How to spend it

Thanks to a windfall, Dan Brennan has a substantial amount of cash available to invest in a business. He needs to decide whether to get involved with an established operation or develop his own idea and become an entrepreneur

DAN BRENNAN HAS never been short of ideas, a trait that has served him well in his 15-year career as a marketing professional. Brennan began his working life in the fast-moving consumer goods sector before moving into financial services and then IT. A hard-working, outgoing individual who is good with people and adept at building teams, Brennan was on course to achieving his goal of becoming the marketing director of a large organisation by the time he was 40 years old.

A little over a year ago, his perspective changed when a close relative died and left him an unexpected windfall of almost €500,000. Brennan prudently paid off his mortgage, which left him with €350,000. He banked the remainder at the best interest rate he could find and thought no more about it until his company was involved in a competition to encourage young entrepreneurs. Brennan was on the judging panel and having sat through a day of presentations, it suddenly struck him that he had what many of the contestants lacked: money to fund a good idea.

Over the next six months, Brennan began to think seriously about putting his money into a start-up. He began to look at sectors with growth potential and kept his mind open as to whether he should start a business himself or invest in a fledgling company in need of development capital.

Brennan has now reduced his long list of ideas to a shortlist of four. Option one is to stay in employment and invest the funds in an established business. He has identified computer gaming, the social media space and information communications technology as possible sectors for this investment.

From his research, he knows there are plenty of young companies looking for money and, while he is not risk-averse, he would prefer to back a likely winner. But he feels he lacks the skills and business experience needed to sort the wheat from the chaff. He is also not sure if he should split his money between a number of small investments or make one or two bigger commitments. He is also wondering within what timeframe he could reasonably expect a return, and whether it is best simply to make an investment or to try to become a little more hands-on with the companies he backs in terms of assisting them with developing marketing initiatives.

His second idea involves giving up his day job to work in a full-time management role in an under-performing hotel and leisure complex. He knows the owner from having stayed there many times with his young family and has been giving the owner free advice on initiatives he might take to turn the business around. However the owner, who has been through almost three years of a downturn, seems despondent and resigned to the fact that the business is going to go under. Brennan disagrees and is prepared to put his money where his mouth is if the owner will give him a chunk of the equity, agree to a complete restructuring, and give Brennan a free hand to take it by the scruff of the neck and make it perform.

Brennan’s third and fourth ideas require him to become an entrepreneur. The first is a telecommunications price comparison website. The second a security device for bicycles to stop thieves in their tracks.

Like many consumers, Brennan has experienced huge frustration trying to work out the best deal on his mobile phone and on a small office package for his wife who runs a merchandising company from home. Brennan has tried to log into a number of existing sites and has wasted hours laboriously inputting the data they require in order to make a valid comparison that takes into account account two smartphones, home land lines, home broadband, introductory offers, lengths of contract and so on. Every time he has given up in frustration.

Adding to his frustration is the fact that he knows that all the telecoms suppliers have sophisticated modelling tools that allow them to compare their complex pricing structures with those of their competitors. However these models have been developed in-house and are not available to the general public. Brennan thinks they should be and would like to develop a site that gives consumers fast access to the information they want, but without the copious number of keystrokes.

He is also aware that recent research in the UK identified that about 75 per cent of mobile-phone users there are paying more than they need to because the tariffs they are on do not accurately match their usage. He assumes the picture may be similar here.

Therefore he is convinced, as a marketeer, that there is a genuine opportunity for a web-based application that captures customer billing information and indicates the best value options for the user depending on the length of contract they are willing to enter into.

In his mind, Brennan can see exactly how the site would look. Most if not all billing information is now available online, and he reckons there should be no difficulty in providing an alternative scanning option for people who still receive their bills by post. Furthermore, he thinks it should be possible to create a smartphone app to deliver the same thing. Brennan is convinced that he could make a sound business out of developing a truly user-friendly and authoritative telecoms value comparison site but knows he would need to recruit people with the necessary skills to make it happen.

His other bright idea represents a similar challenge, harnessing the latest technology to solve a simple problem: bicycle theft. For years Brennan has been an enthusiastic cyclist, willing to spend serious money on what he regards as both basic transport and the perfect pastime.

But Brennan found it difficult to persuade his insurers to include his new €1,800 bike on his household policy. To add insult to injury, the custom-made bike was subsequently stolen from outside his workplace when it was still almost new, even though it had been locked securely and chained in the company’s car park.

Having replaced the bike, he was determined to protect his investment and looked for a suitable GPS tracking style device to buy. He found a number of tracker systems, in Ireland and abroad, but thought some were simply too big and obvious to mount on a bicycle and others were extremely expensive. Despite this he went ahead and bought a system from the UK for €250. However, Brennan feels certain it should be possible to develop a practical, easy to conceal, easy to charge device using the latest technologies – and for half the cost or less.

Brennan has a number of ideas as to how this might be achieved, but here again, he recognises that he really needs to work alongside someone with technical and design expertise to develop the device. He is wary of getting tied up in making the device himself as he has no manufacturing or production experience. He thinks contract manufacturing would probably be the way to go but first he needs to find someone who can turn what’s in his head into a concrete design for a security system that will thwart the thieves.

Brennan is in the happy position of still having a permanent and pensionable job. His dilemma now is whether to keep it that way or to take the more challenging route and plunge into the great unknown.

Which option should Dan Brennan pursue?

THE EXPERTS' ADVICE

Bob McGowan-Smyth, lead equity advisor, Inter TradeIreland

THE FACT THAT Brennan is considering these options suggests he has an entrepreneurial spirit. He also has a significant advantage over many entrepreneurs: his considerable sales and marketing experience. On the face of it, his third and fourth options offer sound business opportunities since they are both market-driven. This means that Brennan has identified a problem that needs solving. Often business promoters are product driven: they have an answer in the form of a product or service and are looking around for the problem to be solved or, in other words, the real market opportunity.

The need for the comparison site is clear. What is less clear is how Brennan would make money from it. He needs to understand clearly what the potential revenue streams are. These could include online advertising, sponsorship, commissions from the telecoms providers or users paying to use the site.

The commission option could undermine the site's independence as users could be suspicious about the results. Website users don't like to pay for anything, so that is probably not a realistic option. Online advertisers would need to be assured that sufficient traffic is being attracted to the site. Brennan will need to demonstrate to advertisers how this will be achieved. It may be the biggest cost.

The bike GPS tracker is also market-driven and the revenue source is much clearer: sales of the tracker to bicycle owners and their families and friends as potential gifts.

The size of the market opportunity and the route to market will need to be defined. Test marketing the product with potential retailers will be key. Market research like this could build on understanding how big the problem is considered to be by cyclists and whether the market opportunity is large enough. It may be too much of a niche opportunity, so he should consider what other complementary products could help to build a great business.

Securing a less costly and better designed tracker could be a challenge. Brennan could contract this out to specialists but will want to ensure that he retains ownership of the intellectual property (IP). There may also be an opportunity to protect that IP with a patent.

Contracting out manufacturing would be a better option than setting up his own operation. He will have to be satisfied with the quality and assurance of supply before committing.

Ultimately, however, finding the best opportunity requires thorough research and planning. Brennan is fortunate that he has the time, the marketing skills, and the finance to do this and my guess is he will be successful.

– Bob McGowan-Smyth

Dervla McCormack, consulting partner PwC

BRENNAN HAS considered a number of options, two of which relate to start-ups. Investing in a start-up can be fraught with challenges. There are a number of factors to consider, and the extent to which each has been addressed will either provide comfort or raise questions for investors. Of the factors that need to be considered, I outline six here.

- The identification of a market need for the product: given the economy and trends within a sector, is there a clearly identified demand for either the comparison site or the bicycle device? What is the estimated level of demand? Where will the customers come from?

- The viability of the product or service itself: is it a proven product? Has it been prototyped? In the case of the comparison site, is it possible to access the information for the comparisons?

- The revenue and cost model, or overall profitability of the business: is the revenue model clearly identified? In the case of the bicycle device, what price will it sell at? There is an added complexity in the case of the comparison site as the revenue will come from advertisers or service providers, as opposed to users. Costs should also be estimated to ascertain the profitability of the business. It is useful to assess what impact a 5-10 per cent increase in costs, or a reduction in revenues, will have on the profitability and viability of the business.

- The people involved in the business: in the case of both start-ups considered by Brennan, he will need to recruit experts with technical and design experience. Brennan will be required to fill the remaining skills gaps.

- The complexity and risks associated with the business operating model: the extent to which the business relies on third parties can cause challenges. If distribution is via agents or third parties, how will this affect the revenues or costs? How reliable are the material suppliers, or hosting services? If manufacturing is outsourced, how is the outsourcing arrangement managed to ensure business continuity

- The funding requirement and return: what level of funds are required for the initial investment in people, prototypes, or website development? What on-going funds are needed over the initial period of operations until the new venture breaks even? What is the expected payback period for the investment? When will the investment generate a return?

There are risks associated with every new business venture but understanding the answers to some of the questions above and identifying whether the answer is positive or not will help Brennan to gain a better understanding of what he is getting into.

– Dervla McCormack

Dr Michael McDonnell, director, UCD Quinn School of Business

BUYING INTO A struggling hotel and leisure complex is the option that bears the least risk, since it is a trading business. There is a huge financial advantage in buying into a distressed situation in that a new investor is probably buying in at a massive discount. The downside is that Brennan is looking at an over-supplied industry, where demand for hotel ownership is low as the perceived potential to make a profit is also low. If he sees these market dynamics changing in the medium term, he may justify trading without a profit for a time. But he should not contemplate entering an unprofitable business unless it can be turned around quickly.

The hotel's financial position needs to be considered carefully. It seems that it is not trading profitably, so Brennan needs to know how close the business is to failure. If the business is heavily indebted, the lenders or existing investors may not want Brennan to enjoy a favourable equity arrangement, although they will want to encourage the survival of the business.

If there isn't much debt, Brennan needs to know how long the business will last – with and without his investment. If his cash is needed to keep it afloat, there needs to be measures in place to change the way business is done. A conversation with the hotel's bank manager should give him a good indication of the business's trading history and financial stability.

While Brennan is clearly successful, he needs a radical strategy. Giving free advice as a visitor is easy; committing money and time to changing the direction of a business is challenging. Brennan needs to consider whether he can bring to the business some ideas that will turn it around. Does the future lie in making it a destination for wealthy visitors? Can he compete in the high-volume, low-cost leisure membership market? Can he buy in at a rate where the property might release value in the long term?

Another consideration is the partnership arrangement. Leaving the current operator in charge is not ideal, since the owner clearly needs help. On the other hand, if Brennan becomes a minor owner but wants management control, he will be in conflict with the current owner. Brennan needs to bring creative solutions to the table: he needs to offer skills and ideas not possessed by the current owner.

A suggested plan for Brennan is:

(i) Generate new business ideas for the hotel and leisure operator, quantify them, estimate the risk levels in each case

(ii) Examine the finances and identify the funding requirement for medium-term survival

(iii) Identify equity needed for a high return based on the business plan and funding needs

(iv) Look at likely partnership arrangements and discuss them in detail with the owner.

– Michael McDonnell