’t trust? If you did, it was only once.
But a brand does other things for you. For example, Apple’s
incredible brand, its reputation for building insanely great products,
allowed Steve Jobs to cajole out of AT&T a share of their monthly
subscriber revenues for the launch of the iPhone, something that no
other telecom had ever granted to a cell phone manufacturer before.
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: the holy grail of techdom.
Imagine how much harder Steve Jobs and Apple would have to work and
how much lower their productivity as measured in revenue per employee
would be without recurring revenues from iPhone app sales and revenues,
advertising revenues on their mobile platform, downloads of paid content
from iTunes and a share of their carriers’ subscriber fees.
From a simple question, asked by Steve Jobs, and a tweaking of his
business model flowed great benefits. The harder they work, the more
money they make and, in Apple’s case, this relationship has become
geometric.
(Jobs has created radical change in industry after industry: personal
computing (the Mac), animation (Pixar), music (iPod), cell phones
(iPhone) and now book/newspaper/magazine publishing (iPad) plus perhaps
television and film (Apple TV). It is truly a remarkable record of
achievement.)
I was almost tempted to add a 11th form of leverage: the power that
comes from co-branding, co-opetition and co-creation. Co-branding is
poorly understood and vastly under-exploited. Here’s a simple example.
If I was responsible for marketing BMW cars, I would ask my self what
else people who buy BMWs also buy. For guys, maybe it’s a Harry Rosen
suit and a Rolex watch. So perhaps my TV commercials would show men
dressed by Harry Rosen looking at their Rolex watches as they step out
of their BMW before playing Texas Holdem for multi-million stakes. These
four brands might share marketing costs but more importantly, they
leverage off each other. People who like to play Texas Holdem get
introduced to BMWs and vice versa.
If I was marketing say promo products, I would use co-branding a lot.
Suppose you want to sell mouse pads to golf pros to give out to their
clients. Club pros usually don’t have much money but some of their
students such as lawyers and accountants do. So co-brand the mousepads
with all three. The lawyers and accountants will pay for it (because
they want to put their names in front of a golf-playing public and this
is a cost effective way to do that) and golf pros will hand them out
(because it’ll be sitting on someone’s desk basically saying: ‘Wouldn’t
you rather be golfing?’ and ‘Learn from the best! Call me now for your
next lesson at 613.mmm.nnnn!’).
Recently, I was advising S3, Select Start Studios on how to build their newsletter list (see: https://www.eqjournal.org/?p=3052). My advice? Invite third party content.
At Exploriem.org, we get a tonne of stuff from people in our
ecosystem for our monthly newsletter: entrepreneurs with new products or
services, Profs who’ve come up with clever new algorithms or pieces of
research ready for commercialization, providers who cater to our market
(entrepreneurs and intrapreneurs/product managers) with new services to
announce…
They not only provide us with more cool content, they become
ambassadors for our newsletter– they have a stake in it and a stake in
getting more readers for it. This is also a form of co-branding and
there absolutely needs to be more of it because it provides big leverage
for both. Basically, it introduces our entire ecosystem to our
suppliers’, clients’ and partners’ separate but overlapping ecosystems
that will almost never be entirely either one or the other.
Another form of co-branding is actually also a form of co-opetition
and a source of leverage. Why do Starbucks, McCafé, Second Cup and local
Bridgehead Coffee all tend to gather near the same geographic
locations? It’s so that: a) that area gets branded as a coffee haven and
when people feel the need, they think of a place where they have a wide
choice, hence overall market grows, b) marketing by any one of these
enterprises benefits the others in the group, c) unsatisfied demand is
reduced (for example, if lineups are too big at Bridgehead, they can go
to Starbucks and vice versa.)
Here’s how it works in the home building biz: two builders construct
model homes across the street from each other and ‘compete’. One is a
stucco builder, the other brick. They both advertise like heck. Someone
comes to see Builder A (the stucco guy). “Ugh,” they say. “I hate
stucco.” So they cross the street and buy a nice brick home. Someone
else comes along and says: “Brick is like so like last century” so they
go buy a stucco home.
Now if Builder A was alone, maybe he sells 1 out of 3 clients. The
other two wonder off to some other part of the city. Builder B is
experiencing the same thing. But if they co-locate and co-brand (even if
it’s really a form of co-opetition), 1 of 2 unsatisfied clients crosses
the road (going both ways) and their success ratios have changed from 1
in 3 to 2 in 3. So the equation 1(3) + 1(3) = 2 sales (read ’1(3)’ as a
success rate, i.e., ‘one of three’) has now changed to 2(3) + 2(3) = 4
sales. THIS IS HUGE LEVERAGE, right?
Co-creation is what happens in the Apple universe when you open up a
platform like the iPhone or iPad to app developers. It turns out that an
active, broadly developed app marketplace is essential to the sale of
iPhones and iPads and one of the reasons for Apple’s wide lead in
smartphones over previous leader RIM and Blackberry. By leveraging the
talents of a huge number of unpaid (by Apple) developers, they extend
their brand and significantly boost the utility and revenues of their
devices sharing some of that bounty with third part app providers.
Microsoft decided (unintentionally) to do just that after launching the Kinect:
“Within weeks of launching Kinect, someone had hacked it and
there was open source code on the Internet. Instead of freaking out,
they decided to run with it and create a software development kit. It’s
thinking like this that will make personalization and co-creation a key
driver for how brands and companies create closer relationships with
their customers,” Sondre Ager-Wick, Head of Design Strategy and Foresight, Nokia, December 14, 2011 (https://nokiaconnects.com/2011/12/14/5-incredible-ways-mobile-design-will-change-in-the-next-5-years/).
Threadless does something along these lines by inviting artists to
submit T-shirt designs for production after a voting process takes place
amongst their community. Biz models are developing or discovering new
and interesting sources of leverage that have never been possible
before.
The most obvious example of network effects is the facsimile machine.
I was actually one of the first people in Ottawa to get a fax machine.
The problem was: what if you had no one to send a fax to? I had to work
hard to get my law firm to install one. They asked me: “Why do we need
it? We have couriers for that?” “But imagine if I could send you to
documents in minutes instead of hours?” I responded. “How cool would
that be.”
Having the only fax machine in a town or having a fax machine that
uses a communications protocol that is different that everyone else’s,
is pretty useless. Having a video player that works with Beta isn’t much
use if all the tapes are VHS.
More recently, network effects are apparent in Apple’s app store,
Google’s search engine algorithm, Skype’s video calling, in fact,
anything that verges on becoming a standard can also create the
potential for network effects to take hold. You can read more about how
standards are creating wealth, please refer to: https://www.eqjournal.org/?p=1366.
Leverage is also generated in Business Models that somehow manage to
reduce the one to many marketing problem to one to a few. This is done,
for example, by developing sales channels that include resellers. We
worked on this for Amy Yee’s EventBots business. You can see our
handwritten notes on this at: https://dramatispersonae.org/StartupDNA/event-bots-biz-model-redesign-march-2011-notes.pdf.
Essentially, practically everyone on the planet will have at least one
event in their lives that they will want to record; e.g., their
weddings! So, in theory, EventBots could market to 7 billion people. Not
very practical.
Instead, we worked on a model that would see EventBots selling to
Wedding Planners, Event Managers, Hotels, Convention Centres, Marketing
Agencies and Media Companies, political organizers, anyone who might
want to record in a meaningful way some event they host or organized.
This builds plenty of leverage in Amy’s model.
Your marketing efforts also generate leverage for you when you use a non-linear selling model: https://www.urbandictionary.com/define.php?term=Non-Linear%20Selling.
Lastly, if you are in an industry that is experiencing price
inflation, you are benefiting from asset value increases without putting
in any effort of your own, i.e., more ‘free’ positive leverage for you.
That is why it is almost always better to enter into buoyant sectors
where ‘all boats are rising’.
Prof Bruce
Prof Bruce @ 4:17 pm
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IRR, Internal Rate of Return
Posted on
Saturday 23 April 2011
Power of Leverage/Goal Setting
Determining the Internal Rate of Return
Probably the truest measure of a project’s rate of return is its
Internal Rate of Return. The IRR is that interest rate that exactly
balances the discounted value of future net cashflows with the
investment required to develop the project or enterprise. The higher the
interest rate (discount rate) needs to be in order that future net
cashflows exactly offset the upfront investment, the higher the IRR is
and the better the project is, at least in terms of return on
investment.
The IRR can be found by solving the following equation by trial and error (computers do it using an iterative process).
In the simplest model, if a student loans a Professor $1,000 and the
Professor pays it back in three years with interest of, say, $150 per
year, we have:
Year Investment/Cashflow (from the Student’s POV)
0 -$1,000
1 $150
2 $150
3 $1,150
The IRR can be found by solving the following equation by trial and error (not much trial or error here):
$1,000 – $150/(1+irr)^1 – $150/(1+irr)^2 – $1,150/(1+irr)^3 = 0
or IRR = 15% p.a.
Now, I have done survey after survey (not scientifically, I may add)
of my students over the years and I haven’t yet found any students
willing to lend their (poor) Professor $1,000 in return for $150 per
year of interest. They usually aren’t interested until the money gets to
be around $200 a year and most of them are looking for even more, $300
or $400 in interest per year. This implies that their Internal Rates of
Return are in the 20 to 40% p.a. range.
Some work I did earlier on rates of return for students pursuing an
architecture degree suggested that their IRRs are in the range of just
14%*. There could be a number of factors at work here including the
possibility that architects (unlike more hard headed engineers like me
or business students) are somewhat ‘other directed’ (a nice way of
saying they are taking their architecture degrees for reason other than
the big bucks).
(* Please see: A Case Study of the Perceived Value of An Architecture Degree, Carleton University, Ottawa, Canada, https://www.eqjournal.org/?p=1061.)
In any event, it is well known that personal discount rates tend to
fall as people get older because: a. they have usually have more money
as they get older and a greater supply of money implies that its price
will fall, and b. their willingness to take risks drops so that they
would rather have it in T-bills than startups by the time most people
are in their 60s, 70s or 80s.
Just as IRRs tend to decrease with age, they tend to drop as
companies become larger. Mega corporations tend to have minimum
expectations for their IRRs (on their equity) of around 20 to 22% p.a.
Entrepreneurs and startups usually require much higher IRRs than this
because so many things can and do go wrong that they have to aim high
just so they don’t go oob (out of business).
When the Disney Company acquired an expansion franchise in the NHL in
the early 1990s, there was some concern that Disney could afford to
‘buy’ players and push up salaries even faster than they were already
going up. Executives from that Company reassured Expansion Committee
members that every Disney investment including sports teams had to meet
certain minimum investment criteria and this shouldn’t be a concern. The
Mighty Ducks of Anaheim began play within a couple of years thereafter
and Mike Eisner, then CEO of Disney, was true to his word.
If you download the spreadsheet for a Rental Home Builder posted at: https://www.old.dramatispersonae.org/IRR/SampleIRR2.xls,
you will see that if an investor/builder/developer puts down, say, 25%
equity on each unit, he or she will see a 22% p.a. IRR. But if they put
down just 5%, the IRR on their equity jumps to 56% p.a. In both cases,
the IRR of the project hasn’t changed—it remains 10.8%. What this tells
you is that the IRR for a project (or enterprise) is made up of a series
of IRRs on equity and debt. In this case, the capital structure is
simple—there are just two components: the investor/builder/developer’s
equity and the bank’s mortgage debt.
So the IRR for the Project (at 10.8%) is like the ‘weighted’ average
of the IRR on Equity (22%, or 56% in the case using greater leverage)
and the IRR on Debt (in this case, this equals the interest rate on the
mortgage, which is 6%). For more complex projects, you can have many
components in the capital structure—equity, structured equity, debenture
debt, secured debt, sub debt, capital lease, unsecured debt and so
forth. Each tranche will have its own cashflow profile and IRR.
You might ask how can Banks afford to lend money at 6% when the above
graph suggests that mega corps want minimum IRRs of 20 to 22% p.a.?
Well, just ask yourself how much interest you are getting on your
savings account. If the answer is less than 1% (in fact, after you
calculate all the fees you pay your Bank, it is probably negative), then
you can figure it out for yourself. Bottom line, the Banks use OPM
(Other People’s Money) mixed in with a little of their own so that their
IRRs on their equity are among the best on the planet. Don’t worry
about your Bank’s rate of return, worry about your own.
(Recently, I have added a similar spreadsheet for an investor or sitting owner (owner occupier) of industrial condos. See: https://www.old.dramatispersonae.org/IRR/SampleIRR2-commercial.xls.
Again, I did two cases: one where you buy/invest in one industrial
condo with 25% down and a second case where you buy five units with 5%
down. In all probability, in the commercial space, you might more
realistically do a case where you buy one with 40% down or two with 20%
down since LTV (Loan to Value) ratios tend to be lower than in the
residential area.
Still the principles are the same: more leverage increases your
return on equity under certain conditions. Your total return (wealth
effect) is again made up of three components: cash on cash return (money
you make every month assuming your mortgage and other payments are less
than your rents), inflation (all inflation in real estate values go to
the equity owner assuming your marketplace is not going through a
recession) and forced savings (paydown of mortgage either by sitting
owner or tenants).
Establishing Sales Goals Using a Reverse IRR Model
The Reverse IRR Model* helps you establish monthly goals for your new
enterprise that, if (when) achieved, will also allow you to pay your
bills and make a profit too. You want to make a profit not so you can
take a trip to Vegas but so you can reinvest in your business and in new
technologies, new products, new services, more staff, more staff
training and so forth.
(You can download this model from: https://www.old.dramatispersonae.org/IRR/ReverseIRRAcmePromotions.xls.)
Visualize Your Goals, Then Achive Them: One Step at a Time
People are really good at reaching goals once they set them. If you
are involved in a timed race, you always want to go second or near the
end when you know everyone else’s times. Then you have a goal, you can
break it down into intervals and WIN.
Same thing for business. It does you no good to say, I want $150k in
sales my first year. What you need to say is, I need $12,500 a month in
sales or $625 a day, every day for the 20 working days in each month.
Visualization is key. Put up a sign “N = ?” in your office and at
home and every day focus on it and drive N up. (N can be sales, number
of customers, number of products shipped, whatever. It is the basic
metric for your business.)
Don’t think that, oh well, I didn’t make $625 in sales today, I’ll
make it up at month’s end. It doesn’t work that way. If you miss today’s
target, it means you have to sell $1,300 tomorrow or $1,925 the day
after and pretty soon, you and your business are toast.
The Reverse IRR Model is based on the assumption that, going in, you
are likely to know your costs more accurately that what your revenues
are likely to be. Revenue estimates, whether based on marketing surveys
you did or a guesstimate you came up with as to what percentage of the
total market you think you are going to get, can be highly unreliable.
So goal setting based on what your expected costs will be plus an
allowance for profitability based on some type of target you have
established, is probably as good a mechanism to establish your future
revenue stream as any.
The Power of Leverage/Using Other People’s Money
Note also the power of using OPM (Other People’s Money) or leverage
(aka debt). It increases the IRR on your equity and it allows you to
ration your use of a limited amount of capital to do more of whatever it
is you are planning on doing.
Leverage is usually interpreted (especially by Banks) as increasing
risk but as you can see in the rental home example we used above, it may
be that if you develop five rental units instead of one, your risks
(and your Bank’s exposure to you as well) may go down not up despite
higher gearing.
Archimedes Understood the Power of Leverage
If you use your equity to build five units instead of one (i.e., you
are putting 5% down on each unit instead of 25% and financing the rest),
and if one tenant leaves, you will have a 20% vacancy rate instead of
100%. The free cashflow you are earning from the other four (still
occupied) units can assist you in paying the mortgage for the vacant
fifth unit.
If the average vacancy rate for each unit over a ten year period is,
say, 10%, then the probability that all five units would be vacant at
the same time is pretty low (0.1 to the power of five or just .001%).
So, as entrepreneurs, we can argue (with our Bank) for more leverage not
less.
Obviously, the Bank will say:
1. If you put down more equity, they will be looking at a better debt
to equity ratio and that means if asset values tumble, their loans are
protected by your equity since in a Bankruptcy, Foreclosure or Power of
Sale proceeding, the secured creditor (the Bank) gets paid first.
2. If you only had one unit instead of five and it becomes vacant,
your income from other sources may be enough to cover your loan
payments* but if you had to cope with all five units suddenly becoming
vacant, you could be under water in a hurry.
(* This is known as the cashflow coverage for your loan; i.e., your
free cashflow as calculated by the Bank must be significantly greater
than your monthly mortgage obligations or they won’t make the loan. The
Bank will usually only include half the rental income you are receiving
and will deduct from your employment and other income, your other
monthly obligations like home mortgage and car payments.)
This is what I like to call the ‘nuclear bomb scenario’ or what other
people call the Banks’ ‘belt and suspenders’ approach to lending. Banks
generally only like to lend money to people who don’t need it (i.e.,
people who have enough of their own cash to start a project without any
Bank lending).
From your POV, your cash-on-cash returns are much higher if
you build five units. The spreadsheet shows if you leverage your $37,500
in equity into five rental properties (with 5% down on each unit), you
have a cash return of $254,052.85 over five years as compared to
$89,291.00 if you can only build one unit (with a down payment of 25%).
So leverage has the strange effect of being more risky (at least from
the Bank’s POV) but ultimately lets you pay off all your debt
obligations much faster than if you used less leverage; i.e., bought
only one rental property.
Bottom line, you need a sophisticated, motivated lender before you can do highly leveraged deals.
@ProfBruce
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 novels at www.brucemfirestone.com.
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 send the first four chapters of Quantum Entity Trilogy to your friends for free from: https://www.exploriem.org/quantum-entity-subscribe/
Prof Bruce’s current motto is: “Making Each Day Count”
Prof Bruce @ 10:58 pm
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Manpacks and the Tipping Point
Posted on
Thursday 21 April 2011
(This article first appeared in Ottawa Business Journal, https://www.obj.ca/Opinion/Bruce-Firestone-5444)
Manpacks Co-Founder, Andrew Draper, recently visited the Telfer
School of Management to give a lecture in our continuing Magic from a
Hat series. Anyone who starts a company with the following tagline (and a
favicon that uses a pair of men’s briefs) is bound to be different:
“We give men (& the people who love them) more time to build
empires, climb mountains, slay dragons to achieve the goals they aspire
to.”
Draper, 36, doesn’t disappoint. The Kanata/Providence (Rhode Island)
company, started by Draper and Ken Johnson in 2009, introduced us to the
concept of PAAS: Product as a Service. The Holy Grail for tech firms is
SAAS (Software as a Service) together with CMRR (Committed Monthly
Recurring Revenues). Draper and Johnson have managed their underwear and
sock subscription service in exactly the same way.
Manpacks Co-Founder, Andrew Draper
Draper has boiled his 2-minute elevator pitch down to just 2-seconds: “We’re the ‘Netflix’ of underwear. But don’t mail it back,” he adds to laughs from his audience.
Draper advises student entrepreneurs to find the essence of their
ideas by distilling them down to the simplest possible form. What
Manpacks does is deliver men’s underwear/socks and other essentials
every 3-months.
It took them just one month from idea to launch but, despite the fact
that they had some cool code, their website was too complicated and it
just didn’t work—they got just one customer in their first three months.
Men don’t like to shop online or in RL (Real Life) so it turned out
that simplicity was really important. By simplifying their site and
re-launching it, they got five clients in the next 24 hours. This taught
them to experiment early and often—to iterate and fail or succeed,
fast. They also track detailed analytics so they actually know what is
going on.
It helps a lot that Andrew is both a designer (1995 grad) and a
(self-taught) coder. Manpacks is a success, in part, because Draper,
like Facebook’s Mark Zuckerberg, can actually code plus they both have
talent, focus, discipline and great timing. Draper feels that terrific
design is more about how it works than how it looks which also happens
to be what Facebook and Apple believe too.
Draper started Manpacks after kicking around for more than ten
years—playing in a band, starting a record label, working for four
different agencies in California and then being an independent
contractor. The last gig paid him $125 per hour but even so, he didn’t
want to be wage slave forever which led to… Manpacks.
Now he wanders around his Kanata home in jeans, t-shirt and slippers
coding and seemingly doing endless media interviews. Manpacks gets more
earned media coverage than just about any other business its size
anywhere in North America. Stories about the off-beat nature of their
service have appeared in: Inc Magazine | October, 2010, Huffington Post |
July 20, 2010, boston.com | June 10, 2010, wgrz.com | June 16, 2010,
nytimes.com | June 9, 2010, ESPNRadio.com | March 12, 2010, Maxim.com |
March 15, 2010, NPR.com | March 13, 2010, Thenextweb.com | March 14,
2010 and many others.
You’ll notice that all the stories cluster around the same time
period: March to Oct. 2010. That’s because they got their key break the
day (March 5, 2010) that Hacker News did a story on them. That got them
14,000 visitors in the next 24 hours. A tipping point had been reached.
It turned out that the guys had created what Seth Godin calls a
purple cow—something so unique that everyone wants to talk about it and
them.
At the time, their business model consisted of buying underwear and
socks from Haines (Champion), having the inventory delivered to their
home and repackaging it there before sending the stuff on to their
customers. The sudden increase in subscriptions sent them to local
Wal-Mart and Target stores to buy product at retail frantically trying
to meet a huge surge in orders.
Now with 17,000 unique visits monthly to their site, this is not
sustainable. So they did a deal with fulfillment company—Sweetwater
Logistics in Charlotte, NC—and now they can handle current volumes and
any additional work that comes their way.
All the media attention they received came from their social media
and blogosphere strategies—they never went to a journalist and asked for
a story.
It’s interesting to note however that the idea of Manpacks is not
unique—a guy had tried it before and failed. Draper makes the point:
“It’s not your idea that counts, IT’S THE EXCUTION OF YOUR IDEA THAT
COUNTS.”
Manpacks was started with $500 + $10 for their domain name. They have never taken a dime of VC money.
Draper looks at starting a business this way: there is a balance of
risks and rewards but, in his view, the rewards greatly outweigh the
risks:
RISKS [RISK MITIGATION]
– could be laughed at [funny on purpose]
– could be called stupid [people forget/forgive fast]
– startup capital is $510 [upside in the millions]
– could be doing something else [watching TV or drinking w/ buds]
– similar biz already exists (Monthly Boxers) [so what; if it’s a good idea will have comp anyway*]
(* Amazon has already discovered PAAS for things like Cologne/Shaving Gel/Hair Gel/Blades etc.)
Draper was guided by Seth Godin’s comment: “The riskiest thing we can do right now, is nothing.”
It didn’t hurt that they nailed the name: ‘Manpacks’ has an obvious
double entendre. They also wanted: a) to be awesome/not mediocre, b) to
be passionate, c) to simplify people’s lives and d) to inspire people.
I asked Draper about his exit strategy. He described four scenarios:
– it fails (unlikely now)
– get to $2m per year in sales (keep it as a PB4L, Personal Business for Life)
– get to $10m per yr in sales (sell to Amazon like Zappos did)
– get to $100m per yr in sales (keep it independent and change/extend the biz model)
He is unsure what is next but that doesn’t bother him one bit. He shrugs and says: “There are two choices in life—you can be a cog or be a wheel. I want to be a wheel.”
Prof Bruce
Postscript: PAAS will spawn many new business models in my view. If
instead of selling a product once to one customer, you can turn it into a
subscription service with CMRR, you could well be on your way to
creating a thriving enterprise with non-linear selling taking place.
I define non-linear selling this way:
Selling in pairs or other combinations and for more than one year at a
time, thereby decreasing the absolute number of deals required to sell
out your inventory as well as increasing your efficiency and
productivity.
If there are 200 signs in an arena and you sell them to sponsors in
pairs for a term of two years each then you only need to make 50 deals
per year to sell out your inventory instead of 200 per year–thus, you
have reduced your workload by 75%. If you can further increase the
number of multi-year deals for pairs of signs you can do per annum then
your sales will increase at an ever increasing rate– that is non-linear
selling.
Postscript 2: A startup is actually a process of discovering what biz
you are really in. Opportunity is everywhere—see it/recognize it/seize
it.
Getting people to give you their email address is almost as good as money.
No matter how well you design something, people will always find a
way to use it that is different than you expected—so get feedback. Watch
your customers. Learn from them.
Postscript 3: here is my definition of Paas.
You’ve heard of SAAS, Software as a Service, well make way for PAAS,
Product as a Service. Customers are subscribing to services that
regularly deliver products they need over and over again. This could
create a whole new class of business models.
Instead of selling your product to one customer, once, you might be
able to turn it into PAAS, ‘product as a service’—people would subscribe
to your service and you would deliver the product to them, say, once a
quarter. It could be anything people use over and over again— like hair
gel, shaving cream, razor blades, perfume, face cream, hey, maybe even
socks and underwear.
tags: saas, software as a service, committed recurring revenue, cashflow, business model, product management
Prof Bruce @ 6:38 am
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Livable Cities Versus Mono Cultured Suburbs
Posted on
Sunday 17 April 2011
This article was originally written for the Conference on Social Harmony, Ottawa Public Library, December 4, 2001
It wasn’t long after my wife and I and our five kids moved to a
western suburb of Ottawa in the late 1980s before a group of our
neighbors circulated a petition in the neighborhood. They were concerned
that a development of townhomes about five blocks away in the largely
single family home suburb would devalue property values in the area.
We had moved to Kanata because my wife felt it would provide a better
place for our five children to find friends and develop a social life
beyond the nuclear family unit.
The not-in-my-backyard (nimby) movement generated a lot of support
(we did not sign on) but, in this instance, they were unsuccessful– the
townhomes were built and property values in the area did not suffer.
Urban Icons (also nimby targets)
Like many such efforts, they are based on two primal impulses—greed
and fear. To a large extent, we are seeing the results of these emotions
in the built form of our cities—large expanses of low density
structures of similar uses (houses) on curvilinear streets that lack
charm and activity—mono cultured suburbs, if you will.
Local politicians, not unlike politicians at all levels, do at least
one thing superbly—they can count noses. I have been to many local
council meetings and watched soundly based plans for urban development
defeated by hostile neighbors. Today, I advise all my clients involved
in the world of planning and development to bring the neighbors on side,
in fact, to bring all stakeholders on side before attempting a change
in use. You just can’t get your plans approved unless you present
Council with a beautifully pre-packaged, gift wrapped, be-ribboned
project with all the noses in the chamber nodding up and down rather
than side to side.
My oldest daughter at 11 asked me if we could move to Riverdale. Not knowing much about Riverdale, I asked her: “Why?”
“Well, all the kids in Riverdale live within walking distance of the Pizza Pit,” she replied.
“I’ve never heard of the Pizza Pit.”
“Well, it would be so cool to be able to, like hang there or like maybe get a job,” Rachel added.
Anyone know who lives in Riverdale?
Well, it includes Archie and Veronica and Betty and Jughead and their gang.
Riverdale is an imaginary place, but not to my three daughters it isn’t
“The reason everyone likes Riverdale is because everything is in walking
distance, the shopping mall, the grocery store, the restaurant(s), the malt
shop, yada yada yada. Just thought you might need this bit of info,”
From, Jessica
(Email message from Jessica, age 10, to her Dad, Sunday October 7th, 2001.
It didn’t always used to be that way. Today, people drive 100s of
kilometres and take a ferry to park their cars to wander around a place
like Nantuckett. Why?
Well, they like the walk-about feel of the place. They like to see
people sitting on their front porches. They like that there are
sidewalks and that houses are close to the street and each other. They
like the fact that there are trees overhanging the street providing
shade in the summer and some protection from winter winds.
Tree in the Boulevard (not permitted in Kanata)
Isn’t it ironic that people need to go to Disney World to experience Main Street America?
How did this come to be?
Once upon a time, town government or city-state government was based
on the Athenian model of participatory democracy. Citizens and land
owners met with town elders to plan the development of their
communities—who lives where, what type of activities would be next to
each other, where the town markets would be, places of worship,
fortifications, tanneries, milliners, coopers, blacksmiths, artisans,
guildworkers, merchants, nobles, and so forth.
Problems between neighbors arose from time to time. “Mary’s goat is
eating my vegetable patch and it should be staked,” says Tom. “He should
fence his garden—my goat, Mabel, needs to be free to forage for food,”
replied Mary.
The town elders would meet with Tom and Mary, hear both sides and
then render a decision (Mary’s goat shall be free to wander—but she
shall pay half the cost of fencing in Tom’s garden).
Speedy resolution of such issues stopped them from festering and
making enemies amongst neighbors. I tell people: “Once you start arguing
with your neighbor, one of you has got to move.” Nothing is worse than
coming home from a workday and not being able to look your neighbor in
the eye, wave ‘hello’ or stop and have a chat.
It’s worse than this though. Municipalities today rely on 1-800
snitch lines to spot bylaw infractions—neighbors are encouraged to rat
on each other. This is not Greek city-state participatory democracy; it
is part of what I call Democratic Abuse.
My backyard in Kanata backs onto the Kanata Lakes Golf Course. It is
surrounded by a four foot retaining wall topped by a six foot high
wooden fence. You need to be 10 and a half feet tall to see in our rear
yard. Yet within three days of erecting a clothesline there, a bylaw
enforcement officer was at our front door with a fine and a warning. (Of
course, clotheslines are not allowed in our neighborhood—they detract
from property values.)
I never did find out who ratted us out but I didn’t take down the
clothesline until our last baby was out of diapers—my wife preferred the
smell of sun dried diapers not to mention the environmental benefits of
not running our dryer six hours a day.
When we were planning a 600 hundred acre development which we called
West Terrace around what was then called the Palladium (now the Corel
Centre where the NHL’s Ottawa Senators play), I had many meetings with
local planners about our concept design.
Along Palladium Drive, we showed nightclubs, cafés, shops and other
services fronting on the street. “But where are the six metre buffer
strip, the double loaded parking aisle, the side yard requirements?”
they cried.
Theatre of the Street (not permitted in Kanata)
I tried to explain that we wanted to develop a mixed use
place—somewhere that people could shop, work, live and play … a walk
about place.
But it wasn’t in their zoning codes so it couldn’t be allowed.
West Terrace—Circa 1989 Mixed Use Plan (Precursor of Kanata West Concept Plan)
James Howard Kunstler in his influential works on neo-uurbansim (The
Geography of Nowhere and Home From Nowhere) recommends that cities “burn
all their zoning codes.”
Let cities develop organically; let them grow like seeds out of the
ground. The world’s great cities like Paris, London, San Francisco,
Sydney, Tokyo and Toronto all have uses mixed together. It isn’t unusual
to find along a boulevard in Paris a patisserie, a corner store, a
print shop, a legal office, a café, an apartment block, a butcher shop, a
print shop, an internet café, an artist colony, an office building, a
plaza, a small park, townhomes, even the occasional magnificent single
family home.
The Palladium Interchange
I have often been asked why the Palladium isn’t in downtown Ottawa.
Apart from the facts that a) the NCC (aka the No Commitment Club) said
‘no’ to putting a ‘hockey rink’ on Lebreton Flats (reserved for uses
that serve a national purpose) and that b) we would have had 500
opponents, most of them lawyers, if we had put it in the Glebe at
Lansdowne Park, Ottawa does not have a big time people mover like
Montreal or Toronto. Buses running up and down Bank Street can move at
best 2,500 pph compared with 20 to 30 thousand pph on subways. We would
have had one sellout—opening day after which no one would come because
they weren’t going to put up with the four hours it took to clear the
arena.
There is a magic elixir or tonic then that helps shape great
cities—they all have big time people movers—their undergrounds, métros,
light rail, streetcar systems. This allows a mixing together of uses
combines with higher densities to form successful and eclectic urban
agglomerations that are highly synergistic.
Siemens and Dopplemayer—3,500 to 5,500 pph
Ottawa’s O Train—started in 2001
Synergy is a fancy word for teamwork. According to Jane Jacobs all
human economic development stems from the development of villages, towns
and cities. It is by proximate co-habitation that we learn about each
others strengths and weaknesses and learn to share and divide tasks
according to individual skill sets.
Many people have the view: “More pie for you means less for me.”
The folks fighting last year on Canada’s east coast at Burnt Church
over lobster quotas clearly believe this old economy saw and, maybe they
are right.
But it is possible that they aren’t.
Economic growth derives from a multiplying of options, from
specialization, from comparative advantage, from the development of
standards and, in the new economy, from network effects,
disintermediation and scalability.
Now let us go back in time to the land of Ugh, Nnn and Zll. In the
land before time, the family of Ugh lived by themselves in the savannas.
Ugh was an expert antelope hunter providing his family with four
antelopes a month. His carving skills, however, were poor, producing
only one set of flint knives per month. A mile away, the family of Nnn
is hungrier- Nnn is a good flint knife producer, producing three sets of
flint knives per month but only bagging one antelope.
Ugh
Nnn
The families of Ugh and Nnn decide to co-locate to form a village, at
first, for the protection of both. By co-locating and forming the first
primitive village, they also open up the possibility of observing each
other and co-operating and trading between the families.
The result is that after a few months, they decide that Nnn will
concentrate on producing flint knives and Ugh will focus on hunting. The
GDP of the two families before the co-location is five antelopes and
four sets of flint knives. After co-location and specialization, the GDP
has increased to seven antelopes and six sets of flint knives each
month. This represents a phenomenal increase in the well being of the
two families. So much so that this first village is producing goods
surplus to their needs. This sets up the possibility of trading with a
third family, the family of Zll, who are expert in producing textiles
(animal skins) resulting in a further substantial increase in value for
the emerging regional economy.
Before Village Formation
Ugh produced:
Nnn produced:
After Village Formation
Ugh produced:
Nnn produced:
This simple example demonstrates why the ‘more pie for me’ doesn’t
necessarily mean less for you. You will note too that this primitive
economy works because information about Ugh’s hunting prowess is flowing
from Ugh to Nnn and information about Nnn’s skill with flint knives is
flowing from Nnn to Ugh. What this means is that it is the beginning of
an information economy and it shows how improved communications even in
the 10th Millennium B.C. causes economic growth through the
multiplication of options and opportunities. Afterall, it was after
1994′s introduction of the Mosaic Browser turned the PC into a mass
communications tool that productivity took off and the long promised
payoff from huge investments in computers finally arrived.
People need people like no other animal on the planet—we are uniquely
co-dependent on each other. Skill sharing is the most fundamental
reason for the improvement in the human condition. What we seem to be
missing in many of our communities is the feeling of belonging to the
‘tribe’; that feeling of belonging to ‘Team Ottawa’ or ‘Team New York’.
We get that feeling during times of great stress like the recent
September 11th, 2001 bombings of the World Trade Center Towers. I have
given a lot of thought about how to engender more of this type of
fellowship in our cities and towns. It is about more than just feeling
good about yourself and your team. It’s about improving living
conditions and productivity too. Sports teams, festivals, artist
colonies, the performing arts, entrepreneurs, researchers, all those
people involved in creative pursuits seem to add to the feeling of
belonging which leads to higher team spirits. People working in teams
can create far more than the individual working alone.
City-State Team Spirit = Festivals + Performing Arts + Universities +
Entrepreneurs + Researchers + Artists + Sports Teams = Creativity +
Productivity
For example, the tulip festival of Ottawa celebrates its 50th
anniversary in 2002. They are creating a five foot high tulip (partly in
answer to the wildly popular Toronto Moose)—two of these sculptures
will be given to each of Ottawa’s 21 Councilors to take into their wards
to get local artists there to paint them. The Mayor will then declare
the Tulip as the official flower of the City and the 42 ‘originals’ will
be auctioned off. Visitors will see these enormous tulips everywhere.
It will be a sign of hope and friendship (the Tulip Festival started
because Canada gave refuge to Queen Julianna and her children in WWII
and Canadian fighting men liberated the Netherlands from the Nazis. The
gift of Tulips from Holland represents everlasting friendship between
the two nations. City building is essentially an optimistic endeavour
and the sense that we are all in it together helps.
Cities and towns all over vie to have the biggest something-or-other: hockey stick or whatever.
Some towns have the big slogans like Biggar, Alberta: “New York is
big, but this is Biggar.” Think how much better this is than the
recently abandoned, $200,000 Ottawa slogan: “Technically Beautiful.”
Think about how important fire is to almost all human technology. It
is amazing to me that in two episodes of the television hit show
Survivor Australia and Survivor Africa, 32 people, contestants who knew
for months that they would be on this show, could not light a fire with
stone age tools after two days of trying on each show.
Survival
These people had months to prepare; they had access to books on how
to do it; they obviously had read them because they put the tools
together—but they got smoke but no fire. Ugh. Imagine how valuable
someone who could reliably do it would be on one of those teams. (Tom
Hanks did better on his own in Castaway.) Make sure you are one of the
people on your team that can make fire!
Ideas are not limited. They are for all intents and purposes infinite. There are no limits to human ingenuity.
There are close to 800,000 people living in the New City of Ottawa
when it was officially formed at the end of last year through the
amalgamation of the 11 municipal and township governments together with
the Regional Municipality of Ottawa-Carleton. When the Outaouais
(including Hull, Aylmer and Gatineau) is included, the National Capital
Region’s population swells to 1,009,000. And within a one hour driving
radius, there are 1.7 million people with the highest average family
income in Canada at over $64,000. This is one of the best kept secrets
in Canada; hardly anyone knows just how big the area has become and how
much influence Ottawa has on a world stage in many areas. Even people
living here all their lives do not understand the changes taking place
in this community. It may not be too bold to predict that the population
of the greater Ottawa area may pass the Vancouver metropolitan area
before 2020; Ottawa has momentum and it has the space.
When a city reaches the one million population mark, an interesting
transformation takes place- economic growth becomes more self-sustaining
and new opportunities and new options present themselves.
One of the things we need to do a better job of, is convincing our
educated young people, who are our greatest resource, that they can stay
in Ottawa and do great things here. It is our most important marketing
job– to market Ottawa to young Ottawans.
It has always bothered me to drive the Queensway east bound from my
home in Kanata and to see a sign: “Ottawa, Population 304,000″. No
wonder the media, visitors to our city and our own residents think of
Ottawa as small and weak; it is a misleading impression and a damaging
one as well. It should be a priority to take down these signs and erect
new signage at all major ingress and egress points to the City and
inside the City’s boundaries as well as to show the true facts-
“Canada’s Capital City, Population 1,009,000″.
Two years ago, a huge proportion of our graduating class in the
School of Architecture at Carleton University, where I teach part-time,
found employment in the U.S. This is repeated over and over again
throughout the Faculty of Engineering to which the School belongs. It is
a serious national challenge, which we must face up to.
Today, what we need to sell to young people is opportunity: access to
venture capital and stock option plans, quality lifestyles, lower cost
of living and housing, lower cost of doing business, the socializing of
risk (Canadian medicare and support for public education come to mind)
and an absence of social disorder and lower crime rates. Some
commentators view medical care as a cost while, in fact, it is an
investment in human capital. Healthy people and a healthy economy go
hand in hand.
The future global economy will, in my mind, depend on highly dynamic
city-states for economic growth; it will be a return to highly
self-reliant urban agglomerations reminiscent of ancient Athens and
Sparta or renaissance Florence, Venice and Genoa.
Glen Shortliffe’s report on amalgamating this region into the New
City of Ottawa reflected this trend. Hopefully, the New City will also
allow us to keep the wonderful diversity of this region- the rural
lifestyle of West-Carleton just 30 minutes from downtown, the french
fact of Vanier, the quaintness of the Village of Rockcliffe Park and so
on.
But there is more that we can do to make our city-state pre-eminent in Canada.
My daughter, Rachel, is now attending Canterbury High School for the
Arts. Canterbury, for those of you who have had the chance to visit, is a
supercharged place where students take on a normal course load and they
do an additional hour or two each day in an area of their choice-
dance, music, theatre, visual arts. There is no vandalism at Canterbury.
A visit there is a stark contrast to some of our other high schools
where any disaffected young person can obtain any type of illegal drug
within an hour.
Why should we not have more Canterburys?
Why not have a High School for the Technological Arts- where our
young people can study multi media, internet protocol, web site design,
fibre optics, computer networking, micro-electronics and software arts? I
would guess that such a school would attract thousands of highly
energetic and committed young applicants. Let us not underestimate the
power of our teenagers- afterall, Einstein did some of his best work as a
teenager.
Sweden recently announced a national program to make broadband access
available everywhere in that country and available to all. This type of
initiative is as imperative to our nation as electrification was in the
early part and middle of the 20th Century.
Ottawa has the highest penetration of internet users in Canada (at
54%)- we should pressure Bell Canada and Rogers to wire up every street
in Ottawa for broadband communications. And, while we are at it, let us
hope that the Mayor can prevail upon Bell to make the entire National
Capital Region a local call- no more long distance to Barrhaven, please.
Let us make a commitment in Ottawa to being at the leading edge in
technology, education, the environment and government services. Our
Mayor should commit to having the majority of municipal government
services available on the net by 2003. Citizens should be able to pay
their property tax bills, get a dog license, obtain a building permit,
apply for a zoning change- all of it on line.
Flying over Ottawa on a summer’s day, one is struck by the amount of
green space and the number of trees inside and outside the City. I
believe that Ottawa should make a commitment to plant 1,009,000 new
trees (one for each resident of the National Capital Region) on public
rights-of-way before the end of the year 2010, as a way of affirming our
continuing commitment to the environment. History has shown that every
country that has become deforested has also become impoverished.
When I was seven, I rode Ottawa’s streetcars for a nickel. My friends
and I went to the now defunct Rideau Theatre- 5 cents each way for the
streetcar, 10 cents for the film, 10 cents for a candy bar (my favourite
was Crispy Crunch) and 10 cents to phone home if trouble came our way.
One of the biggest planning errors we made, was to rip out our
streetcars and our downtown rail station, Union Station, largely to be
replaced by the private automobile. This disenfranchised children and
made car ownership a pre-requisite for first class citizenship. This
needs to be re-examined- the mandate and mission of OCTranspo needs to
be rethought. One must not underestimate the importance of Toronto’s
streetcars, subways and Go Trains in making that city-state the powerful
player it is on the world stage.
We should follow policies that allow families to stay together by
permitting the construction of in-home apartments or ‘granny flats’ in
the rear yard. Why should we force the elderly to live in high-rise
warehouses, in a ghetto where everyone else is elderly? It is expensive
and de-humanizing.
We should continue to build communities that provide a wide range of
housing and transportation alternatives and we should support our public
institutions with adequate funding for public schools and medical care.
We have not embraced in Canada the concept of gated communities with
their private provision of ‘public services’ by quasi private
governments (Home Owner Associations); some two thirds of new
subdivision housing in the U.S. is being built there in the form of
gated communities, thereby dividing U.S. society into haves and
have-nots. Clearly, this is a grave challenge to social cohesiveness in
the Republic to the south of us.
Mayor Lastman and other Ontario Mayors have implored the Federal
government to open up public coffers to help solve the affordable
housing and homeless problem in Canada. Mayor Lastman says his City has
spent $11 billion on the problem and still has 56,000 families on its
waiting list.
Solutions to this crisis are not going to be easy or facile; this is a
problem that won’t soon go away. However, Ontario Mayors cry for more
investment from the public purse should not supersede efforts by Ontario
cities to do their part too.
Ontario Mayors
(https://www.old.dramatispersonae.org/Mayors_Overlook.htm) have it in
their power to push a partial solution to the problem, if they have the
political courage to do so. They can increase the supply of affordable
housing without costing the taxpayer a cent. They can use the magic wand
given over by the Provinces to them—the power over zoning to create
value at no cost to the municipality.
In fact, the Bob Rae government almost did the job for them during
its stint at Queen’s Park in the early 1990s. The Rae government
platform and party policy called for (and went as far as to introduce
legislation) to legalize ‘basement apartments’ everywhere in Ontario
notwithstanding any municipal zoning by-laws to the contrary.
There are an estimated 100,000 illegal in-home apartments (they can
be in the attic, rear yard, basement or above the garage) in Ontario.
What the Rae government had in mind was to legalize these in-home
apartments and their ‘second kitchens’ with a view to bringing them
within the purview of existing legislation and rules and regulations
including the landlord/tenant act, rent control, building and fire
codes.
Legalizing in-home apartments would have allowed the construction of
new in-home apartments in all neighborhoods in Ontario. This was an
important initiative for Ontario; it would have helped to provide more,
cost effective housing. However, it died in the Legislature—Ontario
Mayors would have none of it; the nimby influence killed it.
In-home apartments can be inexpensively added to the existing housing
stock. By addressing the density deficit that affects so many North
American cities, they help cities make better use of public
infrastructure (roads, water and sewer mains, public transit and so
forth). They help folks pay their mortgage and property taxes; allow
working men and women to live closer to where they work; they provide
alternative accommodation for the elderly in neighborhoods where they
have perhaps lived for many years.
Ontario Mayors do not have to rely on Queen’s Park to make the
required changes to permit in-home apartments in all zones in their
cities. They can simply wave their magic (by-law) wands to encourage the
creation of additional affordable housing stock at no public cost.
Why did the Rae government initiative fail? For the same reason that
Ontario’s Mayors do not endorse such action now– strong resistance from
their residents who fear that densification will negatively affect their
property values. Prima facie, legal in-home apartments add income to a
property resulting in an increase in housing prices. In the Glebe, homes
with apartments (above the garage, in the attic, in the basement,
granny flat at the rear) tend to sell or rent for higher prices and tend
to sell or rent more quickly too. Density, per se, does not decrease
home and property values. It brings more customers for public transit,
neighborhood shops and services and more potential buyers and renters
for homes and apartments. Density increases, in what are now largely low
density neighborhoods and suburbs, should increase property values as
long as neighborhoods continue to be well maintained and civic order is
not diminished.
By bringing illegal in-home apartments out of the gray market,
Ontario municipalities have an opportunity to ensure that they meet
minimum building and fire code standards. Ontario’s Mayors can encourage
formation of more affordable housing stock without public subsidy– all
it takes is some political courage.
When I lived in Santa Cruz, California in the late 60s, I resided at
1011½ Seabright Avenue. The elderly lady who lived alone in the ‘Big
House’ in the front yard rented out the garden flat in the rear yard to
students at UCSC. It helped with her living costs and provided her with
company. My friend and I stayed in the garden flat—a lovely one bedroom
home with its own garden. It was idyllic indeed. I am helping a local
architect/builder, a former student of mine, Brian Saumure is working to
bring back these older forms of housing, which can add so much to our
communities (see www.mapleleafdesign.ca).
When I built Briarbrook in the 1980s, a community of 850 homes and
related uses, I combined offices, shops, retirement residences with
townhome and single family houses in an approved plan. In the single
family zones, I included a provision that would allow for the rear yard
construction of granny flats. None have ever been built. Why?
Well, the City of Kanata introduced some rules including: a) granny
flats had to be temporary structures that had to be removed within five
years, b) only related persons could live there, c) a development
charges (DC) would be levied on them.
In Kanata, in the five year period preceding 2001, approximately
5,000 homes were built of which fewer than 50 were apartments or what
could be called affordable housing.
The number of duplexes built in that period was zero. We tried to
build some but the Mayor told us that it was City policy to levy not one
but two DCs on every duplex built in Kanata
(https://www.old.dramatispersonae.org/DCs.htm). This despite the fact
that Mayor Merle Nicholds had related a story to me about how she and
(her husband) David could never have got their start without the extra
rent they got from the duplex unit they owned.
Greed and fear … fear and greed. People don’t want anything that
could hurt their property values (greed). They also don’t want corner
stores in their neighborhoods or duplexes or granny flats or in-home
apartments or rooming houses because, well, you never know, someone
undesirable might live there (fear). In the traditional town, it wasn’t
unusual for maids, gardeners, postmen, handymen, teachers to live in the
neighborhood where they worked. There was a mixing together of the
socio-economic classes. This isn’t permitted in gated communities today.
It can’t be good for society to have safe, secure communities with good
schools inside policed gates while the rest of their society has none
of this.
Our cities are lonely places—it is one of the great tragedies of our
time. People are lonely and isolated in suburbia. Many people had the
best times of their lives in High School—it’s been downhill ever since.
How sad. Why is that?
Well, people like and need to feel part of a team—part of something
greater than themselves. In High School, that role is filled by sports
teams or debating teams or science teams or by clubs or by your peer
group.
As adults we are on our own. How sad.
I have lived in two co-ops in my time and I am involved in financing
and creating a new one today. It’s great having your own private space
but also common reading rooms, a pub, a television room, a games room, a
laundry room where you can go to have interesting conversations and
meet people other than your spouse and kids.
When I was doing my PhD in Urban Economics at the Urban Research
Institute of the Australian National University, I noticed that they
spent a great deal of time designing a true community where people could
live on campus, work on campus, shop there, dine there and mix.
In 1975, when the then Governor General staged a royal coup d’état
and sacked the PM (Gough Whitlam), Mr. Whitlam found refuge at the ANU
where he could lecture, do some research and write his memoirs. Every
morning and every afternoon, it was the custom to cease work for twenty
minutes and adjourn to the common room where learned people such as Mr.
Whitlam would hold forth. It was tea and biscuit time and time for
synergistic discussion too.
“A Blank Wall … A Blank Wall … A Blank Wall” from Village of the Damned
I will make a prediction for you—there will be an increase in demand
for mixed use, walk about types of place to live and work and play. It
is time that architects and knowledgeable people took back the field of
urban design from the urban ‘planners’ who have made such a hash of it
with their zoners’ codes. It is a disgrace that the first thing a
retained architect must do is a pay a visit to the City’s planner’s
office to find out what the rules say he or she may do.
Once, you learn from your assigned planner what the proscribed uses
are and what the prescribed (single) use is and what the density limit
is and what the front, rear and side yard setbacks are, and what the
height limit is and where ingress and egress is permitted for cars,
supplies and people, it’s no wonder that every building looks like a
box.
To be fair, the (former) City of Kanata in its last days made a stab
at embracing the mixed use, neo-urbanist movement. They put together a
quite imaginative plan for the Kanata Town Centre (an oxymoron so far),
championed by none other than Mayor Nicholds. They started talking about
minimum densities instead of maximum ones, build-to lines instead of
setbacks and so forth.
Proposed Kanata Town Centre, circa 1999
They even prepared a streetscape to suggest the way these lands
should be developed. The view is reminiscent of small town Canada circa
the 1930s—everything old is new again. To date, nothing has been built
but the attempt is laudable.
Proposed Main Street
In the mid 80s, the National Capital Commission (NCC) and Public
Works Canada (PWC) were wondering what they could do to add life to the
downtown core of Ottawa. It had a tendency to empty out after 5 pm
weekdays and was lifeless on weekends.
This is a plague of inner cities in North America—they become deserted and dangerous places after hours.
Since then, the NCC and PWC and the City of Ottawa have tried
‘everything’—putting in cute little street kiosks, covered sidewalks,
new paving, banners, banning cars, more street furniture, removing the
kiosks, removing the covered sidewalks, allowing the cars back and so
on. They have called for proposals; they have torn down buildings, made
public squares, renovated public spaces, proposed aquariums and casinos,
proposed to move buildings, added linear or urban parks, promised to
pave the streets red, added sculpture, put up statues to heroes and much
more.
Ain’t none of it worked worth a darn.
Empty Lot
The solution is easy, simple and obvious yet no one does it. I
haven’t figured out why but I have certainly told folks often enough. Of
course, if they just listened to me, all their problems would be at an
end.
There is only one way to revive the downtown core of any city—bring
more people to live there. It’s that simple. Nothing else will work,
ever.
PWC is considering demolishing the Lorne Building in downtown Ottawa
according to the Ottawa Citizen (October 2, 2001). Their consultants
studied five options: a) selling the building and moving federal
employees elsewhere, b) demolishing the building and replacing it with
two office towers, c) converting the Lorne Building to a hotel and
building an office tower in the parking lot, d) converting the building
into apartents and building an office building in the parking lot, e)
renovating the building and adding an office tower in the parking lot.
Guess which option was rated best and which worst? Need I tell you that
demolishing the building and replacing it with two office towers was
rated best and converting it to apartments and building an office
building in the parking lot worst? Will they ever learn?
Footnote: People will travel far to go to Casinos. Because of the
government monopoly on these, there is an artificial ‘scarcity’ of
casinos. As a result, you can pretty much put them anywhere, even in the
middle of a deserted downtown and people will come. This is not a
prescription, however, for urban renewal (I hate that term anyway). Look
at Atlantic City—people will come for their gambling fix but it didn’t
fix the city by itself.
There are times when only governments can make a difference and yet
they act to make a problem worse. Government investment in public
infrastructure and public goods is widely seen as a lever for growth and
development. Just as important is getting the right mix of policies in
place to guide the markets. The situation in our inner cities cries out
for a costless solution—scrap the zoning codes and allow the markets to
work. Or, if local Councillors can’t bring themselves to such a pass
(afterall, giving up power is so hard to do), at least amend the codes.
Introduce a density bonus that allows developers (including the GOC) to
add a residential component (and I don’t care if the residential
component is a co-op, apartments, condos, hotel or what-have-you) to
their office projects. Require it if you want to. Change the ROI
calculations by giving them a density bonus. And get rid of those unfair
DCs that punish affordable housing. Make your cities a people place by
bringing people to live there—services will flourish on their own if
people with disposable income live nearby.
The great cities of the world tell us this—people take care of their
homes. If they live within a five to ten minute walk of something, that
place will work.
People x Density x Civic Order x Mixed Use x Design x Public Transit = Great City
If you have people living in well designed, human scale places with a
high enough density where they are allowed to employ their creative
energies without undue interference from heavy handed zoning
prescriptions, all in a safe environment served by a big tie people
mover, you will get a great city. There, that’s it, that’s all.
Vertical Transition Lines- Closed at Street Level and Open
Water is an important element in city design. People are calmer
around water. Ottawa is fotunate to have three glorious rivers—the
Gatineau, the Ottawa and the Rideau olus one great canal. Imagine what
this place looked like 350 years ago before our rivers became polluted
and the great pines and other trees were logged.
Given the magnificent setting, what have we done with it? Well, most
of the waterfront is owned by the GOC through the NCC and they have
built roads (called ‘Parkways’ for goodness sake) along the water
separating people from the rivers and the Canal.
Three Rivers and a Canal
Think Paris and the Seine or London and the Thames. Think the Left Bank. Ottawa’s treatment of our waterfront is a travesty.
Pont Alexandre III
Why not marvelous cafés, artisans’ lofts and much more along the Ottawa?
Paris Café (Note how many people are facing out to the street)
Take Carleton University as an example—set between the Rideau and
Dow’s Lake, it has incredible potential. And yet the entire campus turns
its back on the water. Again, roadways separate the campus from the
water.
At UCSC, they buried an entire building (their Library) in the side
of a cliff rather than mar the vista of a canyon. We can do better with
our land use planning and urban design!
One of my favourite places as a boy was to explore along the river
banks of the Ottawa below Rockcliffe Park (and out of sight of passing
cars and the prying eyes of adults). We built and launched rafts from
there (I was ‘arrested’ as a ten year old for cutting down tree branches
for raft purposes) and we were the Tom Sawyers of our day (circa the
late 1950s).
The Park had a most wonderful stone pavilion. This huge structure
overlooked the confluence of the Ottawa and Gatineau Rivers. It had a
live element to it—a tuck shop in its lower level that made the best hot
dogs on the planet. You know the kind—toasted bread instead of buns and
b.b.q.’d to perfection. Mustard and relish and 25 cents at the end of a
long day … The money was free too. We collected glass bottles, which we
got 2 cents each for at the tuck shop and there were always enough of
them for at least one dog each. Can it get any better than this? In
those years, money for kids was much harder to come by than it is today.
Here was opportunity (the shop) and the cash was at hand.
They had these fantastic WCs too—vast porcelain and tile areas—huge places in the bowels of the place so to speak.
There are a couple of lessons here for today’s neo urbanist. Firstly,
kids and people without cars weren’t disenfranchised. They could get to
places like a tuck shop, a corner store, a hardware store, whatever on
their feet or by street car. Secondly, public parks weren’t these
pristine, soulless places that they are today. Did you know what the NCC
did with that tuck shop—they boarded it up 30 years ago (the WCs too).
It remains that way to this day. We used to have change rooms and
pavilions like this on all manner of Ottawa beaches; they were shut or
torn down too.
Park and beach utilization has plummeted since then. It’s pathetic
really. If you want public spaces to work, you have to allow for live
uses like this. They become better places and safer too.
Conclusion
You know I read last year that there are now more than 7 million
people worldwide with more than $1 million in investable financial
assets (Business Week, August 28, 2000. Data: American Express.)
I guess this was said proudly and I am sure that it is an impressive
number but it represents less than .1% of the world’s current
population. You can be sure most of those 7 million people are
Americans.
Fair? Well, the world isn’t a fair place but, in my opinion, it is a pathetic number really.
I can imagine a world with much greater wealth and much broader
distribution of wealth. I don’t think we can get there by redistributing
wealth from rich people to the masses. That has been tried and failed.
Rich people have better accountants and more options for avoiding
taxation than governments have.
No, if we want more wealth, it has to be based on a creative economy where more pie for me doesn’t mean less for you.
And more pie for all of us doesn’t have to mean that we ruin the planet through environmental rape.
I view technology as the key to human health and well being and to saving the planet too.
Can you imagine a dumber industry than the newsprint business? We
remove trees (and, by the way, every nation-state that has deforested
itself throughout recorded history has also impoverished itself) to make
pulp and paper. We bleach the stuff and ruin ecosystems and rivers in
the process. We put it on trucks and in rail cars and in boats and ship
it off to printers which churn out billions of newspapers each day that
then get loaded onto trucks and planes and some poor guy comes to your
door in the freezing cold early morning (at least where I live in Ottawa
most days it seems to me) so that you can read it for 20 minutes and
put it in the recycles where another truck burns huge amounts of petrol
to pick it up to be put in other trucks, rail cars and boats to be
‘recycled’ in another hugely expensive, energy-intensive and
environmentally degrading process only to start the cycle again.
Message to Amazon.com, IBM and all newspaper publishers- work on
e-paper please (for students interested in mediatronic paper, read
another Neal Stephenson book, The Diamond Age).
I can imagine a planet with much greater levels of wealth where we treat the earth as a garden and a wilderness.
Father: Hey, I figured out something about the human race on the weekend. Want to know what?
Son: Sure, what is up with the human race?
Father: Well, it’s about the reason why the human race is so mucked up-
psychologically and environmentally and every which way. The reason
we’re so messed up is that modern humans are only 30,000 years old and
in terms of geologic and biologic time that is a nanosecond- we’re so
young that we’re not even adolescents yet- WE’RE BADLY BEHAVED TODDLERS.
An exchange over IM between father (in Ottawa) and son (in Canberra), August 22, 2001.
Where are the leaders of the past, like President John Kennedy, who,
in 1961, could imagine putting a man on the moon and returning him
safely to earth before the decade was out and before there was the
technology to do much more than catapult a tiny capsule around the earth
for a few laps?
Is our current crop of leaders, with their obsession with re-election and the short term, truly the best we can do?
40% of all physicists in the US are involved in some type of research
relating to quantum mechanics. Einstein said that quantum mechanics
was, to his mind, voodoo science. It was and is but much of our computer
science is based on it and a great deal more will be in the future.
As we all know, Einstein proved that the Universe’s speed limit is c,
the speed of light. Nothing can go faster than this- 186,000 miles per
second.
What is weird is if you were in a speeding train moving in one
direction at say 99% of the speed and you were to fire a laser in the
opposite direction, the speed of that laser blast to an observer
standing on the platform would still be c (instead of 1% of c).
The Universe is weirder still than even Einstein could imagine.
Matched pairs of bosons (tiny sub-atomic particles) are always
created with clockwise spin and counterclockwise spins. When you act on
one particle to reverse its spin, the other matched particle reverses
its spin at exactly the same instant no matter how far way they are.
Somehow, the behavior of one particle is instantly communicated to the
other no matter what the intervening distance. This appears to break the
Universe’s speed limit proposed by Einstein.
Whatever, the result is that a quantum phone or data network needs no
infrastructure (sorry, Bell Canada, AT&T, Sprint, Worldcom) and you
can talk to anyone in real time whether they are in Moscow, on the
Lunar Sea of Tranquility or in a canal on Mars with zero transmission
time.
Quantum computers have weird algorithms that search all elements of a
data base close to simultaneously which means goodbye to difficult net
navigation, hello to a world wide phone book and much more.
We are trying to create lasting value. The Holy Roman Catholic Church
is 2,000 years old. The Japanese Emperor’s line goes back,
continuously, over 5,000 years. The House of Windsor is a few hundred
years old and the oldest, commercial charter happens to belong to the
Hudson’s Bay Company (over 350 years).
These long lasting human endeavours share a number of common
characteristics: 1. They own and control their own real estate, which
provides them with security of tenure, inflation protection and
predictable cashflow (rents and imputed rents). 2. They are or have been
tax exempt (property taxes, income taxes, capital gains taxes, wealth
taxes, inheritance taxes). 3. They own significant concessions, brands
or rights (based on land rents, resource exploitation, embedded
constitutional positions, religious faith, feudal grants). 4. They are
monopoly providers or oligopolistic concerns.
It is difficult to say who will join the elite group of long-lived
enterprises but it might be ‘brands’ like Coke or Time Warner, who have
created businesses that share some of the elements I described above.
But you can bring some of this to your own endeavours- I wanted a NHL
franchise for Ottawa for many reasons, love of hockey passed down to me
by my mother and Russian Grandfather among them. But I also understood
that there was likely to be only one NHL franchise in Ottawa!
You know you never want to get too high or too low. Life is full of up and down cycles.
I still remember an Ottawa Citizen headline a few days before we got
the Ottawa Senators franchise: “And the winners are … Seattle,
Milwaukee.” That hurts.
Actually, it was Ottawa and Tampa.
The night before we won the franchise, one of the voters (i.e., a
member of the Board of Governors) told me (at a NHL dinner thrown for
the nine bidders) with his face just centimeters from mine: “You’ll
never, ever get a franchise for Ottawa.”
I can remember Norm Green, then Owner of the Minnesota North Stars,
coming over to my table and asking: “What’s wrong.” “Nothing,” I said.
“Well, get that smucky look off your face, kid, and get out there and
hustle.”
Good advice. Lydia Leeder, in Ottawa, on hearing that comment from
Cyril later that night said: “You can’t stop now! It’s just like the
Canada/Russia series of 1972. Canadians never quit. Everyone is running
to their radios every half hour for an update … We’re counting on you.”
Now that’s pressure!
We did just that and in fact the last thing the Board of Governors
saw before they shut the door to consider the matter the next day at
8:00 am was my nose and the faces of my whole team.
We never stopped.
At about noon that day, the pressure was enormous and frankly getting
to me; so I went for a run along the beach (this was Palm Beach in
December- actually December 6, 1990). I returned at about ten to one and
saw some of my team members waving frantically to me. “What’s up,” I
asked. “The NHL has asked all bidders to be in their suites at one for
an announcement,” said Connie Cochran. “What announcement?” “They didn’t
say.”
Without a shower, I changed into a suit. At one, NHL security took us
down to the basement of the Breakers Hotel, a huge antique of a hotel.
Next to rotting garbage and standing under dripping pipes, I turned to
my colleagues to say: “Fellows. This doesn’t look too good. You have
done everything that you could do. I am proud of you. If we have lost,
we are going to thank the NHL for allowing us to join this process, we
are going to congratulate the winners and then we’re going to have a
press conference to announce- ‘We’ll be back’.”
Then NHL security took us up to the meeting room. Marcel Aubut (of
the Quebec Nordiques) gave Randy Sexton, a big hug: “Felicitation, mon
ami,” he said. We thought he was congratulating us on a good try!
When I went up to the front of the room and sat next to John Ziegler,
I saw the words: ‘The NHL is proud to welcome, as conditional Members
under the Plan of Sixth expansion, the cities of Ottawa … and Tampa.” It
was a magic moment.
Winners never quit and quitters never win.
(Footnote: about six weeks later, I did call the Governor who had
told us that we would never get a franchise. He told me that his comment
was part of a plan by a few Governors. They told each bidder the same
thing; it was a character test designed to see how each bidder would
react. Two of the bidders stormed out; they weren’t successful.)
The Ottawa Senators formally returned to the National Hockey League
on October 8, 1992 after a 58 year absence; it was another great day for
Ottawa. I was at ice level at the old Ottawa Civic Centre when the team
was introduced. The people in that arena applauded those players—they
gave them a standing ovation—for six minutes. I realized that they
weren’t really applauding the players, they were applauding themselves.
This City came of age that day—there was a feeling that ‘we did it, we
did it together’. It was that special feeling that only comes from being
part of something greater than ourselves. Professional sports can do
that. But surely, we can add more days like that. It is a challenge for
you to take up. Carpe diem.
One last thought I will leave you with—in the last 15 years of my
father’s life, he journeyed on a quest for peace and harmony. His quest
was not successful but the goal was there. It is a general human
condition to pursue peace and harmony because so few of us ever get
there. There was a moment in my life at age four, standing in a tiny
pool of water in the front of our house with the hose trickling and the
sun being refracted in the water spray and the colours of the rainbow on
a perfect summer day—a liitle boy at peace with himself and the world– a
moment in time that is endless and suspended. The internal dialogue
silenced …
Oh, to get back to that moment or to have another like it! We must be
part of something greater than ourselves; we can build better spaces
and places; we can be more integrated and co-exist in greater harmony
with nature.
Thank you.
Dr. Bruce M. Firestone, B.Eng.(Civil), M.Eng.-Sci., PhD., Adjunct
Research Professor, School of Architecture, Sessional Lecturer, Eric
Sprott School of Business, Carleton University, Chair, Hickling Capital
Corporation, Founder, Ottawa Senators, Ottawa, Canada, December 2001.
Copyright, Bruce M. Firestone, December 2001.
Postscript: It is possible that the events of September 11th, 2001
will change the way we build cities. I think it would be a shame if one
act of madness causes us to abandon the idea of great architecture or
densification of our cites.
Having said this, European cities have shown that it is possible to
achieve high densities with architectural forms that are three to five
storeys.
Postscript2: It is important to note that my argument for mixed uses
and densification of the city are not arguments against what is called
‘urban sprawl’. Sprawl is what happens when you apply rigid separation
of uses imposed by zoning codes. Low density suburbs separated from
shopping malls separated from office complexes necessitate car trips for
everything.
The fact is, however, that a healthy city requires green field
growth—life will jump boundaries; life will find a way around and over
artificially drawn boundaries placed around our cities. Instead, we
should design our city expansions with a denser mixed use pattern. I
mean if our ancestors could build great towns why can’t we?
Japan’s rigid zoning by-laws (zero conversion or rural to urban uses)
created a price bubble in land values at the end of the 1980s that
reached absurd proportions (the value of Tokyo real estate was worth
more than all the land in the continental US). The collapse of the
bubble economy in Japan has lead to more than ten years of stagnation
there that continues to this day.
Cities are the engines of growth—they need nurturing and must be
allowed to grow. By putting more of the global population in denser
cities, it is my view that we can better manage their environmental
impacts on the planet. People living in cities is a marked improvement
over millions ravaging the countryside.
Appendix
Introduction to Architecture and Urban Design- Modernist Urban Design and Spatial Apartheid- Notes for Students
1. ‘Modernist’ here refers to the ‘City Beautiful’ movement-
the early 20th Century attempt to provide ‘the little cabin in the
woods’ or ‘the castle in the glen’ for the masses.
2. It was a rational reaction to the concentration of tenements in NYC circa 1900.
3. Huge horse population, horse dung problem, high accident rate
between horse drawn transportation and pedestrians, excess density,
substandard housing, lack of building, health and fire codes,
tuberculosis and disease cause this reaction to urban living.
4. Reaction carried too far.
5. Inappropriate segregation of uses.
6. Absence of civic art in urban design.
7. Architects are producing designs and urban spaces lacking in
charm, soul, density, affordable housing, public transportation and
other amenities.
8. Kanata clotheslines contravene by-law.
9. Riverdale- an imaginary town where Archie, Vernonica, Jughead
and Betty live and where kids can live next to the Pizza Pit.
10. Kanata Lakes- a subdivision where it is 1.6 kilometres to the nearest shop.
11. Taxes (development charges) on small homes, ‘granny flats’ and duplexes make it impossible to build affordable housing.
12. Zoning by-laws create spatial apartheid and a new form of
segregation- segregation by income. 19th Century towns tended to mix
folks from different income streams together so that teachers,
gardeners, police officers, fire fighters could live close to or in the
neighborhoods where they were expected to work.
13. Property owners react negatively to almost any change in land
use because of two primal motivations- greed and fear. They are fearful
that any changes (eg., densification of the neighborhood) will lead to a
decrease in their property values even though densification can lead to
increases in value provided there is no breakdown in social order.
14. The reaction to modernist urban deign is neo urbanism.
15. New urbanists will win says Jane Jacobs.
16. New urbanism is the return to 19th century model of town design based on civic art and consensus.
17. New urbanism is the search for catalysts and ‘faery dust’ to bring decrepit urban centres back to life.
18. Catalysts are- deregulation of zoning rules, mixing of lofts,
offices, shops, apartments, homes, theatres and so forth, mixing of uses
provided they meet health, building and fire codes (everything
permitted except what is expressly forbidden instead of traditional
zoning where everything is forbidden except what is expressly
permitted).
19. Value can only be created where social order prevails.
20. Mayor Guiliani implements ‘Broken Windows Syndrome’ solution in NYC.
21. Police on the beat.
22. The spaces of the public room and quasi private/public spaces
are treated with respect- graffiti removed, lamps repaired, …
23. No tolerance for small acts that debase the public room. This alarms civil liberties advocates.
24. De-regulation allows organic growth of a city. Best cities are
walking cities with mixed use- Paris, London, Tokyo, Sydney.
25. Other catalysts- property tax abatement, special federal tax
jurisdiction (tariff-free zone, enterprise zone), abolition of
development charges (eg., Mayor Holzman, Ottawa), sales tax holidays on
building materials, civic presence (library), return to market gardening
and farming in urban areas, urban forests and forest views, parks,
commons, fairgrounds, … the kernel around which the urban area will
regenerate.
26. Virtually all economic growth since the discovery of
agricultural cultivation has derived from the synergy that comes with
the development of villages, towns and cities, says Jane Jacobs.
27. Villages came about first because of security needs then synergy
was derived from the application of specialization (Ricardo’s theory of
comparative advantage)- Ugh hunts antelopes, Nrd makes flint knives and
Znn produces textiles (sewn animal skins). Trade between families
results from their proximity in villages and later on between villages.
28. Villages are first organized on the basis of protection. Then
they become hierarchical and they are based on the FOB principal-
‘Friends of the Boss’ get the best locations.
29. Today, FOB means friends with the mayor, police chief, fire chief, …
30. Zoning creates artificial scarcity of land.
31. Beneficiaries are established (often large) land owners and
sitting owners. Suivez l’argent. First time home buyers and renters are
worse off.
32. Kanata prohibits work in the home with two or more employees.
33. Each am homeowners leave the suburb and bne (break and enter) specialists move in.
34. Kanata has huge rate of bne and vandalism- nothing for kids to do.
35. Work at home reduces travel time, increases block safety. It is
better for the environment, makes double use of very expensive capital
investments in homes and urban infrastructure.
36. Offices will still be needed for tribal gatherings, synergy, team work.
37. Cyberspace will have some impact here when people ‘goggle’ in to the metaverse.
38. The development industry is constantly in conflict with public
authority because so much is now prohibited by zoning by-laws and
regulations.
39. Urban sprawl is what results from segregation of uses.
40. Everything requires a car trip to get to and from origins and destinations.
41. Land use should be determined by the highest and best use for
each site. This is the DAD rule of land development- Dollars are
Democrats. The DAD rule is the worst possible rule except for all the
others, to paraphrase Winston Churchill.
42. Rules used for determining land use include hierarchical rules
(village chief, first officers or nobility, townspeople, expendables),
religious hierarchy, FOB (Friends of the Boss, eg., friends of police
chief, mayor, fire chief, governor and so forth, get preferential
treatment).
43. Urban sprawl results from the application of zoning rules and segregation of uses.
44. This spreads out all uses by separating offices from big box retailers from homes from schools from civic presence.
45. Urban sprawl and city growth are not synonymous.
46. They are often confused but growth at the fringe of a city can
involve mixed use design and the application of new urbanist principles.
47. Urban growth is essential to produce innovation using a greenfield approach.
48. When governments act to prevent urban growth, they are aiming
for the wrong target. Japan tried this by restricting the conversion of
farmland to urban uses resulting in an explosion of land prices, a real
estate bubble at the end of the 1980s, distortion in the entire Japanese
economy and an implosion of that economy in the 1990s.
49. Urban growth is essential to a healthy economy.
50. Let the highest and best use rule apply- farmland is not a
sacred trust and should be treated as any other economic input.
51. If the price of farmland rises because of scarcity and an
increase in farm gate prices then the result will be the reuse of some
urban lands for agriculture- the process will reverse. This is starting
in some US cities where the price of urban land has become negative
(eg., Detroit, South Bronx, South Central L.A.).
52. The housing lifecycle is: the BIG house becomes a shared house
(extended family), then it mutates to apartments, duplexes, triplexes
before becoming a rooming house. Then a gentrification process takes
place where it becomes a BIG house again either through renovation or
teardown. The latter assumes that social order prevails.
53. There can be no value created in an urban context unless social order prevails (the Broken Windows Syndrome).
54. Land rents increase with increasing density.
55. This is the most fundamental curve in urban design.
56. Nimby-ites are wrong to reject density out of hand. Provided
social order is maintained, adding in-home apartments or granny flats
increase land rents and increase land values.
57. Construction of a large office building next to a residential
area, for example, should increase the number of potential customers who
want to purchase or rent those homes to be closer to work, all else
being equal.
58. Land rents can be negative where social order has broken down.
That is, the cost of maintaining the property and paying property taxes
is greater than the annual rents possible in that location.
59. Deregulation of zoning rules should allow a city to densify.
60. North American cities are suffering from a density deficit- the City Beautiful movement has gone too far.
61. The ONLY way to revitalize North American cities is to bring people to live downtown.
62. Robert Kaplan in his work, ‘An Empire Wilderness’, maintains
that global economic and technological influences are undermining the
nation-state.
63. While economic progress is related to healthy city-states, throwing away the nation-state would be a mistake.
64. This would represent the triumph of narrow, parochial,
regionalist and ethnic interests over the sharing of risk and pooling of
resources. Meaningful progress on global policies on pollution, social
policy, trade policy, peace keeping, science policy, disease prevention
and much more will be retarded.
Copyright. Dr. Bruce M. Firestone, Ottawa, Canada, 2001.
www.saragassocity.com
www.dramatispersonae.org
Postscript: Rent Curves
How Developers can Make More Money and Urban Design can Improve by Exploiting Vertical Rent Curves
It has always amazed me that many developers, those veritable profit
maximizers, don’t understand that neo-urbanist principles* can improve
their returns while at the same time making them better city-builders
and I suppose better corporate citizens. For example, most of them don’t
know that there is a vertical rent curve in most towns and cities as well as a horizontal one.
(* For more on neo urbanism and livable cities, please refer to: https://www.eqjournal.org/?p=2449.)
In its simplest terms, as you go out from a city centre, rents drop
and as you go up at many points within the urban fabric, rents increase.
Moving outwards from a typical city centre, density drops,
opportunity for interaction (jobs, entertainment, education, synergy,…)
decreases and transportation links become less available, and rents drop
accordingly. Meanwhile, people ‘downtown’, whether in offices or
residential condo towers, prefer to be higher up and will pay more for
better views, less noise and pollution and, as my Aussie friends call
it, higher poser value*.
(* Donald Trump is famous for ‘floor inflation’. He claims that the
first few floors of many of his towers, including the Trump Tower in
NYC, are so grandiose and volumetric that he is justified in
re-labeling, say, the 12th floor as the 20th. It also allows him to
charge higher prices since the 20th floor is perceived to be more
valuable than the 12th if their actual elevations above grade are the
same.)
It is the latter rent curve (the vertical one) that is often poorly understood by industry.
I took a photo this morning (it is July 6, 2011 as I write this) on
my way to work of a pretty ugly apartment tower at the corner of
Iroquois and Carling in Ottawa ON. It is across the street from the
Carlingwood Mall in an improving part of town. It has become quite the
desirable area to live in as more folks in Ottawa have realized that
being closer to work has its advantages*.
(* That includes my wife and I. Recently, we sold our 7-bedroom
suburban home and bought a small condo not far away from the Carlingwood
Mall; it’s close to the Ottawa River and walking distance, for me, to
work.)
Ugly Apartment Building
The first three storeys are used for a parking garage and the podium
facing the street is a blank wall: it quashes street life, denigrates
the area, lowers public safety and is basically a throw away by the
developer in terms of its economic value. It defies almost all the
principles of neo-urbanism and sound city building.
Here’s another look at the whole tower:
Vertical Rent Curve Degenerating at Grade
Now what if the developer had instead used the volume at grade for
front facing, two storey towns or perhaps for office condos or retail
shops with what I call a window-on-the-world (WOW) effect (which is
actually made up of portals overlooking and access to and from street
level)? Would public safety improve? Would the walkable nature of the
City improve? Would the developer make more dough? Would Buyers/Renters
have more options and greater choice? Would the City be made more
lovely? Yes to all these questions…
I superimposed (rather clumsily I admit) some towns on the building:
Towns at Grade
Wouldn’t you rather see a version of this than a blank wall? So message to builder: there’s a renovation in your future.
I drew rent curves for two conditions (see below). The first (in
yellow) shows the notional rent curve for a typical condo or apartment
tower that ignores the potential for street facing uses at grade. All
units are inward facing and rents just drop secularly from penthouse to
grade: the closer the Buyer or Renter gets to grade, the more noise and
pollution they have to put up with, the worse their views are and the
more perceived security risk there is. Hence, they expect and actually
do pay less.
If instead, the developer used street facing townhomes or other built
forms that take advantage of direct access to the public room, you
could achieve higher rents and better urban spaces. If you have a young
family, wouldn’t you rather have a street facing town that you and your
kids can get out of through a front door? Or if you are running your
architecture practice from one of these towns, wouldn’t you rather have
clients come to your own front door? And how nice would it be to have
your own street facing sign for identification and 24/7 promotion…
Here is what that rent curve might look like (in red):
Rent Curves for Two Different Conditions of Built Form
Prof Bruce
Epilogue
There are many challenges ahead for our city-states. It should be
clear from our discussion today that city-states are pretty important to
the economic and socio-political future of nation-states.
Let’s have a look at some of the biggest challenges ahead.
A. Complexity
When systems become too large and too complex, they have a tendency
to break down. Even before the events of September 11th, 2001, I thought
that the hub and spoke system of US Airlines was becoming too complex
and was operating too close to capacity. It became inherently unstable
and could be easily disrupted.
Cities must operate within the limits of complexity of large systems.
The diagram below shows my take on what happens as systems become
larger.
Complexity and Failure
As the number of components increases, complexity probably increase
linearly. It is my experience though that after a certain threshold
complexity increases non linearly. Entrepreneurs can successfully
operate in the range from n(1) to n(2). As the number of components
increases, however, and complexity accelerates, you need large
bureaucracies and a great deal of system and process to be able to cope.
Entrepreneurs often assume that they can scale up their enterprise
with more of the same seat-of-the-pants management style (Mitel’s SX
2000 comes to mind). This is not so.
NASA’s moon shot and the early years of the US nuclear missile
program are examples of this. Critical Path Scheduling techniques were
invented to assist the latter, which was mind bogglingly complex.
Once you get beyond what one person or a very small group can hold in
their minds, you get into a no go realm, where catastrophic failure can
occur.
Calcutta comes to mind.
B. Terrorism
Wherever large groups of people congregate, there is the possibility of terrorism.
There may be pressure to disperse activities—downtowns may suffer,
suburbs may flourish. There will be a tendency to build at lower
densities and lower building heights.
There is no doubt that dispersed populations are harder to hit with
conventional or biological weapons. It would be too bad if we can’t
build great cities which require density to achieve the kinds of synergy
that we talked about above.
C. Environment
To me, cities are a key to environmental protection. By putting
people in vertical cities, we have a chance to control their emissions.
The emptying out of the capital city of Cambodia by the Khmer Rouge
showed what happens when more than two million people are loosed on the
countryside. Every woodland is destroyed and countries that deforest
themselves are economically ruined.
D. Energy
Cities need energy to work, clean, dependable energy. This is probably the biggest challenge ahead for cities.
I learned a new word this year: ‘hazmat’, as in the hazmat team has been called in to decontaminate the postal office.
Languages change very rapidly and there is no way to reliable
communicate with people who may live here 500 or 5,000 years from now.
It is an intractable problem so we can’t store nuclear wastes for
100,000 years in a safe manner—people have short attention spans. We
need to find energy solutions that don’t require this kind of persistent
attention. We need energy that doesn’t cause climate change either.
E. NIMBY’s
City-building is an exercise in optimism. The NIMBY crowd hate
change—they are motivated by fear and greed: fear of change and greedy
to protect their property values.
Dennis Miller defined an environmentalist as someone who has a cabin
in the woods and a developer as someone who would like to have a cabin
in the woods.
Anytime you freeze the city’s boundaries and resist change you get
the bubble economy of Japan circa the 1980s. You limit the creativity of
folks and damage your economy.
Private property rights and a financial system of unlocking real
capital values underpins our city-state economies and are the best
sources of protection for the environment. The former Soviet Union was
one of the worst environmental offenders and third world economies have
no way of placing home and land mortgages which is the primary souce of
entrepreneurial micro capital.
F. Political Stucture
In Canada, there are only two levels of government under the BNA
Act—federal and provincial. Municipal governments are wholly creatures
of the provinces and have no independent constitutional existence.
Their sources of finance are largely tied to property taxes which limits their scope of action.
G. Public Transport
Without light rail or subways, cities will suffer. Cities can’t
finance these pieces of infrastructure and they don’t push high enough
densities to make them work properly.
H. Leadership
Democratic abuse is rampant at the local level—politicians are afraid
to make decisions because a very small number of upset voters can
change election results since so few people bother to vote in municipal
elections.
I. Zoning Codes
James Howard Kunstler said if you want to build Livable Cities like
your parents and grandparents did, you first have to burn your zoning
codes.
Urban design is too important to leave to urban planners.
Prof Bruce @ 7:34 pm
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Negative Cost Selling a Mobile App
Posted on
Saturday 9 April 2011
Put Leverage in Your Biz Model
What’s the most common reason a municipality or non-profit turns down a project? “We don’t have the budget for that!”
There was a time not too long ago (circa post WWII) when
municipalities thought of things like roads, sewers, power lines and
water mains as investments; today, they think of these things as costs.
That type of thinking also carries over to investments in human capital,
mindshare, tourism, economic development, education … Pretty much
everything is a cost, something to be avoided.
I had a chance recently to talk with a small town, its council and
local chamber of commerce. Actually, I inadvertently sat in on a
presentation to Town Council by the Chamber on its budget for the next
fiscal year. Included in that was about $35,000 for printing and
distributing this year’s brochure again extolling the loveliness of the
town, the industry of its people and the friendliness of every townie.
By the end of the presentation, I was squirming in my seat.
Uncharacteristically, I said nothing. Our project was up next and it
wasn’t really my place to rain on anyone’s parade.
But, the next day, I couldn’t resist talking to the folks at the
Chamber. Privately, I suggested that they might consider building a
mobile app for the Town—it would do everything a brochure would do and a
heck of a lot more besides. It would last for five years or more, be
updateable instantly, could be downloaded by people entering the Town
for the first time and it would have way more current and in-depth
information on where to live, where to play, where to find a job, where
to set up shop, who does what in their town than all the brochures ever
printed in all the history of the place. And better yet, it would appeal
to a younger demographic who, frankly, are taking over the world right
now anyway and it’s those people you need in small town Ontario if you
want to make anything of your community in the next five years. Old
money doesn’t do much. They need to attract new blood.
But being a master of negative cost selling (think of me,
Prof Bruce, as a cross between Yoda and Ben Affleck’s hard-driving, ABC,
Always-Be-Closing character, Jim Young in Boiler Room, except Yoda’s
better looking), I took a preemptive approach. I asked: “How would you
like a mobile app built for the Town of ___________ at a negative cost
to the Chamber?”
To wit, I got the right answer: “Huh? What’s a negative cost?”
I was halfway home.
What I proposed is that the Chamber would lease the app from a
developer I know. He’s a super nice guy, creative as heck and does
wonderful work but he is tired of doing contract work that has no
residuals (no CMRR, Committed Monthly Recurring Revenue).
But first let’s look at this from the Chamber’s POV.
Here is what their lease payments might look like over a five year term:
App Cost $22,000
App Maintenance $3,800
App Updates $4,000
Sub-total $29,800
HST $3,874 13%
Total $33,674
Contingencies $1,010.22 3%
Grand Total $34,684
Amortization 5 yrs
Interest Rate 4.00%
Monthly Payment ($649.25)
That means that the Chamber is on the hook for $649.25 per month paid
to the developer (I’ll call him Sean, not his real name) for the next
five years.
“But wait, didn’t you say, Prof Bruce, that the cost to the Chamber would be negative? Doesn’t look that way from here…”
Gee thanks for giving me the benefit of the doubt, Dear Reader.
Sean’s biz dev team (which is made up of Sean and executives from the
Chamber of Commerce who are co-opted by Sean into this process) is
going to approach and secure 12 sponsors from the Town of ___________
who will each pay $75 per month to be featured in the Town’s new mobile
app. They are going to partner with the Chamber, Sean and the new app
and they are going to be able to interact with app users in a way that
makes an ad spot in the old brochure look mighty suspect in terms of its
return on investment and effectiveness as a biz dev tool for them.
Imagine being a restauranteur in town, or the big dog REALTOR, or the
guy who runs the local campground, or the manager of the local cable
company or the cell phone store, or the wheeler-dealer who runs the
local used car store, and being able to message back and forth with
everyone who has ever downloaded the app? Or being able to send everyone
who is new in town a coupon?
So now the Chamber’s costs look like this:
Sponsors
12 $75.00 per mth
Total $900.00 per mth
Cost to Chamber ($250.75) per mth
It costs the Chamber a -250 bucks a month to create a marvelous tool that really works.
Now what happens if the Chamber and Sean can’t find 12 partners?
Well, a Chamber that can’t find 12 sponsors at $75 a month should have
its charter revoked.
Actually, don’t say that to them. That’s the Jim Younger part of moi saying that.
What the Yoda part would say is: “We will work together to find the
12 partners. In the event, that we fall short of the 9 needed to meet
your breakeven, I (Sean) will make up the deficit.”
Sean could add: “We won’t even start development until we have at least half the partners (6) secured.”
That’s probably about where his breakeven point is anyway.
Remember these folks you are selling to are RISK AVERSE in a very BIG way.
Leverage
Sean is a very creative guy and there is method to his madness. He
has recently done a deal with some very capable developers from Pakistan
who will do most of the yard work for him. He can compensate the chaps
in Pakistan at an above-market rate and still make out like a bandit
here in NA.
That is leverage—if you don’t have leverage in your biz model, it is
hard to make any real headway (i.e, get wealthy). Leverage is a means to
multiply the force exerted by your own efforts, time and brains.
With it, you will have a greater opportunity to succeed. Leverage in
your business model comes primarily from eight principal sources:
i. great HR,
ii. using OPM,
iii. forced savings,
iv. innovation,
v. capital equipment,
vi. location,
vii. branding &
viii. inflation.
Test your biz model: ask yourself do you have great HR, are you using
OPM, benefiting from forced savings, innovating, do you have a great
location or brand, is your capital equipment top notch/best-of-breed
& do you benefit from inflation? If so, you are probably maximizing
your leverage.
Leverage using OPM is increased when the project’s or business’ rate
of return is higher than the interest you pay on money you borrowed. Or
when you use bootstrap capital, say, trade credit, where a supplier
gives you credit at low interest or no interest to buy from them or a
customer gives you a deposit on an order on which you pay no interest,
you are then leveraging your own efforts with their low-cost or no-cost
capital.
You also get leverage when other people are paying off your debts.
This happens when, for example, you own rental property. Every time a
tenant pays their monthly rent and you pay off some of the principal on
your mortgage using their rent, you experience a form of forced savings
and a wealth effect (sometimes called an equity pickup).
I have spoken extensively of the need to have some type of innovation
in your business model; Steve Jobs, for example, has proven time and
again that you can think your way to wealth a lot faster than you can
work your way there. There’s big-time leverage…from innovation.
It would also appear self-evident that having top notch capital
equipment provides greater leverage for your employees and leads to
higher productivity.
You also get leverage from your location and your brand. In real
estate terms, if you occupy a particular location, it obviously means
that no one else can, so make it a good one.
Some people think that having a great brand is nice, actually it’s
essential. Strong marketing creates a strong brand which creates trust
and trust creates the opportunity to sell. Think about it? Ever bought
anything from someone you didn’t like and didn’t trust? If you did, it
was only once.
But a brand does other things for you. For example, Apple’s
incredible brand, its reputation for building insanely great products,
allowed Steve Jobs to cajole out of AT&T a share of their monthly
subscriber revenues for the launch of the iPhone, something that no
other telecom had ever granted to a cell phone manufacturer before.
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 (CMRR again) are recurring: the holy grail of techdom.
Imagine how much harder Steve Jobs and Apple would have to work and
how much lower their productivity as measured in revenue per employee
would be without recurring revenues from iPhone app sales and revenues,
advertising revenues on their mobile platform, downloads of paid content
from iTunes and a share of their carriers’ subscriber fees not to
mention the sale of the iPhone itself.
(I estimated the iPhone’s IRR, Internal Rate of Return, at an incredible 288% p.a. for Apple. Please see: https://www.eqjournal.org/?p=1714.)
From a simple question, asked by Steve Jobs, and a tweaking of his
business model flowed great benefits. The harder they work, the more
money they make and, in Apple’s case, this relationship has become
geometric.
(Jobs has created radical change in industry after industry: personal
computing (the Mac), animation (Pixar), music (iPod), cell phones
(iPhone) and now book/newspaper/magazine publishing (iPad) plus perhaps
television and film (Apple TV). It is truly a remarkable record of
achievement.)
Lastly, if you are in an industry that is experiencing price
inflation, you are benefiting from asset value increases without putting
in any effort of your own, i.e., more ‘free’ positive leverage for you.
That is why it is almost always better to enter into buoyant industries
where ‘all boats are rising’.
Sean is building leverage into his model from five sources: his HR
strategy (his tie up with Pakistani developers), use of OPM* (sponsor
dough), forced savings* (every month some of the principal amount of the
lease is being repaid and that goes into Sean’s pockets), innovation
(not only being part of the fastest growing industry on the
planet—mobile apps—but also bringing negative cost selling into this)
and branding (Sean is ‘borrowing’ the Chamber’s brand to sell to
sponsors—that’s more leverage for Sean).
(* Sean could also do a deal with a finance company, a lender or a
leasing company. For example, Sean and the Chamber could sell their
receivables: 12 sponsors having committed $75 each per month for five
years would yield a total of $54,000 in revenue over the five year term.
However, if they sold this income stream at a discount rate of 8% to a
financial institution, they would receive a one-time cash payment up
front of about $34,000. See my calculations below.
10-Apr-11 Factoring Receivables
Sponsors 12
Fee $75 per mth per sponsor
Fee $900 per mth total
1 $10,800 per yr $10,000.00
2 $10,800 per yr $8,573.39
3 $10,800 per yr $6,805.83
4 $10,800 per yr $5,002.49
5 $10,800 per yr $3,404.61
Total $54,000 $33,786.32 (Discounted Amount)
Discount Rate 8%
This is no different than the way Leon’s does its ‘don’t pay a cent
event’. When you go in to buy a sofa for say $1,500 and Leon’s tells you
that you won’t pay anything for a year, that doesn’t mean they don’t
get any money for a year. Before you have even left the store, they have
sold your contract for cash, mind you a discounted amount of cash. This
is another way for Sean to use OPM and increase the degree of leverage
in his model.
It allows him to provide a form of accretive financing to the Chamber
so that, in effect, they are acquiring the app for no-money-down (or a
negative amount of money down). At the same time, it will permit him to
pay for all his upfront development costs without going into debt
himself.
Furthermore, if he can decrease the interest spread between what he
is charging the Chamber and what he is paying the financial leasing
company or increase the monthly amount they receive from their sponsors,
Sean may be able to pay his developers, lock in his profit and pay the
Chamber a cash bonus, all up front and again without going into debt
himself.
This will result in a cash conversion cycle (CCC) that is negative
which for entrepreneurs is essential. What that means is that Sean’s
business will generate cash (not consume cash) as it grows. More on the
CCC at: https://www.eqjournal.org/?p=2257.)
Sean might even find that he can harness a sixth source of
leverage—inflation. He might build into his app a recurring revenue
growth model—for example, he could do a deal with Groupon or Kahoot (a
local competitor): for every coupon distributed through his app, he
might get a piece of the pie.
Conclusion
If you don’t think the kids are taking over the planet, you haven’t
been paying attention. Not only have the young guys that you have heard
about like Facebook’s Mark Zuckerberg built enormous businesses in just a
few years, there are a ton of these next gen entrepreneurs you’ve never heard of that are doing incredible stuff in your town or city right now and they are growing, fast.
In Ottawa, mainstream media are writing stories about the death of
tech in what was Silicon Valley North but that’s because they are
focused on Nortel’s demise or the fact that Newbridge was sold to
Alcatel and Cognos to IBM. But talk to tech recruiters like the people
at TEK Systems and they will tell you that the unemployment rate amongst
techies in this city is 2.4%. Basically, everyone who wants a job,
already has one.
Lastly, I walked into an office this past week to talk to a middle
aged guy who runs a large lubricants business plus a home heating and
air conditioning business. A more traditional industry you would be hard
pressed to find. But you could have knocked me over with a feather when
he told me: “We just dumped our entire marketing department and every
type of conventional marketing we’ve ever done. Now tell me about
Groupon and Kahoot…”
Prof Bruce
Postscript:
I wrote: HOW TO GET SPONSORS FOR PRACTICALLY ANYTHING. See: https://www.eqjournalblog.com/?p=1649.
Read more on negative cost selling here: https://www.eqjournalblog.com/?p=732.
Plus more about leverage at: https://www.dramatispersonae.org/IRR/IRRPowerOfLeverageGoalSetting.htm and https://www.eqjournal.org/?p=2257.
Prof Bruce @ 4:55 pm
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3 Comments
Six Questions with MovingBoxes.ca’s Jamie Kingsbury
Posted on
Friday 8 April 2011
Name: Jamie Kingsbury
Company: MovingBoxes.ca
Award: Nominated for Fastest Growing Bootstrap Startup
1. In three sentences or less, what is your enterprise’s value proposition?
Movingboxes.ca is an Ottawa based box & moving supplies company. A
convenient, secure online shop for affordable, quality moving boxes and
packing supplies delivered fast and free direct to your home or
business on time, every time. Established in 2005 to meet the packing
& moving supplies needs of our ever growing city and its suburbs.
2. What motivated you to first get involved?
Working ten years as a relocation consultant for a national van line,
I was regularly asked: “Where can I get moving boxes and packing
supplies? My grocery store no longer gives out produce boxes and I don’t
have time to drive around or space in my car for enough boxes to pack
my entire home.” That was my eureka moment. Next, I had to create a way
to meet demand. With my existing network, I knew I could do it so I
decided to take the leap and become an entrepreneur. I’m glad I did.
3. What has been the single most exciting thing that has happened so far?
In all honesty, the most exciting thing is looking forward to the
next business day. Knowing that my business has succeeded thus far and
continues to grow day by day is the most rewarding part of being an
entrepreneur.
4. What has been your biggest challenge and what did you do to get past it?
The biggest challenge thus far has been taking “the next step”.
Business growth is exciting but can also be changeling, overwhelming and
unnerving. The financial risk associated with growth can be difficult
to get used to and the fear of stepping outside my comfort zone was
definitely unsettling. But, by having the right team and the support of
my family and friends, I got past that. Their support is one of my most
valuable assets. Sharing our growth story with them is exciting and has
helped MovingBoxes.ca to grow into the company it is today.
5. Why did you choose the life of an entrepreneur or intrapreneur?
I didn’t choose to be an entrepreneur, I was born that way. It just
took 30 years for me to figure out which idea to run with. I always
dreamed of financial freedom and being my own boss. I also wanted to
feel a sense of pride knowing that something I created could be
successful enough to allow my dreams to become reality.
6. If you had one piece of advice for other entrepreneurs or intrapreneurs, what would it be?
If you truly believe that you have a solid idea and that it can be
successful, don’t waste another moment pondering it. ACT ON IT. The
longer you wait to initiate it, the more time you’re allowing for others
to get ahead of you. No feeling is worse than that of seeing your idea
being brought to fruition by someone else.
(This is the twelfth in a series profiling winners and finalists for Exploriem.org Bootstrap Awards 2011.)
Prof Bruce @ 11:24 am
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