The first article addressed the general concepts of the proposed business.
The second article answered 9 crucial questions to quickly assess if a business idea could be a winner.
In this third of four articles discussing the creation of a new startup, several factors are examined, including:
1. Characteristics of the proposed business that could lead to success,
2. Draft financial outlook for profitability, and
3. Your Current business environmental factors that may help lead to success.
1. Characteristics of the proposed business that could lead to success
Every business requires adequate cash to operate and for a reasonable return to investors. Here are some advantages a Ben's Way startup business has:
Initial spending low
Service businesses need far less investment upfront than manufacturing (significant research and capital costs) or distribution businesses (inventory costs). The main start-up costs for a Ben's Way business are legal, accounting, and systems setup.
I am working on a business case to capture potential start-up and ongoing costs. So far, financial projections look pretty feasible. I plan to share what I learn.
Flexible ongoing spending
Marketing, sales, and administrative (legal, accounting, customer care, and management) expenses are the essential ongoing costs of this service. Initial shareholder funds raised must cover the first year or several months of these expenses. Once the new business is underway, all costs can be raised or lowered easily as market conditions direct.
Staying competitive
Typically, service businesses must continually re-invest to match or outpace the competition. With a Ben's Way opportunity, all clients continue their services after passing away and thus won't be switching to another provider. To keep existing revenues, our start-up business faces no pressure. However, if required, the option is available to re-invest to attract new clients.
Growing revenues
The longevity of this contracted service has another benefit from a cash flow perspective. As the invested funds enlarge, the management fees earned also grow.
Easy Exit
Should the need arise to close shop, say if annual losses are mounting, the company can wind up easily. Contribution agreements would contain terms to distribute the monies raised to the donor's charities of choice according to the recorded donor wishes.
An easily scalable operation
Once processes for customer acquisition and conducting operations are established to address the needs of one niche, a similar approach to other niches will attract more customers without incurring high additional fixed costs.
After the Canadian version of this start-up is proven to work, the international market presents a sizeable further opportunity. As the service builds up to an ever-larger scale, entry barriers correspondingly escalate to discourage would-be competitors.
2. A draft financial outlook for profitability
Investors should see profitability within ten years by keeping start-up and ongoing costs low. This business can command a one and one half to two percent slice of each year's assets. These revenues cover investment management, sales and marketing, audits, legal work, website costs and staff. The fees as a percent of the portfolio will reduce as the fund grows, reflecting efficiencies.
Potential profits at this early stage are not predictable, but an extremely rough estimate using somewhat modest budgets is presented here to give an idea of what is possible. The actual activity and value of the business may be much greater or lesser, depending on how the assumptions would compare to actual results.
Assumptions: I'll assume that setting up the business requires:
A one-time spend of $500 thousand in legal and accounting fees plus start-up marketing efforts
Operations costs begin at $200 thousand a year and grow by $50 thousand each year.
Investor outlay is $700 thousand in year one ($500K start-up costs plus $200K first-year operations costs)
Start-up revenues begin at 2% of assets for the first ten years and cut back to 1.5% after that.
New portfolio additions begin at $5 million the first year, and the value of new additions grows by 25 percent every year.
The investments are professionally managed at the cost of 0.9% of the portfolio per year.
The portfolio value grows via investment returns at 5% a year after inflation.[i]
Results:
After two years, the operations are profitable,
after five years, all invested cash is returned, and
after ten years, the portfolio has compiled $166 million in contributions over the ten years,
the IRR (Internal Rate of Return) is 41.8 %.[ii]
Even if no further contributions occur after year ten, the business remains increasingly profitable.
Note that to secure the investment additions, I recommend the business promise to convert itself into a non-profit.
At the ten-year mark of conversion to a non-profit, all further profits are left in the charities' portfolio of funds.
After ten years in this example, the investors are paid back with a generous return, over eight million dollars, effectively an annual compounding of 28 % on the initial seven hundred-thousand-dollar investment.
3. Your chance to make a difference: the current environment
Now imagine starting an investment business that operates these money capsules.
A money capsule enterprise offers many advantages for the right individual or team and would currently encounter:
a. Low Competition
Logically banks or wealth management companies should offer a form of money capsule service. They do not appear interested – yet. This opening allows smaller, more agile businesses to establish themselves. Many businesses compete successfully with banks. For example, look at the number of players in Canada's FinTech industry.[iii]
Who else might compete? Charities or charitable foundations bear consideration:
Charities raise money for their immediate needs, so they are unlikely to start competing with the start-up's services.
Some charitable foundations might eventually offer donors the ability to grow funds first before giving to charities. Today, however, these foundations are constrained from growing investment funds by the current tax provisions of the Government of Canada. Even if the Government makes the necessary tax code changes enabling a competing service, most foundations will focus only on their unique cause.
b. A large market opportunity
From a total market perspective, the opportunity is immense: In Canada, during 2019, there were 5.1 million donors who gave tax receipted donations totalling $10.3 billion to over 86,000 charities, of which 11,000 are public or private foundations. Motivated donors to all these charities and causes could represent potential clients for seed funding.[iv] $10 million as money capsule contributions per year represents only 0.1% of annual donations.
From a business perspective, the opportunity is enormous: If, for example, seed funds in Canada grew for 150 years from $250 million to $250 billion (in today's dollars), the eventual yearly contributions from capsule payouts could be $10 billion per year, matching the total annual donations given in Canada today. At that future time, admin fees for the business would approach a billion dollars per year, just inside Canada. Imagine the potential business in serving the rest of the world!
It's your decision
If you dream of being an entrepreneur, you can improve the odds of your success by selecting a business opportunity best suited to you and your situation.
A Ben's Way business offers many advantages ideal for the right individual or team as a start-up.
Humanity faces a vast and chronic shortage of funds when addressing social problems. Whether the solution takes one hundred years, two hundred years, or more is not the issue; it is whether you believe this journey to better fund our society's future is worth starting now.
Humanity can generate enormous funds for social benefit by the next century. But we should start now. As the saying goes, the best time to plant a tree was many years ago; the second-best time is now
Based on the above favourable views, (biased as I am) plus the findings in my prior two articles, this looks like a good opportunity.
The above is Part Three of a four-part series on the Ideal Startup.
Contact me if you are interested at Cam@FutureLegacies.ca
[i] See Charitable+Giving+In+Canadian+Wills+By+CAGP+September+2020.pdf (squarespace.com) [ii] Per my very rough spreadsheet estimates on ‘Example business revenue and expense for entrepreneurs.xls’ which I am happy to share on request from Cam@FutureLegacies.ca [iii] Canadian fintech market map | PwC Canada [iv] Trends in the number of donors and total value of donations (current dollars), Canada (statcan.gc.ca)
Photo by Jonathan Petersson on Unsplash