Emily Carr
Sunlight in the
Firestone Group of Seven Collection
http://www.ottawaartgallery.ca/
Essays on Life, Entrepreneurship,
Volume I
By
Dr. Bruce M. Firestone, B. Eng.-Civil, M. Eng.-Sci.,
Ph.D.
Founder,
Entrepreneur-in-Residence,
Adjunct Research Professor,
Realtor, Metro Suburban Realty Ltd.
Executive Director, Exploriem.org, Professional
Entrepreneurs and Intrapreneurs Organization
Chair, Blue Heron Storage Corp, Manchester Development
Corp., Villager Home Corp.
Copyright Dr. Bruce M. Firestone, 2007. All Rights Reserved
Contents
Section 1 …………………………………………..……. On Life
What is the Purpose of a National Economy? …/3
Section 2 ………………………………………..……..... On Entrepreneurship
Entrepreneurship and Intrapreneurship—The Basis for
Economic Development, Personal Freedom and Knowledge …/10
Entrepreneurship, Development and Sustainability …/24
Build and Hold—the Difference between
Getting Rich and Being Wealthy …/47
Creditor
Proofing …/53
Non Linear
Selling …/78
What’s More
Important? Good Execution or the Next Big Idea? …/79
Section 3 …………………………………………..…….. On
Livable Cities Versus Mono Cultured Suburbs …/80
Why Realtors
Should Increase Sale Prices …/112
Democratic
Abuse- Getting Rid of the OMB is NOT the Answer …/114
Peggy Feltmate’s Policies …/116
Strength through
Diversity …/118
Why Invest in Real Estate? …/121
Section 4 ……………………………………………..….. On Creativity
Measuring the Value of Design and Creativity—Value of
a City’s Treescape …/139
Logic has its
Limits …/148
Section 5 ………………………………………………… On Development Economics
Interview with Hernando
Alleviating Poverty and
Creating Wealth by Establishing The International
Day of the Entrepreneur? …/155
Section 6 ……………………………………………..….. On Sports
Why Cheering for the Leafs In
and Montréal is
… Unnatural …/157
Probability Theory, Winning Percentages and Outcomes …/163
Degree of Difficulty …/167
Section 7 …………………………………………………. On Everything Else
Exceptions to
the Rule Make Bad Law …/169 The Value
of Education- A Case Study of the Perceived Value of An
Architecture Degree,
Workers, Managers and Entrepreneurs? …/180
Section 1
…………………………………………..……. On Life
What is the Purpose of a National Economy?
Introduction
Now this is a BIG question that is tied into (at least, to my mind) to the even BIGGER question: What is the Purpose of Life?
Before we look at that, let’s try to enunciate what we most commonly think of as the purposes of a national economy. They are to provide: a) for the defence of the nation-state, b) for the health and education of its inhabitants, c) for the edification, entertainment and happiness of its citizens and d) for the furtherance of the nation-state in its endless competition with other nation-states.
Now these goals are not universally held to be true in all nations but even in those that are governed by dictators they tend to pay lip-service to the middle two of these goals. As George Orwell informed us in 1984, the bigger the lie, the easier it is to believe. But for the purposes of this essay, let us assume they are an acceptable set of answers.
When I was a child of about 10 (circa the early 1960s), I was impressed by the vision of a future (circa the 21st Century) that would allow people to work 12 hours a week and still enjoy a rich lifestyle. For a kid laboring in a private boarding school where the teachers were called Masters and they still caned and strapped their students, this sounded marvelous to me. A future filled with time to play, amazing!
Alas, it was too good to be true. But wait, why is it too good to be true? We have robots building cars, we have labour saving devices in the home, we have satellites in geo-synchronous orbit, we have space travel and space stations, we have universal, ‘free’ and instant communication (the Internet), we have clones, we have heart transplants, we have quantum teleportation, we have… all the things that were first speculated upon by science and science fiction writers in the 50s and 60s and yet everyone I know in 2005 is working incredible hours and not really getting any further ahead. Huh? What’s with that?
On
A few years ago, my family and I were at Red Pine Camp on
I sat with my wife, Dawn on a high bluff overlooking the
Lake—the sunlight reflecting off the surface of
During that time, I thought that it was highly probable that men and women had been coming to this particular bluff and enjoying this spectacle for at least the last 30,000 years. And that led me to think that for most of those generations (before the coming of the White Man), they had had enough time to actually enjoy it. I read that the average work week for a native Indian male in North America before the current era was about 12 hours a week—during which they were able to hunt enough game and provide their families with the necessities of life. The rest of the time, they could indulge themselves in: games, competitions, smoking unadulterated tobacco, communing with their gods, making love and war, playing with their children, trekking, telling stories, chewing peyote buttons, observing the natural world, perfecting their arts, teaching their kids, etc.
I also had time to reflect on a conversation I had with a
worker at a resort in
I got to know him a bit while I was staying at the resort and one day he asked me: “Mr. Firestone, who has the better life? You or me? I work 25 hours a week; I do a fine job, my boss likes me and I meet nice people. I get good tips and I still have time to smoke the Ganja, listen to music and make love to my woman. How many hours a week do you work?”
You have to ask yourself the question, if we accept the four purposes of our national economy as described above, how come it isn’t producing these kinds of results?
Socialization of Risk
In many developed nations, with the significant exception of
the
There is no nation on the planet that has ever held the
power of the
One can not ignore the national priorities of a country like
the
Ask yourself the question: ‘If the
In a relatively powerless nation-state like
Socialization of
Leisure
Now the Europeans have tried to take a middle path and,
certainly, they have had more success than
(* Mind you, this has never
stopped U.S.-based fund managers from constantly criticizing Euros for their
‘lazy’ ways despite the fact that the Euro zone has some of the highest
productivity economies anywhere. It is my experience that the
The Euros laugh at North Americans; they call us the ‘Work/Pajama People’. We work all day to come home at night to get immediately into our PJs so we can get to bed so we can get up the next day to do it all over again. Social life? Fun? Hobbies? Art? Play? Being with our Kids? Lifetime Learning? Hanging Out? Other interests? Extended Family? Bosom Buddies? Are you kidding, who has time for any of that?
It seems clear to me that there is no way we could ever have
a national economy (in
(* We practiced preparing for
nuclear Armageddon in the basement of our school—we were told to crouch down
and put our heads between our legs. I remember hearing the wail of the early
warning sirens, which were tied into NORAD, as these were tested. We would get
20 minutes warning of a nuclear attack. Plus we regularly got updates from the
Doomsday Clock. Scientists set the hands on the clock—the closer to 11 it was,
the higher the likelihood of nuclear war. The futility of it all, the expense,
the never ending stupidity of all humans, it just boggles the mind.)
At its most primal, the urge to work ourselves to death doesn’t just come from our avarice to buy more stuff. It derives from a deep seated fear that if we don’t, our competitors will eat our lunch. If we don’t work hard, our boss will fire us, our chief competitor will steal our clients, our city and our country will fall behind other nations that we compete with, we will all lose our jobs because there are others out there willing to work even harder than we do and for less money, we won’t be able to provide all the necessities of life and educational opportunities for our children, we won’t be able to pay our bills, our spouses will leave us, …
Think about it for a minute—our primary motivations are greed and fear. And these are hugely powerful forces when it comes to humans. Is this the right way to run our lives—living in fear that we are going to get beaten out and greedy for everything we can grab lest one day we don’t have enough?
Standards
National or international standards have always made us
wealthier. What’s the purpose of having a fax machine if every fax machine has
its own standard and one machine can’t talk to another? What if all the fax machines
in your city could talk to each other but not to one in
Most of us have no idea how important these agreements
are—we have standards that affect nearly every part of our global economy: we
agree on the time of day (don’t laugh; it wasn’t that long ago, before the
acceptance of GMT (Greenwich Mean Time), that scheduling am appointment with
someone was subject to a great deal of clarification as to which time you were
using); the calendar, voltage, spelling, driving (right handed or left handed),
signalization (red for stop, green for go), table heights, measurement (length
of a centimetre, etc.), temperature scales, operating systems, counter heights,
work week, right handed screws, protocols for the telephone, television, fax,
tape deck, VCR, IP (Internet Protocol), Browser, Email, DVDs, secure
e-documents (basically, by default, Adobe PDFs), right click, left click and so
on. English has become the international standard for the Internet, for
technology, for business, for politics. Think about the economic advantages
that derive from having one common
language that everyone speaks. The alternative is
We might not like some of the standards that we have adopted but their economic benefits are enormous.
Now what if we agreed on a new international standard that people should only work 12 hours a week? Would that be possible to do? No, probably not but it might be possible to, say:
Agree on 12 days a year that would be set aside as universal, internationally sanctioned holiday days—one a month.
That would allow people to have one three day weekend per month and it would be a start in a new direction. Is it possible that better rested people might be more creative and more productive? It certainly is possible and would be worth finding out.
I know that I can not take any time off; I feel guilty if I do. Work ethic is so deeply ingrained in me that if I try to take a day off when other people are working, I feel lousy. I am sure that I am not alone in this—I need Big Brother to impose time off and make it a social goal, then I am fine with it.
Wouldn’t it be nice if one of our ‘leaders’ was worried about something other than, say, Bill Clinton’s ‘love’ life? That debate practically monopolized the U.S. Congress for two years. The national dialogue in most countries, it seems to me, is incredibly picayune. No one seems to talk much about issues that would really mean something to their citizens. What are we afraid of?
Why couldn’t our leaders simply agree to add the 12 new international holiday days to whatever national holidays they already have in their countries whether that is 6, 8, 10 or whatever number of days. Imagine 12 internationally recognized holiday days where everyone got to rest and, maybe, the planet got to rest too. Turn stuff off for 12 days each year. And while we’re are at it, turn off all the outdoor city lights too so our kids can see the night sky. God knows ‘Gaia’ (Mother Earth) needs a break from human activity.
The Purpose of Life
I wish I knew what the answer to this question is. The
framers of the U.S. Constitution thought it was: Life,
As a young man, I lived in Oz for seven years and I thought that the purpose of life then was sailing. (This was later confirmed for me when then Prime Minister, Bob Hawke, declared an impromptu national holiday in Australia the day after Alan Bond’s yacht wrestled the America’s Cup away from the damn Yankees, after more than 120 years of U.S. domination of the sport).
When I was a kid, I felt sure the purpose in life was to advance technology so we could go flying around the Solar System and then the Galaxy. Immediately after this phase, I felt really sure that the purpose in life was girls.
So what is the purpose of life? Maybe if we understood it better we might also find the answer to what we should be aiming to do with our national economies too. If the purpose of life is to sit on the beach and contemplate nature then perhaps we should only be doing just enough with our national economies to keep ourselves fed.
If we decided this was the right path, then we would need international agreement (an impossibility I realize) to implement a radical change like this. You can’t have one nation working feverishly piling up wealth, technology and weapons while others made up of slackers are contemplating the Tao because, if there is any one lesson that history shows us, is that nations and peoples that don’t keep up with their competitors, well, they simply cease to exist. So you need agreement before any one nation-state could even consider re-jigging national priorities to, say, give people more family time*.
(* International agreement is
a practical impossibility; you can’t even get national agreement on anything
like this. Look at what happened to the national consensus and provincial
consensus in
They also put forward
plausible sounding arguments like: “Shouldn’t people be allowed to choose what
they want to do and when they want to do it? People can always choose not to
shop on Sunday but why should they take away the rights of others to shop if
they want to.” The result of these campaigns is that Sunday shopping is now
allowed practically everywhere in
It has proven to be
disastrous, in my view. Now every day is just like every other day. Nothing is
special anymore. There is no rest day. My youngest son, Matthew, works in a
local retail store and they all are required to take shifts whenever management
requires them to; unwillingness to take their turn may result in dismissal.
So if we can not come to
agreement about what purposes the national economy should be put to and if we
do not then socialize these goals by agreement and by implementing these
agreement through standards, then they aren’t going to happen and the whole
debate is just stale air coming out of our mouths anyway.)
Now if you examine the geological record, you can see the evidence of mass extinctions and selective extinctions. Mass extinctions seem to have occurred when external events like a comet impacting the earth happened. Selective extinctions are harder to explain but in all probability, those species disappeared because they could not adapt to new circumstances in their environment or because of the rise of new competitors that literally either ate their lunch or ate them for lunch.
It seems the height of hubris to think that this cannot happen to humans; in fact, it seems all too likely.
In the case of extinctions, the biological slate is being cleaned—and biological room is being made for other life forms to arise. The convenient extinction of the dinosaurs almost certainly made room for the rise of mammals and humanity with it too.
Arthur C. Clarke recognized this possibility in one of his early works Childhood’s End, where humanity perished in the process of giving rise to its successors. (Interestingly, he also predicted in this novel (in 1953, no less) that long distance would be at an end as of December 31st, 1999. The Internet arrived just in time to see Mr. Clarke’s prediction come true.)
If all the works of humans must one day perish, what’s the point*? Maybe smoking Ganja and listening to music is the right path after all.
(* Existentialists embrace a
philosophy that emphasizes the uniqueness and isolation of the individual
experience in a hostile or indifferent universe. They regard human existence as
unexplainable and stress freedom of choice and responsibility for the
consequences of one’s acts.** This seems to neatly get around the need to
explain things like: how did life begin? But if human consciousness, ‘I think
therefore I am’, is unique, or at least, a very special event and not plentiful
in the Universe, then it seems to me that we are here to ask the hard questions
and not to embrace a philosophy, that even though it does have a moral
underpinning, it refuses to go beyond a ‘rose is a rose’ explanation of the
wonders on the unimaginably large and unimaginably old space we experience
around us. Humans seem to need absolutes to tell right from wrong—everything
can’t be relative; everything can’t be ‘Beautiful
in its Own Way’ as a syrupy old song once crooned… There is too much evil
in the world for that to be true.
** American
Heritage Dictionary of the English Language, Third Edition © 1992 by
Houghton Mifflin Company. Electronic version licensed from INSO Corporation. )
But somehow I don’t think life is really like that. Humans have an innate desire to create new things and manipulate their environment. Our brains have grown so enormous that the only limit on their development is the diameter of the birth canal. There must be a point to it.
We have opposable thumbs that are just perfect for gripping tools. Tools and brains, brains and tools. That is a recipe for hard work—I realize it is a circular argument; we have big brains and tool using digits so we must be meant to use them and we have big brains and tool using digits because we have used them.
Life is a self organizing and powerful force. If you have ever been present when someone dies, you would realize how precious it is and how fiercely it is surrendered.
There are many unanswered BIG questions—what created the Universe, how did life begin, how do different species actually arise? No matter how hard we think about it, no one can truly understand the meaning of a Universe that is 15 billion years old. Can you imagine, for a minute, what it would be like to witness 1,642 billion sunrises and sunsets (the approximate age of our Solar System is 4 and ½ billion years)?
No matter how hard we try, no one can really grasp the idea that there was NOTHING before the Big Bang and that the Universe was created at that moment and the enormous energies unleashed at that moment in time were conjured up from the nothingness of nothing; not even the background noise of space since space and time are linked and without time (which began at the moment of the Big Bang), there can be no space. Huh?
No one really understands how you mix a bunch of chemicals and energy in a Petrie dish and, voila, you get self-replicating DNA*. No one can really explain how you breed generation after generation of cats and, somehow, through speciation, you get a dog. Sure, we understand that longer necked giraffes had a competitive advantage over their shorter necked cousins, so now all we see are the longer necked ones. I get that. But no matter how many times we breed giraffes, we aren’t ever going to produce a zebra.
(* In Bill Bryson’s excellent
book, A Short History of Nearly
Everything, he notes that in order to create proteins, you need to assemble
amino acids (the building blocks of life) in a precise order. To produce
collagen, a common protein, you require a 1,055 sequence molecule. The chance
of this happening randomly is vanishingly small. For a protein with a more
modest 200 sequence, the probability of this happening by itself is 1 in 10260,
Bryson calculates (p. 288). That is a larger number than all the atoms in the
Universe. Obviously, science has a great deal more explaining to do to solve
the mystery of how life began. Wouldn’t it be remarkable if science found the
answer—it is bound to be wonderful because it is so improbable.)
Speciation has been defined as occurring when isolated groups from a single species develop along differing evolutionary paths until finally they can no longer interbreed. This seems much too limited a theory to account for the incredible biological diversity we see around us and that has taken place on earth over geologic time.
And random mutation isn’t the answer either since an entire population needs to be created simultaneously so they can breed successfully.
Life is stubborn and I suspect that it could be quite widespread. Intelligent life might be much rarer. Exogenesis seems as likely a vector for the start of life on earth as anything else that I have read—for example, rocks have traveled from Mars to the Earth and, less frequently, from the Earth to Mars. Natural forces such as asteroid or comet impacts have thrown Mars rocks into orbit which have later intersected with Earth’s orbit and fallen to the surface. If there was life on Mars at one time, it’s already here in all probability—having hitched a ride on space debris.
I think we have little to fear from space borne plagues that we haven’t already seen at one time or another already.
So what is the purpose of life? I don’t know but it isn’t to work ourselves to death and it isn’t to feed our children into the maws of corporate giants to spit out ever more profit for the lucky 1% of the population that are equity lords (thanks to Neal Stephenson for coining this term in his novel, The Diamond Age) in our society. But I don’t think it is to just sit on a beach either, smoking weed. If we all did that, life would still be short and brutish—you’d be old, toothless and dead before 40. No thanks*.
There is something much more complicated, much more beautiful, much more dangerous going on. I just don’t know what it is.
(* If you are unsure about
our use of at least some technology, I recommend you see the film, Quest for Fire, again. It shows what
life is like for a primitive tribe that has lost its one source of fire; it’s
not a pretty sight. Life without fire is not pleasant for the group. Fire is
the basis for cooking, warmth, development of new technologies and for
protection. It allows them to extend their day (because they can see at night.)
It has subtle effects like allowing them to hang around the fire at night and
begin to tell each other stories. They now can pass on information to their
children and each other. They can entertain themselves. They can discover humor
and leisure time. They can become more creative.
So anyway, they send out three hunters to find fire and bring it back to their cave. The three hunters have many adventures, the most important of which is their contact with a more advanced group that has mastered the art of making fire. If you think this skill is trivial, remember that in subsequent episodes of the hit TV series, Survivor, not one modern human could successfully make fire despite the fact that each of them knew, in advance, after watching the contestants in the first series, that this would be a huge advantage in the game to outwit and outplay their opponents and win a million dollars. Yet not one of the next 16, after more than two days of effort, could do it.)
Copyright.
Dr. Bruce M. Firestone,
Section 2
………………………………………..……..... On
Entrepreneurship
U
Entrepreneurship and Intrapreneurship—
The Basis for Economic Development, Personal Freedom and Knowledge
By Dr. Bruce M.
Firestone, B. Eng. (Civil), M. Eng.-Sci., Ph.D., Entrepreneur-in-Residence,
entrepreneur en résidence,
|
There are a dozen lessons for Students who want to be
successful entrepreneurs or intrapreneurs highlighted in this speech today. They are: A)
Set goals
for yourself and your team; B) Be a self-starter; C)
Practice as
hard as you play; D) Focus on your goals; E) Work hard; F)
Be flexible
in how you achieve your goals/show some adaptability; G)
Bring some
innovation to what you do; H) Create a Personal Business for Life; I)
Protect
your reputation and understand and apply ethics in all that you do; J)
Be prepared
to deal with uncertainty and stress; K) Execute well; L)
Take care
of the business and it will take care of you and your family. |
INTRODUCTION
Good morning and welcome. Bienvenue à tous.
I would like to thank Dean Kelly and the
J’ai le
grand honneur d’être le premier entrepreneur en résidence à l’Université
d’Ottawa. J’ai demandé au doyen Kelly : « Qu’est-ce qu’un
entrepreneur en résidence ? » Il m’a dit : « Je ne sais
pas. Vous êtes le premier et vous devez inventer le poste. »
C’est
parfait pour moi – toute ma vie, je n’ai jamais su ce qui
m’attendait…
Je suis le
fondateur des Sénateurs d’Ottawa et de presque soixante-dix entrepôts.
J’ai construit plus de mille cinq cents maisons et plusieurs édifices
commerciaux, notamment
I also have held utility and industrial design patents in electronics and aerodynamics. I teach, write and research not only in the field of entrepreneurship but also in the field of design economics, real estate development and architecture.
Now I tell my entrepreneurship students that focus is an important part of their future success and then they stare at me—much as you are doing now—and so I must tell them not to follow my example.
Question—what would you rather do? Race the downhill course before or after your chief rival? Well obviously, you would choose afterwards. Humans are capable of incredible feats when they focus and set goals. When you know the spilt times of the other skier, you might be amazed to see that your times are fractions of a second better on each part of the course.
When we brought the Senators to
Now why did I choose 22 instead of say 30 or some other number? Because the worst ever team in NHL history (the 1972 Washington Capitals) got 21.
Does anyone here remember what our point total was in our first year? 24.
I believe that if you set your goals, if you visualize them, if you internalize them, if you can see yourself achieving them, you have a great opportunity to be successful. I suggest to all my student entrepreneurs that they write a simple equation everywhere—their homes, their offices, wherever they can see it:
N = ?
Where N is number of clients, customers, visitors, revenues, patients … Anything that measures the performance of their organizations. It seems simplistic but if everyone in your organization buys in to a single goal and all efforts are focused on achieving that, you will.
Notice I said set your goals; I haven’t said a word about planning how to get there. Plans are useful guides but they are like war plans—they change as soon as you come into contact with reality. So whether you are an entrepreneur or you are working for a large company or a Not-For-Profit organization be prepared to be flexible—life has a lot of surprises in store for you and you need to be able to change with the changes in your environment—adapt or perish.
If you remember Sigourney Weaver’s role as Ripley in the Alien series, she showed remarkable ability to make the best of her situation. The US Marine Corps unofficial motto is ‘Show Some Adaptability’.
WHO GETS THE PROMOTION
I am interested in applying entrepreneurship skills to large organizations as well. Not everyone wants to be an entrepreneur with all the risk, stress and responsibility that that entails. But many of my students learn how to apply those skills within larger organizations. Those people are called intrapreneurs.
Now suppose you and a colleague both go to your manager with a proposal. She says: “I have a great idea for a new product. If we invest $10 million in R & D, I can get the product out the door.”
You say: “I have a great idea for a new product and I have three pre-launch clients willing to invest $2.5 million each to help us with $10 million in R & D expenses. Plus they are willing to take the first six months of production.”
Now whose project gets the green light? AND WHO GETS THE PROMOTION?
When we won the NHL franchise for
a) Have an all night blow out party?
b) Come
back from
Answer: BOTH. We partied then we got back into town the next day and sold $22 million in season tickets in cash in ten days.
An entrepreneur or intrapreneur is someone who can create $2 in revenue for every $1 that any fool could generate.
Most successful entrepreneurs start with (practically) nothing. If you had to choose three things from the following list, what would they be:
- Launch clients and customers;
- Access to VC financing;
- A great, never-tried-before idea;
- A good business model;
- Sound execution;
- Approved bank financing;
- A good partner;
- Access to government grants?
If you chose 1, 4 and 5, go to the head of the class. I tell my students, don’t waste your time pursing VC money and government grants. The best partnership is often none at all. Banks only lend you money if you don’t need it. Maybe the reason the never-tried-before idea has never been tried before is because it is a bad idea.
Entrepreneurs and intrapreneurs who start with nothing often build much stronger businesses, focused on real clients, real cashflow and real profits. If you have real clients and real cashflow, you will get financing today, not the other way round.
I like the ad where Canadian basketball superstar and League MVP Steve Nash says that if you want to be great, you need to practice the day after the best game of your life. I’ll bet Steve Jobs after launching the iPod spent very little time resting on his laurels.
And that is what you need to do: FOCUS, SET GOALS, PREPARE, WORD HARD, BE FLEXIBLE. The harder you work, the luckier you’ll get.
THE DIFFERENCE BETWEEN BEING WEALTHY AND BEING RICH
I really like comedian Chris Rock. Has anyone heard Chris Rock do his thing on wealth versus rich?
Well, according to Mr. Rock, Shaquille O’Neill, the basketball player for the Miami Heat, is RICH but the guy who signs his pay cheque (Micky Arison) is WEALTHY.
Chris Rock got it exactly right. You can get rich by winning the lottery, becoming a NBA Star, speculating, asset flipping, gambling, picking the right parents or prospecting for gold, diamonds, nickel, whatever, but you can’t become wealthy doing any of these things.
Wealth derives from control over a factor of production, a license, a franchise, a territory, a concession, some IP (Intellectual Property like the secret formula for Coca Cola or the 11 secret herbs and spices that the Colonel uses to make fried chicken), a competitive advantage, a comparative advantage, property ownership—anything that creates a sustainable, repeating and renewable income stream; it is your ‘pixie dust’—the magic that really makes your business work.
Now let’s just look at some numbers; let’s say someone controlled the early Beatles catalogue (say, someone like Michael Jackson). Mr. Jackson is reputed to have bought the catalogue in 1985 for $47m (but he lost his friendship with Paul McCartney along the way). By 1993, MJ’s company was reportedly earning $30m from it (albeit, MJ had added other songs by other artists by that time but let’s ignore this for the moment) and it was estimated to be worth $300m at that time. This yields a cap rate (capitalization rate) of 10, which is pretty typical for this type of privately held asset. No one knows what kind of income stream he gets from this now but it has a rumored value of $1 billion today. MJ still owns 50% of it, the balance is owned by Sony.
With a cap
rate of 10 and given that MJ owns half of the catalogue, we can guess that MJ
gets $50m a year in income from his ownership. Plus the Beatles are making a
huge comeback—just ask my 14 year old daughter, Jessica, who only wants Beatles
CDs for her birthday and knows just about every word to every tune the Beatles
ever recorded. So it wouldn’t surprise me if MJ’s income is going up every year
from this source. This is called wealth. However, let’s say that MJ is in need
of some quick cash and sells his interest to Sony for $500m. Now MJ would be rich (for a while) from selling his
interest in the catalogue but he would no longer be wealthy because he has lost the ability to renew his wealth every
year by producing an income stream from control over this particular factor of
production.
But what’s that you say? He could invest the proceeds in T-Bills, Muni Bonds and GICs (Guaranteed Investment Certificates). Sure he could, but they produce puny 1.7% to 4% rates of return. If MJ paid $100m in taxes, he would be left with $400m, which would give him an income stream of $6.8m to $16m a year with no inflation protection. I mean if MJ were to continue to control the catalogue, he could always increase the price (aka royalty) paid for each tune if inflation takes off and starts to bite into his revenue stream. But even ignoring inflation, why would MJ trade an income stream of $50m a year that makes him wealthy to become a remittance man getting $6.8m to $16m a year? MJ has already turned down offers to sell; presumably he understands the Chris Rock difference between becoming rich and being wealthy*.
(* Somehow
I doubt whether Lisa Marie Presley has read this piece. In December 2004, it
was announced that Lisa had sold her father’s image and name as well as 85% of
Elvis Presley Enterprises Inc. to Robert Sillerman-controlled SFX Entertainment
for a reported $100 million, which included some stock in a new SFX controlled
business. So not only does Lisa no longer own, control and direct a valuable
franchise (her father’s estate, which brought in $45 million last year), she
didn’t even get all her compensation in the form of CASH. As any entrepreneur
knows, cash is KING. (Pardon the pun, Elvis). Now compare that with J.K.
Rowling’s absolute and tight control over her creation (the Harry Potter series)—not only the
publishing rights but also the film rights and other media rights as well. It
has made her the richest woman in the
Did you know that many, maybe most, lottery winners blow their entire wad in less than five years? By that point, their spouses have left them, they are alienated from their old friends, they have got a whole new set of ‘friends’ who are only around while the money lasts and they don’t even have their old job to go back to. Many of them have picked up nasty habits along the way like taking drugs. It’s absolutely amazing how many of them end up in bankruptcy. They are much worse off for their ‘good fortune’.
PERSONAL BUSINESS FOR LIFE, PB4L
For the last few months, I have become increasingly certain that people in the 21st Century are going to need what I can only call a Personal Business. It seems to me that there are so many changes in the local, national and global economy going on and so many things can and do go wrong, that it might not be a bad idea after all to have a fallback position.
You know that I have been stressing to you how important it is to have a Personal Web Site for life—a place where you can collect your personal IP over your lifetime and career and one day, maybe, you can find a way to make money from it too—while you are lying on a beach.
But something else has struck me recently—just how many people have little sideline hobbies, gadgets, gizmos ... micro businesses really that make a bit of money. It also struck me that this could be a highly useful thing to have.
Let me give you an example. I recently met with
Richard Rutkowski is a former Kanata City Councilor.
Richard is an intriguing person—he is very sure of himself, a good marketer, a good promoter and a sure handed politician—prepared to make the time investment in being a City Councilor (which is like a 24/7 J.O.B.).
I asked Richard what he does between political jobs and, sure enough, he hauls out this cute little magazine called The Best of Kanata. Now this is really low tech—businesses advertise in it, so that is one revenue stream for Richard. It costs about $600 for a half page and there are lots of pages. Then, people buy these things for 20 bucks and in the back of the magazine, there is a 'member's card' about the size of a credit card, which entitles them to 10% off at all stores and services featured in the book.
When I did a Google search, the only mention I
got was: http://www.ncf.ca/gcuc/food.html
So, Richard hasn't even bothered with a web site. (The Kanata Food Cupboard sells the book for 20 bucks and keeps 15).
Well, this is a pretty simple business and folks advertise in it like crazy because they like Richard and it works for them and it is pretty inexpensive.
Richard sells 5,000 copies of the thing, so you can figure out for yourself the economics pretty easily.
There have got to be a zillion of these kinds of ideas. Do you know what I told Richard: "NEVER, NEVER sell this thing—it is like a sinecure, a franchise, a license, a concession ... it is your 'pixie dust' forever."
It is low tech and low intensity to manage this particular micro business and it is a kind of concession because it is so local, so focused and Richard is so well known locally that everyone who is anyone in the 'urban village' that is Kanata is going to be in it.
So while I have told you to create businesses through entrepreneurship that will provide you with more value than if you just had a J.O.B., maybe there is a more subtle message here that I could provide you.
Maybe, we should each have one micro business that we hang onto for life—that never gets shared with anyone, no partners, never is pledged to a Bank for a loan and, thus, something that we can fall back on in troubled times.
It would be pretty cool if every man, woman and child on the planet each had a Personal Business for Life (PB4L) that stayed with us throughout our lives and, if things get messed up, well, we have (as my late father, Professor O. J. Firestone, would say): “a fallback position” or “an iron reserve”. My father lived through two World Wars and he really understood the need for both.
How did
It was the unleashing of their entrepreneur class along with freer financial markets, better education systems and access to international trade that largely powered this economic miracle.
Thousands of people in
INDIVIDUALS
COUNT
Imaginez ce que serait
chacune de nos communautés sans les entrepreneurs. Les entrepreneurs prennent
de grands risques pour créer de nouvelles entreprises, et juste un petit nombre
d’entrepreneurs peuvent avoir un impact important sur leur communauté locale. À
Ottawa, par exemple, une poignée d’entrepreneurs comme Terry Matthews, Mike
Cowpland et Mike Potter ont créé des milliers d’emplois directement ou
indirectement en démarrant des entreprises comme Mitel, Cognos et Newbridge
(qui appartient maintenant à Alcatel). Les communautés locales doivent appuyer
les efforts de leurs entrepreneurs pour que les avantages économiques qu’ils
apportent soient durables.
MORAL UNDERPINNINGS
While it is true that the
entrepreneur is largely following his or her own self interest, there is a
moral underpinning for this: one's first obligation to society is to take care
of yourself and your family so as not to become a burden on society. Once that
is achieved, humans who are uniquely interdependent, have a further obligation
to take of their fellow human.
MICRO ENTREPRENEURS
I read an interesting article in the Globe and Mail (by Luke Harding of the
Guardian News Service, February 10, 2003) about micro entrepreneurship in
There, slum dwellers
erected latrines—one for men and one for women and a third for children only.
Charging just one cent per use, they built a profitable business using only
$900 USD in start-up capital advanced to them by
Who would have thought that you could make a successful business out of
a latrine but that is apparently what the women of this village did. I was
intrigued so I sat down and did a spreadsheet on it this morning and here is
what I conjectured:
Village of Kalmandhai, India with assistance
from WaterAid, UK
Cost of Construction of New Latrine
Men's $450 USD
Women's $450 USD
Children $0
Total $900 USD
Revenues Per Use $0.01 USD
Daily Use Men 300
Women 375
Children 400 free
Total Use 1,075
Total Paid Use 675
Total Daily Revenue $6.75 USD
Annual Revenue $2,463.75 USD
Maintenance 10% $90
Night Watchman 1 $450 $450
Cleaning Staff 3 $1,350
Net Revenues $573.75
Return on Investment 64% p.a.
So they achieved a
(possible) 64% p.a. rate of return on this investment, which is impressive.
Just as importantly, there are significant health benefits that accrue to these
people from proper disposal of human wastes. Plus they generated additional
activity including:
a. the construction of a shower block for traveling truck drivers that pass
through the Village and for the villagers themselves (and more fees);
b. the use of their 'product' (from the latrines) in their herb garden (for
self use and third party sales);
c. startup of a composting business;
d. money lending to women in other villages to start similar enterprises.
Think about the number of jobs they created-from a latrine! Give a human
a fishing rod, not a fish.
If these ladies could create a thriving business from a $900 investment just imagine what privileged people like us, like you students here today—with all the advantages you have: great education, access to capital, free, civil societies and much more—can do.
TRUE JOB SECURITY
People often tell me that they are scared to become entrepreneurs. “Isn’t it safer just to get a pay cheque every two weeks?” Well, maybe.
But a friend of mine worked for the GOC (Government of Canada) doing post project reviews for 25 years. In the great downsizing in the 1990s, he was laid off! After sending out 500 résumés, he had a total of ZERO interviews. What kind of JOBS are available for a guy with a PhD in History who has done nothing but GOC work for 25 years? ZILCH.
So he came to me and asked
me what to do. I knew he was not the kind of person to star his own business—he
needed some kind of structure so I advised him to buy a franchise, He did. He
bought a Subway and a couple of years later he bought another.
He
took over a loser of a location but turned it around in less than 24 months
using smart (guerrilla marketing). Every day at 10:30 am he would go over to
the mega mall parking lot across the street and put $1 off sub coupons under
the windshield of 500 cars. He would run back to his shop and wait for the
traffic to come in the door. He also visited every local office within three
kilometres between 11:00 am and noon weekdays over an 24 month period. He would
bring in huge platters of finely cut subs and a bunch of $1 off coupons. He
would talk his way past the receptionists and get into even highly secure
buildings and hand out free food and coupons by the bucket load. Although he only made $30k in his first year,
he made over 100 grand for himself and his family in year two.
He bought a second location and now
takes home over $140,000 every year. He told me recently he is making more than
he ever did at the GOC and he loves what he does. He does his own hiring,
firing, banking, accounting and marketing. He has an outlet for his creativity.
As long as he keeps a good relationship with the Master Franchisor, no one is
ever going to downsize him again.
True
job security comes from what you have between your ears—what you learn over a
lifetime, your ability to put into practice what you know. It doesn’t come from a job description…
WHAT’S MORE IMPORTANT? GOOD EXECUTION OR THE NEXT BIG IDEA?
If you ask me, the big idea is LESS important than good execution. Most of my students think that the big, NEVER BEFORE TRIED, idea is more important but there are lots of companies that do very well with good execution of fairly mundane things.
I am pretty sure that the only thing that is in infinite supply is ideas; numbers, for example, represent an idea and they are infinite. There are probably more than 25 million smart Americans in their basements at any one time trying to come up with the next bid idea (like, say, Google). They are generating a huge volume of new ideas; that tends to suggest, in economic terms, a surplus of ideas while the skills to implement them are in much shorter supply and, hence, the latter will generally attract a higher price.
The market for new ideas, such as it is, tends to put a low price on them (just try to sell your BIG IDEA at a business model stage and you will see: a) how hard it is to do that and b) just how little you will get for it). Obviously, a startup that combines some type of innovation with good execution is better off than one with just sound execution. Fred Smith, when he started Fed/Ex, brought the hub and spoke system to the overnight package delivery business, essentially creating that industry.
Before that, it was thought to be an impossible challenge—if you had 60 cities as both origins and destinations in the network that meant 3,600 overnight flights, an obvious impossibility. If you had instead five hub airports within easy trucking distance, you could get by with 25 overnight flights…
However, most successful start-ups
do not create new industries or are not necessarily first movers. Google wasn’t
the first search engine; however, they did bring significant innovation to the
table including: neutral search rankings, search rankings that reflected
traffic loads on and links to a site, paid search links and auctioning off of
paid search links. GradeAStudent.com, now GradeATechs.com, was not the first at
home computer repair service but their execution was good and they used a back
end system (GASnet) to automate their appointments and their billing systems.
I have felt for a long time that VCs are heading in the wrong direction; they should NOT fund startups. Rather, they should wait until startups have proven themselves in the marketplace. It’s kind of like watching for tall shoots in a field of grass. Those are the ones they should fund. It’s better for VCs, better for the national economy and, interestingly, better for startups too.
It’s better for VCs because they will fund more winners and fewer losers and generate better returns for their investors. This, in turn, will attract more capital to the industry which is good for innovation overall. It’s better for the national economy since careful rationing of scarce capital will provide higher overall growth rates. And finally, it’s better for startups, in my opinion, to focus on: a) building a sound business model, b) self (bootstrap) capitalization, c) using smart (guerrilla) marketing to capture customers inexpensively and d) generating real cashflow from real clients and customers. The founders of these businesses will find it much faster and much less frustrating to find customers first rather than spending nine months or more hoping to attract VC funding or going after government grants. They will also get help from clients in other ways such as designing the final product or service. It’s like a war plan—as soon as your contemplated business model comes into contact with customers, it will change; they will force changes that YOU CAN NOT PLAN FOR.
Finally, the founders of these businesses will get to keep more of the equity in their businesses if they do a deal with a VC firm later when their business is more mature and, frankly, they are more mature. Nothing gives you more leverage in negotiations with VCs than the fact that you have enough cashflow to fund the business without them.
BUT STILL, INNOVATION IS IMPORTANT
Digg.com’s founder, Kevin Rose made
$60 million in 18 months. Kevin is just 29 years of age so there is still time
for you!
Kevin Rose, Founder, Digg.com (BusinessWeek August
14, 2006)
While I think great execution is really important, having some type of innovation in your business model can help you create a sustainable advantage; i.e., you need to have some type of ‘pixie dust’ or differentiated value in your organization’s business model. This creates a franchise or concession for you that is hard for others to copy.
Let’s return to the Digg.com model. What makes it different? What is its differentiated value?
1.
It
is a new model for a newspaper uniquely adapted to the Internet.
2. It is not simply the online version of the New York Times or some classified advertising page transferred to the Internet.
3.
It
is a digital community made up of a fairly homogenous demographic—80% are male,
mainly young techie readers.
4.
Readers
are also contributors.
5. Readers dig up interesting stories from all over the web and post brief synopses to the site and links to them whereupon other readers vote on them—the most popular ascend the page.
6. The site harnesses the competitive instincts of the readers/contributors to compete to see whose story will lead.
7. The site works because of its homogeneous demographic—contributors only post stories that will be of interest to the group.
8. The site is dynamic—leading stories change by the minute or hour.
9. Digg.com’s cost for headline writers = ZERO.
10. Digg.com’s cost for journalists = ZERO.
11. Digg.com’s cost for editors = ZERO.
12. Digg.com’s cost for distribution = ZERO (at least, the marginal cost is practically zero).
This is a lot of pixie dust. I think Digg.com is important for another reason—I believe that it is important for communities that are working together to be reading the same things, to share a common culture. If you think about it for a moment, many of the communications you have in a given day are made much easier by possessing a common culture; you don’t have to explain where you are coming from and the context of what you are saying in every conversation you have.
Now the innovative nature of Digg.com would be pretty useless without good execution so creativity is a necessary condition for the kind of success Mr. Rose has had but not a sufficient condition.
TRUST AND
REPUTATION
Quand je me
suis lancé en affaires, un avocat très réputé que je connais* m’a dit :
« Au bout du compte, tout ce que tu auras, c’est ta réputation. Si tu as
une bonne réputation, les clients feront affaire avec toi, les fournisseurs te
feront du crédit, les banques te prêteront de l’argent et les employés voudront
venir travailler avec toi ».
(* Kent Plumley was an early investor in Mitel Corp. and
made more than $50 million from his investments in tech.)
To Mr. Plumley’s advice, I can add another piece today: what is more important:
a)
Love;
b)
Trust?
I would
argue that trust is the more important. Think about it. If you can’t
trust your girlfriend or boyfriend, your spouse, your partner, your employees,
what kind of life is it? Surround
yourself with positive people you can trust and you will have a better life in
every way.
PERSONAL SACRIFICE
BusinessWeek (August 14, 2006) reports that Mr. Rose sank every penny and all his energy and time into Digg.com to make it a success losing his girlfriend along the way. She objected to the fact that he put his money into the business instead of putting a down payment on a house.
Entrepreneurs
make a lot of sacrifices along the way and not all the stories have happy
endings.
Peter Patafie, a friend of mine, gave a lecture on entrepreneurship. He is an up by the bootstraps kind of guy. At age 45, he got laid off from his sales job selling moving and packing supplies because he was making too much money (more than the President). He had a wife and three kids to support and had never finished High School. What to do?
He started his own business selling moving and packing supplies. He started with less than $5,000 but he had a great reputation, he knew how to sell and he could get product on credit from his suppliers. Also, in a pretty mundane business, he brought some creativity to it.
He had one great insight. He realized that the salespeople for his clients spent a lot of their time redelivering packing and moving supplies to their clients. In other words, he worried about his clients’ clients.
He went to the moving companies with an irresistible proposition. “What if instead of delivering moving boxes to your warehouse and then having your salespeople redelivering them to people who are moving, I save them the time and trouble and I deliver the boxes and moving supplies directly to them. That way, your salespeople can spend more time selling (moves) and less time delivering boxes.”
Peter ended up with a 97% market share (better even than Microsoft’s OS). Within six years he had built a business that did $13 million per annum with 30% margins. He told me he never expected to make that kind of money and every year he gets together with his employees and shares the profits with them.
He told the class that he had three priorities:
Priority # 1: TAKE CARE OF THE BUSINESS.
Priority # 2: TAKE CARE OF MY FAMILY.
Priority # 3: TAKE CARE OF YOURSELF.
Students asked Peter: “Surely, you mean TAKE CARE OF THE FAMILY is your number one priority.”
But Peter stood firm. He explained it this way: “What is the number one cause of divorce: a) Alienation of Affection, b) Financial Difficulties? The answer is b). Having creditors call at home for payment of debt puts tremendous stress on a marriage. Sure people may say that they fell out of love but often the root cause is financial pressures.” So he concluded if you take care of your business, you can take care of your family, no the other way round.
Life isn’t easy and being an entrepreneur or intrapreneur is
hard. But for people who want to use their creativity, who want the
responsibility, who believe that true security comes from what they know and
what they can create themselves, it is a road worth taking. Entrepreneurs and
intrapreneurs use resources efficiently; they know that creating a sustainable
enterprise that will last for generations and outlive* its founder means not
eating all the seed grain. They are stewards of the organization and the
community and the environment. C’est
un beau défi, un défi qui vaut la peine d’être relevé.
(*A true entrepreneur creates more value in his or her
business than just providing a JOB for themselves. There are many attempts to
define what an entrepreneur is; certainly one of the tests should be that the
enterprise can last beyond the involvement of the Founder and that significant
value is created.)
CHALLENGES FOR STUDENTS 2006-2007:
Anyone here need $7,000.00 in cash? If you do, then come study ENTREPRENEURIALIST CULTURE (ADM3396 Seminar in Administration: Entrepreneurialist Culture- How to Bootstrap Yourself to Business Success in the 21st Century: http://www.dramatispersonae.org/EntrepreneurialistCultureFrontPage.htm) with me and participate in some new initiatives including:
I. Two competitions this year-
a) The Business Model Competition: http://www.dramatispersonae.org/BusinessModelCompetition/DescriptionUOBizModelCompetition.htm;
b) The Wesley Nicol Business Plan Competition: http://www.dramatispersonae.org/WesleyNicolBusinessPlanCompetition/UOttawaWesleyNicolBusinessPlanCompetition.htm.
II. Let us
join together today to forward to the United Nations a proposal to set aside
one day each year to celebrate all entrepreneurs who contribute so much to
society. Not only do they contribute from an economic point of view but also
from the point of view of providing us with more interesting choices and more diversity
everywhere.
(SIGN THE PETITION TO THE SECRETARY GENERAL—VISIT: http://www.dramatispersonae.org/UNDayOfTheEntrepreneur/UNDayOfTheEntrepreneur.htm)
III. Entrepreneurship Quarterly Journal publishing.
IV. Launch of parking meter signage program at UOttawa.
V. Applying LawnSignKing.com to a real world business.
VI. Launching Ottawa’s own Mural Arts Program (MuralArts.ca).
Thank you. Merci.
Speech to: Kiwanis Club of
Date: Friday September 12, 2003
Where: Fairmont Chateau Laurier Hotel
Subject: Entrepreneurship,
Development and Sustainability
Introduction
Entrepreneurship is more than just a key engine for economic
growth; it is the most efficient means of producing a sustainable community,
not just in
I always found it strange how some businesspersons feel threatened by the concept of sustainability and how some environmentalists feel threatened by entrepreneurs. What I want to show today is that, fundamentally, the two objectives—producing more with less are not in contradiction at all. I mean isn’t it kind of obvious that if you can produce a given number of widgets with fewer inputs (of materials and energy) that your profits will be higher? And isn’t that good for the environment and doesn’t that help move the whole economy onto a higher plane of sustainability?
Now there is that word ‘profit’. Canadian entrepreneurs find it hard to use that word. They feel the media, labour and environmentalists will criticize them if they use it; it’s a ‘four’-letter word in our country. But should it be?
Let’s go back in time for a minute to the time of Adam Smith; the discoverer of the ‘invisible hand’. He found it incredible that a nascent free market economy could produce the greatest number of goods and services for the greatest number and be self-organizing too. How did this happen?
Well, Adam Smith said that each individual acting in his or her own self interest, would produce the most goods and services that he or she could sell thereby employing the greatest number of persons and resulting in the maximum benefits for society as a whole without really meaning to. He determined that the invisible hand of the marketplace was moving these people along and, if left alone to their own devices, this would produce the greatest utility for society as a whole.
But there is another side to this story—there is a moral underpinning to the operation of free capital markets.
Your first duty to
society is to not become a burden on it.
So when we use the term ‘profit’, whether applied to a family or individual who is producing more income for themselves than they are consuming (the difference either being put to use as savings or investment) or an organization or a business that is producing a surplus, we can be sure that they are meeting this moral test.
Private ownership of a ‘thing’ can be viewed as private stewardship of that thing.
As a former owner of a National Hockey league franchise, I never felt like I owned it and, frankly, I was always uncomfortable with the notion that hockey players under contract to the team were like indentured workers, albeit, highly paid ones, that could be traded like pork bellies. I always felt that I held the franchise in trust for the fans and the City.
I remember how counter productive it was when West Carleton Township Council considered in the 1990s passing rules to control the use of private woodlots. These woodlots, most of them carefully managed by private owners, remained in production over a period of time measured in generations. They carefully harvested product to feed wood stoves, pulp mills and board production so that they would have an income stream continuing over many years.
The threat of controls by the local Council caused the exact problem the Township was trying to avoid—some woodlot owners clear cut their entire acreage in advance of the new rules becoming law; they feared they would not be able to realize any income after the rules were passed. This is so typical of government initiatives—a. governments often create enormous programs aimed at the whole population of that industry or sector when they are actually trying to solve a problem that is caused by a tiny percentage of the population in an industry, b. hence, they penalize the vast majority of that population without actually solving the problem, c. they often generate unintended consequences.
Again, Private Ownership = Private Stewardship.
If you look at the example of the 80 year rule by the proletariat in the former USSR (actually, it was rule by the nomenclature), you see that ‘public’ ownership produced the worst ecological consequences for the Planet—from dumping old nuclear reactors into Lake Baikal to the Chernobyl meltdowns, Russia faces a set of environmental circumstances that will take 100,000 years to deal with.
Can you imagine what the mindset has to be to dump
contaminated nuclear waste into
“It contains 20% of the world's total unfrozen freshwater reserve. Known as the 'Galapagos of Russia', its age and isolation have produced one of the world's richest and most unusual freshwater faunas, which is of exceptional value to evolutionary science.” (From UNESCO: http://whc.unesco.org/sites/754.htm)
If no one owns a ‘thing’, no one seems to care about it. At least, that is the western view and it certainly seems to be a cross cultural view with perhaps the exception of a few indigenous peoples who may nurture nature in a collective way.
When watching Star Trek, TNG, I was always struck by Captain Picard’s view of
the Ferengi as something of a sub species because of their clearly established
commercial avarice. Starfleet and the Federation no longer felt the need to be
guided by the individual pursuit of personal enrichment—I guess they are
something like Commune-ists.
The Invisible Hand of the Ferengis
As someone who has lived in communes, I can tell you that communes are organized in a hierarchical manner, no matter what they may advertise. As Orwell said: “Everyone is equal, except some are more equal than others.”
What worries me is how to decide who is more equal than others without using the scorecard of dollars and achievement—after all, dollars are democrats. Are we better off with a benevolent dictatorship like Starfleet making decisions on who gets what rather than using money, which does not discriminate and is blind to gender, race, religion or any other form of segregating humans except merit? Perhaps (to paraphrase Sir Winston Churchill) money, free markets and democracy form the worst possible system, except for all the others.
Even so-called not-for-profit corporations are required by law to generate significant reserve funds to tide them over the rough patches. A ‘reserve’ fund is just a politically correct term for ‘profit’.
What else does a profit allow? Well, it allows the organization (or family) to invest in more research and development (or education for example), as well as better technology and technical methods of doing things, to implement best practices and much more. Profits are not just so ownership can have nicer cars, boats and other toys.
If anyone has ever worked for a company that loses money, you already know it’s no fun. When you want to travel somewhere, say to meet a client or go to a trade show or go to a conference, guess what? You can’t.
An unemployed fellow I just interviewed the other day for a JOB with a client of mine said it particularly well:
“It’s possible to have money without fun but it’s virtually impossible to have fun without money.”
So, please, make profits in everything you do—including running the Kiwanis Club of Ottawa so you can do more good works for the community (don’t just call it that).
Development Economics and Entrepreneurship
I met Walt Rostow when he visited
Preconditions for Economic Takeoff
1. education
2. health
3. supply of and private ownership of housing (safe, affordable, privately owned)
4. clear title to housing and accurate addressing and surveying
5. tolerance of and legalization of cottage industries
6. tolerance of mixed use neighborhoods where people can work, live, shop, trade, play, entertain all in the same location
7. effective legal system, respect for the rule of law
8. moderate levels of taxation and avoidance of confiscatory levels of taxation
9. re-integration of black and gray markets (deeding of lands and title in squatter settlements )
10. active capital markets (borrowing circles and financial recycling of savings and investment, home mortgage availability)
11. culture of and support for entrepreneurship and innovation
12. wide spread Internet access and effective communications system
13. sound public infrastructure
14. extensive private ownership of economy
15. respect for human rights
16. protection of private property rights
17. good, honest and transparent government
18. social peace and harmony
19. strong civic institutions
20. civil defense
21. trust, courage, hope and faith
I added in point # 10 above—the need for a culture of and support for entrepreneurship and innovation. I have become convinced that this is an important ingredient to unlocking development potential not only in DCs but first world countries as well. More on this later.
Respect for the law including contract law is an important
pre-condition. Former President Bill Clinton, when asked to comment on why it
was taking so long for the ‘new’ Russia to be fully accepted into the community
of trading nations, he responded that this would have to wait until contract
law was widely accepted as binding by the people and institutions of that
country. People doing business in
It’s hard for an economy to takeoff without trust. I have learned as an entrepreneur that you can have rooms full of legal paper but if the other side has no respect for a contract, the legalese is generally pretty useless. Having to go to court to force someone to live up to their agreement is not only expensive and time consuming, it is soul destroying too.
Hope and Courage
Another one of the pre-conditions for economic takeoff that I added above is the need for hope and courage in the population. It takes courage to start new ventures—one must have faith that things will somehow work out and hope for the future. I loved the line from the film Shakespeare in Love about how a play actually all seems to magically come together at the last minute and that how this happens is, well, “It’s a mystery.” The same is true of entrepreneurial activity—how any of these initiatives work out at all, gee, it is a mystery.
I know that most entrepreneurs who have started a successful business never would have started if they actually knew beforehand: a. how long it was going to take to become successful, b. how much money would have to be spent to get there, c. the risks they took to do it, d. how hard it was, e. how much work it was, and f. how often they were naysayed and criticized for it. To paraphrase rock singer Bob Seger, if you’re going to be a serial entrepreneur, sometimes you might say to yourself: “I wish I didn’t know now, what I didn’t know then.”
One day in the mid 1990s, I was walking around the Carleton
University Campus in
Later on, a few minutes of research uncovered an interesting story—Canadian National Railways had needed a new cross-Ottawa line and the only way that the then Chair of the National Capital Commission (NCC) would agree to it was if the
CNR would bury it under the lake. The NCC apparently wanted
to protect views in the National Capital Region. Now I realize this is kind of
frivolous when compared with the enormous challenges that DCs are facing but I
was struck by the courage it took on the part of the NCC to take this position.
This got me to thinking about an earlier trip to
If you have ever looked at the Rockies from the eastern side and thought about the idea of running a rail line over those mountains as Van Horne did beginning in January 1882 and completing the crossing just three years later in 1885… what courage these people had.
William Van
Horne, 1843-1915
While it is true that Government concessions helped Van Horne, it was heroic efforts on his part that made this possible:
“Van Horne worked himself harder than his crews, arranging steamship service to distribute materials and supplies, seeing to the opening of stone quarries and three dynamite factories, which supported the building of the transcontinental. … He managed to continue the building of the railway when there was no money left for payment (my italics). He himself went without pay for months. Directors used their personal fortunes, businessmen advanced credit and supplies and construction forces went without pay,” North America Railway Hall of Fame.
Courage, hope and leadership. These are preconditions needed
for entrepreneurial success. Van Horne had them in abundance. Do you know the
story of how King Clancy got the original MLG (
Well thousands of construction workers bought in to the King’s dream and the result was a fine new home for the Toronto Maple Leafs and a building that earned the nickname, the ‘Carlton Street Cashbox’. All of the scrip was redeemed btw.
There are the things that governments can do as well as or even better than the private sector. They may not be as good as the private sector at the doing of a thing but they can provide the right conditions or environment for it to be accomplished. To my mind, this is the true mission of government—providing for the right conditions to allow the private sector to achieve desired social, economic and environmental goals.
Micro Entrepreneurship
and Development Economics
I read an interesting article in the Globe and Mail (by Luke
Harding of the Guardian News Service, February 10, 2003) about micro
entrepreneurship in
There, slum dwellers erected two latrines—one for men and
one for women and a third for children only. Charging just one cent per use,
they built a profitable business using just $900 USD in capital advanced to
them by
We Can Do
Better Than This
Who would have thought that you could make a successful business out of a latrine but this is apparently what the women of this village did. I was intrigued so I sat down and did a spreadsheet on it this morning and here is what I conjectured:
Sanitation Improvement
Village of Kalmandhai, India
With assistance from
Cost of Construction of New Latrine
Men’s $450
Women’s $450
Children $0
Total $900 USD
Revenues
Per Use $0.01 USD
Daily Use
Men 300
Women 375
Children 400 (free)
Total Use 1,075
Total Paid Use 675
Total Daily Revenue $6.75 USD
Annual Revenue $2,463.75 USD
Expenses
Maintenance $90
Night Watchman $450
Cleaning Staff 3 $1,350
Net Revenues $573.75
Return on Investment 64% p.a.*
(* Assumes the $900 from WaterAid is a loan not a grant and must be repaid; otherwise, the ROI is infinite.)
Other Revenue Sources
New Shower Block 6 cents USD per use
Purchase of red worms from State of
Money Lending (Banking) To women in Neighboring Communities other revenue generating Latrines
Wow, a (possible) 64% p.a. rate of return on this investment is impressive. Just as importantly, there are huge health benefits that accrue to these people from proper disposal of human wastes. Plus they have generated additional activity including:
a. The construction of a shower block (and more fees);
b. The use of their ‘product’ in their herb garden (for self use and third party sales);
c. Startup of a composting business;
d. Money lending to women in other villages to start similar enterprises.
Think about the number of jobs they have also created—from a latrine!
So micro-Enterprise Loan Funds focus on helping low-income people start their own businesses. Using a peer-lending model, each borrower is paired with other borrowers who are starting their own businesses. Together the loan recipients are responsible for each group member’s loan and collectively benefit from education and technical assistance provided by the micro-enterprise fund. Many organizations around the world have created banks and loan funds based on this model.
“Give a human a fishing rod, not a fish,” Anon.
Property Rights, Human Rights and Economic Development
In
I always found it interesting the Province of Ontario, for example, banned billboards along major highways in Ontario (the 400 series roads) because they were considered a dangerous distraction for drivers and visual pollution (i.e., ugly) and then they turned around and gave a monopoly to an American-controlled company with the ugly name of TODS (Tourism Oriented Destination Signage). TODS has monopoly rights for all signage along 400 series highways within 400 metres. This was a huge one-time shift in value from landowners along 400 series roads to TODS. In my view, it was expropriation without compensation and if the Canadian Charter of Rights had included protection of property rights, I am sure someone could have successfully challenged this.
Mr. Trudeau felt, I believe, that property rights are also fundamental to human rights; that unless people are protected from unreasonable infringement of their property rights, there can be no real personal freedoms. If governments can grab your land, take your business, well, it isn't a big step to taking away your personal freedom or even your life.
Property rights are also fundamental to economic development. To this day, most startups are, one way or another, financed with home or other building and land equity. If an entrepreneur owns a home, he or she will pledge it for startup capital from a bank. If Mom or Dad or rich Uncle Buck is helping out, their homes or other personal property is probably somewhere in the loop as collateral.
In many developing countries, they either don't have a
sophisticated and extensive enough banking system to bring mortgages to the
masses or they discourage private ownership of property. In
President Vincente Fox is to bring the financial system into line with North
American standards so that home ownership becomes an
attainable goal for the middle classes. Even if they have 50% or even 75% cash
equity, people still find it hard to get a home mortgage in
This is a big problem because there is a huge amount of capital tied up in land and buildings that can't be leveraged in support of entrepreneurial ventures; this locked-in capital affects developing countries to a great extent.
Government policies often exacerbate the problem. Even micro amounts of capital available from vacant or agricultural land mortgages can make a big difference to a peasant economy or developing economy.
In
HUMAN RIGHTS AND ECONOMIC DEVELOPMENT = FUNCTION (Property Rights)
Should Every Man, Woman and Child on the Planet Have a Personal Business for Life?
Putting Your Stamp on Something
I have become increasingly certain that people in the 21st Century are going to need what I can only call a Personal Business. It seems to me that there are so many changes in the local, national and global economy going on and so many things can and do go wrong, that it might not be a bad idea after all to have a fallback position.
I have been stressing to my students how important it is for them to have a Personal Web Site for life—a place where they can collect their personal IP over their lifetimes and careers and one day, maybe, they could even find a way to make money from it too—while they are ‘lying on a beach’.
But something else has struck me recently—just how many people have little sideline hobbies, gadgets, gizmos ... micro businesses really that make a bit of money. It also struck me that this could be a highly useful thing to have.
Let me give you an example. I recently met with Richard Rutkowski who is a candidate to replace retiring Kanata Councillor Alex Munter on Ottawa City Council. Richard is a former City of Kanata Councillor.
Richard is an intriguing person—he is confident, a good marketer, a good promoter and a sure handed politician—prepared to make the time investment in being a City Councillor (which is a 24/7 J.O.B.).
I asked Richard what he does between political jobs and, sure enough, he hauls out this cute little magazine called The Best of Kanata. Now this is really low tech—businesses advertise in it, so that is one revenue stream for Richard. It costs about $600 for a half page and there are lots of pages. Then, people buy these things for 20 bucks and in the back of the magazine, there is a 'member's card’, the size of a credit card, which entitles them to 10% off at all stores and services featured in the book.
When I did a Google search, the only mention I got was: http://www.ncf.ca/gcuc/food.html
So, Richard hasn't even bothered with a web site. (The Kanata Food Cupboard sells the book for 20 bucks and keeps 10).
Well, this is a pretty simple business and folks advertise in it like crazy because they like Richard and it works for them and it is pretty inexpensive. Richard sells 5,000 copies of the thing, so you can pretty easily figure out for yourself its economics.
There have got to be a zillion of these kinds of ideas. Do you know what I told Richard: "NEVER, NEVER sell this thing—it is like a sinecure, a franchise, a license, a concession ... it is your 'pixie dust' forever."
It is low tech and low intensity to manage this particular micro business and it is a kind of concession because it is so local, so focused and Richard is so well known locally that everyone who is anyone in the 'urban village' that is Kanata is going to be in it.
So while I have told you to create businesses through entrepreneurship that will provide you with more value than if you just had a J.O.B., maybe there is a subtler message here that I could provide you. Maybe, we should each have one micro business that we hang onto for life—that never gets shared with anyone, no partners, never is pledged to a Bank for a loan and, thus, something that we can fall back on in troubled times.
Maybe StreetPaddleTennis.com will be that for my 14-year-old son, Matthew, who knows?
It would be pretty cool if every man, woman and child on the planet each had a Personal Business (PB) that stayed with us throughout our lives and, if things get messed up, well, we have (as my father would say): “a fallback position” or “an iron reserve”. My father lived through two World Wars and he really understood the need for both.
I was thinking that a number of the students in
Entreprenurialist Culture (one of the courses I teach at
Politics, Media and Business Form an Identity
When I got the courage up to first ask my future wife, Dawn, out on a date, she said: ‘no’. Being a somewhat persistent individual, I asked ‘why’.
Dawn Said ‘No’
She told me that she ‘didn’t want to date a business man’. ‘Why not?’ I asked. ‘Because business is dirty and, at the top level, business, media and politics are all the same and I am apolitical.’
I suggested that we downsize from dinner to just meeting for drinks and I would prove to her that she was wrong. So we met, fell in love and have five children together. But years later, I called Dawn at work and told her, she was right; at the uppermost reaches of business, there is an unholy alliance between the media, politics and big business. So now I write on the board for my students this equation:
P = M = B,
where P stands for Politics, M for Media and B for Big Business. Frankly, large political, media and business interests don’t want you, the entrepreneur, to succeed.
What I had realized is that most national economies are controlled by a handful of families or a few hundred at most. And they like their oligopolies and their positions of power and are highly motivated to keep both. As entrepreneurs, we often run into these entrenched positions and that is why so many entrepreneurs live by the credo that:
“It is better to ask for forgiveness than it is to ask for permission.”
Centralized Control Over Media Including the
Internet
Promotes Political and Big Business Agendas
Wilderness
Tours
I was speaking to Joe Kowalski, Founder of Wilderness Tours
(WT), last weekend when he and his wife Sue took Dawn and I and some of our
kids rafting down the
Joe (in stern) Calmly Takes the Raft Gently Down the Stream
I was particularly interested in how he started because he
was the first to recognize the power of the white water on the
Joe told me that he started on the Ottawa with ‘no money’
plus two rafts and he just started—he was a river guide and he hired a summer
student from back home (Joe hails from Pennsylvania) and they just set up shop.
He didn’t ask anyone for permission. He just put the rafts in and took them out
and enough folks came that he carried on … for 30 years. Wilderness
If he had asked for permission from, say, the local Council, this would have started a process that might easily have brought in the Provincial Governments of both Ontario and Québec (the Ottawa is the boundary between these two Provinces) as well as the Federal Government, which is in charge of navigable waterways.
They would have formed a study group; they would have studied the issue for at least a year. They would hold public hearings. Potential competitors would have been tipped off. Outfitters in other places would learn of Joe’s plans. Existing tour operators (e.g., canoe places, say) would object.
Joe would have had to hire a lawyer. Tens of thousands of dollars and two years later, Joe would have quit and Jean Chrétien could not have proved that he was still youthful enough to lead the GOC and the Liberal party through a third majority government by staging a photo opportunity in a WT raft on the 25th Anniversary of WT. Oh yes, thousands of person-years of employment would never have been created either.
Federicos Gondolas
Compare this with the experience of Darcy McRae, who started
a Gondola business on the
He launched in September 2002 in the scenic and historic
He docked at the Dow’s
It was around 10 p.m. and we saw this ghostly shape gracefully move through the mist to dock at the National Arts Centre—Darcy had earlier in the evening taken a couple from a restaurant further up the Canal to the NAC for a show and was coming by to pick them up. What a romantic way to spend an evening, n’est-ce pas?
Darcy on Mooney’s Bay, Ottawa
Well, in
They sent an armed RCMP officer in full body armor to give
Darcy a cease-and-desist order that not only banned him from the Canal but also
forced the management of the NCC-controlled Dow’s
Darcy was left with no clients, no berth and his life
savings and his investors’ money were in jeopardy. Interestingly, the berth
next to Darcy’s was occupied by a boat that provided charters on the Canal but
somehow, rather mysteriously, that was O.K. with the NCC. The reason for
banning Darcy? The NCC had earlier given a monopoly to a major tour operator
whose boats hold 150 personas each. There are no Gondolas on the
Oh yes, Darcy was also banned from the Rideau Canoe Club, the Casino du Lac Leamy and just about everywhere else he tried to put in. Finally, in June of 2003, Denis Giacobbi and his family (from www.fitnessleaders.com and www.fitbug.com) were kind enough to allow Darcy to use their dock on Mooney’s Bay.
Darcy continues to be harassed by Government representatives to this day. P = M = B.
Ottawa
When OBN was started by yours truly in the mid 1980s, we wanted to break into the newspaper market which was then totally dominated by one newspaper, the Ottawa Citizen. Advertising rates reflected that newspaper’s dominant position and we thought that OBN would provide a useful B2B advertising vehicle and it was a way to bring the maturing business community together.
We wanted to drop paper boxes on every street corner. These are amazing devices—they just sit there and advertise your product 24/7 and they don’t cost very much.
We then faced the question: ‘Do you ask for permission first?’
Our answer was ‘no’. If we ask for permission to drop paper boxes on the sidewalks of the City, the City will convene a study group. They will hire a consultant. The Study Group will be made up of representatives of the established media (e.g., the Citizen folks, the billboard people, etc.). It is not in their interest to allow paper boxes since that is a leg up for startups like OBN. And they have the perfect political cover—paper boxes are ‘visual pollution’.
So what we did was send around a young fellow in a costume
(thanks, Duncan MacDonald) to put quarters in expired meters to save folks from
the dreaded Green Hornets and their parking tickets. (By the way, after we did
this, Ottawa City Council passed a bylaw making this illegal. They were afraid
that their parking ticket revenues would decrease if this became a habit. So
now, in
This was the first time anyone had tried this PR stunt and it got OBN’s mascot a lot of good media coverage. That was our political cover.
Then we just dropped a couple of hundred paper boxes all
over
Of course, the reaction was to get us to cease-and-desist but we made two effective arguments: 1. this was a freedom of the press issue; 2. the City should license paper boxes (we suggested $25 per year per paper box). Rather than ban them, the City should make money from them by ‘regulating’ them.
This is quite persuasive because politicians love power and they know that power comes from money. In fact, let’s add that to our Dawn equation P = M = B = $.
The end result is that there are a ton of paper boxes in
A Lesson for Entrepreneurs
Established enterprises don’t want you to succeed. Even very large countries tend to be controlled by a relative handful of political, media and business interests. One of the keys to their continued power is the ability to create concessions for themselves—newspaper monopolies, cable empires, television licenses, for example, are all tightly controlled and doled out according to arcane rules that hugely favour the incumbents.
One of the keys to long term business success is control over some type of factor of production. If you want your business model to be sustainable, you need some type of ‘pixie dust’, some type of long term competitive advantage. You need to be able to execute well but you also need to have ‘access’—to capital, to boat launch facilities, to City sidewalks, whatever.
Again, it is better to ask for forgiveness (sometimes) than to ask for permission. The caveat is that, like so many things in the field of entrepreneurship, this is a gray area and one has to be careful about legal liabilities (another closed system, I am afraid).
But nevertheless, great businesses have come about because people like Joe Kowalski and Darcy McRae have faced down entrenched interests so there is hope that you can too.
Teamwork in the 10th
Another secret to making entrepreneurial endeavors work is teamwork. According to Jane Jacobs all human economic development stems from the development of villages, towns and cities. Think about that for a minute. What is so special about cities, towns and villages?
Well, it’s by proximate cohabitation 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 a couple of years ago on
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
The Local Economy of Ugh and Nnn
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.
The families of Ugh and Nnn decide to colocate to form a village, at first, for the protection of both. By colocating and forming the first primitive village, they also open up the possibility of observing each other and cooperating and trading between the families.
Ugh Carrying Spear, Nnn Looking for
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 colocation is five antelopes and four sets of flint knives. After colocation 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 (profits again) 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.
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
People need people like no other animal on the planet—we are
uniquely codependent 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
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 Creativity
+ Productivity = FUNCTION (City-State Team Spirit)
City-State Team Spirit
= FUNCTION (Bohemian Index)
Bohemian Index = FUNCTION (Festivals + Performing Arts + Universities + Entrepreneurs + Researchers + Artists + Sports Teams)
For example, the Tulip Festival of Ottawa celebrated its 50th anniversary in 2002 by creating five-foot high tulips (partly in answer to the wildly popular Toronto Moose). Cities and towns all over vie to have the biggest something-or-other: hockey stick or whatever.
Some towns have big slogans like
People are always talking about limits but ideas aren’t limited. They are for all intents and purposes infinite. Maybe it is the only thing that is infinite. There are no limits to human ingenuity. But you need a great team to make these ideas actually work for you.
FIVE STEPS IN THE ENTREPENEURIAL PROCESS
|
Step 1 |
Generate Idea |
|
Step 2 |
Apply Ingenuity |
|
Step 3 |
Have Courage |
|
Step 4 |
Form Team |
|
Step 5 |
Execute Well |
Fed/Ex Example
Let’s look at what Fred Smith did when he put together Fed/Ex:
Step 1 (Generate Idea): Overnight parcel delivery
Step 2 (Apply Ingenuity): Instead of flying individual routes amongst 50 US cities (an impossibility since this would generate 2,500 overnight flights, i.e., 50 x 50 permutations), use the ‘hub and spoke system’ to bring parcels into major nodes and then long haul flights take packages into regional centres for further distribution.
Step 3 (Have Courage): The first night, Fed/Ex had five packages to be delivered, that’s right five. After tremendous investment and huge risk taking by Fred Smith to get the system set up, it tuned out no one knew that they need overnight parcel delivery. Fred was way ahead of the marketplace and his customers.
Fred Smith has Guts
Not a comfortable place to be. He needed a lot of courage and hope (some would say blind faith) that his gamble would work. (At the end of the day btw, every business decision is an article of faith in my view. We do a lot of analysis to try to make informed decisions but we still need to use human judgment to make wise choices.)
Step 4 (Form Team): Fred Smith’s team is amazing; they are loyal, committed people. Ever talk to a Fed/Ex driver? They are amazingly upbeat and they feel they are part of something bigger than themselves.
I always find it sad that so many middle aged people like me seem to have had their best days back in High school or College. When you ask them ‘why’, they almost always talk about their experience on a team—coming back from an impossible deficit to win a house league tournament… And this is the highlight of their lives? Well the underlying reason is that they felt they were part of something bigger than themselves. We somehow need to bring this feeling into our daily lives as adults too.
Step 5 (Execute Well): I don’t care how great your idea is or how ingenious you are, if you can’t execute well (generate sales, control costs and deliver value to your clients and customers in the process), you’re sunk. Obviously, Fed/Ex can do this on a year to year, decade to decade basis. And BTW the three most important tasks in this step are SELL, SELL, SELL. Startups with real customers and real cashflow will attract financing, not the other way round.
I find it peculiar that researchers spend so much time analyzing why businesses fail. I can tell you from experience that almost all business failures ultimately can be traced back to a failure to generate sufficient revenues. If your revenues are buoyant, your business will go on, maybe without you at the helm for other reasons (such as failure to control costs), but it will go on.
Let’s look at an example where I have some direct personal
knowledge of the steps we took to secure a National League franchise for
Step 1 (Generate Idea): Driving down the Queensway in 1987
wondering what I could do next, I asked myself what does
Step 2 (Apply Ingenuity): To clip the wings of any other potential bidders arising locally, we secretly bought 600 acres of land for a new arena, rezoned it, sold 15,000 PRNs (Priority Registration Numbers, basically giving people the right to buy season tickets in the then non-existent franchise), signed 500 corporate sponsors and 31 original corporate sponsors to help us in our campaign to BRING BACK THE SENATORS (a team that had played in the NHL until 1934 when they transferred to St Louis because of the deepening Depression).
Step 3 (Have Courage): The local media wrote a story the night before we won the franchise that there wasn’t much hope for success for our bid.
Step 4 (Form Team): We had a superb group of young, talented and extremely dedicated executives, all trained by me. THEY WOULD’T BACK DOWN.
Step 5 (Execute Well): The campaign was tightly focused on the only people who mattered—the 21 voters (Members of the Board of Governors and owners of the NHL Member Clubs) and the President of the League too.
It took a great team of unimaginably dedicated people to BRING BACK THE SENATORS.
I still remember an Ottawa Citizen headline a few days
before we got the Ottawa Senators franchise: "And the winners are …
Of course, it was
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
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
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
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
Winners never quit and quitters never win.
(Footnote: After collecting myself for a few minutes, I
asked Mr. Ziegler what the final vote was and he told me with a nonchalant
shrug: “It was unanimous, 21 to 0.”
About six weeks later, I did call the Governor who had told us that we would
never, ever get a franchise. He told me that his comment was part of a plan by
a few Governors. They told each bidder the same thing; it was a character test
designed to see how each bidder would react. Two of the bidders stormed out;
they weren't successful. Only two bidders got up the next day to continue
lobbying until the last possible second—Phil Esposito (leader of the
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
Let me leave you with a quote on the role of hope in human affairs, which frankly does not get enough attention. Human beings need to have hope to live.
"Most of the important things in the world have been accomplished by people who have kept on trying when there seemed no hope at all," Dale Carnegie.
Copyright. Dr. Bruce M.
Firestone,
Build and Hold—the Difference
between Getting Rich and Being Wealthy
(The Value Created by Long Term Control over a Sustainable Competitive Advantage or Factor of Production)
I read in October 2004 that Ottawa-base QNX Software Systems was sold to Harman International for $138 million USD. I know that some of my students and clients read it too and they will be thinking build something and sell it for A LOT OF MONEY. The only problem is that most of them might not read to page 2 of the Ottawa Citizen article (October 28, 2004) which says: “For Mr. Dodge, 50 and his partner Gordon bell, 49, the deal marks a vindication for their effort to build a profitable company without venture capital over 24 years.” (The emphasis is mine.)
I am not saying that you should never sell your business but what I am saying is that it takes time to build a great business.
People who build and sell quickly are known as flippers.
Most of them flip ‘til they flop. If you have built a successful business, you
have climbed
It is so hard to build a successful business, it takes so long to do it, you use up so much of your lifetime storehouse of luck doing it, that you should think very carefully before you sell it. Successful entrepreneurs often think: “Well, I did it once, I can do it again and again”. Bad news, people, often you can’t.
If you have built a great business, why sell it? What exactly will you do next? Start again? Why go through all the heartache and risk again when you already have a fine business you built yourself?
I didn’t feel that an essay on Building and holding onto your business (and helping to creditor proofing yourself at the same time) would be complete without mentioning this trap that so many of us fall into. It’s called hubris.
One of the best ways to get out of creditor hell is never to get into it in the first place. One of the ways to do that is to not sell your successful business. In almost all cases, a successful business will sustain you and your family and your employees and your suppliers and your other stakeholders far, far better than cash in the Bank.
Let me tell you another story, this one about Sean (not his real name). Sean was a by the bootstrap kind of guy and he had one great thing going for him—he had charm. He was a born salesperson and in the game of entrepreneurship, if you can’t sell, you’re out of the game before you can begin. (The three most important things in entrepreneurship are SALES, SALES, SALES.)
Well, one day about fifteen years ago, Sean found himself working in the fish department for a large supermarket chain; he was wearing one of those hair net things and he was developing arthritis in his hands from the cold and ice he was constantly exposed to. He and his spouse, Freda, had their first child (of what would eventually be a clan of three kids).
Sean thought to himself: “I can do better than this.”
The next day he went out and bought himself his first computer (never having even booted one up before) and started an advertising and promotion business in his basement with nothing other than guts, charm and a high school diploma. (I have changed his industry too to protect their identity. I apologize to my readers.)
I met Sean one day, about two years after he started working out of his basement, and he convinced me to move our entire advertising and promotion account over to his company. He was that good. I certainly asked him about his bona fides. Could he produce the volume we needed? How was his Quality Assurance program? Yadda, yadda, yadda.
I didn’t know until years later that this was his big break—it allowed him to finally move his business out of his basement, buy more equipment, hire more, better people, etc. But when he told me, we laughed about it together and I was doubly glad—glad that he was a success and glad that he didn’t let us down.
A few years later, Sean called me out of the blue. He had an offer to buy his business from a larger competitor for TWO MILLION DOLLARS IN CASH. I told him to slow down and think about it a bit more. I asked him a few questions. How much are you taking out of the business? About $200 to $250k a year. How much do you pay Freda to do your books? Oh, about another $50k. Do you have any company cars? Yeah, reckon so—two of them in fact.
In total, Sean and his family were getting about $300,000 a year from the Company, year in year out—it was a sustainable number.
I asked Sean, do you know what interest rates are on term deposits right now? No. Well, they are about 1.7% p.a., which means that even if this sale was tax free, your income from your two million dollars is going to be 34,000 bucks a year and every year inflation is going to eat away your principal. Now why would you give up $300,000 a year and a business you love and built yourself for that?
Let me quote actor and comedian Chris Rock:
“Shaq (Shaquille O'Neal who plays for the NBA’s Miami Heat) is rich but the man who signs Shaq’s pay check is wealthy.”
Chris Rock got it exactly right. You can get rich by winning the lottery, becoming a NBA Star, speculating, asset flipping, gambling, picking the right parents or prospecting for gold, diamonds, nickel, whatever, but you can’t become wealthy doing any of these things.
Wealth derives from control over a factor of production, a license, a franchise, a territory, a concession*, some IP (Intellectual Property like the secret formula for Coca Cola or the 11 secret herbs and spices that the Colonel uses to make fried chicken), a competitive advantage, a comparative advantage, property ownership—anything that creates a sustainable, repeating and renewable income stream; it is your ‘pixie dust’—the magic that really makes your business work.
(* What was the grant by the
Crown of exclusive fur trapping and trading rights to the Hudson Bay Company in
Rupert’s Land (all the lands (all 3.9 million square kilometres of it) that
drained into Hudson’s Bay) in 1670 worth to that firm? Well, they became one of
the longest-lived corporations ever known—in continuous operation to this day.
Their great wealth and economic and political reach was based not only on their
fur trading rights concession but also on their control of real estate—they
later came to control some of the most valuable sites in many Canadian cities.
Long term wealth is often
based on these types of privileges gained through political maneuvering. The
Fred Harvey Company controlled the Mule Train concession to the bottom of the
If you are the Emperor of
Japan, head of the House of Windsor (aka, the Queen of England) or head of the
Holy Roman Catholic Church (aka, the Pope), you have a different type of
concession but ones that have proven to be hugely long lasting. But maybe they
aren’t quite so different after all—their fortunes are based on real estate as
well as hereditary or faith based positions of power. The Queen is a huge
rentier (basically, a landlord with residential and commercial properties as
well as broad acres for lease); the value of the Emperor’s estate in downtown
Tokyo (the Imperial Palace) is incalculable and the Church has developed one of
the greatest portfolios of property on the planet by colonizing some of the
best sites in every city and town where the Church was represented. Astutely,
they almost never sell their property, calculating, correctly, that land leases
of 49 or even 99 years were the right way to produce income for an institution
with a time horizon measured in millennia. They can enjoy income from their
properties without having to give up long term control over their lands. After
the completion of a land lease, the property reverts back to the Church and the
process begins all over again—perfect inflation protection and, since they are
tax exempt too (in most instances), the Church has one of the most stable
financial platforms imaginable. In my view, the Queen seriously eroded the long
term stability of the House of Windsor in the last decade of the 20th
Century by voluntarily giving up the Crown’s tax-exempt status in an attempt to
appease her critics. It was very democratic of her but certainly will have
adverse consequences for the future of her heirs.
There is no better business
to be in than the Government business—they keep all the best businesses for
themselves. For example, there is no higher margin business than the Casino or
lottery business and governments everywhere seem to either keep the business
and operate it themselves (as they do in Canada) or regulate it and tax it
heavily. The dole out other choice concessions to their friends or influential
people who can help them get re-elected. If their costs go up, they simply
increase their prices (aka, taxes) and, if you don’t pay the higher prices, a)
you have no where else to go for service anyway (e.g., for your water and sewer
connection) and b) they can force you to pay either by taking away your
property or your liberty or both.
Governments love the liquor
business too—again, either they control it and operate it themselves or they simply
control it and hand out concessions to private operators and tax them to the
max. Yesterday’s bootlegger is today’s protected oligopolist.
Just how important are these
types of ‘concessions’? Well, look at what the professions do. Professional
Associations (for Architects, Engineers, Lawyers, Accountants, even Real Estate
Agents, etc.) are based on the tradition of guilds made up of artisans who band
together to: a) raise prices and b) restrict or otherwise raise barriers to
entry for newcomers. They always cover their tracks (it’s called political
cover) by claiming that they are raising standards to protect the consumer and
the public interest which no doubt they are doing at least in part. Not to be
too facetious about it but self-interest is a top consideration for these
organizations. Unions (like, say, the NHL Players’ Association) perform exactly
the same function for their members BTW.
In
Now let’s just look at some numbers; let’s say someone controlled the early Beatles catalogue (say, someone like Michael Jackson). Mr. Jackson is reputed to have bought the catalogue in 1985 for $47m (but he lost his friendship with Paul McCartney along the way). By 1993, MJ’s company was reportedly earning $30m from it (albeit, MJ had added other songs by other artists by that time but let’s ignore this for the moment) and it was estimated to be worth $300m at that time. This yields a cap rate (capitalization rate) of 10, which is pretty typical for this type of privately held asset. No one knows what kind of income stream he gets from this now but it has a rumored value of $1 billion today. MJ still owns 50% of it, the balance is owned by Sony.
With a cap rate of 10 and given that MJ owns half of the catalogue, we can guess that MJ gets $50m a year in income from his ownership. Plus the Beatles are making a huge comeback—just ask my 14 year old daughter, Jessica, who only wants Beatles CDs for her birthday and knows just about every word to every tune the Beatles ever recorded. So it wouldn’t surprise me if MJ’s income is going up every year from this source. This is called wealth. However, let’s say that MJ is in need of some quick cash and sells his interest to Sony for $500m. Now MJ would be rich (for a while) from selling his interest in the catalogue but he would no longer be wealthy because he has lost the ability to renew his wealth every year by producing an income stream from control over this particular factor of production.
But what’s that you say? He could invest the proceeds in T-Bills, Muni Bonds and GICs (Guaranteed Investment Certificates). Sure he could, but they produce puny 1.7% to 4% rates of return. If MJ paid $100m in taxes, he would be left with $400m, which would give him an income stream of $6.8m to $16m a year with no inflation protection. I mean if MJ were to continue to control the catalogue, he could always increase the price (aka royalty) paid for each tune if inflation takes off and starts to bite into his revenue stream. But even ignoring inflation, why would MJ trade an income stream of $50m a year that makes him wealthy to become a remittance man getting $6.8m to $16m a year? MJ has already turned down offers to sell; presumably he understands the Chris Rock difference between becoming rich and being wealthy*.
(* Somehow I doubt whether
Lisa Marie Presley has read this piece. In December 2004, it was announced that
Lisa had sold her father’s image and name as well as 85% of Elvis Presley
Enterprises Inc. to Robert Sillerman-controlled SFX Entertainment for a
reported $100 million, which included some stock in a new SFX controlled
business. So not only does Lisa no longer own, control and direct a valuable
franchise (her father’s estate, which brought in $45 million last year), she
didn’t even get all her compensation in the form of CASH. As any entrepreneur
knows, cash is KING. (Pardon the pun, Elvis). Now compare that with J.K.
Rowling’s absolute and tight control over her creation (the Harry Potter series)—not only the
publishing rights but also the film rights and other media rights as well. It
has made her the richest woman in the
Did you know that many, maybe most, lottery winners blow their entire wad in less than five years? By that point, their spouses have left them, they are alienated from their old friends, they have got a whole new set of ‘friends’ who are only around while the money lasts and they don’t even have their old job to go back to. Many of them have picked up nasty habits along the way like taking drugs. It’s absolutely amazing how many of them end up in bankruptcy. They are much worse off for their ‘good fortune’.
People are meant to work. They are built for it. If you have built a good business, control a great concession, own a valuable franchise, possess a ‘secret’ formula, whatever, hang on to it, fight for it*—it is your security against creditor phone calls in the middle of the night asking you: “Mr. Jones, when can we expect payment?”
(* I was doing some work
recently with a mega real estate agent. He is a salesperson for a large
brokerage and is vying for one of the top national spots in terms of sales
volume. He has developed a team approach to selling residential real estate and
will sell more than 120 homes this year (2004).
I was surprised to learn (and
it surprises me that after a great deal of experience with the real estate
industry that I didn’t already know this) that he has developed a long term and
sustainable competitive advantage.
Remember, this is an industry that has no minimum educational requirements, not
even a high school diploma is required to get your license. After successfully
completing a three phase course in
There are more than 40,000
real estate agents (more properly called ‘sales representatives’; technically,
‘agency’ is a term reserved for the relationship between the broker and the
client.) in
Well, first of all, John (not
his real name) treats his position as a salesperson as if it were a stand alone
business. It is my personal belief that every salesperson in every industry
should consider himself or herself as a quasi-independent entrepreneur.
John has a business
model for himself and his team of sales assistants. He views his broker as
one of his suppliers—the broker supplies John and his team with office space,
holds his license, manages the trust accounts, pays the phone bill and keeps
the lights on. He doesn’t really expect much more from his broker although he
counts on the firm (which is a nationally known company) to burnish its
reputation so at a minimum his association with the firm is not a net negative.
Trust in this business is hard earned, important to his success and easily
lost. But what freedom—you don’t have to worry about keeping the lights on,
paying the phone bill or what have you—you just get to concentrate on your own
core competency (i.e., selling) and there is no upper limit on what you can
make. If more people thought this way and they treated their sales as a personal
business for life (PB4L), then we would have a lot more high performance
and happier sales reps.
As a supplier, the Broker
represents John’s major COGS (Cost of Goods Sold), taking a 30% bite out of his
commissions. John is responsible for his own marketing and sales, personnel
selection and HR policies as these relate to his own team.
By thinking strategically
about himself as a separate business unit, John and his team have experienced
tremendous sales growth. But all of this would not have been possible without a
bit more ‘pixie dust’—John has spent the last 15 years ‘farming’ a specific
geographic area—he now controls more than 20% of all listings and sales in
‘his’ area.
Now I realize this is an old
real estate trick—i.e., concentrating your marketing effort in one target area.
In the real estate business, listings are everything. If you control a listing,
then buyers or buyers’ agents have to come to you. Eventually, if you control
enough listings within a designated area (probably around 20%), you become the market maker—sellers have to come to you
to get their properties listed and sold because you have so many buyers coming
to your (already) listed properties that if one isn’t just right for Harriet
and Albert Smith, you probably have another one that is just perfect for them…
John has so many of his signs
in his designated area that: a) it discourages other agents from trying to set
up (poach) in that neighborhood and b) people who want to list and sell would
be think twice before listing with anyone else. The awful thought in the minds
of potential buyers if it wasn’t listed with John’s team might be: “What’s
wrong with this house?” And that is the kiss of death in residential real
estate. Perception is everything.
It turns out that farming a
neighborhood and becoming its market maker are sustainable competitive
advantages in an industry that really shouldn’t have one given its
fundamentals. So think about it—it took John 15 years of incredibly hard work
to get to this position. He sells over $30 million worth of homes a year. He
does this with an average house price still in the $200,000s as compared with
other agents in larger, wealthier markets where average home prices are in the
$700,000s or higher and he still manages to make it into the top 1% of agents
in his firm. Now if decides to cash in his chips and sell his PB4L, what would
he get for it? Well, nada, nothing. That’s why it’s called a Personal Business
for Life.
Postscript: John could, of
course, explore a way to perhaps pass on the value he has created. He could
take his broker exams and set up his own shop. In that way, his clients’
loyalty would be to the Brokerage (his Brokerage) and not necessarily to John.
So when it comes time to sell, John has (maybe) something to actually sell—the
Brokerage’s client list and existing listings.. But there are obvious problems
with this approach—a) the clients may not port over to a new, unknown and
untested Brokerage and b) maybe after John retires, the clients that have
followed him to the new enterprise might drift away because they followed John
and like and prefer working with him. I am not sure that there is any simple
solution to this problem because surely one of the objectives of entrepreneurship
is to create something that has a life beyond your own; in that way, you would
have created something that can make money for you ‘while you are lying on a
beach’.
For real estate salespersons
and entrepreneurs, this remains a challenge that requires more thought. What
John has created, so far, is a PB4L that remunerates him richly. This is only
half the equation in entrepreneurship. He and I haven’t (yet) solved the other
half and, unless we do, what he has done is basically create a J.O.B. for
himself, albeit, a highly paid one.) Whatever John does though, he should
clearly and doggedly keep what he has so dearly created—Build and Hold, Friend.
Copyright. Dr. Bruce M.
Firestone,
Creditor Proofing
Introduction
As I have gotten
older and perhaps wiser, I have realized how little has been written on this
subject that, at least to my mind, is reputable and trustworthy. Bankruptcy
trustees, who are supposed to give someone in trouble impartial advice, can’t
help perhaps but be influenced by the fact that if you decide to go bankrupt,
that’s a new customer for them. Banks and financial institutions are unlikely
to be your friend in need if you are facing a financial question. They are as
likely as not, upon hearing that you may be in financial trouble, to call your
loan immediately—so they can be first in line to get your remaining financial
assets before someone else does or before you can either fritter the ‘estate’
away or transfer it to someone else (e.g., a spouse or adult child.)
It won’t matter to
them that if you did, in fact, transfer your assets away within a year or so of
a bankruptcy, this could be considered fraudulent and reversed by a bankruptcy
trustee appointed by a court to organize and supervise your affairs. They will
place you in their ‘special loans’ division—those are scary people who only
care about minimizing the Bank’s loss. When you’re in ‘special loans’, you’re
in a heap of trouble.
There really is no
such thing as ‘Creditor Proofing*’; it’s a misnomer. When people use the term
they are primarily thinking of putting their money in secret overseas, numbered
bank accounts, protected by bank non-disclosure laws in neutral countries like
(* Every year, the lecture
that I give on ‘Creditor Proofing’ in my course at Carleton on
Entrepreneurialist Culture seems to be the one lecture that my students ask the
most questions about so I figured it was time that I wrote this up as an essay
that other might find useful too.)
Neal Stephenson
wrote a ripping good yarn about a group of California-based techies who work to
create an overseas data haven in his novel, The
Cryptonimocon. A ‘data haven’ is another phrase for a pirate bank really;
what is money these days but data? If you use Internet banking today, all you
are doing is paying your bills or moving your money about as binary code—1s and
0s. So a data haven in Stephenson’s imaginary
But frankly, if you
have to resort to this, you are already in trouble and maybe doubly so. If you
throw your lot in with thieves and mercenaries in pirate nations, you shouldn’t
be too surprised when they find a way to rip you off. And to the people you
deal with in whatever nation you live, you will have lost a lot of their trust
and a lot of your credibility too so, no, I don’t think off shore secret
accounts are the right way to do things.
My late
father-in-law, Ken MacMillan, was an old fashioned guy. He thought that the
best way to credit proof yourself was to not have any creditors. He listened to
pitchmen selling mutual funds and laughed. He felt that the stock market was a
mug’s game—only the insiders win. He kept his money in a savings account in the
Bank. He paid all his bills on time. He lived within his means. He saved money
every month. He paid cash for his home and only purchased what he could afford.
When Ken passed
away, his estate attracted no death duties or terminal tax liability because he
kept all of his money in cash so there was no deemed disposition of stocks,
RRSPs, property (other than his primary residence, which is tax free in Canada
anyway). The Canada Revenue Agency (CRA, the equivalent of the IRS in the
I don’t think my
father-in-law thought much of me; I was a young smart aleck as far as he was
concerned involved as I was in ‘Big Business’. I had had all the advantages in
life—smart parents who emphasized education, private schooling and three
degrees. Plus I was fortunate to be born in a country like
Yes, I had it all as
far as he was concerned including a great wife (his daughter). But also I had
built first a real estate empire and then a (NHL) hockey franchise together
with a huge land assembly, largely with debt. He was not impressed.
The late Harold
Shenkman, the Founder of Shenkman Corporation, a very large real estate holding
company in
When his son, Billy
asked me what I was going to do in 1982 when, as a young fellow I first got
into business, I told him I was going to build office buildings. Billy said he
was going into parking lots. I laughed. At the time, parking in downtown
I was thinking of my
father-in-law, one day in 2000 when I went to my Bank to see how my mutual
funds were doing. I had left $100,000 in cash with the Private Bank (an arm of
the Bank for upscale customers only) in 1995 for them to invest in their Bank
mutual funds for me. Before that I had these particular funds in GICs
(Guaranteed Investment Certificates) and some term deposits. These are not very
exciting investments—but the principal amounts are guaranteed by the Sovereign
(i.e.,
I talked with my
private Banker and somehow I seemed to recall that one of the pitches they had
made to me initially was that I would receive a monthly statement ‘every month’
(!) no less, so I would know precisely where I was at. But I don’t recall ever
seeing one statement in the five
years they had control of these funds. When I asked to see how my portfolio was
doing, I got a series of excuses—it will take time to pull a statement together
(that bought them three weeks). I was also told: “You have to remember that you
can’t judge the performance of the Bank’s mutual funds over a short period of
time.” Finally I said: “Walter (not his real name), I’m not mad, I just want to
see a statement.”
Well, in the
greatest bull market in my lifetime and maybe ever (1995-2000), the Bank’s
mutual funds were among the 10% worst-performing mutual funds in
How
to Get in Trouble
How do people get in
trouble; how do educated people with all the advantages get in trouble? I am
sure that there are an enormous number of Canadians and Americans (and other
nations’ citizens too) who are headed for or are already in dire financial straights.
There is an incredible industry that has evolved to ‘help’ people out of
trouble—many of these helpers are dubious in my view but more on that later.
First, what are the
symptoms that you are in trouble? Yes, you need to self diagnose; like compulsive
gamblers or alcoholics or drug addicts, before you can get better, you need to
know and admit that you are in
trouble.
Here are a few of
the symptoms:
·
you do
not pay off your credit card balances every month;
·
you
receive multiple applications for other credit cards in the mail and you
complete these and get those cards too;
·
you miss
payments;
·
your
bank lines are maxed out;
·
you
bounce a few cheques by mistake;
·
you
can’t keep track of all the payments you have to make;
·
creditors
start calling your house;
·
your
spouse goes out to buy an appliance on OAC (On Approved Credit) and she is
rejected because your credit rating (measured by your Beacon score) has fallen
below 650 or 600;
·
your
bank calls your personal loans;
·
you
can’t get another mortgage on your house;
·
your
bank wants you to change your Line of Credit into a term loan so you pay it off
and then they won’t renew it;
·
you need
to go to private lenders for loans at much higher than prime lending rates.;
·
you
can’t get any new financing at all.
You get the picture
and it isn’t pretty.
Now what causes
this? Well, we have hinted at a few reasons—you have a drinking problem or a
problem with drugs or gambling. I came to realize how bad compulsive gambling
can be when an acquaintance of mine (an Appraiser) told me (proudly) how he had
recently tweaked his business model to make his firm much more profitable.
As someone who
studies and does research in entrepreneurship with an emphasis on business
models, I was keen to hear how he could transform what is essentially a pretty
simple (and a bit boring) business. I mean appraisal firms basically send out a
bunch of appraisers to assess the value of your property to make sure it meets
the minimum FMV (Fair Market Value) that the Bank needs in order to get its money
back from the QSV (Quick Sale Value) of your property.
So if a Bank has
tentatively approved, say, a home mortgage for you with a LTV (Loan to Value)
ratio of 75% of the FMV, the FMV is the appraised value and not what you say it
is. Basically, if you stop making your payments and the Bank seizes your
property through a Power of Sale notice, they want to be able to realize the
QSV and it had better at least 75% of the FMV otherwise the appraiser is likely
to get sued*. The Bank wants their money back for sure. (In commercial
transactions, the LTV ratio can be a lot lower (often 50%) and the QSV
(basically what the Lender can get for your property in 90 days or less) is
sometimes used in place of the FMV so the lender is ‘doubly’ protected from
loan loss.)
(* By the way, as people
found out in the Alberta economic meltdown of the 1980s after the hated
Liberals imposed their National Energy Program which crumpled their oil
industry, you are not off the hook even if you hand your Bank back the keys to
your house. (Thousands of people did this in
So by not dealing with this
sort of problem yourself, you may end up worse off—the Bank is selling your
home when everyone else is selling, which depresses prices further, (in real
estate, you make money by buying low and selling high which is easy to say but
hard to do) and you may end up paying for things ‘twice’. First, you have lost
the equity in your home and, second, you may still end up paying all of the
Bank’s costs anyway. The only way out is to declare bankruptcy (which many of
them did) but this could worsen your situation too—more on this later.)
Appraisers usually
get paid $150 to $250 for run-of-the-mill home
appraisals.
But Morris (not his
real name) told me he had developed a new specialty—the 24/48 hour ‘rush’
appraisal for $500+, more than twice what he normally gets for a home
appraisal. He told me that he has a special team of elite ‘SWAT’ type
appraisers (a LOL comparison, I thought) who did these rush assignments. Why on
earth I asked him, would anyone need such a thing?
Well, it turns out
that Ottawa-Gatineau has two Casinos; and there are storefront lenders near
these places that lend money to (compulsive) gamblers. These are not banks;
these are openly controlled by criminal elements and their rates of interest
including the vigorish (or ‘vig) are above the legal limit set in
Now, Morris told me
he has a new middle class, middle aged type of client who needs 24/48 hour
appraisals because, if you don’t pay these loans back, they don’t send the
Bailiff over to your house to put you and your family out on the road and take
your possessions, they send other types of people—even scarier than Bank
special loans officers or Bailiffs, much scarier. So Morris’ ‘special’
appraisals then are submitted to an American Bank (AB, not the real name of the
institution either) that has set up shop in Ottawa to exclusively offer ‘home
equity’ second mortgage loans of up to $100,000 in less than 24 hours. Their
rates and fees are also atrocious but less than the legal limit and it’s better
to owe AB money than these other people.
OK, so you’re
saying: “It can’t happen to me” or “I don’t have a problem with drugs, alcohol
or gambling”. Well, bully for you.
I think the number
one cause for divorce is none of the above—it’s probably financial problems.
Yes, I know that people say ‘I didn’t love him anymore’ but I’ll bet the root
cause of many marriage breakups is financial stress and not that you really
fell out of love with him. If your kids aren’t getting the opportunities you
want to give them, if creditors are calling you at all hours, now that’s
stressful.
Interestingly, over
80% of proposals for marriage come from the man asking the woman; the reverse
is true for divorces. Draw your own conclusions.
Paradoxically, while
I believe that the number one root
cause for family breakup is financial stress, I also believe that the number
one reason for financial hardship is marital breakup. It’s a circular argument
but probably true. The nexus of a society is the family; if parents stay
together, it is my belief that this affects, in a positive way, the social well
being and the financial well being of the next two generations. The single largest class of poverty-stricken folks
is single mothers. Need I say more?
Other obvious causes
of financial hardship include: job loss, loss of a business, insured losses
(losses where the insured value is less, often much less, than the replacement
cost—and don’t get me started about the insurance industry*), loss of markets,
loss of a large account, entry by a new competitor, illness, a change in your
marketplace, inability to collect receivables, a default on a loan owed to you,
loss of hope.
(* Former (now deceased)
Chief Justice of the Supreme Court of Canada is reputed to have said ‘the
insurance industry is one where large companies take advantage of smaller ones
and individuals’.)
If a large client of
yours or a large client of your firm goes bankrupt, your ability or your
company’s ability to collect a receivable may drop to nil. The knock-on effects
of this type of event can often be devastating and while, most of the time, if
you want to know who is at fault when you are in financial difficulties, you
just need to look in the mirror, sometimes, the fault is not yours.
Having said this, if
one of your clients is getting into trouble, you usually have some inkling
about it and you should be taking steps to avoid going broke yourself by
diversifying your client base, for example.
So in the end, for
most of us who face financial difficulties in our lives, the first thing to do
is stop blaming everyone else. It doesn’t matter if someone didn’t repay that
loan you made to him or her; if you can’t collect it, too bad. Get on with the
rest of your life. This brings us to the last cause I mentioned: loss of hope.
Human beings can not live without
hope. If you have lost hope, you will never climb out of debt and you will
never creditor proof yourself.
The
Personal Bankruptcy Option
Many executives I
have met in the
And for employees,
who have been laid off, I have seen many go on to more productive and happier
work lives elsewhere. But I can tell you, I have never met a
In the British
tradition, personal bankruptcy is a personal disgrace. I don’t think of it that
way, but many people do. However, there are many, many things you can not do if
you have been personally bankrupt which may include: teach (!), be a member of
a police force, have a job where a security clearance is required*, get a
credit card, get a cell phone, visit some countries, be a Director or Officer
of a publicly traded company, become a professional like an Accountant, buy on
credit, get a mortgage and more besides.
(* I suppose you can’t get a
security clearance because the concern is that you could easily be bribed to
reveal confidential information. When you are in serious debt trouble, or so
the thinking goes, you are considered potentially unreliable.)
Now you may be told
that you can skate out of your debts by declaring personal bankruptcy but that
may not be true either. For example, you can not get out of paying alimony in
You may be told that
you can get a complete discharge from bankruptcy after a few years or even
months and your record will be wiped clean. I believe that is total bunk; there
are data havens that exist where your information will be kept and your
personal bankruptcy will follow you around like a bad disease, forever.
It will come up over
and over again—it will haunt you the rest of your life.
And there’s worse. I
think if you declare personal bankruptcy, you end up paying three times. Yes, three times over. First, you will have
to pay the court appointed Bankruptcy Trustee to oversee and manage your
affairs (there, you have a new boss). Second, you will not be discharged from
some of your responsibilities anyway (like say your alimony payments or the
Judge may decide that while you don’t have any assets left, you have good
earning potential. So she or he may decide that some of your future earnings
will be set aside in a pool for your creditors; so, guess what? You end up
paying them back anyway). Thirdly, after your personal bankruptcy, try getting
a telephone hooked up. There are services that exist for people like this. A
residential telephone service for people with bad credit will cost you twice
what you would pay to Telus,
So when someone
tells you, you should declare personal bankruptcy, hold your horses and, at
least, think about it a bit before plunging off that particular cliff.
Now I am not
counseling anyone to do any particular thing in this essay—I can offer no
advice. But what I can do is at least raise some issues that might help you
consider your options.
I personally believe
that bankruptcy should be an option and should not involve any preconceived
notions that you are a bad person. Everyone can make mistakes. I believe that
everyone deserves a second chance. When I served on the NHL’s Board of
Governors, I believed that the NHL’s drug policy should allow players a second
chance. I believed that any player that came forward and admitted they had a
problem with legal or illegal drugs should get counseling and support from the
League, no questions asked. (Mind you, I also don’t believe in third chances.)
Imagine if personal
bankruptcy resulted in your execution. How many people would go into business
for themselves? How many people would want to be an entrepreneur? None.
Bankruptcy should be a means of last resort but it should also be a means to restart your career. I know from a life
of entrepreneurship that we learn far more from our mistakes—so we mustn’t
throw these people away (sure we don’t execute them or send them to the
poorhouse to work in exchange for their debts anymore but we kill them just as
certainly by ruining their credit ratings).
How
to Get out of Creditor Hell
I wish I could give
you a simple recipe that is quick and painless. I don’t think such a thing
exists. But one thing I do know that if you don’t get control of yourself, you
won’t get out of debt.
If you drink too
much, stop doing it. If your health is bad because you smoke like a fiend, eat
too much, eat the wrong type of stuff, take drugs, gamble excessively, watch
too much TV, don’t get any exercise, well, darn it, fix it.
Huh, you say, how is
this related to the fact that you’re in debt up to your eyeballs? Well, I know
if you drink a lot, you are NOT going to be at your peak and you need peak
performance from your body and mind to get out of debt.
I tell people before
they become entrepreneurs to be prepared to work hard, very hard over a long period
of years. There is no substitute for this. Some of my students read about the
guy who sketched a business model on a napkin and sold his company (which had
no revenues and no clients) 18 months later for $120 million USD. Well that is
about as likely as you winning the lottery. I tell my students that you can
plan to get rich but you can’t plan on winning the lottery. So don’t pay any attention to these types of
exceptions—most of us, virtually all of us, who will have any type of financial
success, will do so from concerted effort over considerable periods of time
measured in years or decades.
Terry Matthews told
me that it took him 7 to 12 years to build a great business and he has done it
more than once (Mitel and Newbridge come to mind). So if it takes Terry 12
years, it will probably take you longer.
Once you have
realized you have a debt problem and you have gotten control of yourself,
what’s next? I suggest the next step is to look at how you can lower your
costs. For a guy like me who has spent most of his entrepreneurship career on
the revenue side of business, this is a latter day conversion. I now realize
that no matter how buoyant your revenues are (either personally or
corporately), if you can’t control your costs, they always rise to exceed your
revenues.
One chap I know who
makes a fabulous living working for a Fortune 100 corporation got into trouble
in the year in which he made the most money of his career. We’re talking about
a person who made more than $40 million in a single career-best year. How is
that possible—well, he and his spouse collect rare artifacts and they overspent
in a number of private auction sales. He ended that year with a horrendous tax
bill, which he couldn’t pay.
So even if you’re
mega-rich, you have to hold down your costs.
Now for most of us,
it means doing some simple things like:
·
reducing
the number of phone lines you have,
·
having a
home office instead of a plush office downtown,
·
doing
our own filing instead of hiring a clerk,
·
answering
your own phones,
·
sending
your kids to public school instead of private school,
·
taking a
nice GoTravelDirect.com holiday to an all expenses inclusive resort in the DR
for $899 a person including airfare instead of staying at the Kahala Mandarin
Oriental Hotel in
·
visiting
a qualified, trusted Mortgage Broker and renegotiating your home mortgage
interest rate,
·
visiting
a qualified, trusted Mortgage Broker and increasing your home mortgage in order
to pay off high interest rate credit card balances,
·
freezing
your credit cards*,
·
selling
your home and downsizing,
·
turning
off lights in your home,
·
lowering
the thermostat,
·
getting
rid of premium cable services,
·
getting
rid of cable,
·
reducing
the number of dinners out,
·
brown
bagging your lunch,
·
planning
your day to become more efficient with your vehicles,
·
buying
gas when it’s cheap,
·
maintaining
your vehicles so they last longer—doing preventive things like remembering to
change the oil once in a while,
·
doing
minor house repairs and routine maintenance yourself,
·
etc.
(* A lawyer friend of mine
told me that he and his spouse have actually frozen their credit cards in a
plastic dish. Every time they want to use one, they have to take the dish out
of their freezer and wait for it to unfreeze. This delays their purchase by some
hours or as much as a day. By that time, they usually have thought the better
of it and return the dish to the freezer. I realize it sounds hokey but it
works for them.)
I am sure you can
add a hundred more things to my list but you get the picture. Note that most of
the things on my list will find you doing more for yourself—so again that means
getting up earlier and working longer hours so you need to be fit. When I talk
about fitness, I don’t mean peak fitness like, say, a Brad Pitt or a Jennifer
Anniston must look to. They get $10 to $20 million a film and their entire job is to look good. Please, don’t
compare yourself to folks like this, you’ll only be disappointed. I mean lifetime fitness, which means a little
bit of fitness (something that you do and will keep doing for years and
decades), a care about your diet, not too much drinking and so on. This you CAN
do.
Now the other side
of the equation is the revenue side of your life. Some questions you might ask
yourself:
·
Can I
ask my boss for a raise?
·
Should I
look for a higher paying job?
·
Is there
anything else I can sell?
·
Should
my spouse take a job outside the home?
·
Can I
start a business that will make us more money?
·
Should I
get a second job?
·
Can I
add to our income by doing some consulting?
·
Can I
make more money by stopping some of
the things I am doing and concentrating on the best opportunities? (My Dad
called this ‘supporting the winners and dumping the losers’.)
There are usually
some things you can do on the revenue side of your life but usually it is
pretty small, at least in the short term. So I typically tell people to focus
first on immediately reducing their
cost structure. Hey, I find that once you get into it, it can really snowball.
There is a huge
movement in
The Europeans laugh
at us sometimes—they call us the ‘work/pajamas people’. We work all the time,
come home, change into out pajamas, go to sleep, only to do it all over the
next day. That’s it, that’s what most North Americans are doing, with some
mindless TV watching to help us get off to sleep so we can forget what a misery
our lives are.
We live to work, the
Euros work to live. I mean what is the purpose of an economy anyway—to give us
money to educate our kids, to give us the opportunity to do interesting things
and learn interesting things ourselves too? Or is it so we can work all the
time to pay our bills?
Whatever you do,
don’t ignore your creditors—they hate this and will definitely report you to
their credit bureaus, which will kill your credit rating in a hurry (more on
this in a minute). When they phone, be polite, tell them what steps you are
taking to pay them (even if you are late) and then live up to what you said you
would do.
Now at the end of
the day, maybe you just can’t get out from under the heap of debt. What to do?
Well, I have asked you to at least pause before you declare personal bankruptcy
because of the serious consequences that I believe result from that drastic
step.
But I have found
that if you are honest with your creditors, at least some of them will cut you
some slack. In business, your suppliers don’t want to see you fail—they like
having customers to sell to. So, for businesses in trouble, one of the first
places you go to is your suppliers.
Now this can
backfire—they may instantly cut you off. It’s a risk.
When I was with
Terrace Investments Ltd., we had a policy of not kicking our tenants out when
they had a financial problem and not suing them either. We felt we would get
much further ahead by working with our tenants—lowering their rents by
agreement during tough times and getting it back during better times. We
estimated that we saved about 40% of our tenants from the dustbin that way and
we NEVER wasted any time suing bankrupt tenants that went broke—we had better,
more positive and productive things to do than engage in soul-destroying
litigation*.
(* Samuel Adams I think it
was who said (and I paraphrase here): “If a man should steal my watch, I shall
fight him for it. But if a man should sue me for it, I shall take it off and
give it him, glad to have gotten away so cheaply.’)
So sometimes you can
make a proposal yourself to your creditors and have then accept longer payment
terms, lower interest rates or even get their agreement to take less than face
value on your debts.
On the other hand,
some residential landlords when they hear you are in financial trouble will
take immediate punitive steps against you—like try to evict you or distrain
your premises. (The latter is a term you see more frequently in commercial real
estate. Basically, it means that the Landlord can lock you out of your premises
and seize everything inside as recompense for their unpaid rent.)
I realize that
making a proposal (whether you do it yourself or get expert help from a
recognized, trusted professional) is
risky but I am assuming that you are out of other options. And you have
gathered by now that I believe you are probably better off most of the time to
make your own decisions and handle your own affairs.
And I have found
that if you are honest with people, most of them will cut you some slack. When
I started out in business in 1982, a smart lawyer by the name of Kent Plumley
told me that the most valuable thing in business was your reputation. I didn’t
really get it then but I sure do now. If you have a good reputation, people
will hire you, buy from you, sell to you and, when you get in trouble, help you
as best they can. I believe that the number one thing in life is not love; it’s trust.
Still, I have known
Banks that just get a whiff of trouble and they’ll pull the trigger on your
loans (they ‘call’ your loan, i.e., demand immediate payment in full) even
though you may not have even missed a payment. They do this so they can be
first in line to grab what they can from your estate (a bankruptcy estate is
not the same as the estate you leave on your passing but I can see how
sometimes it feels that way). They absolutely shouldn’t do this but if you look
at most of the personal Bank lines of credit agreements and other types of debt
agreements, the Banks usually have a lot of weasel words in there that pretty
much allow them to do what they want.
When you have a big
debt problem, one of the things you can try to do is a debt consolidation. This
can be done informally (like when you re-mortgage your house to pay off your
credit cards) or formally through a proposal to creditors (which you will need
legal and professional help to do).
The latter is a kind
of delaying tactic—you are trying to feed an elephant but only one peanut at a
time.
Remember that you
must change things—whatever you have been doing, it isn’t working. I can’t tell
you how many people seem to be frozen in the headlights when they see a debt
problem coming at them but refuse to change what they are doing*. You must act.
(*It is the definition of
insanity to repeat the same things over and over again and expect a different
result,” Anon.)
What
to do if You or Your Company is Petitioned into Bankruptcy
Fight it, especially
if it’s personal bankruptcy. I believe that it is hard and maybe even
impossible to fully recover from personal bankruptcy. If a vindictive creditor
just wants to hurt you, they may try to petition you into bankruptcy. You don’t
have to accept that.
This will be a court
proceeding and you will need a lawyer but you
should appear and argue against this if you can. I believe that most judges
will be somewhat sympathetic to someone who wants
to repay his or her debts; is making efforts to do so and wants to avoid the
stigma of personal (or corporate) bankruptcy.
I have also found
that meeting face to face with your most difficult creditors is generally a
good idea—they see that you are not such a bad person after all. They will see
your pain up close. You are far more likely to work out a deal if you can get
an in-person meeting than if you have your lawyer talk to their lawyer. In most
cases, their lawyer doesn’t want to settle anything. They make money by
dragging the case on and on—lawyers usually get paid even if no one else does*.
(* I find it frankly
incredible that NHL owners and NHLPA members are allowing two lawyers to attempt to resolve the
current labour dispute that is on-going as I write this. Both Gary Bettman and
Bob Goodenow are well trained, combative lawyers and, if I was ever in a jam, I
could do a lot worse than having either of these two men defend me. But I can’t
imagine how the League and its Player Association will ever come to terms
unless League owners and Players sit at the table along with Bettman and
Goodenow.)
I have seen
hardhearted creditors melt in these kinds of meetings. It also gives you an
opportunity or your lawyer an opportunity to tell them that even if they got a
judgment against you (which you will defend), they still have to enforce it and
that may not be easy. A lot of people don’t know that just because they have
won a court case and have a judgment against you, they might not actually
receive anything for it. A judgment can be appealed. A judgment that is upheld
must be enforced. First, there will be a debtor- creditor examination to see if
the debtor has any assets left. Then, the creditor has to find a means to
collect on his or her judgment—the Government and the Courts won’t do that for
them—they are on their own. So an expensive court proceeding that can take
years may be worthless even if they win. Much better to get the cooperation of
the debtor who might be able to make at least partial restitution. And that
restitution might not be in the form of cash or assets—it could be in the form
of services. You could work for them!
A friend of mine
called me up a few years ago in tears. Kevin (not his real name) was incredibly
upset—the Bankruptcy Trustee (called in by his Bank unexpectedly) had just
entered his premises and was in the process of taking over his business and his
files. His Bank had told him that they would give him notice if they were going
to do anything precipitous. They didn’t but I can understand why most of the
Special Loans Bank officers don’t want to give people like Kevin any
notice—they are afraid of last minute fraudulent transactions to remove assets
or cash from the business.
But Kevin wasn’t
like that; he was still working hard to save what had been a very successful
financial services company. The Company was knocked over by a single (large)
transaction that had gone south. Many good businesses are ruined by they
themselves not being able to collect their receivables.
Kevin asked me:
“What do I do? They’re at my door asking me all sorts of questions, demanding
answers from me right away!”
“The first thing you
do, Kev,” I answered, “ is nothing at all. I want you tell them the (smart)
truth*. Tell them you’re very upset right now (which is true) and you will
fully cooperate with them. Tell them you’re sick about what has happened but
that you have to go home right now.
Then just take your personal effects and leave immediately.”
(* I learned from another
clever lawyer, Scott MacLean that one must always tell the truth but it must be
the smart truth. No one expects the truth anymore in our media saturated
society. The smart truth keeps you out of trouble. The truth hangs you. How you
say things makes a huge difference. Here is an example—Coke came out with a
vending machine a few years ago that adjusted soda prices when the weather
changed. They also came out with a media release that basically said ‘we have
invented a vending machine that raises soda prices when it gets hot.’ You can
imagine how that went over: ‘large company denies thirsty customers on hot
days’. The smart truth would have been to say: ‘we have invented a vending
machine that lowers prices on cold days’. Same thing but completely different
result. The spin on this would have been: ‘Company cuts customers a break on
cold days’. Coke’s new vending machine has never been rolled out.)
One thing that
happens in our society when things go wrong is that we always want to find
someone to blame. And that someone is you. I told Kevin to call me from home.
Here is what I told him the next steps should be:
·
Call the
Trustee the next day and arrange for
him to send you a list of questions that he needs help with.
·
Take the
initiative.
·
Offer to
help.
·
However,
never answer their questions off the top of your head.
·
They
have done this dozens, maybe hundreds of times and they know how to think
around corners. You have done this (hopefully) never. Therefore, it is a very
unequal playing field and likely to result in a very unequal result.
·
Remind
yourself that they are not your friends.
·
Remind
yourself that they may be trying to trap you into saying things that
incriminate you even though you have done nothing wrong.
·
Answer
their questions on paper first. Then sit on your answers for at least 24 hours.
·
Read
them again. See if they still make sense.
·
If you
can’t handle it yourself, get a lawyer.
·
Don’t
get bullied or rushed into premature answers. Tell them you’re trying as hard
as you can to get all the info they need.
·
Start by
giving them something innocuous to show that you are cooperating and this will
buy you some time.
·
Remember
what happened to Patty Hearst—she not only got captured by the Symbionese
Liberation Army, she was brainwashed into becoming a gang member. This is known
as the Stockholm Syndrome, which means that any of us can be forced to do
things we would normally abhor if we are under sufficient duress.
·
If
people keep telling you, you are a bad person, you may eventually come to agree
with them even if you did nothing wrong. (This entire essay is based on the
fact that you are a trustworthy person trying to get ahead honestly in the
world but, like everyone else on the planet, you make mistakes of omission.)
·
This is
what Crown Attorneys (District Attorneys in the
·
You
would be surprised what people will admit to—even things they did not do just
to get them to stop.
·
You
never let people like this put words into your mouth. Don’t repeat bait words
like: “Isn’t it true Mr. Smith that you paid bribes to City officials to get
your permits released?” You don’t answer: “I never paid bribes” because the
next question will be: “Well, Mr. Smith, if you don’t like the word ‘bribe’,
what word would you use?” You can see where this might take you. The smart
answer is: “We have records and invoices from the City for all of the costs for
our building permits.” The word ‘bribe’ never passes your lips.
·
Remember
the ‘pen is a long arm from the grave’. Never write anything down that you
would not feel comfortable seeing on the FRONT page of your local newspaper.
·
This
goes for email too.
·
Especially
for email.
I also talked to
Kevin about some other stuff too. I told him that I would allow him to feel
sorry for himself for three days. The first day, you are allowed to drink some
wine or whatever and wallow in self-pity. The second day, try to get some extra
rest. The third day, I want you to get some exercise. By the fourth day, apart
from trying to deal with the fallout from your company’s bankruptcy (which can
go on for years and you are just going to have to learn to live with), I want
you to start planning your new future.
Your
Credit Rating
Now if you owe money
to the IRS or CRA (in
With a judgment
against you, they now have the power to ruin your credit rating, to send a
bailiff in without notice to take your stuff, to garnishee your wages from your
employer, to seize any property you have and much more.
If you credit rating
is torpedoed, you’re sunk. Your spouse won’t be able to go get that new tool he
wanted or the new fridge she wanted OAC (On Approved Credit) because your
Beacon Score (how most credit agencies rate you) has fallen too low.
Credit bureaus are
hugely powerful—they keep track of all your credit cards, your mortgages, your
Bank debt and much more. Privacy in
Anyone who is a
member of a credit bureau can request your credit history (called a credit
report) and they are going to know a lot about you. Did you know that just the
number of requests that are made on your credit rating lowers your Beacon
Score*? So if you just sold your condo and your old car to move your family
into a new home, buy a new washer and dryer, a new fridge, a new car, some
curtains and some other nice stuff OAC or if you approached a few Banks for a
mortgage (and each of them will query your credit report), your Beacon Score
just took a big hit. Huh? What’s with that? Isn’t that what the big box stores,
the car dealers, the Banks, the Government want you to do? Isn’t that what your
Mom and Dad told you to do when you grew up—be responsible, get a house in the
suburbs, have a couple of kids, drive a nice car?
And your credit
rating goes down! What a …. (I can’t say it in polite company.)
(* Every time someone ‘pings’
your credit report, your Beacon Score will go down by 3 points. If you have a
lot of involvements (e.g., you are an entrepreneur with fingers in a lot of
pies and you are busy starting new ventures, developing new technology and new
ways of doing things, building new facilities, creating lots of jobs—i.e.,
doing the things that entrepreneurs should be doing), then there could be many
requests for a credit report on you. Every time you do a new financing, your
credit rating could go down. Not only is this unfair, it actively works against
society’s best interests as well as the individual’s. This practice should
stop, in my opinion.)
Now if your credit
rating goes down, everything becomes more expensive—you can’t take advantage of
that don’t pay a cent event until…. No interest until…. You have to pay cash
for everything or if you borrow money, it will at a higher interest rate.
Ken MacMillan was
right all along. If you can manage it, don’t borrow money and live within your
means.
Having said this,
you have the absolute right to demand from each credit bureau (there are two
main ones in
It takes a huge
effort to get the credit bureaus to change something that is out of date or is
wrong but you must be persistent. A bad credit report is a career killer and a
business killer.
So monitor your
credit report and do things that will improve your Beacon Score like retire
your credit cards, pay off your back taxes, etc*. Your score will go up over
time as you gain control over your financial life.
(* To give you a sense of how
important this is, a friend of mine who works for a major Bank in Canada tells
me: “I have witnessed how quickly the Bank will terminate credit products if
the client is deemed to be too high risk—even if they have made ALL of their
minimum payments. Working there, I have also seen first hand how difficult life
can be for people who have declared bankruptcy or those who have unsatisfactory
credit history.”
Banks have any number of ways
they can ruin your credit rating. One of the most abusive I have ever heard of
was brought to my attention by a Small Business Owner—he called me in some
distress to tell me that a crucial order for materials had been derailed when
his cheque was returned to his supplier, NSF (Not Sufficient Funds). He
couldn’t believe it. I had just helped him sell a piece of real estate he
owned. The net proceeds from that sale were to be used to expand his business.
He had received a certified cheque
from his law firm’s trust account drawn on a major Canadian Chartered Bank.
Now a certified cheque in
(It is actually against the
laws of
I think that every city
economy (which is really a city-state in the sense that, for most people these
days, your economic well being is probably far more tied to how well your local
economy is doing than the national or global economy) has a certain ‘speed
limit’ attached to it. That is, the maximum speed at which a local economy can
move is limited by many local factors such as how fast your lawyer moves, how
fast your local financial institutions react to your requests for financing,
how fast your customers make up their minds, how fast your suppliers can move, etc.
My perception is that business moves a lot faster in Hong Kong, NYC and
Back to Paul’s (not his real
name) story, his Bank had put a hold on his deposit for ten days while the
certified cheque ‘cleared’. I was flabbergasted and offered to call his Bank
for him right away. I spoke with the Branch Manager. I told her: “This is
highly unethical and might even be illegal. How can you do this to Paul? On
what basis have you put a hold on a certified
cheque issued by one of our largest, most prestigious law firms and a major
Canadian Chartered Bank? What are your concerns? Have you done this to other
SMEE clients? Is this a policy of your Bank? What are you going to do to make
it up to Paul?”
She agreed to release the
funds immediately but did nothing else. Paul had to make amends with his
supplier and he was lucky that he wasn’t reported by his supplier to the credit
bureaus. Passing NSF cheques is a big no-no but it can happen to anyone.
I was pretty sure that this
was an isolated incident until two more SMEEs told me the same thing happened
to them. This is atrocious behaviour on the part of Canadian Banks.)
Even if you have bad
credit, over time you can rehab your rating. I tell my students to absolutely
not declare personal bankruptcy when they graduate because they have way too
much student debt but sometimes, it happens. I may not see them until years
later when they are starting their own businesses and have not awoken to the
fact that they have bad credit and can’t get say supplier credit.
This is not good.
So I tell them to
re-establish their credit by taking some small steps in that direction. For
example, I tell them to get a credit card (yes, I really do) but one with a
really low limit. And then use it from time to time on absolute essentials and
pay off the full balance every month.
Credit card
companies may allow someone with bad credit to have a credit card by
establishing a cash collateral account and clearing the card regularly. For
example, a friend of mine who recently went through a formal, court-monitored
proposal to her creditors managed to keep one of her credit cards by informing
her Bank in advance of the filing.
They agreed to allow her to keep one card with a $3,500 limit, which they
cleared every Thursday against a cash collateral account that she maintained at
$5,000.
She is a high
earning professional who had made some terrible investment choices. She travels
a lot in her business and, for her, a credit card is an essential tool.
It takes time but
you can rebuild your reputation
The
Proper Role of Debt
I also teach in the
A mortgage can be a
form of useful debt—it allows you to buy a home sooner and is a form of forced
savings. I ask my students how many of you can save $700 a month. Not many put
up their hands. I ask how many of them can afford to pay $700 a month in rent.
Most of them can manage this.
Well part of every
month’s blended mortgage payment is going to pay off the principal and this
will add up over time to a mortgage-free home. So let’s say that an average of
$700 a month went into principal repayments over a five-year period, that’s
$42,000 ‘saved’. Now most of us, if we had this in a bank account somewhere,
would find ways to spend this money but because it is locked into bricks and
mortar, we generally keep it.
Home equity is the
most important form of savings we typically tend to have—it is easily accessed
if we get into a jam by re-mortgaging the home and, around the world, it is the
single most important source of capital for new business formation (far, far
more important than Venture Capital).
Also, there is a
little understood but important wealth effect that comes from paying off a home
mortgage—it is called imputed rent. If you own a home free and clear, you are
much better off than because of this (at least in
The way to
understand imputed rent is as follows:
1.
You own
a home free and clear.
2.
You
decide to move out and rent your home out for $2,000 per month.
3.
But you
need to live somewhere, so you rent a comparable home for $2,000 per month.
4.
Your
former principal residence (now a rental property) is producing income for you
and let’s just assume you net $24k a year (i.e., your costs are zero).
5.
However,
you are in the 50% marginal tax bracket, so you have to send CRA half of this
amount—you are left with $12k after tax.
6.
But you
are paying rent of $24k a year to your Landlord so you are out $12,000 in CASH.
7.
Therefore,
you are $12,000 better off staying in your principal residence. This is a very
real effect* if somewhat hard to grasp.
(*
So buying your own
home using a mortgage is likely to be a good idea for most people—not all debt
is bad. But buying a NHL hockey team with debt is probably a bad idea*.
(* One of the first things
that new Commissioner
How
to Reduce Your Risks and Protect Your Family
I have already said
that, in my view, you don’t protect your family by hiding your assets on
So you are
completely free to arrange your affairs in a way that is efficient and
effective, as long as it is legal and simple and meets GAAP (Generally Accepted
Accounting Principles). The legal and GAAP part, I will largely leave to you to
figure out (with help from professional lawyers and accountants). The simple
part needs more elaboration.
I always laugh when
I read in the media that people (i.e., NHL Owners) are buying their teams for
tax loss purposes. NO ONE SHOULD EVER BUY ANY BUSINESS TO LOSE MONEY.
I think we waste an
incredible amount of resources and time, trying to figure out ever more complex
schemes to avoid paying taxes—this is called financial engineering. Every
financial engineer I have ever known eventually went bankrupt. They engineer
such incredibly complex transactions that eventually no one really knows what
is going on. Human beings constantly overestimate their intelligence and
complexity is the enemy of success.
So rule number
one—keep your affairs simple. The best way we have yet discovered to hold
assets for long periods of time is the LLC—Limited Liability Company*. Apart
from a few institutions that are bound together by ‘other directed’ means (like
the Holy Roman Catholic Church, The Emperor of Japan or the House of Windsor),
the longest lived organizations on the planet are incorporated companies.
(* Most of my students think
that a LLC is just that—it totally limits your personal liability. It does put
some limits on your personal liability but it is not a 100% guarantee. Your
company’s creditors can, in certain circumstances, breech the wall of limited
liability. In
So I tell my
students, start early: incorporate a personal holding company (PHC) and put
your assets in there except for your principal residence. Because in
I believe that your
principal residence should go into your spouse’s name—the spouse who is not
actively involved in high-risk business. In
Don’t pledge your
house to secure loans if you can avoid it. Try to pay off your mortgage as soon
as you can.
Your creditors (in
I understand that
some types of insurance products (like seg (segregated) funds) are creditor
proof but don’t ask me to explain them or whether they are a good investment.
Ask a trusted professional investment advisor*.
(*
Most of my entrepreneur friends are really good at taking care of their
businesses and really bad at taking care of themselves. So I asked Sandra
Pollack, a knowledgeable and trusted financial planner from TRIMARAN Financial Limited (sandy@trifina.com)
for her help in understanding seg funds and pensions for entrepreneurs. Here is
what
“Many entrepreneurs ask me if
there is a way that they can protect their RRSPs from creditors and/or taxes
and the answer is yes and no. Segregated
funds have been often discussed as means of doing this. I will attempt to highlight what these funds
are, the advantages and disadvantages of including these as part of an
investment portfolio, and then perhaps an informed decision will be able to be
made.
Segregated funds are pools of
securities that are managed and offered by insurance companies. These contracts are regulated by the
Provincial Insurance Acts. As such, they
enjoy benefits such as probate protection, the potential for creditor
protection and capital guarantees that are not available with common mutual
funds. These plans can be in the form of term deposits or mutual funds.
As these are considered life
insurance contracts, with proper beneficiary designations (e.g. Parent, spouse
or child), also known as preferred beneficiaries, these funds may also be
distributed outside the estate at the death of a person and paid directly to
the beneficiary.
Under provincial insurance
law, life insurance annuity contracts issued by life insurance companies are
exempt from execution and seizure by creditors of the policy owner if there is
a preferred or irrevocable beneficiary designation.
While there have been many
attempts to challenge this “protection”, the Supreme Court of Canada has
confirmed that these funds may be exempt from seizure with the understanding
that the transaction of depositing these monies into segregated funds was not
carried out in “bad faith” in order to avoid creditors. Although each individual case may be
challenged, it depends upon the surrounding facts and circumstances. The courts may look back five years to
determine that no bad faith has occurred.
For example if John Smith, a
successful entrepreneur, who has been in business for 10 years and has
consistently contributed to an RRSP in the form of segregated funds, is forced
to declare bankruptcy, there is a very good chance that his funds would be
exempt from creditors. If John had never
invested in segregated funds, was aware of current financial challenges that
the business was undergoing and decided to transfer his RRSPs into segregated
funds a year or two previous to declaring bankruptcy, the funds would more than
likely be challenged by creditors and be seized.
As such it would be wise to
start investing in a segregated fund from day one to avoid potential
challenges, should a bankruptcy occur due to unforeseen future circumstances.
Another useful tool to have
in your “creditor proofing” toolbox is an Individual Pension Plan (IPP). This is a defined benefit registered pension
plan that a company contributes to on behalf of the owner manager/employee. The contributions are tax deductible to the
company and non taxable to the employee (owner/manager).
This type of pension plan is
primarily designed for the high income earners over the age of 45 who have a
history of earned income of $100,000 (minimum). An actuarial calculation is
used to determine how much past service and current contributions can be made
on behalf of the individual, and in many situations, lump sum contributions of
$60,000 or more can be deposited from the company in the name of the employee. The calculations assume retirement at age 65;
however, the funds may be withdrawn at age 69.
The plan must be registered
with Canada Revenue Agency and is fully creditor protected since it is a bona
fide pension plan. The costs to administer these plans have decreased
significantly due to technology and the competitive market place. For the right individual the IPP is an
opportunity to redirect earnings from the business that are totally tax
deductible and invest them in a pension to provide retirement income for the
entrepreneur. Since this is a pension,
the funds are protected from creditors.
Many successful entrepreneurs
are so busy pursuing opportunities and reinvesting capital to spur the growth
of their businesses, that they often miss out on a couple of simple planning
strategies, that will provide them liquidity and peace of mind when an
unforeseen financial event has the banks and creditors closing in on their
heels. It may be wise to take the time
to diversify income that the business earns and set it aside in a retirement
pot as well.”)
You probably should
own a very small percentage of your PHC; your spouse should own the majority.
Again, if you get in trouble, the PHC may not go down the drain with you. Also,
if you own only a nominal shareholding in your PHC, upon your passing, the
taxes you will pay on the forced deemed disposition of your assets will be
minimal. Your terminal tax return will not then leave an enormous tax liability
for your heirs to pay, at least, not on this account. Remember, companies can
live forever, you won’t.
If you have a home
office for your PHC, some of the costs of running your home may be tax
deductible.
If one of your
companies has some success, you can pay inter-corporate dividends between two
Canadian companies tax-free. So you may be able to find efficient ways to get
money into your PHC and out of your PHC into the hands of yourself or your
family.
For example, you or
your spouse or both might become consultants to your PHC. And your PHC might be
a consultant to your clients. Often a first step toward full on
entrepreneurship is to turn yourself into a consultant instead of an employee.
I was last an employee in 1982 when I worked in the Department of Public Works
in
Even after I became
more of an entrepreneur in my own right, I kept the PHC going and consulted
with the companies I was helping to start. At a minimum, the PHC certainly
allows you to establish more control over, keep better track of and even
leverage more of your investments.
If you think you
have it tough in terms of risk exposure, look at what my architect students
face during their professional careers. At one time in
Under pressure from
the OAA (Ontario Association of Architects),
In any case, every
practicing architect or entity (such as a LLC) engaged in the practice of
architecture must carry errors and omissions insurance (for example, as
required in
Many practicing
architects may not think of themselves first as entrepreneurs (they tend to
think of themselves, I believe, foremost as artists) but indeed they are. Like
most writers, poets, novelists, painters, dancers, musicians, composers,
videographers, screen writers and other creative persons, they are not paid
every two weeks by an employer who not only ‘feeds’ them but protects them from
liability and provides them with nice benefit packages and a pension plan. So
they too need to think a bit about creditor protection so they won’t die broke
(or at least, if they die broke, they did so out of choice).
There are many
things you can do to try to protect your family and you should try to do this.
Most entrepreneurs that I know are so focused on making their businesses
succeed that they never do any personal or family financial planning and this
is a shame because bad things do happen to good people.
At the very minimum,
you should create a personal balance sheet (PBS) to keep track of the things
you own. You can do this informally (if you know something about accounting) or
formally with help from a professional accountant.
While not a formal
legal arrangement like a LLC or a Family Trust, a PBS will help you understand
what you own, what liabilities you may have incurred and maybe it will help you
see opportunities you may otherwise have missed.
One of my former
students, Claire (not her real name) had bad credit—she had a vehicle
repossessed some years earlier for chronic non-payment. She had also defaulted
on a credit card. She had matured a lot since then and, in fact, had started a
successful computer service business. We got hold of the credit card company,
she made good on the past debt and even received a new card too. She also made
a deal with the finance company to make a partial restitution (which they
agreed to) and clear the account with them. When we created a PBS for Claire,
we found that services businesses like hers were valued at somewhere between .5
and 1 times revenues and even at .5, she had a very positive PBS with
practically no debt. Within a year, she was able to purchase her first home.
Build
and Hold—the Difference between Getting Rich and Being Wealthy
I read in October
2004 that Ottawa-base QNX Software Systems was sold to Harman International for
$138 million USD. I know that some of my students and clients read it too and
they will be thinking build something and sell it for A LOT OF MONEY. The only
problem is that most of them might not read to page 2 of the Ottawa Citizen
article (October 28, 2004) which says: “For Mr. Dodge, 50 and his partner
Gordon bell, 49, the deal marks a vindication for their effort to build a
profitable company without venture capital over
24 years.” (The emphasis is mine.)
I am not saying that
you should never sell your business but what I am saying is that it takes time
to build a great business.
People who build and
sell quickly are known as flippers. Most of them flip ‘til they flop. If you
have built a successful business, you have climbed
It is so hard to build
a successful business, it takes so long to do it, you use up so much of your
lifetime storehouse of luck doing it, that you should think very carefully
before you sell it. Successful entrepreneurs often think: “Well, I did it once,
I can do it again and again”. Bad news, people, often you can’t.
If you have built a
great business, why sell it? What exactly will you do next? Start again? Why go
through all the heartache and risk again when you already have a fine business
you built yourself?
I didn’t feel that
an essay on creditor proofing oneself would be complete without mentioning this
trap that so many of us fall into. It’s called hubris.
One of the best ways
to get out of creditor hell is never to get into it in the first place. One of
the ways to do that is to not sell your successful business. In almost all
cases, a successful business will sustain you and your family and your
employees and your suppliers and your other stakeholders far, far better than
cash in the Bank.
Let me tell you
another story, this one about Sean (not his real name). Sean was a by the
bootstrap kind of guy and he had one great thing going for him—he had charm. He
was a born salesperson and in the game of entrepreneurship, if you can’t sell,
you’re out of the game before you can begin. (The three most important things
in entrepreneurship are SALES, SALES, SALES.)
Well, one day about
fifteen years ago, Sean found himself working in the fish department for a
large supermarket chain; he was wearing one of those hair net things and he was
developing arthritis in his hands from the cold and ice he was constantly
exposed to. He and his spouse, Freda, had their first child (of what would
eventually be a clan of three kids).
Sean thought to
himself: “I can do better than this.”
The next day he went
out and bought himself his first computer (never having even booted one up
before) and started an advertising and promotion business in his basement with
nothing other than guts, charm and a high school diploma. (I have changed his
industry too to protect their identity. I apologize to my readers.)
I met Sean one day,
about two years after he started working out of his basement, and he convinced
me to move our entire advertising and promotion account over to his company. He
was that good. I certainly asked him about his bona fides. Could he produce the
volume we needed? How was his Quality Assurance program? Yadda, yadda, yadda.
I didn’t know until
years later that this was his big break—it allowed him to finally move his
business out of his basement, buy more equipment, hire more, better people,
etc. But when he told me, we laughed about it together and I was doubly
glad—glad that he was a success and glad that he didn’t let us down.
A few years later,
Sean called me out of the blue. He had an offer to buy his business from a
larger competitor for TWO MILLION DOLLARS IN CASH. I told him to slow down and
think about it a bit more. I asked him a few questions. How much are you taking
out of the business? About $200 to $250k a year. How much do you pay Freda to
do your books? Oh, about another $50k. Do you have any company cars? Yeah,
reckon so—two of them in fact.
In total, Sean and
his family were getting about $300,000 a year from the Company, year in year
out—it was a sustainable number.
I asked Sean, do you
know what interest rates are on term deposits right now? No. Well, they are
about 1.7% p.a., which means that even if this sale was tax free, your income
from your two million dollars is going to be 34,000 bucks a year and every year
inflation is going to eat away your principal. Now why would you give up
$300,000 a year and a business you love and built yourself for that?
Let me quote actor
and comedian Chris Rock:
“Shaq (Shaquille O'Neal who plays for the NBA’s Miami Heat) is rich
but the man who signs Shaq’s pay check is wealthy.”
Chris Rock got it
exactly right. You can get rich by winning the lottery, becoming a NBA Star,
speculating, asset flipping, gambling, picking the right parents or prospecting
for gold, diamonds, nickel, whatever, but you can’t become wealthy doing any of
these things.
Wealth derives from
control over a factor of production, a license, a franchise, a territory, some
IP (Intellectual Property like the secret formula for Coca Cola or the 11
secret herbs and spices that the Colonel uses to make fried chicken), a
competitive advantage, a comparative advantage, property ownership—anything
that creates a sustainable, repeating and renewable income stream.
Just look at the
numbers; let’s say someone controlled the early Beatles catalogue (say, someone
like Michael Jackson). Mr. Jackson is reputed to have bought the catalogue in
1985 for $47m (but he lost his friendship with Paul McCartney along the way).
By 1993, MJ’s company was reportedly earning $30m from it (albeit, MJ had added
other songs by other artists by that time but let’s ignore this for the moment)
and it was estimated to be worth $300m at that time. This yields a cap rate
(capitalization rate) of 10, which is pretty typical for this type of privately
held asset. No one knows what kind of income stream he gets from this now but
it has a rumored value of $1 billion today. MJ still owns 50% of it, the
balance is owned by Sony.
With a cap rate of
10 and given that MJ owns half of the catalogue, we can guess that MJ gets $50m
a year in income from his ownership. Plus the Beatles are making a huge
comeback—just ask my 14 year old daughter, Jessica, who only wants Beatles CDs
for her birthday and knows just about every word to every tune the Beatles ever
recorded. So it wouldn’t surprise me if MJ’s income is going up every year from
this source. This is called wealth. However, let’s say that MJ is in need of
some quick cash and sells his interest to Sony for $500m. Now MJ would be rich (for a while) from selling his
interest in the catalogue but he would no longer be wealthy because he has lost the ability to renew his wealth every
year by producing an income stream from control over this particular factor of
production.
But what’s that you
say? He could invest the proceeds in T-Bills, Muni Bonds and GICs (Guaranteed
Investment Certificates). Sure he could, but they produce puny 1.7% to 4% rates
of return. If MJ paid $100m in taxes, he would be left with $400m, which would
give him an income stream of $6.8m to $16m a year with no inflation protection.
I mean if MJ were to continue to control the catalogue, he could always
increase the price (aka royalty) paid for each tune if inflation takes off and
starts to bite into his revenue stream. But even ignoring inflation, why would
MJ trade an income stream of $50m a year that makes him wealthy to become a
remittance man getting $6.8m to $16m a year? MJ has already turned down offers
to sell; presumably he understands the Chris Rock difference between becoming rich
and being wealthy.
Did you know that
most lottery winners blow their entire wad in less than five years? By that
point, their spouses have left them, they are alienated from their old friends,
they have got a whole new set of ‘friends’ who are only around while the money
lasts and they don’t even have their old job to go back to. Many of them have
picked up nasty habits along the way like taking drugs. It’s absolutely amazing
how many of them end up in bankruptcy. They are much worse off for their ‘good
fortune’.
People are meant to
work. They are built for it. If you have built a good business, hang on to it,
fight for it—it is your security against creditor phone calls in the middle of
the night asking you: “Mr. Smith, when can we expect payment?”
Conclusion
We now know (from
reading this essay) that, in
In the
(* I realize that there may
be unscrupulous people out there benefiting from this type of protection and
some of my readers might not like that very much. O.J. Simpson is out there on
a golf course looking for the ‘real’ killers of his former wife and her friend
and the only reason OJ has the resources to do this is because his IRAs were
untouchable by his creditors. A disgraced NYC lawyer I know has a huge house in
There are people out
there who are committing errors of commission. I know one fellow who runs an
import/export business (actually it’s in another industry) who keeps
bankrupting his companies and stiffing his suppliers. I presume he is somehow
pocketing, or his family is, the money he does not pay his suppliers. Sounds
like serial fraud to me.
However, at least in
my view, we should not ‘reform’ bankruptcy laws because there are bad people
around. We have other laws for them—it’s called fraud. So my advice to
lawmakers is not to harden bankruptcy laws (for example, by taking away IRA
protections or the sanctity of the homestead) just because there are some bad
characters around.
You often find that
Governments react in a knee jerk fashion to extreme cases like the above and
the public outcry that comes with it. But exceptions like this do not make a
good basis for writing new laws. And the unintended effects on honest
entrepreneurs who are trying to create new ventures and new opportunities and,
at the same time, protect themselves a bit and their families too, will be
devastating. Society as a whole will lose new jobs, new wealth and a generation
of entrepreneurs is at risk as well.
The crooks will
always find other ways to hide their wealth anyway; it’s the honest folks who
will get slammed to the mat.
Copyright.
Dr. Bruce M. Firestone,
Posted on Tuesday 10 October 2006
I have given advice over the years to various sales organizations, NGOs, Not-for-Profits, Charities, what have you. They all intuitively seem to know that if your organization is not growing, it’s dying.
But it always amazes me how some of the most basic steps they can take to increase their sales, their sponsorship dollars, their donations, etc. are ignored.
When I worked at the Ottawa Senators, we had about 300 signs and rink boards
that we needed to sell every year. If you attend a game at
Think about it. If you have to sell 300 signs and you sell them in pairs and for a minimum of three years, you will only need to make 50 sales a year instead of 300. This makes your organization much more efficient.
The same philosophy is applied to the Ottawa Senators (Charitable) Foundation and I brought that concept to other charities that I support like Christie Lake Camp for Kids. The latter’s sponsorship has grown hugely in the last two years because they are not starting over every year. So you are not like a baseball player having to start over every season with 000 home runs…
It is the same for a business. If all your deals are for one year, you have a growth curve that is essentially flat, year over year. You need heroic efforts to grow your business and outputs are pretty much in a linear relationship with inputs (this is a fancy way of saying that you are basically an hourly wage slave).
If you do three year deals (or, at a minimum, two year deals), you start to get a positive slope to your revenue curve and maybe even some non-linearity; i.e., exponential growth.
More money, less effort, sounds right to me.
Dr. Bruce
What’s More Important? Good Execution or the Next Big Idea?
Posted on Tuesday 15 August 2006
If you ask me, the big idea is LESS important than good execution which obviously includes staff training. Most of my students think that the big, NEVER BEFORE TRIED, idea is more important but there are lots of companies that do very well with good execution of fairly mundane things.
I am pretty sure that the only thing that is in infinite supply is ideas; numbers, for example, represent an idea and they are infinite. There are probably more than 25 million smart Americans in their basements at any one time trying to come up with the next bid idea (like, say, Google). They are generating a huge volume of new ideas; that tends to suggest, in economic terms, a surplus of ideas while the skills to implement them are in much shorter supply and, hence, the latter will generally attract a higher price.
The market for new ideas, such as it is, tends to put a low price on them (just try to sell your BIG IDEA at a business model stage and you will see: a) how hard it is to do that and b) just how little you will get for it). Obviously, a startup that combines some type of innovation with good execution is better off than one with just sound execution. Fred Smith, when he started Fed/Ex, brought the hub and spoke system to the overnight package delivery business, essentially creating that industry.
Before that, it was thought to be an impossible challenge—if you had 60 cities as both origins and destinations in the network that meant 3,600 overnight flights, an obvious impossibility. If you had instead five hub airports within easy trucking distance, you could get by with 25 overnight flights…
However, most successful startups do not create new industries or are not necessarily first movers. Google wasn’t the first search engine; however, they did bring significant innovation to the table including: neutral search rankings, search rankings that reflected traffic loads on and links to a site, paid search links and auctioning off of paid search links. GradeAStudent.com, now GradeATechs.com, was not the first at home computer repair service but their execution was good and they used a back end system (GASnet) to automate their appointments and their billing systems.
I have felt for a long time that VCs are heading in the wrong direction; they should NOT fund startups. Rather, they should wait until startups have proven themselves in the marketplace. It’s kind of like watching for tall shoots in a field of grass. Those are the ones they should fund. It’s better for VCs, better for the national economy and, interestingly, better for startups too.
It’s better for VCs because they will fund more winners and fewer losers and generate better returns for their investors. This, in turn, will attract more capital to the industry which is good for innovation overall. It’s better for the national economy since careful rationing of scarce capital will provide higher overall growth rates. And finally, it’s better for startups, in my opinion, to focus on: a) building a sound business model, b) self (bootstrap) capitalization, c) using smart (guerrilla) marketing to capture customers inexpensively and d) generating real cashflow from real clients and customers. The founders of these businesses will find it much faster and much less frustrating to find customers first rather than spending nine months or more hoping to attract VC funding or going after government grants. They will also get help from clients in other ways such as designing the final product or service. It’s like a war plan—as soon as your contemplated business model comes into contact with customers, it will change; they will force changes that YOU CAN NOT PLAN FOR.
Finally, the founders of these businesses will get to keep more of the equity in their businesses if they do a deal with a VC firm later when their business is more mature and, frankly, they are more mature. Nothing gives you more leverage in negotiations with VCs than the fact that you have enough cashflow to fund the business without them.
Dr. Bruce M. Firestone, B.Eng.(Civil), M.Eng.-Sci., PhD.
Section 3
……………………………………………..….. On
For release:
Conference on Social Harmony
Livable Cities Versus Mono Cultured Suburbs
It wasn’t long after my wife and I and our five kids
moved to a western suburb of
We had moved to
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 (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, |
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
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
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
Theatre of the Street (not
permitted in
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
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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
The Palladium Interchange
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I have often been asked why the Palladium isn’t in
downtown |
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.
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Siemens and Dopplemayer— 3,500 to 5,500 pph |
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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
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
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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.
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Before Village Formation |
After Village Formation |
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Ugh produced:
|
|
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Nnn produced:
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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.
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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 City-State Team Spirit + Prosperity = Festivals +
Performing Arts + Universities + Entrepreneurs + Researchers + Artists +
Sports Teams = Creativity + Productivity For example, the tulip festival of Cities and towns all over vie to have the biggest
something-or-other: hockey stick or whatever. Some towns have the big slogans like 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.
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
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
It has always bothered me to drive the Queensway
east bound from my home in
Two years ago, a huge proportion of our graduating
class in the
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
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
My daughter, Rachel, is now attending
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.
Let us make a commitment in
Flying over
When I was seven, I rode
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
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 Mayors (http://www.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
There are an estimated 100,000 illegal in-home
apartments (they can be in the attic, rear yard, basement or above the garage)
in
Legalizing in-home apartments would have allowed the
construction of new in-home apartments in all neighborhoods in
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.