Case Study #2: The Inventor's Best Friend
The Start-up: TechShop
The Founder: Jim Newton
Menlo Park, California
The business proposition: A chain of workshops that cater to inventors, tinkerers, and hobbyists. Each location will house a variety of equipment, from manual milling machines, lathes, and welding furnaces to 3-D printers and computer-assisted design software. Much of the equipment is bought secondhand on eBay or Craigslist. The company will operate like a health club, selling memberships--$30 for a one-day pass, $100 for a monthly pass, $1,200 for an annual pass. Members can reserve equipment in advance or simply show up and putter around the facility. TechShop will organize clubs and classes to help people develop projects and learn new skills.
The founder: Jim Newton, 44, previously ran Laurel Systems, a user interface graphics company that peaked at $750,000 in sales in 2000. Five years ago, he joined a team competing in BattleBots, the robot fighting competition that was at the time televised on Comedy Central. He subsequently taught a metal shop class at the College of San Mateo. When he stopped teaching, however, he no longer had access to the campus lathe. So he got the idea for TechShop.
Newton, who bought out a co-founder in March, has joined forces with Gary Banta, a veteran of the semiconductor industry. In their off-hours, Newton and Banta use TechShop themselves: Newton is currently trying to build a digital clock that has only gears, while Banta is assembling an old-fashioned steam engine "just as a challenge."
No. of full-time employees: 6
Capital raised to date: $300,000 from angel investors
Market potential: Interest in hands-on industrial arts seems to be rising. The magazine Make:, a quarterly publication for hobbyists, has grown to 90,000 readers in two years, at $35 for an annual subscription. Last year, the magazine held its first-ever convention, Maker Faire, in San Mateo. With little marketing, the event drew 21,000 people. This year, organizers expect at least 40,000. TechShop had a small presence at last year's event and plans to have a 1,500-square-foot presence, replete with a working lathe, this year.
2008: $1.5 million
2009: $2 million
Cash-flow picture: Banta says each location will break even at $500,000 in annual revenue. Excluding ancillary revenue for a minute, if a location signs up 450 members at $100 per month, it will produce $135,000 per quarter or $540,000 per year. (At 500 customers, Banta says, each location will be "full but not crowded.") The Menlo Park TechShop currently has 150 members and is signing up 20 people per week.
Competition: Printers that make 3-D prototypes are falling in price and may some day soon be available at most copy shops, but it's unlikely that the local OfficeMax will ever add welding equipment.
Of course, if the TechShop concept takes off, FedEx Kinko's (NYSE:FDX), Staples (NASDAQ:SPLS), or Home Depot (NYSE:HD) could create a rival offering either at their existing locations or at new spots--and they would have access to the capital needed to move quickly.
Growth strategy: The company intends to expand geographically from the Bay Area. TechShop is already scouting space for a second facility. Target markets include Seattle, Portland, Los Angeles, and San Diego.
Challenges: So what happens if a customer cuts off a fingertip? "Safety is our Achilles' heel," says Newton. "Any company that deals with the physical, personal safety of its customers has to be focused on that all the time." As a precaution, an injury waiver is part of the standard membership agreement.
Real estate could be another issue. Commercial rents in the Bohannon Park section of Menlo Park, where TechShop is located, are low, so Newton was able to find space cheaply. The build-out took longer than expected, however, hurting membership sales. In high-rent cities, delays could be deadly. And Newton and Banta lack real estate experience.
Opportunities: Remember that ancillary revenue we mentioned? Banta says the beauty of the concept is that once member dues cover TechShop's fixed costs, any additional sales--of materials, or bottles of water or cups of coffee, or fees for taking a welding class--will produce very high margins for the business. "Ultimately," he says, "we would be excited to see net margins in the ballpark of 25 to 30 percent."
What You Can Learn From TechShop
- Never underestimate the power of a delay in construction to harm a business.
- You don't necessarily need brand-new equipment when you start out.
- Guaranteed revenue through memberships is a great way to ensure cash flow.
Advice from Paul Orfalea of Kinko's
I think this sounds like a good idea and I could see there being demand for TechShop.
Running a Kinko's or a company like this is exactly like running a bowling alley. Your variable costs are inevitably low--at Kinko's, mine were typically about 18 percent. But your fixed costs are very high. You have a big nut to cover each month. What's more, you're essentially in the time business. You have equipment and you rent time on that equipment. Obviously, you can't sell time from three hours ago. You can only sell tomorrow's time.
With this in mind, you have to think about strategy: If the most important objective is to sell tomorrow's time, should you worry about controlling costs or worry about adding revenue? The answer is that you should worry about adding revenue.
How do you do that? A lot of it is about smile and attitude and the emotions of the people at the cash registers. Hiring becomes very important. Companies like this can make the mistake of promoting technical people to manage stores instead of promoting people people. They say, "He's so hard working, and he's so good with the machines." Well, there's a difference between knowing how to operate the machines better than anybody else and knowing how to motivate people to run the business for you. And the fact that someone is good with the machines is probably a clue that he won't be so great with other employees or with the customers.
Another thing you want to do to add revenue is to spend all your time in the field looking for new applications. I have ADD to the max, which makes me restless--but at Kinko's, I think that restlessness really helped me. I would go wandering in and out of the stores to see what people were doing. I would never appear unannounced, because that shows a lack of respect for the store manager, and you want them on your side.
Still, I would visit often. One lesson I learned is that it is important how you behave when you visit stores. As an owner, your instinct is to look for what people are doing wrong and to nitpick. That's a sure way to destroy a manager's credibility. I learned never to explode when I'm in a store. You can always ask a manager to correct something after you leave.
Instead I learned to use my time in stores to find out what people were doing right. Those new ideas were almost always more valuable than any small corrective step I could bring about. I once visited a store in San Diego, for example, where I learned that the staff had built up a little side business helping customers make calendars with their own digital photos. I thought it was a good idea, so I tried it out in some other stores, and it proved to be popular everywhere. Today, that's a $25 million line of business and the margins are 85 percent. Plus, we are normally slow in December so that business really helps us.
I worry that the founders of TechShop are underestimating the capital requirements. It is just as easy to ask for $5 million as it is to ask for $500,000. And if you don't have enough money, you'll do whatever it takes to make a sale, which means you'll make decisions that drive down margins. And you won't be as aggressive. You won't be willing to throw a loose nickel at a project. If you throw enough loose nickels around, they'll take you where you want to go.
Which gets to my final point: You must be flexible and astute and focus on the big picture. Busyness is not your friend. Start-up entrepreneurs too often try to run away from their anxiety by being busy. But you have to leave time open on your schedule for hard thinking rather than hard working. Make sure you get plenty of sleep, take vacations, and don't get mired in the details either at the store or at your headquarters. You don't have to be at your desk in order to analyze cash-flow projections or revenue-by-category data, both of which I love to pore over, by the way. Can't get enough of it. You, as an owner, have to be smart about managing your relationship with time. My definition of owning a business is to make money while you're sleeping. If you can't make money while you are sleeping, then your business owns you--you don't own it.
Back to Jim Newton for some final thoughts:
"The thing about TechShop is that I am building it for me--I'm a frustrated inventor who needs to have access to this kind of stuff. And people always say that the best companies are the ones where the founders are passionate about what they are creating, which is exactly what I am. In theory I agree with Paul that as we think about expansion, we'll need to raise more money. But we're so young now. I would argue that this first TechShop is an experiment to see if people besides me need this product. As for hiring, I agree that we'll have some people who are happy working with the machines and other people who have the ambition to grow. I think that's true of any company."