Case Study #2: The Inventor's Best Friend

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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.

Revenue projections:
2007: $750,000
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

1. Never underestimate the power of a delay in construction to harm a business.
   
   
2. You don't necessarily need brand-new equipment when you start out.
   
   
3. Guaranteed revenue through memberships is a great way to ensure cash flow.

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