It was an absolute pleasure to get a call from Otto last week. Otto is one of life’s serial entrepreneurs, who is always headed for the newest best thing in the world, although seemingly never quite gets there. That’s probably why his nickname is ‘Trotter’, after the great Del Boy, who we all know and love. This time next year we’ll be . . . oh, you know the drill. Otto called me up while I was ironing my socks, which led to a trip to the accident ward with a burned ear, but once the swelling had gone down I called him back to see what was up.
‘Hey man!’ (he’s from Kettering, but talks like he’s just jumped off a surf board), ‘What’s up man?’ he asked. Other than the throbbing red lug hole I told him I was fine and dandy. What did he want? ‘Well, I’m in New York and headed for a bunch of roadshow meetings. I’m trying to get some cash together to get this new business idea of mine going,’ he informed me. He had a lot of new business ideas that didn’t always take off. Like his collection of Rolf Harris artwork for example.
He told me to be in New York on Friday and that he’d send me the business plan beforehand (something he never did). ‘Mr. P. I need a guy there with a beard. Beards are cool at the moment. I’ll tell them that you’re my advisor. You won’t have to say anything, I’ll do the talking. Just wear a suit please, don’t wear your work boots and have a wash for God’s sake,’ he shouted. So it came to Friday and I was suited and de-booted standing outside Yellow Snow Asset Management waiting for Trotter.
We sat waiting for the obligatory 25 minutes while listening to the trials and tribulations of the receptionist’s love life until ushered into a meeting room looking out over Park Avenue. No drinks, no biscuits, no clue that it was even the office we were supposed to be in. Finally three 15-year olds and a balding thirty-something walk in. Golf shirts from a broker’s golf day? Check. Badly fitting enormous beige chinos? Check. Metal-rimmed specs? Check. Tan tassled loafers? Check. We’re in the right office alright.
Barely a smile, the youngest opens a leather-bound jotter and writes the date at the top of an empty page. They mutter to each other and laugh quietly like they’ve just heard the punchline to a joke that we on the other side of the table will never even get to hear. Then they turn gravely and seriously to Trotter and me. Not a word, not a gesture, but we’re on!
Trotter then begins to explain his business. He says he wants to buy a bunch of factories. He’s going to fill these factories with regular equipment to make candles. He is then going to rent the factory and equipment out to somebody who wants to run a candle-making operation. He then describes the business to them to make sure they ‘get it in one sentence’.
He looks up at the stone heads across the table, takes a deep breath and says ‘OK. So here it is in a nutshell. We buy the factory and rent it out. In order to create economies of scale we’ll buy lots of factories in fact. Don’t know how many are required, we’ll just buy as many as we can afford. We’ll fill every one with candle-making equipment. Then we’ll hire the staff and create the candle-making business for ‘persons unknown’ who we’ll find later to rent the factory off us. Then all they have to do is buy the wax and the wicks and produce the candles. Or is it ‘sell the candles? It’s easy to lose track.
‘Now, here’s the interesting part. We’ll collect rent from them only based on what they can sell the candles for. If they sell them for lots we’ll get more money. If they sell them for less then we’ll get less. What is important here is that we have no control over the price of candles and no guarantees on our income or utilisation of our equipment, we will just receive what they receive, less a bit – even though we’re staffing and running the factory for them.
‘The price of the real estate for candle factories also moves. It is based on whether people want to buy candle factories or not. When the revenue for candles is at its lowest, the market for candle factories is at its lowest. That can happen at any time. Over time the factory will only be worth salvage when it gets knocked down, but let’s not dwell on that.
‘What’s our competitive edge I’m sure you’re thinking? Well, there is no licensing required to build a candle factory or make candles. So there are zero barriers to entry. And in fact, lots and lots of people have come up with this exact same business plan and gone bankrupt with it. We don’t have a brand and customers are not really that bothered anyway as anything that burns wax and lights the dark is considered a candle. They’ll buy the cheapest possible. All of the candle sellers compete like crazy and drop their prices without a second glance, so the lowest price is usually the price for all. Oh, and I almost forgot. If you get a good contract to supply at a nice margin, if they find that they can buy them cheaper elsewhere then the buyer will probably walk away and give you the candles back to sell (or make, I’m confused now) at a price where you’re losing money doing so.
‘If we decide to make long white candles then the equipment cannot be recalibrated to make say, birthday cake candles. What we make on day one we’re going to be making until the factory falls down. When candle-making businesses like ours go bust then the factories are not necessarily knocked down and the machinery isn’t changed. A new business, just like ours, comes in and starts making candles on behalf of somebody else to sell them at any price to pay for the mortgage on the factory and equipment that they just bought.
‘It is impossible to forecast the future price of candles or candle factories by the way. But I know what you’re thinking right? Are we a real estate company that buys factories specifically in the candle-making sector? Are we in fact an equipment leasing business for aspiring candle makers? Are we candle makers or sellers? Well, we’re a bit of all of it. What we’ll do is buy the factories, so we’re in the real estate business. Then we’ll fill it with equipment and workers – or maybe hire a company to fill it with workers for us, to whom we’ll pay a fee. So we’re candle makers. But we will tell investors that we are in the ‘candle business’ generally, not which specific bit and it seems that they just hear the word ‘candle’ and forget to ask about the rest.
‘Then when the investors want to know what we’ve been doing with their money we can talk about the prices people are paying for candles, how many candles are being made globally and forecast the Chinese candle demand and the likelihood of power cuts to boost candle sales. So we’ll describe the business of the guys who are using our factory and workers to justify our results, but not explain what we are doing. Oh I nearly forgot. There’s only one way to make a candle so technical innovation isn’t likely to ever be a factor.’
Finally he pauses and looks into the eyes of the astonished chuckle brothers sat opposite him. He stares at each one slowly, as I shift from buttock to buttock in a state of massive unease. ‘You fellas got any questions? You’re looking a tad confused’ says Trotter. In fact angry would be my description.
‘Mr Otto’ says baldy, who seems to be the boss on account of being the only one old enough to be able to drive, ‘That has got to be the single dumbest pitch I’ve ever heard. No facts, no figures, the most horrific business plan. What in the hell made you think that we would be interested in having our time wasted by you for this?’ He sits back, folding his arms and smirking at Trotter. The boy with the jotter slams it shut dramatically and to a man, they all push their chairs back from the table, lean back and stare mockingly at my friend.
‘Well’ says Trotter confidently, ‘You boys have a lot of money invested in shipping. I thought if I tried something that sounded a bit more plausible then it just couldn’t fail.’
PS: By the way, next week I’m actually going to do some serious stuff (sort of), so please read it as for once it will actually take some time to write.