Kate's business challenge: five possible solution

Hi there, I've been given a challenge today when I was at the gym Most of the people in the gym know that I work with investments so they always come to me for advice. So in today's story, let's call this coach Kate (not her real name). This was the business case that she presented to me: in my gymnastics club, there is a waiting list that is over a thousand long for children wishing to participate in our classes - whenever we have a chance for parents to register for new spaces (at the beginning of the school year), they often camp out in the car park overnight just to secure a space for their kids in the programme. Gymnastics is popular in London but there are few decent gymnastics clubs despite Greater London having a population of 9.5 million: there are just seven gymnastics clubs with proper facilities and a lot more with basic facilities - so if you have a five year old child who wants to just have some exercise, then one of these clubs with more basic facilities would do but if you are working towards the next Olympics, then you have to hope that one of these seven gymnastics club would have a space for you. Kate wants to create a gymnastics club that will be the best gymnastics club that London has ever seen: it will be huge, it will have the best equipment, she will have a great programme for children of all levels and there is undoubtedly a long waiting list of parents waiting to enroll their kids in the new gymnastics club. She has found a warehouse in Finchley would is a neighhourhood in North London which she wants to convert into this gymnastics club and thus all Kate needs right now is just £3 million (US$3.69 million or S$5.14 million). 

So Kate asked me how she could get that £3 million, I shook my head and said, "no that's not possible." Whilst I don't doubt that Kate has a good business plan and she has indeed spotted a gap in the market, the main challenge she faces is that she wants a loan of nearly £3 million to start a new business - that's totally unheard of. Even in the British version of The Apprentice, Lord Sugar will give the winner just £250,000 - those of you who are familiar with the programme will know that Lord Sugar will get the best experts in to go through the candidates' business plans with a fine comb and pick the one that is the most credible. Kate has no track record in running a business - she is merely a gymnastics coach at the moment so for her to convince a bank to lend her £3 million to start a new business is just impossible. She told me that her parents are willing to put up their family home as collateral for a loan and that family home is worth about £500,000 but there is no way she could leverage that six times to get a loan of £3 million. There are some lenders out there who will give businesses loans at quite high rates of interest, their business model is based on the fact that even if some of these loans fail and they are unable to recoup the money, they would have at least made enough money on the other loans to cover that loss as they are effectively loan sharks charging shockingly high rates of interest. However, even then, such loans tend to be small (under £100,000) and for shorter periods of time - it is highly unlikely that such a lender would consider lending Kate £3 million as the risk associated with such a big amount is way too big and it would be at an hideously exorbitant rate for Kate to repay over a rather long period of time (oh I bet she never considered that). 

So what are Kate's options then? Is this the end of the road for Kate's dream of opening a brand new gymnastics club? Is she destined to work as a coach for the rest of her life? Well, I have come up with the following suggestions for her: she isn't going to like these options but having thought this through, I'm sure at least my readers might be interest. I will explore five options for Kate and none of these are perfect solutions - I shall explore the pros and cons of these options.

1. Start small, grow organically

Most businesses start of small, it would involve the founders working with what little capital they have personally and perhaps they might get some contributions from their friends and family. They are really striving for a MVP (minimum viable product) to prove that their business model can indeed work. So let me tell you how another coach in London started his own gymnastics club this way - let's call him Ivan. He coached at a nice school in North London who had some basic gymnastics equipment, it wasn't great but it was enough for the school kids. Ivan then found out that the school's sports hall was not used on Saturday afternoons and that some of the students at the school would love to do more gymnastics. So he negotiated a deal with the school for the use of the sports hall for a small fee on Saturday afternoons but in exchange, he was able to invite students from other schools to come and train there on a Saturday afternoon as well. So that was his MVP which Ivan managed to achieve at very little cost, he was able to make a profit fairly quickly once he managed to get the parents to pay up front to secure a space for the kids in the Saturday afternoon class. Once Ivan managed to prove that his MVP worked, he took over every spare slot that sports hall was available and his business has grown over the years, using the same business model of renting sports halls from schools when they were not used. Of course Ivan couldn't teach every single class himself, so he hired a team of gymnastics coaches to teach the many classes. Hence all Ivan does now is manages his team of coaches running classes spread out throughout several schools in London and he has been making a nice profit based on this business model, good for him! 

Note that Ivan has followed the AirBNB and Uber model - AirBNB doesn't actually own any properties and Uber doesn't own any cars/taxis, by the same token, Ivan doesn't actually own a gym but still he manages to run a gymnastics club. He started small and has grown organically without any investors or debt, he instead invests his own profits back into his business. Obviously, Kate cannot follow Ivan's business model as he has already snapped up every single school in London with decent gymnastics equipment - Ivan isn't trying to prepare gymnasts to become Olympic champions, instead he is merely trying to make as much money as possible. Many businesses do start small: global furniture giant IKEA started out as a personal project by the founder before it grew into the super brand we all know today. KFC is a global fast food chain today but it started out with just one small restaurant in 1930, in a little town in Kentucky - it was nothing like what you might recognize as a fast food restaurant today, it was merely the dining area of a petrol station. From those humble beginnings, KFC grew into one of the biggest names in the F&B sector. Thus my point is simple: Kate doesn't need £3 million to build a shiny new gymnastics club with the best equipment in the world - she could start small like Ivan did and simply try to get an MVP off the ground. All new businesses usually start out small the way IKEA and KFC did, you're simply not going to get a £3 million loan from the bank for your first venture. Just because you start small doesn't mean you have to stay small - if you are good at what you do, if you have a great business plan, you can grow just like IKEA and KFC but such slow organic growth will take time of course and I think she is just too impatient for that. 

Pros: Kate can get started right now, she doesn't even need her parents' help if all she is trying to do is get an MVP going and start small. She can be independent and in control of her own business this way, she is not dependent on a third party to support her or invest in her new business. There are just too many people out there who are "all talk, no action".

Cons: Kate may stay small for years and that can be frustrating - she would be giving up coaching gymnastics in a nice gym with great facilities for coaching gymnastics in a sports hall with little decent equipment, that would be frustrating as well. Is Kate patient enough for organic growth to happen through years of hard work? I don't think so, she wants her business to grow quickly, thus this option doesn't suit her. Ivan never shared Kate's vision - he was focused on his MVP.

2. Keep costs low, go outside London

London is a really expensive place to set up a business - everything costs more and a gymnastics club requires a huge amount of space and that's why it is rare to find gymnastics clubs (or any sports/leisure facility requiring a massive amount of space) near the city center. Kate picked Finchley as her location for her gymnastics club as it nice residential suburb in North London but it is still in zone 3 - for those of you not familiar with London, allow me to explain our zonal system. London is divided into concentric circles, with central London being zone 1, the first outer ring is zone 2 then it goes up to zone 9. The bigger the number, the further out of town you are and generally, zone 3 is still considered fairly central actually, Kate could go much further out and set up her business outside London where everything from rent to labour cost would be much lower. Note that Kate wasn't planning on buying the warehouse for the gymnastics club (that would be crazy expensive), she was merely planning to rent it and if rent was going to be such an important part of the costs, then this is a simple way to make her business plan a lot cheaper. Sure London has a lot of her potential clients but Kate also has to remember that many families do move out of central London when they have children in order to afford a bigger house to bring up the kids, so it's not like she will have no customers once she moves beyond zone 3. She should be looking at one of the commuter towns where such families live - the parents would be able to get on the train to go to the office in London within an hour thanks to our rather efficient train network. An example of such a town is Tunbridge Wells, it is 58 km from central London and the train there takes only 45 minutes from London Bridge station. 

Pros: The lower her costs, the easier it would be for Kate to get her business off the ground, the easier it would be as well for her to make a profit quickly when she is spending less. There will still be plenty of business for her out in places like Tunbridge Wells and beyond, hence Kate could easily pick a town where there isn't a gymnastics club to get started. 

Cons: Kate has lived in London for years and doesn't want to move to a brand new town far away from all her friends here. She was hoping to tap into her network of friends and gymnasts to get new clients for her new gymnastics club but if she moves to somewhere far away, she would be starting from scratch as she wouldn't know anyone in town, making the process of attracting new clients harder. Starting a new business in a town where you don't know anyone is so hard. 

3. Find a famous partner to do this with

For some reason, Kate is fixated with the idea of doing this all on her own and I wanted to tell her, no you can't. There are already gymnastics clubs out there and she needs a good marketing strategy in order to make sure that she gets noticed when she sets up her new club. Whilst gymnastics is popular, don't forget, Kate isn't just competing with other gymnastics clubs for business - she is competing with all other sports as the majority of the parents aren't really that fussed which sport their children do, so if gymnastics isn't available, fine they'll just send their kids to ice skating, hockey or tennis instead. Now a good strategy would be to team up with someone already well known in the sport: a good example of this would be the Tom Daley diving academy - Tom Daley is already a well known diver because he is an Olympic gold medalist and the finest diver in the UK. He is a household name thus his name would be instantly recognizable even to people who have never participated in diving before. The good news for Kate is that team GB is extremely successful at gymnastics, having produced numerous world and Olympic gold medalists in the last 20 years with big names like Beth Tweddle, Louis Smith, Claudia Fragapane, the Downie sisters, the Gadirova sisters and Max Whitlock just to name a few. Once Kate gets some serious star power from a famous gymnast, then her business plan would be a lot stronger to anyone who is looking to invest in her business. Kate is an experienced gymnastics coach but I'm sorry, nobody knows who the hell she is. Hence a very famous partner would allow her to launch her new club really quickly, if it is a very big name that most parents would instantly recognize: she needs that celebrity factor to get noticed. 

Pros: If Kate can pull this off, then she will be able to launch her club in a big way - it will be a lot more high profile given that this famous gymnast would already have a strong following on social media. This would instantly lend her business plan a lot more credibility and give her a much stronger chance of getting more credit to launch this project. The hardest part for every new business is to get enough attention and with this kind of celebrity endorsement, it would solve that problem. Famous British Olympic bronze medalist and world champion Beth Tweddle has already launched three Beth Tweddle gymnastics centers in the north of England - proving that this is indeed a business model that could work well. 

Cons: The celebrity gymnast would do very little work but expect to be financially rewarded for the use of his/her name - so this celebrity gymnast might run a workshop or two every week but not do any real coaching, but at the same time, s/he would expect a sizable share of the profits for doing very little real work. Financially, it would be a bad deal for Kate. When your entire brand identity hinges upon the reputation of this famous gymnast, Kate wouldn't really be seen as the person in charge despite having to stump up the capital and do a lot of the hard work. And of course, the celebrity gymnast doesn't know Kate, so this celebrity is in a much stronger bargaining position: "you need me much more than I need you Kate, so I'm going to tell you exactly what I want out of this and of course you're going to give me everything on my list." Unless Kate already knows someone that famous (for the record, she doesn't), then it's going to be a really difficult route for her to take even in principle, it is a feasible solution as this is already a tried and tested business model. 

4. Taking over an existing gymnastics club rather than start a new one

It is very ambitious to try to build a brand new gymnastics club at the cost of £3 million - you would burn through capital at an astonishing rate.  A much cheaper way to do this would be to find a rather unloved, rundown gymnastics club where the equipment is very old and the management have not bothered investing in the club for a while. This is usually a sign that the owner have lost interest or at least lost passion in running the club and thus you could put in a bid to take over the club - the cost would vary depending on how big the gym is and how rundown the equipment may be, but at least compared to Kate's original plan, you're not starting with an empty warehouse. Even with the old and rundown equipment, you could start running classes and slowly invest in new equipment as you start to make some money. Furthermore, an existing gymnastics club like that would undoubtedly have some existing clients so you already have a captive audience. There would also already be some coaches working at the club, so you wouldn't have to worry about trying to find enough coaches to teach all your classes there. This kind of 'take over' business model is actually fairly common in the business world: for example, there is a Chinese restaurant in London Chinatown called Wong Kei that had been around for many years and it had a reputation for authentic Chinese food at very reasonable prices but the service was often poor. So when the restaurant had new management in 2014, they made a big deal about the changes they were making, focusing on improving the customer service with the famous tagline, "rudeness is now off the menu". 

Pros: As discussed above, fixing a business with problems would cost a lot less than starting one from scratch and many positive changes can be achieved in a relatively short period of time with the right strategy and people in place to run it.  

Cons: If a business is profitable and running well, then the owners have no reason to want to sell it - not unless they're very old and want to retire. Only the businesses which have all kinds of terrible problems would be up for sale: in short, you get what you pay for. Fixing problems caused by others is can really be a thankless task - you get blamed for a long list of stupid crap that wasn't your fault in the first place. Furthermore, gymnastics equipment is expensive - Kate would eventually have to find the money to replace the old stock and that's one problem she can't avoid even if she took over a gym full of very old equipment. Even if Kate does manage to take over an old gymnastics club, unfortunately it would still be a long way from her dream of her ideal gymnastics club, she will still need an injection of capital to invest in the club.

5. Sell the idea to a big company who has the capital, ask them to employ you. 

There are poor people with bright ideas on one end of the equation and then there are companies who are cash rich and looking for investment opportunities. I happen to be working with the latter and I know of loads of companies out there who are looking for companies to invest in. Would they give someone like Kate £3 million to run a gymnastics club in exchange for a 50% stake in the business? No, absolutely not, even if the business plan is really good - the only way I can see this happening is if they take a full 100% stake in the business and then employ Kate as a general manager to run the club. I imagine the kind of big business who would entertain this would something like a property developer or even a company running a chain of sports facilities. My local gymnastics club is owned and run by the Better group, they run all kinds of sports facilities and my gymnastics club is part of a multi-sports complex offering everything from football to yoga to badminton to basketball. The Better group is so diverse they offering everything from ice skating to tennis to swimming to climbing. Yes, there's money to be made in sports and they want a slice of every piece of pie out there. Such a huge company would easily have £3 million to invest in a big project like Kate's vision of that new gymnastics club in Finchley but they would never lend Kate the money to do the project: her best case scenario is that they help her realize her dream and buy her every single piece of equipment she needs for that gymnastics club but it then becomes the latest gem on their portfolio of new sporting facilities in London, whilst Kate is merely employed as a general manager or even a coach at the new gymnastics club, but a lot will depend on how she negotiates this with her investor. 

Pros: This is undoubtedly the fastest and easiest way for Kate to realize her grand vision of that beautiful new gymnastics club - let's not forget that this is a massive, ambitious project and Kate doesn't want to be still dreaming of it five to ten years from now, she would rather it become a reality sooner rather than later so this option has the attraction of being the fastest route. Let's not assume the worst of this deal: I think Kate's ultimate role in the new gymnastics club will depend on her negotiations with her investors, if she can convince them that she needs to play a pivotal role to make this new business venture a success, then she could land herself a really nice job running this new sports facility as general manager whilst earning a very respectable salary - a lot more than what she is currently earning as a gymnastics coach. 

Cons: How is this any better than Kate's current situation? Kate is simply a gymnastics coach at a nice gymnastics club now so even if she can persuade a big company to build another gymnastics club and employ her there as a general manager or gymnastics coach, she is not the one who owns it or making all that profit. Furthermore, there is actually very little to stop the big company from offering Kate little in return for her good business ideas and they could simply say to her, "no we are not interest in this but thanks for your time", then go ahead and do it all without her anyway. They simply need her business plan and good ideas, they don't actually need her to implement those. With this route, it is hard to make sure that Kate actually gets something out of this. After all, she was so sick and tired of seeing how the gymnastics coaches are paid very little whilst the gymnastics club is very profitable, she wanted to get in on the business side of things to make some real money rather than simply work as a coach, but this solution doesn't really allow her to do that. 

So before I finish, please allow me to address some Q&As that popped into my mind when I was proofreading this post. 

Q: Would your company invest in a project like Kate's new gymnastics club? 

A: No, the simple reason is that Kate has zero business credibility, she has never run a business before in her life, she is a gymnastics coach. So whilst I can agree that she has definitely spotted a gap in the market (that's always a good start for any business plan), any investor will want to know that Kate can successfully manage a big project like that and on that front she has absolutely zero experience. Whilst I don't doubt that she is very passionate about the project, that means nothing and unfortunately, her enthusiasm is no substitute for years of relevant experience running a business. 

Q: Would a venture capitalist (VC) be interested in investing in Kate's gymnastics club project? 

A: Again, the answer is no. VCs are usually interest in new products and services that game changers that have massive potential. So if you have a patent for new technology that will change the way we charge our phones (for example, making it a lot faster than the current technology), then this would have huge potential given how many mobile phone users there are in the world! Thus for a project like that, the VCs would be lining up to outbid each other to support you. But Kate's gymnastics club doesn't include any kind of game changing concept or technology, she has merely spotted a gap in the market. The potential is limited to how many gymnasts you could fit into the gym for lessons every week - thus compared to a technology project like the phone charging solution, this is far less attractive to VCs. Typically, VCs would prefer to invest in scale ups rather than start ups - so an example of a scale up would be if a Malaysian restaurant in London is very successful and wants to open another branch in London, then the VC can see that the business owners have a track record of successful running a restaurant and making it a success, that there is clearly a demand for authentic Malaysian cuisine in London so they would feel a lot more comfortable participating in a scale up like that even if there are limits to a project like that (ie. how many diners can you get through the restaurant for lunch and dinner service each day), but hey if it goes really well, then they can expand further and have a third, fourth etc restaurant and keep expanding across the country - as well as focus growing their business online with the many food delivery services. 

Q: Why wouldn't anyone want to give Kate a chance? Would you invest your own money with Kate? 

A: The simple answer is that the worst case scenario - Kate simply isn't good for the money if things go very wrong. We have seen this recently in America recently when the Larry Nassar sexual abuse case caused one of the most successful gymnastics clubs there the Karolyi Ranch to close overnight because a lot of the sexual abuse took place at the club and at best, the coaches there were negligent in their duty of care and at worst, the coaches there were totally complicit in facilitating and allowing the sexual abuse to take place. Overnight, they went from a gymnastics club that produced Olympic gold medalists to such a toxic name that they had no choice but to shut, just like that. Now you can buy insurance against natural disasters like floods that could damage a sports facility like a gym but there is no insurance policy out there which can protect your business when you have a hideous scandal like that. Even in the UK, there are allegations of really horrific abuse in gymnastics emerging all the time and this goes all the way to the top involving senior coaches being criminally abusive to their young gymnasts. This is a sport where things can go wrong very quickly if you put the wrong people in charge and thus this raises the question, if it all goes wrong for Kate, is she in any position to return the £3 million she borrowed? A working class person like Kate has never ever seen that much money in her life before, so she is simply not credit worthy to borrow that much money even if her business plans are solid. The fact is she can't repay the loan if things do go wrong and thus she would never be able to obtain that loan in the first place. Only a loving parent would give their child a huge loan under such circumstances, ignoring common sense and business logic. 

That's my five solutions for Kate, none of which are ideal because there's just no way she can that £3 million loan/investment but what do you think? Which option should she go for? Given that none of the options are perfect, which do you consider the best or 'least bad' option for Kate at this stage? Or is there another option that I've not covered? If all five options are so bad, would Kate be better off doing nothing, simply keeping her job as a gymnastics coach at her club? So what do you think Kate ought to do? Please leave a comment below and many thanks for reading.