Ryan’s and Tyler’s luncheon meetings evolved to dinner meetings at their homes. These meetings included their wives Pam and Paula who wanted to be involved. They became more and more excited as they sketched out an overview of their plan. Tyler identified the sites that would meet the requirements for a rail-served manufacturing center and obtained the tax maps which showed the parcels involved. Pam did the ownership research. She found that some were owned by the city and state, others were owned by railroads and others by obscure LLCs. From experience they knew assembling property would be difficult because their plans couldn’t be kept secret. But, before they delved into the technical details, they had to figure out whether the concept would be profitable.
Tyler and Ryan did some very high-level order of magnitude calculations. One thing they discovered was that to be profitable, the manufacturing center would need to operate at a high volume. To get to that level would require a period when the facility would not be profitable, estimated to be about five years after construction which would take additional years before they would have usable space. They also knew that without a substantial investment in the beginning they would never get to the break-even point. There were large economies of scale, but they can only be reached over time. The economies looked to be enough to make the center competitive world wide, when they took into account the site’s close proximity to a major port.
They also discovered that they needed to set up a flexible environment where entrepreneurs could rent equipment and workspace on an as needed basis and then use the SFHAX labor Exchange to schedule workers by qualification to make the product. Paula understood how this would work and started preparing training courses for the would-be entrepreneurs on how to use the SFHAX system to schedule and price labor. Manufacturers in scattered small scale suburban and rural areas would relocate, especially if they were in commuter range, to take advantage of the economies they would have in the shared facilities.
This brought up an issue that the group was concerned about. They knew about the problems facing rural and some suburban areas. Manufacturing and other work has left their communities over the years and they didn’t want to make it worse. Paula thought about it because she came from a rural area. She met Ryan in college and they decided to move to the big city. She did know that many of her friends didn’t want to move out of the area they grew up in. She thought it was harsh to tell people to uproot their lives to move to another place where they wouldn’t have friends and family. She also knew that some, like her, found rural areas to be too constraining and yearned to move to the big city.
Tyler mentioned that on some of his projects, he needed a qualification that had a limited supply of workers; for example, pipeline inspectors. Large projects drew workers from all over the country. The ones who didn’t live within commuting range had to be put up in motels and paid a per-Diem for food and related expenses which was rolled up into the cost of the job. He said that many of these workers lived in rural areas and owned acreage, their cost of living was lower than for people in more populated areas. Also in many cases they owned their houses and land outright. This meant they could accept a lower wage to account for travel and food costs. They also liked the idea of only working part of the year. This was possible, because when away from home they tried to work six days a week for at least 10 to 12 hours. Of course there was the negative of being away from their families.
Paula mentioned that now SFHAX was regional, but, she understood they were getting ready to release a system that priced travel and per-Diem costs into the labor payment. This allowed workers to bid on jobs all over the country. She thought that the manufacturing center should have lodging included as well. That way, if an entrepreneur needed a workforce larger than was locally available, the entrepreneur could bring in workers outside the immediate area at a known labor payment. The SFHAX system was aimed primarily at farm migrant workers but could be used for any qualification.
Pam said the idea sounded good about having dormitories associated with the manufacturing center. She understood from her reading that China does this and was one of the reasons why their manufacturers could bid on very large orders. They brought in workers from rural areas when there was demand for their labor. Pam said there was an issue they would need to figure out. City zoning usually prevented the mixing of residential, industrial and commercial uses.
They all however realized that even though they worked through many of the conceptual issues they needed to prepare a formal plan and prepare detailed calculations if they wanted to raise money for their project. While upper middle class they weren’t from wealthy families so they needed to see if they could raise enough money to allow them to work on their project. Ryan didn’t want to dump a bucket of cold water on their dream, but he had to explain to them how the venture capital market worked.
He had investigated trying to move into investment banking, but, found it was a closed group made up of people who went to the right university for their MBAs or, more importantly came from wealthy families that had funds to invest. It was amazing how qualified a person could be when recommended by a large investor.
It was possible to raise funds but you had to abide by all the rules and regulations of the SEC. The only way a person outside the favored group could get noticed was to use “friend and family” funds to get a business started, show some cash flow and hope a venture capitalist or large company would find you. These groups were constantly scanning the market for ideas or potential competitors they could exploit or buy and shut down or merge into their business. They had no interest in funding projects that required research and development or took more than a year or two to execute. There were exceptions but these were superb marketers with significant personal wealth who could convince investors of their vision and the huge potential that was just over the horizon.
Pam had begun to investigate how they could raise money to fund their plan. She soon found there were a myriad of management consultants and lawyers who thought their idea was great and, for a fee, would be glad to introduce them to potential investors. When it came down to identifying these potential investors they always seemed to disappear and the “friend and family” were urged as the supplier of the initial funds. Pam and Ryan came to the conclusion there was no organized capital market where they could present their plans. It frustrated them that that a few master con-artists who could, with a brief “elevator talk”, convince a large fund to invest large amounts in their poorly thought out plans, but a group of diligent people with clearly thought out business plans couldn’t even get a hearing.
They knew there was more to it than what appeared on the surface. Ryan thought that for the venture capitalists to justify their large fees and expenses they had to place large sums of money at one time. These precluded any effort or research analyzing small operations that only needed millions of dollars to get started not tens of millions. They also weren’t very adept at identifying valid ideas so they had to fund a bunch of large value start ups and hope one would hit it big.
Pam had an idea. Instead of looking to venture capital, maybe they should seek a grant and use the funds to finance a more detailed study. If the study showed their idea had promise they could get it started perhaps as a non-profit development company. Both Pam and Tyler knew that the community would need to be involved as zoning, utilities, streets and railroads need to be changed to get the project off the ground.
Their idea had a large political component which filled them with apprehension. How could they get the project completed on a reasonable budget and time frame without becoming a boondoggle wasting everyone’s time and money? They had passing acquaintances among many of the local officials and politicians seen at local functions but were not “connected”. On the surface the politicians and officials seemed like reasonable people, but who knew how they would behave when the prospect of setting up an organization with the potential for having large sums of money pass through it came under their jurisdiction. Tyler mentioned he had seen grass roots groups prepare plans only to have them taken over by connected consultants who rapidly pushed them aside.
They discussed the possible paths forward and decided that the best would be to form a non-profit educational organization. Pam said she would do the legal work. Paula before she started working in the human resources field had worked for a university helping professors prepare grant proposals.
Tyler and Ryan were hesitant about what they should do. Ryan knew the bank he worked for had the contacts and perhaps would make a contribution to the organization from their marketing budget, but was concerned that they might not like the idea of his devoting considerable time to the project. Similarly, Tyler knew that it seemed all his firm was concerned about was billable hours. They had no significant budget for marketing or research and development. They even discouraged their employees from joining volunteer organizations where their professional skills would be useful. They should try to get them to pay for their services instead. Tyler knew he was overstating his position. His firm did under pressure from the younger staff work through professional organizations in their field on environmental and other social concerns. The staff also contributed both time and money to their local community food banks and other charitable organizations.
The name they chose for their organization was City Manufacturing Centers (CMC) incorporated in their state as a nonprofit 501c3 educational organization. They each contributed some money to cover the expenses they would incur. The mission of CMC would be to educate the general public, entrepreneurs and investors about the potential in urban rail based manufacturing centers. They all started work on a grant proposal and identifying potential grant givers. They also decided to try and contact the city council through one of the council members with whom they became acquainted
Copyright 2014-2020 Richard A. Cornell, PE