"For evil to triumph is for good men to do nothing".~Edmund Burke

How To Package Ventures and Projects: A Case Study with Solution

THE ART OF DEAL PACKAGING: A PUTO PROCESSING VENTURE

BACKGROUND. Ernesto is a 30 year old Oasnon who left Oas after high school in the early 90s when he realized that tending to his family’s small farm was hardly worth the backbreaking labor, the declining yields and rising costs of farming. At the urging of a relative he left for Manila hoping to find a job that couldsend himself to college, after which he would apply for work in the Middle East. It did not take long before he learned that good foreign jobs were scarce, and took a lot of risks. The next time he was out of work, he stayed on surviving on his wits, taking odd jobs until he landed as an apprentice in a bakery in Caloocan. It would turn out to be his break in life, for after a few months he learned enough about baking and selling bread to gain the confidence to go into business for himself. Many salesmen friends encouraged him to take over small bakeries that were in trouble before striking out on his own.

Once, while surfing the Oasnon.org site he got intrigued by the puto industry in Oas. Initial curiosity gave way into excitement as he experimented with various ideas for turning the lowly puto into a world class gourmet snack product targeting a growing market for organic foods in Japan and Europe. Using what he knew he went to a consultant, who agreed to undertake studies of plant layout and food processes needed to set up a puto making plant. The project study findings (“Base Case Scenario”) are found in the attached file named “Cash flow model.xls. One problem with project studies is that they do not show how the venture’s backers will make money even if the project itself is profitable. That’s because they are put together by engineers, not deal managers who need to use them to raise the money to fund it.

You are Berto, Ernesto’s cousin who in the 80s left Manila to try your luck in the US, and ended up as a real estate agent in California. One day you receive a letter from Ernesto asking you to lend him $ 20,000 to set up his gourmet puto business. You want to help him not only because it looked like it was a money maker, but because it would create jobs for 80-100 Oasnons, which you felt to be your life goal. As you are more exposed to gourmet diet foods, you thought that the consultant’s plan needed refinement by investing $ 10,000 in a technology that could improve quality while lowering costs (thereby increasing operating profit margin from 8 % to 12%).

Now you were ready to raise money from fellow Oasnons, all professed lovers of Oas, but all they could commit was $ 2,000, which would not even pay for round trip fare. You don’t want to give up, but at the same time you don’t know how to raise the money. You recall that while doing your MBA, you learned how to do financial projections, but aside from having already forgotten it, you are not sure if this is about doing financial projections and not doing a business plan to entice moneyed folks to invest in it for a chance at getting rich. In desperation you ask an office mate who packages housing loans and he agrees to help you. You get very excited because not only will it let you help your relatives and poor Oasnons, but he said that without investing a penny, you can pull out cash from it to let you retire In Oas, something which seems more unlikely to happen in America today.

YOUR TASK. Follow your friend’s instructions as he takes you, step by step, through the process of deal structuring and venture packaging. From the first file which is the Base Case, you read how and why he takes figures from there and plugs them into the second file, where he demonstrates how the puto deal is packaged for funders, challenging you to use what you learn to improve the demonstration package. The third file is one such improved package, and he challenges you to better it. The last file urges you to persevere in learning despite the hard work because to put it frankly, Oas has no alternative tool against poverty. [Note: the file Cash_flow_model.xls was presented in the prior posting]

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Permalink Reply by F. Lastname on October 5, 2011 at 3:58pm

The attached file is the demonstration file (or solution) to the case which was purposely not emailed the first time in order to see if there will at least be an attempt to try solving it. In this version attached, the package involves $ 15,000 in debt and $ 10,000 in equity to fund the production equipment worth $10,000 plus other outlays related to its implementation (esp in the form of an ending cash balance that exceeds the minimum recommended by the case of 15 % of sales each year - the actual minimum can be smaller than that. When funded, the project will give livelihood to some 80 + Oasnons.

For Berto (the fictional packager who helped his cousin Ernesto package the deal), he can negotiate 50/50

for the 57 % incremental Economic Value made possible over the original $ 37,060 that Ernesto's consultants showed was the value of the deal, BEFORE the introduction of modern technology. This 57 % increase to $ 58,153 represents the added value that Berto created "from thin air" after he is done (from conceptualizing the new product, locating the appropriate technology, designing the optimal package and seeking prospective funders - more easily said than done, yet done all the time). Berto's share of this added value of $ 29,096 represents real value that he can Ernesto to give him in carried free interest, as a reward for creativity if not honest toil. You can bet that any outside investor who is shown these results can always pay Berto that value the moment he sells his shares in the company (that he acquired as a result of his efforts) esp. if he sells them at a discount. Not bad for somebody who had nowhere to go in his real estate job in California.

Those who are not versant in these things are urged to take notice of this (much simplified) method of acquiring stakes in businesses as a "sweat equity" partner. IT IS INDEED HOW SMART PEOPLE MAKE MONEY IN THE REAL WORLD, NOT BY INVESTING MONEY THEY DON'T HAVE BUT KNOWLEDGE AND RESOURCEFULNESS. It is as well the only way people who care for others can do something that can uplift their lives. Nothing else comes close - charity, humanitarian and other do-good methods will at best make their givers feel good.

Unfortunately, you can't be too successful (by being too greedy) in using this method, because many people think you are "stealing" what is rightfully theirs. When overdone, you get what happened in Wall Street in 2008, where excess turned into mayhem that triggered the worst financial crisis in history. But it would be a terrible mistake to conclude from that, that greed is bad. In fact if Ernesto wasn't being greedy enough to worry about his future in crisis ridden California, he wouldn't have jumped at this opportunity to help himself by doing this deal. In so doing, he (hypothetically) gave hope to Oasnons who would never have received a chance if they only relied on politicians, governments, donors and other well intentioned but strapped folks.

So there we see how Adam Smith was right - it is not from the benevolence of the baker or the farmer that one gets his supply of bread to feed his family. Rather, it is in how, each of these folks, thinking only about their personal benefits, are able to fulfill them and at the same time, give jobs to these hard working folks. This is a lesson so subtle that always and every time gets trounced by the easily evoked accusations of "greed, greed, greed" by well meant but misinformed people who do not see the hard work, the sacrifices and risks that people like Ernesto goes through. Greed, if one looks at it closely, is the most obvious sign of something that gets deeper. The Church itself is complicit in all that nonsense, focusing only on fairness and nothing else, forgetting that perhaps the reason why people are poor is because they are too lazy to be greedy. This, is the greatest tragedy that has resulted from not paying serious attention to economics.

In New York City today, there is a bunch of activists threatening to storm Wall Street for the excesses the bankers committed during the crisis. No doubt much of that opprobrium is deserved - I myself decried this excessive selfishness and told my former students to expect a retribution down the road. But watch it, because it isnot so easy to segregate what is helpful greed and what is not, and since it doesn't cost anything to mount a platform and attack the institutions that failed them, one of these days, if these demonstrators are not careful, they in turn will trigger a backlash that instead of helping their cause, actually will hurt America's poor even more. And that is exactly the same principle that turned the 1987 Constitution into the harshest tool that turned millions of Filipinos into the "nannies" of the world. Sad, but so true.

Anyway, I tried my best to do this case - all in a week - as my contribution towards the avoidance of this paradox that on the surface seems so obvious (helping the poor by bashing the rich) that in reality makes it even worse for them. Ayayay, sayang not many show even an iota of interest on something that explains why the world they are living now is partly a result of their own doing.

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