Case Study #2: The Inventor's Best Friend

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."