Anatomy of a deal in progress

Published in the San Diego Union-Tribune, May 1, 2017

I have always been suspect when the famous entrepreneur tells his tale and makes it sound like success was simply a matter of connecting the dots. Let me tell you about dots. There are a way big lot of them, and they operate under the Heisenberg uncertainty principle, namely that if I know where they are, I can’t know their speed and thus, it is really hard to corral the little fellows.

So, in an effort to provide a road map of dots in real time, herewith the anatomy of a deal – in progress.

On a Saturday night in February, I find myself at the annual dinner of the Building Industry Association (BIA). I work the room during the reception, and I meet Michael McSweeney, public policy adviser for the BIA, and the conversation turns to prisons and entrepreneurship and reform. It turns out he has a good friend who was “formerly incarcerated.”

Rule No. 3 – You must go to all the events and all the meetings – in particular the ones you are sure are a complete waste of time.

He says let’s get together for a lunch with a pal of his, Scott Crosby, the president and CEO of the Associated Builders and Contractors, a trade group. I am sure that all they really want is to ask me for money.

Rule No. 515: Don’t jump to conclusions, you idiot.

So we meet and it turns out they do not want money; they want a solution to a problem. Here is the problem. There is a shortage of qualified workers in the construction trades. In other words, they have more jobs than candidates to fill them. When a formerly incarcerated individual gets out of prison with the basic skills and a simple OSHA certification, the Associated Builders and Contractors can get them a job in 48 hours. About 80 percent of prison construction and maintenance is done by the inmates themselves.

OK, so what’s the problem? Jobs are waiting. The problem, chucklehead, is transportation. When our guy (we will call him Bob) gets out, he goes to a halfway house for six months of re-entry and parole. But the ABC has a job waiting for him immediately, and so how does he get from the halfway house to the job site (let’s call it Poway).

I figure this is a no-brainer. “Avis for ex-cons.”

Rule No. 516: I know you are brilliant, but remember to ask yourself why no one else has done this or is doing it?

So I begin due diligence – which is code for calling a friend who used to own some car dealerships. You know the rule about knowing what you don’t know. And I don’t know a carburetor from a pepperoni pizza. (I drive a 12-year old Lexus SUV.) I talk to four smart car guys who own dealerships, and I get educated. One of these guys I met on an airplane coming back from a ski trip.

Rule No. 517: Work the room, even on an airplane.

The next problem is where to get a bunch of used cars costing less than $5,000. I find one of the largest companies in the country that takes in older used cars for non-profits and in exchange the donor gets a tax deduction, and the CEO happens to work in San Diego.

I will not bore you, but the bottom line, in order to rent a cheap used car and pay sales tax and cover insurance, repair and maintenance etc., you need to charge our pal Bob about $90 per week. Huh, he just got out of prison, he gets a job for $13 to $14 an hour, he is almost happy, and you want him to pay you $90 per week. You are insane. For $360 per month, he can finance a new car purchase – if he has good credit. But our Bob does not have good credit.

On top of that, if we own the car and rent it to Bob, we have the liability risk if there is an accident. No individual (even with a corporate shield) is going to take that risk and be the deep pockets.

Also, these car rental businesses like Avis do not make the majority of their money on renting cars. They make money on selling the car later. So, renting is not going to work. We need to sell a car to Bob.

In any start-up, you need to understand the market opportunity. There are 1,800 prisons and 3,000 jails in the United States (we are numero uno in the world in this area), and the construction industry spans the country. In 2015, there was $900 billion of new construction. Lots of jobs lurking. We need to think about how to scale and go big while we also figure out how to get Bob to Poway so he can frame the house.

We have some good things going for us. Bob can get a job offer with the XYZ Construction company, he can enter the trade group’s craft and training program, and the guy who pays him each week knows where he is and controls the paycheck, So, what if the XYZ Company buys the car from our little non-profit, and then sells it to Bob on favorable terms?

One of the key objectives of this project is to help our formerly incarcerated gentleman improve his credit – and the absolute best way to improve a credit score is with a declining balance term loan – i.e. a car loan.

But we need to de-risk the transaction for the XYZ Company. We need to create a buffer, a space for Bob to get acclimated and also for XYZ to test and make sure that he is the right guy for the right job.

Rule No. 518: Find out what money can’t buy and offer a non-monetary benefit to that organization.

We decide that for the first 60 days on the job – while Bob is getting adjusted to his new life and completing the paperwork and updating his driver’s license and reacquainting himself with things like fresh air and freedom, we will ask Lyft and Uber to subsidize his travel to and from the job site. Imagine if they were able to say that they were doing something good and true and decent and creating jobs not only for their drivers, but for the passengers. Our Bob can pay something, but he needs some assistance at the beginning of his rehabilitation.

We are talking to Lyft. Uber has not yet responded. (If you know Travis Kalanick, ask him to call me. They for sure need some improved public relations.)

The big idea for the solution to scale comes from Scott Crosby and from my past time as a software CEO – the distributed network effect. Instead of a single owner of 5,000 cars, what if we had 1,000 owners of five cars. If a single contractor sells a few cars to his new workers, then he can fill the jobs, manage the payments and create improved credit for his boys. (And not charge them 25 percent interest like a used-car guy might). And at scale, you could do this across America. There are 729,000 construction companies in America with an average salary of $48,000 per year. I think this dog might hunt.

So I am sharing this as a deal in progress. There are still some hoops to jump through, but I am optimistic. More information on this adventure will follow in a couple of weeks.

Neil Senturia, a serial entrepreneur who invests in early-stage technology companies, writes weekly about entrepreneurship in San Diego. Please email ideas to Neil at neil@blackbirdv.com.

Rule No. 519: I love the game.

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