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Emerging industries! Connected Health, Local Exchange Trading Systems and Flexible Office Spaces
Reference number H201408
Publication November 2014
Number of pages 54
Email address corresponding author [email protected]
Address Panteia
Bredewater 26
P.O. Box 7001
2701 AA Zoetermeer
the Netherlands
Phone: +31 79 322 20 00
All the research reports are available on the website www.entrepreneurship-sme.eu
Zoetermeer , November 2014
The responsibility for the contents of this report lies with the authors of the subsequent
chapters. Quoting numbers or text in papers, essays and books is permitted only when
the source is clearly mentioned, including author names. No part of this publication may
be copied and/or published in any form or by any means, or stored in a retrieval system,
without their prior permission. Panteia has collected and processed the authors’
contributions, does not accept responsibility for its content, nor for any printing errors
and/or other remaining imperfections.
This research has been partly funded by the research programme SMEs and Entrepreneurship
(www.entrepreneurship-sme.eu). We thank the 2014-2015 class of MSc students in Strategic
Entrepreneurship at the Rotterdam School of Management. This report is based on their
thoughtful and diligent work to explore entrepreneurial challenges and strategies in a range of
emerging industries.
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Contents
Preface 5
1 Connected health 7 1.1 Introduction 8 1.2 What is connected health? 8 1.3 What are the major trends in connected health? 10 1.4 External Challenges: need-to-know to start a new venture 12 1.5 Internal Challenges: Learning from active entrepreneurs 17 1.6 Wrap-up 20
2 Local exchange trading systems 23 2.1 Introduction 23 2.2 The money system 24 2.3 Description of the LETS industry 26 2.4 Sales and Marketing 29 2.5 Product and Development 31 2.6 Management and Organization 33 2.7 Finance and Cash flow 35 2.8 Nine steps towards your LETS 36
3 Flexible office spaces 39 3.1 Introduction 39 3.2 The Industry 40 3.3 Opportunities 43 3.4 Challenges and strategies 46 3.5 The entrepreneur 51 3.6 Future outlook 52
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Preface
Whenever entrepreneurs consider creating a new venture they are eager to learn what
others have done before. However, to-the-point industry information is generally hard
to get, so that entrepreneurs find themselves browsing a range of blogs, statistical
sources, company reports, and more. Especially in new and emerging industries such
industry information is missing - which is a shame, as the best entrepreneurial
opportunities are typically found in such environments!1
A steeper learning curve is obtained if start-up entrepreneurs can take stock of the
challenges that their predecessors faced, and how they coped with these. To fill this
void, Panteia joined forces with RSM Erasmus University2. In a collaborative effort with
62 master students of the 2014-2015 cohort in Strategic Entrepreneurship, a
challenge was launched in which teams of students explored the challenges and
strategies of entrepreneurs in emerging industries. Each team conducted a desk-
research, a literature review and a range of in-depth interviews with incumbent
entrepreneurs. Their best reports can be found here3.
In chapter 1, Barre, Bilyachenko, Domke and Fodor deal with challenges in the
connected health industry. Beyond an industry overview, they elaborate on the
external and internal challenges that entrepreneurs face. In chapter 2, Cubizolle,
Hulskorte, Kruijsen and Melkert reveal the practices of local exchange trading systems
(LETS). Drawing on a range of interviews they identify a nine-step procedure to start-
up a new LETS. Finally, in the third chapter Derks, van den Heuvel, Onwuachu and
Wagener go into the details of flexible office spaces – providing an overview of current
business models found in this emerging industry, and again the challenges and
strategies that incumbent entrepreneurs have applied.
Industrial information systems reliably reveal the opportunities that entrepreneurs
pursued in the past. For future opportunities, however, the kind of work presented
here is highly valuable. The chapters will inform those who are eager to start similar
ventures, and inspire all who are concerned with tomorrow’s business.
Jeroen de Jong
Academic director MSc Strategic Entrepreneurship at RSM Erasmus University.
1 Shane, S.A. (2005), Finding fertile ground: Identifying extraordinary opportunities for new ventures, Pearson:
Upper Saddle River, NJ. 2 We are grateful to Ton Geerts (Panteia), Victor Straatman (RedKiwi) and Martin Luxemburg (Erasmus Centre
for Entrepreneurship) for jurying the submitted reports. 3 Beyond the industries reported here, students investigated 3D-printing, Mobile app development, Online retail
by farmers, Crowdfunding, Cloud computing, Ecological restaurants, Biological food webshops, Social media services, Dance festivals, Wellness centers, and more.
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1 Connected health
Jonas Barre, Max Bilyachenko4, Chris Domke, Akos Fodor
Summary
We are currently witnessing the onset of a health care revolution that comes under
the umbrella term of connected health. This “buzzing” field is expected to grow from
USD 2,5bn in 2013 to USD 26,5bn in 2017. The industries that are part of connected
health, namely Services for health professionals, Health Management, and Prevention
and Wellness, differ mainly in their respective target groups (B2B vs. B2C), their
maturity and growth prospects as well as different levels of uncertainty to enter. As
prevention and wellness is the most mature segment it currently offers the lowest
level of uncertainty. The other two segments are primarily held back, as the role of
privacy in health is still unclear and traditional health care players are reluctant to
endorse new solutions.
When entering the field of connected health an entrepreneur has to be aware of
industry specific challenges and their solutions. According to our interview partners
and conducted desk research these can be grouped around five major topics: (1)
Customer development includes the low awareness of customers about the availability
of resources as well as how to find them, the need to differentiate the product
according to stakeholders involved, and customer’s resistance due to privacy
concerns. (2) Industrial legislation & consolidation includes the advantages of having
an app and device as well as being integrated with other manufacturers’ solutions.
Additionally, the need to carefully review regulation is key here. (3) Product
development related concerns include the need to find the right developers and think
about manufacturing challenges in advance. (4) Market entry is facilitated using a
freemium model or in-app purchase for apps, maintaining a premium brand image,
picking an ASO-friendly name, using social media and AdWords and finally contracting
with distribution and strategic partners.
However, overcoming internal challenges is also vital to a firm’s success. Our
identified solutions can be grouped around five key areas: (1) Founding the firm
includes the need to choose co-founders with similar vision and commitment as well
as diverse skill sets. (2) Building and managing your team promotes experimentation
and failure-tolerant culture as well as balancing power within the management team
for efficient decision-making. (3) Managing cash flow for survival hints at several boot
strapping techniques, careful choice and managing of investors. (4) Resource
allocation over time focuses on developing the business instead of the product.
Additionally, building a user reference case can substantially help to gain sales
momentum. (5) Prediction and control highlights the importance of not getting
trapped with conventional planning and instead building a system in place that can
respond to a wide range of contingencies.
“The digital world has been in a separate orbit from our medical cocoon, and it’s time
the boundaries be taken down.” – Eric J. Topol (American cardiologist, geneticist, top
10 most cited medical researchers)
4 Corresponding author: [email protected]
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1.1 Introduction
What is connected health and why does it matter?
We are currently witnessing the onset of a health care revolution. While health used to
be the domain of a few select specialists, people no longer accept the trench between
knowledgeable experts and passive patients. Instead, many people assume a much
more active role in their own well-being. This revolution comes under the umbrella
term of connected health and is fuelled by technological advances such as the ubiquity
of smartphones and dropping sensor prices. Consequently, a host of completely novel
products have recently hit the market, which are often hair thin close to our bodies
and range from personal to very intimate.
What is in this report for me?
This report not only presents the vast business opportunities connected health offers,
but also the unexplored risks that would-be entrepreneurs need to carefully consider:
On the upside, the emotional aspect of this new technology has the potential to
trigger high adoption rates – thereby increasing overall health of the population,
relieving the ever-increasing pressure on health care systems worldwide, and offering
substantial turnover for alert entrepreneurs. On the downside, new ventures are still
faced with high levels uncertainty, as societies have not yet provided necessary
legislation (e.g. solving the liability issues that start-ups are faced when developing
novel healthcare solutions) and infrastructure to support the connected health
revolution. Furthermore, industry dynamics might lead entrepreneurs to start their
venture in market segments where uncertainty cannot be minimized effectively as
elsewhere.
How is this report structured?
The objective of this report is to equip nascent entrepreneurs with the necessary
insights and tools they need to have in order to successfully launch and manage their
startup in the early phase of their development in that “buzzing” industry. To do that
we have interviewed eight entrepreneurs in the connected health industry and
combined their first-hand experiences with industry data and academic theory.
1.2 What is connected health?
Just like high-tech, connected health is an umbrella term. That means they both
incorporate a wider array of industries that have the same context, but are rather
heterogeneous in terms of their target customers, cost structures and competitive
landscape. When looking at connected health three industries can be identified (Figure
1.1)5. There are three dimensions to the connected health ecology: Industry segment,
adoption of apps and devices, and target groups (traditional health care providers vs.
end consumer/patient). These three industries differ regarding their maturity and
growth prospects.
5 Wragge & Co. (2014). Wragge Connected Health White Paper.
Retrieved from http://www.echalliance.com/echalliance-and-wraggeco-launch-connected-health-whitepaper/
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Figure 1.1: Connected health at a glance
Source: research2guidance, 808 apps from Apple App Store, Google Play, BlackBerry App World and Windows Phone Store (March 2014)
When looking at the industry hype cycle (Figure 1.2) we can say that the disease
prevention and wellness (DPW) industry is far more advanced than the rest. Out of
approximately 100.000 published apps on the major platforms iOS and Android 70%
belong to the DPW category6. This might be triggered by less uncertainty for start-ups
in the B2C market where there is a lower degree of regulation with regards to privacy
and health related issues (more on that later).
Figure 1.2: The Gartner hype cycle
On the other hand, health management and services for health professionals are right
in the trough of disillusionment7, as first reality checks are done by the health care
system, especially for monitoring and patient self-management8.
Key features of the connected health industry
The connected health app market currently amounts to USD 4bn and is expected to
grow substantially to more than USD 26bn by 2017 (i.e. CAGR of 90%): see Figure
1.3. Much of that growth is expected to come from connected health products and
services in the B2B market9.
Currently, the main sources of revenue are services, pay per download and device
sales. However, this distribution will shift towards services as health management is
expected to grow. Considering these tremendous growth rates, is connected health
6 Research2guidance (2014). mHealth-App-- Developer-Economics-2014.
Retrieved from http://mhealtheconomics.com/mhealth-developer-economics-report/ 7 Gartner (2014). Gartner’s 2014 Hype Cycle for Emerging Technologies Maps Out Evolving Relationship
Between Humans and Machines.
Retrieved from http://www.gartner.com/newsroom/id/2575515 8 Health Populi (2014). Health on the 2014 Gartner Hype Cycle. Retrieved from http://healthpopuli.com/2014/09/02/health-on-the-2014-gartner-hype-cycle/ 9 Research2guidance (2014), op cit.
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the way to go? To answer that question, the next section provides a closer look at the
drivers and blockers of growth in the connected health movement.
Figure 1.3: Global connected health market revenue in USD (2013-2017)10
1.3 What are the major trends in connected health?
What growth pattern can be expected across dif ferent industries?
Connected health will not grow evenly across all its industries, because each is
influenced differently by the industry’s drivers and blockers – as will be illustrated
below.
Figure 1.4: Drivers and blockers by industry
10 Adapted from research2guidance (2014), op cit.
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So what makes DPW attract ive r ight now?
First of all, the DPW industry is the most mature of the three. Its growth is stimulated
by an ongoing change in lifestyle. The other two segments are held back by two main
reasons: (1) The role of privacy in health is still unclear. There is no legislation and
infrastructure in place to give protection to companies providing novel health related
solutions (e.g. insurance)11. (2) Additionally, doctors hesitate to endorse new
solutions, because they fear a loss of power and overflow of information from the
empowered consumer. According to insights from our interviews it will take some
more time to resolve these issues, which is in line with industry growth estimates.
Is it advisable to start a venture in the “buzzing” f ield of connected health?
You would be ill-advised with a categorical “yes”, but there are numerous
opportunities for entrepreneurs. According to our research and interviews the market
is growing, but the industries are not growing at the same speed and a lot of issues
have not yet been resolved. Furthermore, a lot of that growth depends on the
assumption that the B2B market will enter the next maturity phase. Consequently, we
can say that there are a lot of opportunities in the market but you need to choose
your spot wisely.
What can I expect in the short term if I enter the connected health industry
r ight now?
We currently see many hot-headed start-ups storming in to grab a share of the
“buzz”, especially in DPW. Not surprisingly then, DPW is still a very fragmented
industry, which might indicate a shakeout in the coming years. The smart
entrepreneurs will closely monitor customer preferences through existing successful
and unsuccessful products. As it turns out, many startups in DPW actually fail to meet
customer needs: For example, only 28% of respondents of a US study are fully
satisfied with the existing solutions in mobile health12. Until adequate regulatory and
legal solutions have been developed for the B2B market, we would be careful to enter
this market even though it promises high upside potential in the long-term.
How are current players differentiat ing themselves?
Connected health app publishers could be categorized into six main groups (Figure
1.5).
Figure 1.5: Overview of differentiators
11 BCG (2012). The Socio-Economic Impact of Mobile Health.
Retrieved from https://www.bcgperspectives.com/content/articles/healthcare_payers_providers_global_ health_socioeconomic_impact_of_mobile_health/ 12 Booz&Company Inc., 2013, op cit.
12
We can see that established healthcare players and helpers under-perform in two
ways: First, they are less likely to generate any money with the development of their
apps. Second, they are less likely to publish really successful apps (i.e. >1m USD in
revenue). The opposite holds true for connecters and medical specialists. They
represent a bigger share of “millionaires” relative to those other groups. One could
reason that leveraging medical know-how as well as adopting a strategy that aims at
to create value-rich apps by enabling connection to other apps, sensors and databases
offer higher chances of being successful.
1.4 External Challenges: need-to-know to start a new venture
Starting a new venture is never easy. However, today’s entrepreneurs have access to
more tools and resources than ever before, such as crowd-funding websites or pre-
made mobile app templates. We interviewed eight connected health entrepreneurs
about their ventures ranging from the very early stage up to the growing, one billion
dollar business. Just like in any sector, you have to cope with a diverse set of
business-related challenges. We have grouped our key industry-related findings
around five major topics. These are the most crucial business areas, where most of
the founders without industry specific background may overlook some external
challenges. Every business is different and there is no ultimate approach to starting a
venture in connected health. However, based on our industrial analysis and
interviews, there are five common business areas that logically follow a sequential
order, namely (Figure 1.6):
Figure 1.6: Five industry-specific business areas
Consider these aspects when creating your venture, and your chances are much
higher to create a successful business, also in the long run. Let’s dive into the most
important findings and possible takeaways for the five areas.
A: It a l l starts with the customer in mind
The connected health sector is an emerging market with lots of unsatisfied health-
related customer needs. But before you pursue the first idea that comes to your mind,
think about the following four issues related to customers.
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4 hot issues regarding customer needs:
1. Low awareness
2. Need for differentiation even if the customer segments require the same solution
3. Resistance
4. Privacy
Awareness is still developing. Connected health is still a magical word. Globally,
still only a few would have a vague idea what it means and what sort of devices and
services it actually covers. Awareness of this sector is rapidly growing, but still
relatively low. Consequently, your potential customers might not be able to clearly
articulate their needs, or they would seem really enthusiastic about a product idea
that they will not buy or download in reality, and vice versa.
Before investing a large amount of time and money into development, try to show and
familiarize them with some existing solutions, which are at least roughly similar to
your concept. Create mockups, use mobile app emulators or build a really simple,
even non-functioning device and ask some potential customers to test whether they
would actually use it in their everyday life.
Identifying real customer needs go hand in hand with product development. It should
be an iterative process at least at the beginning. However, a continuous iteration for
every little step in the development process could be even advised against. Try to find
the product-market fit as fast as possible, and even if it’s not 100% sure, go and build
your solution, before someone else will. This is a turbulent sector. If your idea is an
application, it is likely that someone else is already working on that idea. If it is a
tangible device, your chances could be better, as it is investment-heavier and more
complex, discouraging lots of wannabe entrepreneurs to exploit it, but still there is no
time to lose.
The need to differentiate. It could be the case that you create your solution for a
few customer segments, like practitioners and patients, and based on their feedbacks,
they may seem to need exactly the same set of features. In such case, keep it in mind
that some customer groups wish to differentiate themselves from others. Taking the
above mentioned example – practitioners and patients, it is highly likely that
practitioners would not want to use the same app or device that patients use at home.
Why so? It’s simple. Connected health and simply the internet make patients more
and more aware and knowledgeable about their own body and health. Some doctors
fear losing their superiority. Using exactly the same apps and devices as patients do
may picture them unnecessary. If you create a product for several customer
segments, do your best to differentiate it somehow. It may be extra features, different
user interface or simply the brand. It may help you gain acceptance more easily.
Relating to customer awareness, keep in mind that health concerns are more common
among the elderly. They grew up in a less technology-intensive world and got used to
a more conservative health care system. For such people, who may be your ideal
target group, explaining the benefits of a smart phone mobile app that lets them
consult their doctors even without leaving their home, could be really challenging.
Developing a full stand-alone device might be a better direction as the elderly
generation has the lowest smart phone penetration rate. Giving another example,
where awareness or readiness are lower, health care institutions may be also less
progressive.
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Prepare for resistance. You may fully understand the needs of a customer group,
but it does not mean that your highly technical solution for such requirements fits.
Iteration is a key at early product development. Get ready for some severe resistance.
Connected health is really promising, however, it still needs a conceptual change.
Be ready to answer privacy questions. Besides distancing themselves from new
technology streams, privacy is an often mentioned concern. Our health is really
private and personal. Sharing some information in the cloud, or just even
anonymously participating in surveys make lots of people step back. If you develop a
connected health solution, you probably have to give a fulfilling answer to the fears of
privacy issues, too.
B: Okay, I know what customers want and what to develop. Can I start?
Before you start development, take a step back to understand the industrial
circumstances. Considering some of the key industrial factors could modify your plans
and even the final product.
4 important takeaways regarding the industrial changes:
1. Have a device, not only an app
2. Integrate your solution with others’
3. Scan the regulation
4. Keep an eye on big data
Tangible devices can have tangible benefits. Launching only a web or mobile app
carries two major risks. First, the risk of imitation is quite high, because the barrier of
entry is much lower. Second, very few succeed in monetising a single application in a
really profitable way, meanwhile a decent margin can be realised on gadgets and
wearables. Distribution could be challenging, but we’ll discuss that at the market entry
section.
Integrate, integrate and a thousand times integrate! Many made a fast success
story with one single app or device, but almost none survives without industrial
integration. The lone wolf seems to have no place in the long run. It’s connected
health, think about it. The name of the main phenomenon is not accidental. As our
body is an integrated whole, the wider set of feedbacks and metrics, your solution can
provide about people’s health, the better.
Consider how smartphones killed the need for many simple, stand-alone digital
cameras, as soon as they integrated photo and video-making. If you have only one
specific connected health solution, you have 3 future directions. You continuously add
additional features. You integrate your solution to a wider range of solution-providers.
Or you’ll be overrun after a while by a larger player. For a continuous development in
many fields, one needs substantial resources. Being the best and catchiest in one
specific field, then integrating to others, may make the most logical path for most of
the new entrants. Convergence, open protocols and APIs, in addition to strategic
partnerships are more and more common. Keep an eye on them, and your chances are
higher to have long-term success as a smaller slice of a fast growing industrial cake.
Red lights from regulation and liability issues. Health is by nature a very
sensitive topic. As such, regulations are strict and manifold. You may get a permission
or certification in the US easily for a smaller charge, however, be sued for any minor
liability issue, while in Europe, the regulatory frameworks hold you up for months,
even years, and vice versa.
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There is no obvious and standard legal framework yet, and chances are this will not
change in the immediate future, although regulatory environment in health care can
change fast. Before starting product development, consider regulations not only in
your test market, but also possible expansion markets. This may be a go/no-go
decision, or simply modify your actual product development.
If our own health is so private, no one collects data about us. Correct? That’s
partly correct. While only a few collect data directly, many do so anonymously. As
connected health gets more and more interconnected, big data and its utilisation is set
to become a hot topic soon.
C: Customer needs identif ied. Industria l chal lenges taken into account. Let’s
develop the product!
Main development-related concerns:
1. Specification is vague
2. True innovation always holds some risk
3. You choose wrong developers
4. Not ready for manufacturing
Specifications: The devil in the details. People especially without technology
background believe development is the easiest part. You tell the developers what you
want, magic happens and you’ll get it on time and on the agreed budget. There are
lots of reasons why reality is often different. Let’s see the four most common ones.
Vague specifications cause slight misunderstandings that escalate. Not double, but
even triple-check that you are on the exact same page. Screenshots, mockups,
wireframes and early customer feedbacks can help a lot.
The risk of the innovator. If you develop something brand new, even the most
experienced developer cannot tell you exactly how much time it will take. It’s just
impossible. They can estimate to the best of their knowledge, but still, the more
innovative outcome you want, the higher the chance for unforeseen constraints. In
highly complex projects, get ready for some slippage. Sometimes even 2-3 times
longer than officially planned with an additional 30-40% budget increase. Do your best
to minimize risk, but bear in mind and be ready to deal with unplanned issues in the
development department.
Invest into finding the right developers. Choosing the wrong developers is
common. Find the right ones and you will shine. As a non-techie, you will never be
able to tell, if a developer does their job in a nice and professional way. Asking or
even hiring an expert for the selection process or some quick follow-up sessions could
be worth extra effort and costs. Finding the right developers as contractors or as team
members saves your money, time and sometimes the whole project.
Furthermore, if you plan to develop hardware as well, manufacturing is of key
importance. If your developers are experienced in manufacturing and mass
production, that helps. But still, normally the first functioning prototype is not ready-
made for mass production. You need to allocate some time and money to get ready for
large scale production. It takes some readjustment on your prototype.
Manufacturing difficulties. Lastly, manufacturing probably has to be done in China.
You have mainly three options: You can find the appropriate manufacturer, however,
plans often get stolen and reproduced at a lower price. You may have patents on your
product and that helps, but workarounds are just as common.
16
If your product rocks, someone will follow and try to imitate you, but do not create
your own competitors at day one by choosing a wrong manufacturer. You can ask a
contractor with local knowledge and experience to help you find the right partner.
Lastly, there are some trustworthy manufacturers, who also brand their own products,
but they offer those for white-labelling.
D: Let’s assume your product is ready to ship. How do you enter the
market?
Marketing how-tos in connected health:
1. Use freemium model or in-app purchase for apps
2. Maintain premium brand image
3. Pick an ASO-friendly name
4. Use social media and AdWords
5. Contract with distribution and strategic partners
How do you price your product and what revenue model to use? Finding the
most suitable revenue model and pricing is not easy. The willingness to pay for
applications is quite low, although higher than in case of other app sectors. However,
still it takes a long time to build a lucrative revenue model only on applications.
Freemium model and in-app purchase are the most common choices.
Maintain premium brand image. However, the odds to make great money on
devices are better, though the prices generally tend to fall mainly for two reasons.
Firstly, low quality copycats enter the market. Secondly, distributors that sell devices
try to keep prices low as their main competitive advantage. To stay profitable,
maintaining a premium brand image and keeping prices high still may be a good
strategy to follow.
Set up several distribution channels! E/m-commerce booms nowadays, but in
connected health, you may try to combine several channels. If you have just an
application, that’s alright, but that limits your options. A catchy, ASO-friendly name
(App Store Optimisation) can save your life and your early marketing budget as well.
With a handy application and a sticky name that people search in app stores, you can
generate hundred thousands downloads without spending even a penny on marketing.
Social media is essential as well. Facebook, Twitter and with some hack even
FourSquare offer app-install ads. AdWords are also handy for app promotion.
Contract with distributors. When you strive to distribute also a device, you may
bear in mind that for most of our interviewees, selling only via a webshop has never
generated enough traffic and revenue. It’s an important channel, but still, finding
wholesalers and well-known electronics distributors could be the key. Although this
direction erodes your margin, the larger volume may result in a bigger surplus. To
approach main health care providers, like hospitals, medical centres and associations
is not an easy way either, because of their conservativeness and possibly outdated
technologies, but it is worth the efforts. Some even try to cooperate with
telecommunication companies or phone/tablet manufacturers to get their apps default
on their devices or to get an additional sales channel.
E: Your product seems successful, but always stay alert and innovative!
And last but not least, bear in mind that it is a turbulent industrial sector. You always
have to check the latest changes. In the meantime, be innovative and proactive.
Continuous development is needed to stay ahead of the competition.
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In connected health sector, product lifespans have radically decreased from 5-6 years
to around 18 months. Analyzing data about the product usage gives you guidance to
where to develop further. However, in some cases such as mobile applications, even
the best app-tracking solution does not uncover all the underlying customer habits.
For instance, you will never know why someone deletes your app. It’s just gone.
Relying on purely automated data collection is normally not enough to make wise
decisions about future development.
1.5 Internal Challenges: Learning from active entrepreneurs
Entrepreneurs and managers encounter internal challenges in their “backyard and
kitchen”: with their founding partners, teams, and cash flows. This kind of challenges
may be overlooked by those entrepreneurs and managers who tend to focus solely on
external challenges and attribute their problems and failures to unexpected external
events beyond their control. However, it is the inner machinery of start-ups that
ultimately differentiates successful ventures from failures.
As most of our interviewees are start-ups in their early stage of development, the
majority of their internal problems are understandably related to five key areas: A)
founding the firm, B) building and managing the team, C) managing cash flows for
survival, D) resource allocation over time, and E) prediction and control. Below we
present our advice on how to deal with the most important internal challenges that
connected health start-ups encounter in their early development phase.
A: Founding the f irm
Find founding partners with similar vision and ambition levels. Otherwise, as soon as
your company encounters its first major challenge your “divorce” is inevitable.
Agree beforehand with the other founding partners on the level of their commitment.
Time and effort devoted to your business and a fair balance of commitment among
managing partners is a major consideration and a deal breaker for you potential
investors.
When selecting your partners, ensure to avoid an unbalanced mix of managing
partners in terms of their skills and capabilities. Too often we encountered a case
where all managing partners are creative and none is pragmatic, which led to
unreasonable waste of time because of managing partners’ being too creative and
unable to stop where they ought to. Do not treat your business as a hobby –
otherwise it will remain a hobby forever.
B: Building and managing your team
If you have an opportunity to start your venture with a team you have worked with
previously – just seize it. Having a familiar team will give you a substantial head start
and help keep internal challenges to a minimum.
Heavily use networking as your recruitment tool. However, be very careful to avoid
the pitfall of your start-up being just “friends-and-family” because that definitely
ensures a loss of balance and objectivity in your team. We would suggest keeping the
share of “friends-and-family” in your team as low as possible.
In case that there are multiple managing partners in your team, we urge you to have
a clear division of responsibilities starting from day one. There must be one leader
who makes final decisions, not a “multiple-headed dragon”. Otherwise a great many
decisions will cost you much more time, money, lost opportunities, and wounded team
morale than you could imagine.
18
Promote experimentation and failure-tolerant culture in your team. Connected health
is a young industry, and products and markets are far from having found their perfect
fit there. Do not assume you know best what to do and where to go – you don’t. Let
your team experiment and fail. The main purpose is to learn – and, hopefully, to
create a product that at least temporarily fits the market of your choice.
Approach your team from a dynamic perspective. Assess what skills and capabilities
you need in your team to deliver each of your venture’s key milestones. Our
interviews show that you often have to change your team composition once your
company has passed an important milestone. Be warned: the contribution and
perceived importance of your “old team” members may decrease after they deliver a
milestone, which may be a strong demotivation for them going forward. Be careful not
to lose your “old guys” after you beef up your team with new employees.
Being the CEO, you should have the guts to delegate as much and as soon as you can.
Do not be a “one-man orchestra” – it is quite often a deal-breaker for you potential
investors. Do not assume that you cannot find cheap professionals – you can and
ought to. Be prepared for “dirty” hands-on work – instead of “pitching the grand
vision” and working mainly on the strategy. Your company has minimal chances to
take off as soon as you expect and will not provide you the privilege of just issuing
orders from your “mountain peak”.
C: Managing cash f lows for survival
Make do with less cash. Hire students or recent graduates, who are less experienced
but also less expensive. Do not overrate experience: Connected health is a young
industry that needs a lot of experimenting. “Old tricks” of experienced professionals
may not work, therefore you may not risk a lot when you employ students. Provide
your team with non-financial rewards and a sense of certainty, and they will be ready
to accept less cash
Promote the values of belonging to a group; build a nice working environment. Simple
and frequent “thank you” messages work wonders – making you a “good guy” worth
working with, making people feel proud for themselves. Sweat equity is never enough.
Do not leave your team without guidance for a moment – your team’s uncertainty
about your immediate goals is a strong demotivation. Employee uncertainty is much
worse that a lower salary. Keep beating your “battle drum” even as your company
keeps stumbling.
Employ smart funding techniques. When choosing your founding partners, other
factors being similar, give preference to those potential partners who have ongoing
streams of revenue somewhere. If your team is not 100% utilised, consider earning
temporary revenue from external projects not related to your business. For example,
one of our interviewees leverages IT skills of their team by taking on short-term
consulting jobs. Participate in start-up competitions and accelerators. Two of our
interviewees succeeded in obtaining substantial amounts of cash from such events.
When participating in accelerators, consider your mentors as your would-be investors.
One of our interviewees turned their mentors into lead investors who also brought
along other investors. Apply for industry awards. One of our interviewees won multiple
awards, which gave them a lot of publicity and credibility with their future investors.
Manage your investor relations properly. Be careful not to deal with a large group of
small investors – associated costs are likely to outweigh benefits.
19
One of our interviewees likened that to a problem of “hoarding cats”: all of a sudden
you need to cope with a multitude of conflicting ideas and expectations, which might
paralyse your business. Being the CEO, be persistent in building a trusting and
enduring relationship with your existing investors. Keep them up to date about your
most pressing problems and your immediate plans. Do not leave your investors “home
alone”.
D: Resource al locat ion over t ime
A great many start-ups make the rookie mistake of constantly improving and polishing
their product before they expose it to potential customers. We urge you to adopt the
concept of Minimum Viable Product instead (see Box 1.1).
Box 1.1: Minimum Viable Product (MVP)
"The MVP is that version of a new product which allows a team to collect the maximum
amount of validated learning about customers with the least effort."13
An MVP is a product possessing just those core features that allow the product to be
deployed, and no more. The product is typically deployed to a subset of possible
customers, such as early adopters that are thought to be more forgiving, more likely
to give feedback, and able to grasp a product vision from an early prototype or
marketing information. It is a strategy targeted at avoiding building products that
customers do not want, that seeks to maximize the information learned about the
customer per dollar spent.
An MVP is not a minimal product – it is a strategy and iterative process directed
toward making and selling a product to customers whereby one seeks to minimize the
total time spent on iteration.
Do not burn your resources unnecessarily – rough is enough. Please keep in mind that
product life in the connected health is short (rarely exceeding 12-18 months), and for
this reason your start-up needs to churn out new MVPs as quickly as possible. Short
lead times are a key competitive advantage in the connected health industry.
You need to set your priorities straight in the very early development stages of your
start-up. Initially, product development is much less important than business
development. Start pre-selling your product as soon as possible (even if your product
is raw or even unavailable yet). Your pre-sales effort is the best and cheapest way to
get customer feedback and develop a product that your customers need – not the one
that your team, friends and family need. Also, the earliest and roughest product
versions tend to be more easily purchased by early “eager adopters”, who are
enthusiastic to provide valuable feedback about the changes that need to be
introduced to the product. “Eager adopters” are also a cheap and smart social
communication channel to wider customer audiences.
We advise you to build a convincing use case or reference project for your product – it
is one of the best ways to convince distributors to accept your product and to create
the necessary sales momentum for your start-up.
E: Predict ion and control
The value of conventional planning and prediction in connected health is minimal
because it is a very young and dynamic industry. You cannot cope with uncertainty in
the connected health by trying to make predictions about the future as precisely as
possible. Most of the younger start-ups whom we interviewed do not attempt to
predict the future. Instead, they have a philosophy and build a system in place that
can respond to a wide range of contingencies.
13 Eric Ries, March 23, 2009, Venture Hacks interview: "What is the minimum viable product?", Lessons Learned.
20
To briefly formulate their philosophy: “To the extent that we can control the future,
we don’t need to predict it.” This kind of outlook is consistent with the so-called
effectuation reasoning that expert entrepreneurs use – in contrast to the causation
reasoning commonly used by people with a managerial mindset (see Box 1.2 for
details).
Box 1.2: Effectuation vs. Causation Reasoning
Based on a scientific study, expert entrepreneurs’ (EE) reasoning substantially differs
from that of common managers along 5 key principles:
1) “Bird in the hand” principle. EEs start from considering the available means and
imagining a possible outcome based on these. Managers do the reverse – they
first set a pre-determined goal, make a plan and try to acquire the necessary
means.
2) “Crazy quilt” principle. EEs focus on building partnerships (thus often stitching a
“crazy quilt”) whereas managers concentrate on competitive analysis.
3) “Affordable loss” principle. EEs make their choices in favour of investments that
have a limited affordable loss. In contrast, managers base their investment
choices on the expected upward potential/ return on investment.
4) “Lemonade out of lemons” principle. Manager minds try to avoid surprise as much
as possible, whereas EEs try to leverage them.
5) “Pilot in a plane” principle. Manager minds believe they can control the future to
the extent they can predict it – therefore their emphasis on prediction and
planning. In contrast, EEs believe that future is inherently unpredictable, and the
only way to control the future is to develop one’s capabilities to cope with
contingencies (i.e. put emphasis on control, not prediction).
We advise you not to get caught in the trap of conventional planning, especially in the
context of the young and volatile connected health industry. The reality will always
turn out to differ substantially from your “nice and well-thought-through” plans. Do
not waste your time analyzing and finding out the reasons for deviations from your
plans. You had better focus on getting prepared to respond to contingencies rather
than predicting and planning.
1.6 Wrap-up
To conclude, we wish to point out once more the most important findings and
takeaways regarding industrial trends, external and internal challenges, that may help
wannabe entrepreneurs and already incumbents to cope with the complexity of the
emerging, turbulent mHealth industry.
Industrial trends. Currently, we are witnessing the health care revolution, fuelled by
changes in people’s mindset to take a more active role in their own well-being, and by
technological advances. Within the broader umbrella term, ’connected health’, our
report focuses on the disease prevention and wellness app subsegment, in which
mainly B2C businesses act. This subsegment experiences even a faster-paced change
stimulated by the ongoing change in people’s lifestyle.
External challenges of the disease prevention and wellness app subsegment. 5 main
groups of external challenges were identified during the conducted interviews. As they
usually follow a sequential order, wannabe entrepreneurs have to face them one by
one.
21
Once more, let’s have a quick overlook on them, and their plausible solutions, if any:
1. Customer development. In this domain, the generally low awareness of customers,
the must for differentiation among different customer segments, the expectable
resistance from some of the stakeholders, and privacy issues must be taken into
consideration.
2. Industrial legislation & consolidation. Coping with this topic, 4 advices popped up
frequently, namely to have a device not only an app, need for integration with
other solutions, the thorough scan of regulation, and to keep an eye of the
opportunities and challenges of big data.
3. Product development along with product/market fit. Regarding the difficulties of
product development, 4 concerns often arose: the vague specification, the
reluctance on the fact that true innovation always holds some risk and
unpredictability, the wise choice of developers, and the readiness level for
manufacturing.
4. Market entry. Marketing is a general challenge for any venture, however, some
industrial specific characteristics along with advices were identified. If possible,
use freemium model or in-app purchase for apps. Maintain premium brand image
to avoid price war. Pick a really ASO-friendly name. Use social media and
Adwords. And lastly, contract with distribution and strategic partners.
5. Stay alert and innovative. mHealth sector is highly turbulent. The product
lifespans decreased from 5-6 years to 18 months. Innovation and alertness for
changes are key success factors in the mid run.
Internal challenges. Besides external challenges, internal ones await for
newcomers, too. These challenges may be generalized to lots of other industries, and
could be grouped around five main topics, namely founding the firm, building and
managing the team, managing cash flow for survival, resource allocation over time,
and lastly prediction and control. Related to the last one, it is worth re-emphasizing
that connected health is a very young and dynamic domain, thus conventional
planning and precise prediction are highly unlikely to succeed.
Our report and the given expert advices of practicing entrepreneurs can help
wannabes, planning to enter the connected health market, to get ready for challenges,
to mitigate risks, and to succeed.
23
2 Local exchange trading systems
Bruno Cubizolle, Pim Hulskorte, Ireen Kruijsen14 and Renaldo Melkert
Summary
In this contribution we describe how problems with the ‘official’ money system and a
general distrust in governments and banks caused the alternative currency industry to
emerge. The main objectives of alternative currencies are economic, environmental
and social sustainability. The focus of this report is on one of the many alternative
currencies: Local Exchange Trading Systems (LETS). LETS are community-orientated
trading organizations, which aim to promote exchange, within a self-regulated group,
through a community currency. We have interviewed 6 entrepreneurs within the LETS
industry and also asked advice from 3 experts in the field. From this information we
were able to comprise a list of the most common challenges faced by start-up LETS
and the strategies to deal with these. Main challenges are related to:
Sales & Marketing: how to gain and how to maintain members for your LETS.
Product & Development: challenges related to this category have to do with the
website, finding a fit between supply and demand and partnering up with other
businesses to promote your LETS.
Management & Organization: includes challenges such as having the right board
members, starting with a clear vision and goals, and professionalizing the
organization.
Finance & Cash Flow: obviously, this category is concerned with how to get
financing for starting your LETS. It also touches on the subject of how to pay your
active members.
In order to explain how one can handle all the challenges, we have devised a 9-step
plan for starting a LETS. The 9 steps are: 1. Formulate a clear vision and clear goals
for your LETS, 2. Find your IT guru, 3. Start with influential partners, 4. Get that
starting capital, 5. Get the first members, 6. Build the board, 7. Set up rules and
procedures, 8. Cover unfilled categories, 9. Maintain your members. This plan could
also be useful for entrepreneurs that already started, since it might show what they
missed during the start-up phase.
2.1 Introduction
In the last couple of years we have seen a lot of disturbances in the economy. We
have seen a credit crisis in the financial markets in the summer of 2007, the Eurozone
crisis since early 2009, an increase in unemployment, families who came in financial
difficulties and a lot of companies that went bankrupt. All these facts have negative
consequences for a society. This biggest cause of all these problems is money. Is
there a solution to overcome all these negative consequences when the money system
isn’t working properly? A possible solution can be found in Local Exchange Trading
Systems (LETS). LETS are one of the types of alternative currencies that are available
nowadays. Alternative currencies are available in all kinds and measures. Due to
crises with ‘official’ currencies, the industry of alternative currencies has been
emerging in the last couple of years. Experts argue that interest in community
14 Contact at [email protected]
24
currencies skyrocketed during the economic recession at the end of the first decade in
the twenty-first century15.
We conducted interviews and studied literature about the LETS industry to be able to
create valuable insights into the challenges and strategies related to starting a
business. The information in this contribution is meant to help new and established
LETS to improve their business. In addition to information about LETS systems, we
will also inform you on the ‘official’ money system and other alternative currencies.
The central question that will be answered with this report is: What should nascent
and early-stage social entrepreneurs, who intend to start or have recently started a
business in LETS, do?
2.2 The money system
This section will inform you about the money system in general. The purpose of this
section is to give you a better understanding of money in general so that you are able
to position LETS in the broader area of currency systems. Therefore we will start with
the ‘official’ money system – backed by governments – and then follow with a
discussion of alternative, recently emerged currencies.
The ‘off ic ia l’ money system
In order to understand LETS, you have to understand the current situation in the
‘official’ currency industry. Money influences our economic cooperation and increases
competition because money is rare while everybody needs it. The society that we live
in is complex. Money is an important control mechanism within that society. The fact
that money is an important control mechanism has positive and negative
consequences for society16. Money can be defined as any item or verifiable record that
is generally accepted as payment for goods and services and repayment of debts in a
particular country or socio-economic context. The main functions of money are:
Medium of exchange;
Unit of account;
Store of value;
Standard of deferred payment17.
When you think of money you are probably thinking about the Euro, Dollar or Yen.
These currencies are broadly used today as money, but if we look at history you can
see that there were a lot of items that were used as money; for example, feathers,
salt, seashells, silver and gold. While the item of exchange changed during the years,
its functions are still the same.
So how does new money enter the economy? Commercial banks are able to create
money out of nothing and thus are able to bring new money into the economy18. Most
people think the government creates money, but the reality is different. While the
name of banks may suggest differently, like The Royal Bank of Scotland, as if it is a
government bank, they are actually commercial banks in private hands. If commercial
banks are able to create new money in the economy, how does this work? The origin
of money is debt. Money is created when someone takes out a loan at the bank. The
bank takes this loan in their administration and transfers in return new money in the
15 Collom, E. (2011). Motivations and differential participation in a community currency system: The
dynamics within a local social movement organization. Sociological Forum, Vol. 26, Issue 1, pp. 144-
168. 16 Toxopeus, Helen (2014). Een @ander sort geld. Uitgeverij Jan van Arkel, Utrecht, NL. 17 Mankiw, N. G. (2006). Marcroeconomics (6th) Sixth Edition. Worth Publishers (MacMillan Education),
UK. 18 Toxopeus (2014), op. cit.
25
economy. When the loan is refunded the money goes out of the economy5. If money
can be created through commercial organizations then there must be more
possibilities to create new money. That is exactly what is happening right know.
Alternative currencies are on the rise. One of them is LETS. Local Exchange Trading
Systems provide the same functions as the ‘official’ money system. LETS make it
possible to exchange goods and services with a unit of exchange. The magnitude of
‘official’ money like Euros is of course bigger than local trading systems. Nonetheless,
LETS can be a good complementary system besides other currencies. The industry of
alternative currencies is still an emerging one. The future wil l teach us how this
develops.
Alternative currencies
Next to the ‘official’ currency that is backed by the government there are a lot of
different kinds of currencies. We will call these currencies alternative currencies,
because they give people a choice between different currencies. An alternative
currency is a method of exchange that is different from the exchanges that usually
take place in the economy: the ‘official’ currency or traditional currency. There is no
clear distinction about the different definitions yet. If you talk about currencies
besides the ‘official’ currency the following terms can come up: alternative currency,
complementary currency, community currency and local currency. In economics, a
local currency, in its common usage, is a currency not backed by a national
government (and not necessarily legal), and intended to trade only in a small area.
With a community currency we refer to a type of currency that is used by a group with
a common bond. The term alternative currency is not really applicable to a specific
type of currency because every currency besides the ‘official’ one is basically
alternative. The same holds for complementary currency. Every currency that exists
as a supplement to the ‘official’ currency is complementary. At the moment there are
several alternative currencies in the world. We will discuss some of them to give you
an impression of how wide-spread they are:
Bitcoin: Bitcoin is one of the most famous alternative currencies available. Bitcoin
is electronic money that uses open-source-software. Via the internet people can
send and receive Bitcoins to buy or sell something. The process that creates new
Bitcoins is called ‘mining’.
BerkShares: This alternative currency is local because it’s only accepted in the
Berkshires, a region in western Massachusetts (USA). At the moment 400
Berkshire businesses accept the currency, and 13 banks serve as exchange
stations.
Starbucks Stars: People know Starbucks from the coffee they sell. What few
people know is that they also have an alternative currency. Starbucks Stars is a
currency that is not limited to a particular geographic locality, but to the corporate
ecosystem that is Starbucks.
Linden Dollars: Linden Dollars are usable within the online community Second Life.
Here, the users can buy the Linden Dollars with traditional currency or earn them
by selling goods or offering services to other Second Life users19.
In recent years, partly because of the internet, there have been a lot of changes in
the money system. Where people used to pay with the currency backed by the
government, you now see a shift that people are more willing to accept alternat ive
currencies. The main objectives of alternative currencies are economic sustainability,
environmental sustainability and social sustainability. This chapter will focus on a
19 Gross, J. (2013). 10 alternative currencies, from Bitcoin to BerkShares to Tide | TED Blog. [ONLINE]
Available at: http://blog.ted.com/2013/07/25/10-alternative-currencies-from-bitcoin-to-berkshares-to-
sweat-to-laundry-detergent/. [Accessed 18 October 2014].
26
specific alternative currency: the Local Exchange Trading System or LETS in short. In
the next part we will elaborate on this alternative currency.
2.3 Description of the LETS industry
An emerging industry
LETS are community-orientated trading organizations, which aim to promote
exchange, within a self-regulated group, through a community currency20. LETS have
been described as a “sophisticated extended barter system”21. Using LETS to exchange
goods and services is more effective than barter. Barter implies direct reciprocal trade
between two parties8 – exchange takes place when there is a match between supply
and demand. If there is no match, the exchange will not take place. LETS tackles the
challenge of mismatch between demand and supply in barter systems, since the unit
of exchange can be saved and used for exchange later. To be efficient, LETS require
enough trade within the community. Due to its “use value”, LETS favors exchange
between its members. The unit of exchange – the currency in place within the
community – needs to be used within the community, since it has no value outside
this community. Moreover, researchers argue that the unit of exchange cannot be
stored as a speculative tool, since the system cannot guaranty its existence in the
future22. The value of the LETS currency can be matched to an “official” currency.
However, a wide survey of LETS in the UK shows that a small minority of LETS fix
their currency to the sterling pound - 13%; whereas 79% have their currency floating
against the pound and 13% fix their currency unit on a time based system 23.
LETS were pioneered in British Columbia (Canada) in 1983 by the community activist
Michael Linton24. He issued a local currency – the green dollar – tied to the Canadian
dollar at a rate of 1:1. This local currency was established as “emergency money” to
face the recession. Pundits have concluded that LETS emerged from community
groups, and spread to Europe, New Zealand and Australia during the 80s and 90s
through green activist network25. Our field project is focused on LETS in the
Netherlands. In the Netherlands, the first LETS system was “Noppes”. Based in
Amsterdam, Noppes was set up in 1993 as an initiative of Strohalm. Strohalm is an
NGO that aims “to develop innovative projects to tackle the underlying economic
causes of environmental degradation and social problems such as poverty, long-term
unemployment and consumerism”26. LETS were introduced as a solution to these
challenges in the Netherlands. In 2000, there were around 90 Dutch LETS. Most of
them were started after 1995. Strohalm supported their development and connected
the different systems27. In 2014, roughly 260 LETS were reported worldwide. The LETS
industry is emerging. The number of LETS increased by 800% since the mid-90s28.
20 Hepworth, S. (2002). Local Exchange Trading Systems and Impact Assessment – Application Guidance Notes,
University of Manchester, pp. 1-20. 21 Bebbington, J. (2001). Local Exchange Trading Systems (LETS): An introduction. Social and
Environmental Accounting, Vol. 21, Issue 1, pp. 12-18. 22 Hepworth (2002), op. cit. 23 Croall, J. (1997). Lets act locally: The growth of local exchange trading systems. Gulbenkian
Foundation Report, Calouste Gulbenkian Foundation, London, pp. 1-120. 24 Longhurst, N. & Seyfang, G. (2013). Growing green money? Mapping community currencies for
sustainable development. Ecological Economics Vol. 86, pp. 65 – 77. 25 Seyfang, G. (2002). Tackling social exclusion with community currencies: Learning from LETS to Time Banks.
International Journal of Community Currency Research, Vol. 6. 26 Strohalm Foundation History [ONLINE}. Available at: www.strohalm.nl. [Accessed 18 October 2014]. 27 Hoeben, C. (2003). LETS’ be a community: Community in Local Exchange Trading Systems – A Dutch
study. ICS-dissertation, Groningen. 28 Complementary Currency Resource Center - ccDatabase. [ONLINE] Available at:
http://www.complementarycurrency.org/ccDatabase/. [Accessed 18 October 2014].
27
Object ives
Community currencies aim to deliver services that mainstream cash cannot. They aim
to achieve sustainable environmental, economical and social objectives29. LETS,
through their main objectives, contribute to this effort. LETS aim to achieve economic
sustainability. First, advocates claim that community currencies can increase one’s
purchasing power and economical activity, since national currencies are a scarce
asset. Economical inactivity is generally due to one’s lack of cash30. People, who are
unemployed or rely on low income, can be active in the LETS and earn goods and/or
services. Second, since LETS currency does not have a store value – members cannot
speculate on the currency - LETS create local economic circuits and prevent wealth to
be “siphoned off” towards international markets31. Also one of LETS’s main missions is
to promote community building and social justice. LETS advocates promote the social
benefit of LETS for economically “marginalized”32 people, i.e. the retired, unemployed,
underemployed, isolated, etc. Since the members of the LETS exchange
goods/services within their community, they get tighter social networks. Advocates
stress the benefit of LETS as a vehicle for encouraging exchange beyond employment.
Also, LETS members can participate in informal work, proving their worth in economic
activity and thus boost their self-esteem33. LETS improve the employability of their
members and can be a seedbed of self-employed business ventures34. In most cases,
LETS provide interest-free credit to their members when they join, to start exchanging
immediately.
Pundits have moderated the LETS ability to achieve their main objectives. LETS are
not alternatives to the formal monetary system but complement it20. LETS
acknowledge that the formal economy, through its money system will provide the
large majority of goods and services35. From the evidence available, scholars tend to
argue that the social equity and community building achievement of LETS are more
significant than their economic impact36. Finally, in reality, members of LETS systems
tend to be more appealed by the desire to build a social community than by financial
gains23. Economically “marginalized” appear to struggle to benefit from this social
gain. LETS enrolment is generally developed by word of mouth. Isolated and
unemployed members tend to suffer from their initial poor social connections23. In the
Netherlands, the data reveals that LETS members are usually employed in a secure
job. Still, 25% of the members depend on social benefits. Typically, Dutch members
are well educated – higher educated than the Dutch average population. Typical Dutch
member of LETS seek social reward through community attachment based on relations
of trust. LETS were started in the Netherlands for social purposes, and most of the
founders embrace this vision. Members exhibit idealistic motivations, followed by
social motivations. Economic motivations are least important37. Regarding the
missions of the LETS and the structure of the industry, we describe LETS as social
ventures. Mainly, LETS companies are not-for profit. Though, we observe some hybrid
types38 - enterprise goals are chiefly social, combined with for-profit objectives. We
29 Longhurst & Seyfang (2013), op. cit. 30 Collom (2011), op. cit. 31 Bebbington (2001), op. cit. 32 Collom (2011), op. cit. 33 Pacione, M. (1997). Local Exchange Trading Systems – a rural response to the globalization of
capitalism? Journal of Rural Studies, Vol. 13 Issue 4, pp. 415-427. 34 Williams, C., Aldridge, T., Lee, R., Leyshon, A., Thrift, N., & Tooke, J. (2001). Bridges into work? An
evaluation of Local Exchange Trading Schemes (LETS). Policy Studies, Vol. 22, Issue 2, pp. 119-132. 35 Crowley, E. (2004). Local Exchange Trading Systems: Globalising rural communities. Institute for
International Integration Studies, IIIS Discussion Paper no. 37, Trinity College, Dublin. 36 Peacock, M.S. (2006). The moral economy of Parallel Currencies: An analysis of Local Exchange
Trading Systems. American Journal of Economics and Sociology, Vol. 65 Issue 5, pp. 1059-1083. 37 Hoeben (2003), op. cit. 38 McLean, M & Peredo, A. M. (2006). Social entrepreneurship: A critical review of the concept. Journal
of World Business, Vol. 41, pp. 56 – 65.
28
regard the founders of LETS as social entrepreneurs since they aim to create social
value while exhibiting the willingness to take risks – investing time and money.
Sample
To carry out our survey, we interviewed 6 LETS based in the Netherlands. In our
sample, 50% of the LETS were created in the mid-90s, 33% are roughly 3 years old,
and 16% are 1 year old. The number of members ranges from 70 – 66% – to 500 –
16%. 16% of our sample has 100 members. Finally, the number of employees –
generally volunteered members paid in the unit of exchange – is linked to the size of
the company, ranging from 3 to 10.
Future perspect ive
Researchers argue that to fully achieve their economic and social objectives, LETS
need an increase in size to widen the range of goods/services available and to make
them available to deprived populations39. An intensified activity would allow the poor
and unemployed to satisfy their basic requirement through LETS26. LETS require at
least between 1000 and 3000 participants to be “economically significant”26.
Advocates further emphasize the need for involvement of both local and central
governments to promote and enable the LETS40. Additionally, advocates claim that the
low-tech and low-cost requirement of LETS will allow their growth in number41.
LETS appear to be hardly scalable. The large majority of LETS members aspire to build
a community with close social ties rather than looking for financial gain. Members
have little motivation to expand the LETS, since expansion could affect the community
ties and trust26. For instance, an increase in size may threaten the “fairer price”-
principle26 within the LETS. LETS members generally believe in fair prices for the
goods/services they provide since they trust the member of the LETS and are looking
for the benefit of these fair prices in return. We note the LETS dilemma. Expansion to
achieve LETS objectives – its raison d’être26 – may negatively affect the value that
LETS members pursue. Also, experts hold that LETS will suffer from their
heterogeneity. The fragmented landscape of local currencies menaces its expansion.
People do not like exchanging money all the time while travelling42. Moreover, as soon
as community currencies grow substantially enough to threat the privilege of the
central bank and the current bank cartel system, this system will try to “kill” the
community currencies through regulation29. Finally, exchange communities may suffer
from the emerging perspective of lending. Exchange could be replaced by lending from
one person to the other directly – e.g. car sharing, Peerby.nl, without an intervening
currency43.
Experts do highlight certain opportunities for the future of LETS. ‘Official’ currenc ies
are still very fragile – debt based. Users are starting to question the current monetary
systems. They are trying to understand money better and are looking for
alternatives44. To adapt their strategy, toward the education of (potential) members
about the benefit of alternative currencies, is crucial for LETS. Also, LETS benefit from
the support of the Green Movement – a growing trend in societies nowadays. Some
LETS initiatives such as food exchange – local transport, fresh product, and origin
known – could be promising in the near future.
39 Peacock (2006), op. cit. 40 Williams, C.C. (1996) The new barter economy: An appraisal of Local Exchange Trading Systems
(LETS). Journal of Public Policy, Vol. 16, Issue 1, pp. 85-101. 41 Longhurst & Seyfang (2013), op. cit. 42 Interview with Expert 2. 43 Interview with Expert 1. 44 Interview with Expert 2.
29
2.4 Sales and Marketing
In any LETS, the most important thing is to get people to join the community. No
matter how many members you would like to have in your LETS, it is important to
know how you will get them to join. During our interviews we realized that this was a
prominent issue in the creation of LETS. Most of the interviewees have struggled to
gain and retain members. The systems we came across during our research were
mostly based upon ideological reasons, like equality and redistribution of wealth.
According to the interviewees, the LETS are mostly targeted towards people who are
lacking certain resources to be able to buy their goods and services in the normal
market place. Another thing that came up regarding marketing-issues within LETS is
the image the systems might have. Table 2.1 provides a summary of the most
common challenges in marketing and sales for LETS, as well as how to deal with these
challenges. We elaborate on these findings hereafter.
Table 2.1: Challenges and Strategies in Sales and Marketing
Challenge Strategies
Gaining
members
Financials People are unable to become
aware of the LETS system.
Different advertisement places.
Marketing plan with targeted marketing
to each specific group. Word of mouth.
Skills People lack the (social) skills
to become or be a member.
Key players.
Buddy-system.
Image People perceive the system as
being old-fashioned and
unprofessional and are
concerned for their privacy.
Key players.
Professional (looking) website.
Controlled marketing to the outside world
(including social media).
Maintaining
members
Turnover People join the system, but
then they leave again.
Buddy-system/lessons.
Intake (look for a good ‘fit’).
Regular meetings.
Targeting economical ly marginal ized people
As you may recall from earlier in this chapter, most LETS systems are based on
ideological topics, such as social and economic sustainability. In our research we
found that most of the LETS were targeted towards people with little spending power.
However, since only 25% of all current LETS-members are actually economically
marginalized, it seems that targeting these people has yet been unsuccessful. In our
interviews with entrepreneurs several of them said that it was hard to target these
people with little spending power. This is mostly because little spending power is
associated with other forms of social disadvantage, such as illiteracy. Some of our
interviewees claimed that they could put ads in local magazines, but a lot of their
target market was not able to read or not comfortable with reading. Another reason
for why it is hard to target financially disadvantaged people is because, according to
the entrepreneurs, most of them don’t own computers. Since most of the LETS
operate on an online basis, it is hard to get people without computers to the website
and teach them how to work with it.
In discussing this challenge with the entrepreneurs, we have found that they cope
with this in different ways. First of all, we found out that the entrepreneurs had
various ideas about effective advertisement. All of the entrepreneurs told us that word
of mouth advertisement was the most effective type. However, this is not a very
workable strategy when you’re just getting started. Most of the entrepreneurs had
various locations in which they put up ads; this included: local magazines/papers,
local doctors/social work offices, community centers, local businesses, etc. What we
did not find in our research was a LETS with a clear plan on who to target and how to
target them. None of the entrepreneurs we interviewed had different marketing
strategies for different target groups. This might be interesting for future LETS-
30
entrepreneurs. Off course it is very important to keep your LETS working perfectly and
keep the members happy. In this way, they will create a buzz and spread the word
about the LETS. Regarding the lack of access to a computer, it is important to work
together with local (public) businesses and the municipality by making sure that
everyone has access to a computer at, for example, local libraries or at the municipal
office.
Targeting people with l imited (social) ski l ls
Another issue we came across while talking to the entrepreneurs is that LETS are
aimed at including people with limited social skills into the community. Since the
systems we came across acted mostly upon an ideological basis, it was very important
for the entrepreneurs to reach these people. This is difficult, however, since these
people might be inclined to avoid situations where they deal with other people. Which
is exactly what the LETS is about. Convincing someone that does not like to interact
with other people, because of fear or any other reason, to interact with other people,
is a daunting task.
When speaking to the entrepreneurs, we came across two strategies that might be
able to help with this. One of the systems worked with what we call ‘key players’.
These are people who are ambassadors of the LETS; they promote the system and are
a good source of word of mouth. These people do not necessarily have to be a
member of the system, but this will help with their credibility. With these key players,
the LETS is humanized, meaning that it is no longer some abstract system on paper.
Another strategy that might work is that of a ‘buddy-system’. Some of the
entrepreneurs we interviewed mentioned that, in the beginning, everyone who signs
up is teamed up with an existing member. This person can tell them all about the
system and explain how things work. For people who lack certain social skills, it might
be easier to get acquainted with one person, before meeting the rest of the LETS
group. This might help them feel more comfortable.
The image of LETS systems
Yet another issue that was mentioned by the entrepreneurs in the quest for why it is
hard to find members for the LETS system is the image the system might have. Some
of our interviewees mentioned that the LETS might be characterized as something
older people do, something that is for the ‘artistic and free-spirited’ people in society
and not professional. Some also mentioned that people are concerned for their
privacy. Another challenge mentioned by one of the experts on LETS, is that people do
not know how LETS work. There is a big opportunity, because people are looking for
alternative currencies, but LETS need to adapt to this and educate people on their
potential45.
There are several ways of dealing with this challenge. The first one was mentioned
before, which is the assistance of ‘key players’. These people will be advertising the
LETS and make people more aware of what its benefits are. Another thing that is
important in tackling this challenge is a professional website. Many of the LETS we
have encountered operate with an outdated (looking) and very basic website. While all
the necessary functions are there, this is not very good for the LETSs image. A
professional website is very important nowadays to ensure a professional and safe
image. It would also be more attractive to younger people. The third strategy we
found for controlling the image of the LETS is controlled marketing to the outside
world. One of the entrepreneurs mentioned that some of the members decided to start
45 Interview with Expert 2.
31
a Facebook-page. The board had no control over this page and this led to a
deteriorating image of the system. Our advice is to make sure members, no matter
how enthusiastic they are, don’t operate on their own when it comes to the system’s
public image. Off course you should allow people to have their say about the system
(censorship is definitely a no-no), but make sure that you are the only one who can
put an official message out to the world. In other words, make sure that no one is
able to speak on your behalf.
Maintaining members
So, once the LETS is started and up and running with members, how do you make
sure that people stay within the LETS? We have learned that there is actually quite a
lot of turnover in members. In talking to the entrepreneurs, we found some reasons
for the turnover, but most of them have also confessed that it is not really clear why
people leave. It seems that some people do not understand the potential of the
system. More clearly stated problems in maintaining members in the LETS where such
as:
Members do not understand the LETS (how to gain currency, how to spend it)
Members do not understand the online services
Members do not find what they’re looking for (supply and demand does not
match)
One of the ways to deal with this was already discussed before, which is the ‘buddy-
system’. A buddy can help someone get started in the system, by showing a new
member how things are done. This deals with the actual process of working with the
website, but also the social (normative) aspect. If you do not want to use a buddy-
system, it is also possible to give the new member a lesson on how to work with the
(online) system. Another way of controlling the turnover of members is by getting
started right. Some of the entrepreneurs we interviewed mentioned that they do an
intake before someone can join the system. In this intake it is discussed what exactly
the system is, how it works and what is expected of members. The potential new
member can ask questions and also let you know what he or she will be offering. In
this way, you can look for a ‘fit’ between supply and demand. Another option is to
have these sorts of talks after someone becomes a member. Some systems have
regular talks with their members about how things are going and what they would like
to see improved. Yet another option that is helpful in dealing with the challenge of
maintaining members is face-to-face meetings. These can be business-type meetings,
or more social gatherings. One of the entrepreneurs we interviewed held monthly
social drinks in a local bar. Another had a real-life marketplace a few times a year
where people can do their trading offline. At these gatherings people can ask more
questions, if they have any. But, it is also a good way to keep people connected and
committed to the system. Off course, as the founder of the system you should always
be available to answer any questions (new) members might have.
2.5 Product and Development
When launching and growing a LETS, entrepreneurs face different challenges in the
field of product and development. A LETS consists of different aspects. These aspects
combined, are the service that the LETS delivers. One aspect of this service is the
system where members of the LETS make trades, often the website. Another aspect of
the LETS service are activities that do not happen on the website. Things like personal
contact between the members or a monthly meeting at a café. Therefore, LETS’s
product contains all the different aspects that keep the LETS operational. The
32
development of the LETS can be described as every activity that is carried out to
improve the LETS. Most of the times, it has to do with the website.
Product and development is in general an important but also difficult point for LETS.
This is because special skills are often needed to develop the product and for LETS
systems these skills are hard to obtain. The board is often appointed with the task of
product and development or they might appoint a special committee. The procedure
for developing the product is usually that the board or committee has a meeting. In
this meeting different opinions about developing the product will be discussed and the
result will be proposed to the members. The members then vote for the different
options and the board/committee will execute the chosen options. Table 2.2
summarizes the main challenges and strategies with regard to product and
development.
Table 2.2: Challenges and Strategies in Product and Development
Challenge Strategies
Evolving the website At the start of the LETS an IT person needs to be on board.
Fit between supply and demand Actively search for people, who can cover unfilled categories.
Adding (new) businesses to the
LETS system
Start the LETS with influential partners.
Evolving the website
The biggest challenge for LETS is evolving the website. The website is the place where
most of the activities of the LETS happen. On the website different services and
products are posted, which members can respond to. Entrepreneurs within the LETS
want to evolve the website because this will improve the overall product. Some points
that where mentioned in the interviews: adding new sections, new welcome page,
more interaction possibilities between members etc. The challenge is that for evolving
the website, somebody with IT skills is needed. LETS have a problem with finding
people with these skills. This is because a LETS has little money and therefore the IT
person has to do it for free or at minimal costs. Additionally, the LETS (online) system
is a complicated system, because of the internal trading system and posting by
members of products/jobs. Therefore it is not possible for everybody to create and
maintain this system.
In discussing this challenge with the entrepreneurs, we have come to the conclusion
that it is necessary to have an IT person on board when starting the LETS. This
strategy is important because the different LETS struggle with evolving the website.
Neither of the interviewed LETS has a clear solution for this problem. LETS that
started with no IT person on board keep struggling with this problem. Resulting in
limited overall performance of the LETS. This problem is often the start of other
problems, such as no or little trade within the system. Therefore we advise only to
start with a LETS if an IT person is willing to assist. Without this person the LETS will
never reach its full potential and the road will be hard for the founders.
Fit between supply and demand
Another big challenge for LETS is having a ‘fit’ between the supply of services and the
demand of services. Some categories, like wellness, have multiple providers but some
categories have no providers, like repair services for devices. Because of this,
members are less content with the LETS and will use it less. This can eventually lead
to members leaving. The challenge for LETS is finding people with skills who are not
covered in the LETS. By adding these people, more categories will be fulfilled and
members will use the LETS more often.
33
It is important for LETS to have regular trade within the system, this to improve
commitment of the members to the LETS and to have a social impact on society.
Regular trade will happen if there is a fit between supply and demand. Therefore we
advise to actively search for people who can cover unfilled categories. The best
solution is to appoint a committee for this task. This committee needs to make a plan
on which skills are not covered and how to attract people with these specific skills.
Another technique is to let members search in their personal environment and give a
reward, in points, to people who introduce new members. People with special skills
can be persuaded to join by explaining to them that there is a lot of demand for their
skills and that they can earn a lot of ‘money’ with their skills.
Adding (new) businesses to the LETS system
Another challenge for LETS is to add professional businesses to the system or to add
new businesses to the system. These businesses can be very different, but the most
valuable businesses for LETS are businesses in the food market. Having businesses
within the LETS improves the overall trade and commitment of the members, because
businesses provide products that members can use in their household. Examples of
businesses that are active in a LETS are a supermarket or a bakery. Members can use
their currency to get a discount in the store and businesses can use the currency to
get people to do some chores for them, like painting the store. The challenge for LETS
is to add these businesses to the system. This is a problem because most of the
businesses don’t see the added value of the LETS to their business, mostly because
the business has no chores to be done because they have employees or contractors to
do this for them. Also, the store might lose money on the short term, because it gives
a discount. This makes it hard to persuade businesses to join the LETS.
One way to deal with the challenge of adding businesses to the system or adding new
businesses is that the LETS starts with influential partners. One of the LETS started in
cooperation with the city district and housing associations. By choosing this set-up the
LETS immediately got attention and legitimacy in the neighbourhood. This also created
interest from businesses in the neighbourhood and these businesses immediately
singed up for the LETS. This is important because now the LETS has proof that the
LETS system has added value for businesses; something that is much harder to prove
when there is no other business in the system.
2.6 Management and Organization
Entrepreneurs face different challenges in the management and organization of their
LETS. The board is usually in control of the management of the system. Management
is also about committees and staff within the LETS. The organizational part of the
LETS is about rules and procedures within the LETS and about where it stands within
the broader community. To conclude: management has to do with people who keep
the LETS operational; where the organization of the LETS is about the rules and
procedures within the LETS.
For LETS, management and organization is an important point. Like in most
organizations that work with volunteers it is very important that the management and
organization are well regulated. This is important because otherwise nobody is willing
to put effort in the LETS and then the LETS will not function. Another reason why it is
important that management and organization are well regulated is that otherwise
problems will occur between members of the LETS. Everybody will have a different
opinion about how the organization and the management should be filled in and this
will cause problems. An important part of the management of a LETS system is the
34
board. The procedure for choosing the board members is the same for most LETS.
People can nominate themselves for the board and from the nominated members the
other members will choose a board. Table 2.3 provides the most significant challenges
that we found with regard to management and organization, as well as the fixes that
we identified in the field.
Table 2.3: Challenges and Strategies in Management and Organization
Challenge Strategies
Having good board members Actively search for good board members and train the board
members.
No clear vision and goal (at the
start)
Formulate a clear vision and goal before starting a LETS.
Professionalization of the
organization
Setting up rules and procedures.
Having good board members
The biggest challenge for LETS is finding good board members and keeping them. As
already mentioned, board members are very important within a LETS. The board
keeps the LETS operational and develops the LETS. It is important that the board has
different members with different qualities. But most important is that the individual
members of the board have the competence to lead a LETS. Board members need to
have some kind of experience in leadership and need to have good communication
skills. They also need to understand how a LETS works. Finding these people appears
to be a challenge for LETS. Perhaps this is because the focus group for LETS is people
who struggle to fit into society. These kinds of people usually don’t possess the skills
needed to be a board member. Because the board members are nominated from the
members it is common that the board consists of people who are unsuitable. Resulting
in a LETS system that will never reach its full potential and will have many problems
on the way.
To deal with the challenge of having good board members, we formulated the
following strategy: actively search for good board members and train these board
members. This search should not only be done within the LETS system but also
outside it. It could be an option to add a board member with a lot of (managerial)
experience but who is not a member of the LETS. This person can have an outside
view on the LETS, resulting in better leadership and actions. Another advice is to train
the current board members. Again, a person from outside the LETS can facilitate this.
Additionally, a buddy-system within the board can help in training board members.
Board members with more experience can be a buddy for “new” board members and
help them with the different competencies that are necessary for a board member.
No clear vis ion and goal (at the start)
Having no clear vision and goal, at the start, is a challenge for LETS. Having a vision
is very important for the rest of the existence of the LETS. In the interviews, different
entrepreneurs mentioned that they had struggles between the board and the
members, because of different visions about a LETS (what is a LETS, where does is
stand etc.). With a clear vision about the LETS from the start, these problems will not
occur. All members can then sign a contract in which they agree with the vision and
goals of the LETS. This will prevent people from questioning the vision because they
already agreed with the vision. If they don’t agree with the vision, then they should
not become members of the LETS.
To cope with this challenge the obvious strategy is that before a LETS is started, first
the vision and goals of the LETS need to be formulated. This needs to be done by the
founders of the LETS. They need to discuss every aspect of a LETS and need to report
35
the results in a report. Every member needs to agree with the vision and goals, before
becoming a member.
There needs to be a clear vision, in one sentence and the goals should cover every
aspect of the LETS and need to answer questions such as:
Who can become a member?
How many members do we need?
Can you make money in the LETS?
Will the active members (board, committees) get paid for their efforts (in the local
currency, or in the ‘official’ currency)?
The report can be changed and things can be added during the LETS’s existence, but
the vision should not be adjusted. This is because the vision is the basis of the LETS
and gives direction for the goals.
Professionalizat ion of the organizat ion
Another challenge LETS struggle with is to professionalize the organization. By
professionalizing the organization the overall performance of the LETS will improve.
Professionalizing the organization means that rules and procedures are set up and that
these are enforced. This also means that different people get a task and there are
consequences if somebody didn’t do his/her task. This is necessary for LETS because
most LETS have volunteers and therefore nobody is held accountable for a task. This
usually results in tasks being done by a small group of people, who are not necessary
the best persons to do these tasks and that some tasks are not being done. This also
results in problems between members because some members do all the work and
might express their frustration about this to others.
The only way to deal with the challenge of professionalizing the organization is to set
up rules and procedures. Setting up rules and procedures means that different people
get tasks and there are consequences if somebody didn’t do his/her task. These rules
and procedures need to be set up by the board and the rules and procedures need to
be distributed in a formal document. The rules and procedures need be the same for
every task. This document should state: what the task is, when it needs to be finished
and who can be contacted when there are questions. Also, it is important that the
board frequently meets with people who perform the task and track their progress. By
setting up something like a “framework” for new tasks, it is easier for members to
complete the task and for board members to check the progress. This will result in
better performance of the overall LETS.
2.7 Finance and Cash flow
While talking to the entrepreneurs we found out that finance is one of the lesser
problems in LETS. Sure, every company needs some money, but this seems to be very
little for the LETS we have seen. Mostly, the entrepreneurs did not really see the cash
flow as a problem; because they felt that the system did not need that much money
and grants or membership fees could provide for what they needed. Nevertheless, we
will discuss what kind of money is needed and how you will be able to obtain this.
Table 2.4 summarizes the most significant challenges and offers potential fixes.
Table 2.4: Challenges and Strategies in Finance and Cash Flow
Challenge Strategies
Finance You need money for marketing and
the website and banking system.
Government grants; funding from
foundations; membership-fees.
Optional: Pay for
active members
Members that are active in a board or
committee should be paid for their
efforts.
Membership-fees; volunteer fee
(government).
36
As said, every company needs money, no matter how little money this is. Let’s look at
what is specifically needed to start up a LETS:
Marketing
Website and banking system
Optional: pay for active members who are in the board/committees?
As you can see, when you start a LETS, you will still need money. The question is,
how will you obtain this money?
Most of the entrepreneurs we spoke to applied for funding or grants when starting
their system. These were either government grants, aimed at social cohesion, or
funding from foundations related to one of the goals of LETS (social cohesion, helping
out financially disadvantaged people, etc.). With this money, the start-up could be
financed. It seems that most of this money was used for marketing-purposes. Another
way to obtain money is by membership fees. This can only happen off course, once
the system is up and running. Members can either pay in ‘real’ money or in the
currency of the system. We saw that some of the systems charge a one-time fee in
Euros, some of them charge a monthly fee in Euros, some them charge a monthly fee
in the currency of the system and some have a mix of these options. Membership-fees
are a good way to pay for day-to-day operations. When asked, the interviewees told
us that the ‘real’ money is used for basic needs, such as paper. Membership-fees in
the currency of the system seem to be used more frequently as payment for the active
members (those who are active within the system by helping out in the board or some
other committee), since it has no value outside of the system. Another option for
paying the active members could be by applying for a volunteer fee at the local
municipality. This will not be applicable for every system, but it is worth a try. Most
importantly, the strategy that was used by every LETS system we’ve encountered,
was bootstrapping. Bootstrapping is described as “all the more or less smart ways
entrepreneurs can find to get ahead without making significant financial outlays”46.
Bootstrapping means making do (do whatever works, don’t look for the perfect
solution) and using the resources that are available, instead of obtaining expensive
resources. We can see this approach most clearly in LETS in the way the websites are
built. In most of the LETS we’ve encountered, the website was built by one of the
members of the system, at no or minimal costs. Furthermore, the banking system
behind the website was usually copied or borrowed from an already existing
organization, such as Strohalm, Qoin or other LETS organizations, again, at no or
minimal costs. While bootstrapping is an excellent method for a start-up, we would
like to note that previously we discussed the importance of a professional-looking
website. It might be wise to invest a little more in a good-looking website, than
making do with a less professional one.
2.8 Nine steps towards your LETS
You have this amazing idea to start your own LETS. But what should you do next?
When starting a LETS you have to think of many things, but we have investigated the
most important ones. By following this checklist you are well on your way in
developing your very own LETS! Obviously, this list is also useful for existing LETS,
since it shows you what you might have missed over time!
46 Davidsson, P. (2012). The entrepreneurial process. In: Enterprise and Small Businesses, Carter, S.
and Jones-Evan, D. (eds.), pp. 95-118.
37
1) Formulate a clear vision and clear goals for your LETS. Do this in one sentence:
What does the LETS stand for? The goals should cover every aspect of your LETS,
for example: What kinds of jobs/services are allowed within your LETS? How many
members do you need? Is it allowed to make money within your LETS? Will the
active members (board, committees) get paid for their efforts (in the local
currency, or in the “official” currency)?
2) Find your IT guru. To find this IT person, search for people in your network that
possess the right skills. LinkedIn and Facebook are valuable sources where you
can search for your own IT guru. Write a short ad in which you explain your vision
and what you need from the IT guy. Make sure you emphasize the huge amount of
experience your IT guru will gain. Experience and references are very important
for this group, you can facilitate in this! Use this to persuade your guru!
3) Start with influential partners. One of the most powerful tools to boost your LETS
is to start in cooperation with the city district and housing associations. This will
immediately give you legitimacy. Approach these partners by mail/phone and
explain what your plans are. You can use the first two checklist points as part of
your plan. These kinds of partners are always looking for interesting plans; you
only need to approach them!
4) Get that starting capital. You need some capital to start your LETS. There are
three ways to get your first cash: a. Government grants: contact the government;
there might be a little jar of money reserved for organizations like yours! b.
Funding from foundations: these foundations are always looking for good projects
that return something to society. Focus on that in your pitch! You create a better
society and this project only needs funding at the start. After this is will survive on
its own and the impact on society is sustainable. c. Family, Friends and Fools.
5) Get the first members. Getting your first members is hard but also fun! In this
stage your LETS starts to come alive. But how do you get your first members?
First of all, make a marketing plan. In this marketing plan you describe who you
are going to reach and with which tools. If you are not familiar with marketing,
ask advice from students. This marketing plan should not take too long to make
because marketing is more about execution. For students, it is a nice way to get
some extra experience, a win-win situation. The best tools to get your first
members are: Word of mouth, Professional website, Social media, “Offline”
meetings
6) Build the board. Scan your environment and your current members. Which of
them are leaders, have good social skills and understand the LETS? These people
might be your first board members! Board members are important in growing the
LETS so choose them wisely. A 6-month trial period is a good way to see if
somebody is suited as a board member. Don’t opt for the easy road and choose
your friends, this will be the hard road in the end! The best boards consist of
people with different skills and personalities.
7) Set up rules and procedures. This step is really straightforward. These rules and
procedures need to be distributed in a formal document and need to be the same
for every task. This document should state: what the task is, when it needs to be
finished and who can be contacted when there are questions. Set up a framework
for new tasks. This makes it easier to complete the task and for board members to
check the progress.
38
8) Cover unfilled categories. Everybody has different skills. But what if some skill is
not covered within your LETS? The best way to tackle this problem is to appoint a
committee. This committee makes a plan about how to attract people with these
specific skills. The best technique is to let members search in their personal
environment and give a reward, in the local currency, to people who introduce
new members. In persuading people to join the LETS, explain to them that there
is a lot of demand for their skills. Make them feel like a superstar! Give them the
feeling that they are really important to you and the LETS. Also explain that they
can earn a lot of ‘money’ with their skills.
9) Maintain your members. Once you have your beloved members, you want them to
stay! But how? Some good ways are: a. Buddy-system / lessons: set up a buddy
system between members. This will create more personal contact between
members. It is also possible that the members will teach each other new skills. It
may be a good idea to rotate buddies every six months. b. Regular meetings:
regular meetings with all the members improve the social interaction between
members. Meeting in person is still the best way to interact with one another! c.
Intake (look for a good ‘fit’): maintaining members starts at the registration of the
member to your LETS. It is important to have an intake at the beginning, to see if
there is a good fit between the member and the LETS, if the member understands
what a LETS is and what is expected from him/her. This will result in no energy
wasted on people who are not 100% motivated and a fit between what people
offer and what people are asking for within your LETS.
Acknowledgements
The authors would like to thank all interviewed entrepreneurs for providing access to
their organizations, and all experts for their helpful insights.
39
3 Flexible office spaces
Liz Derks, Tijmen van den Heuvel47, Amarachi Onwuachu and Moritz Wagener
Summary
This contribution aims to inform prospective and current entrepreneurs within the
flexible office industry. Several factors led to the emergence of the industry and its
growth. Not only is there an increasing demand for flexibility, the number of empty
offices has also been growing in the past years. And these trends are fortified by the
economic crisis and the shift towards flexible work organizations. The market for
flexible office spaces is currently best described as one where entry barriers are fairly
low, competition is fierce and supply and demand drift apart.
Opportunities in this industry mainly exist in business model differentiation, which can
be accomplished by implementing different revenue models, product differentiation
and through the communication of a unique vision or a social purpose. Main
challenges in the start-up phase include high start-up costs, getting the customer into
your building and dealing with competition, whereas the challenges in the growth
phase include quality assurance, physical growth and securing additional capital. The
report elaborates on other challenges and provides strategies that can be used to deal
with each of the identified challenges.
Looking at the future prospects, we expect that in the short term the industry for
flexible office space will continue to grow and change, however in the longer term the
number of businesses will stabilize. For the nearby future a lot of flexibility is needed
from both the existing companies as well as the new entrants.
3.1 Introduction
The turbulent economic sphere since 2008 has adversely affected the commercial real
estate market worldwide. As companies dramatically cut down spending, a parallel
process has created the conditions for the emergence of the market for flexible office
space. Even as the economy slowly limps towards recovery, companies still cannot
always afford renting traditional office buildings, leading to many empty office spaces.
Additionally, over the past decades a gradual shift in working attitudes has taken
place, leading to a concept called “The new way of working”. The combination of
empty spaces and increased working flexibility has sprouted an idea that serves many
types of customers and has become an industry on its own.
In the Netherlands, the market for flexible office space is dynamic with different
business models available in the industry. One type can be a “plug-and-play” office,
when one can enter a full furnished and operational office space with Internet
connection, catering, a cleaning service and other conveniences. The advantage of this
type of office space is in its flexibility, as rent agreements can vary from a few days to
a few months. Other types of offices provide free public spaces in a “café” setting in
which privacy is limited, while providing premium options of private meeting rooms
when necessary. This diversity shows the potential of the market, especially in light of
the rapid growth in the demand for flexible office space.
47 Contact at [email protected]
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This report aims to inform and inspire entrepreneurs and industry players alike, as it
contains up-to-date industry information, obtained through both desk research and
interviews conducted with important industry players. Aspiring entrepreneurs may use
it as a roadmap for understanding the opportunities and challenges in this emerging
industry. It provides them with a comprehensive industry overview, including the
competitive environment, the prevailing business models and the potential pitfalls one
could encounter when starting up a business in this industry. Incumbent
entrepreneurs might value the insights on the current state of the market and how it
is expected to develop over the next few years. Additionally, depending on the age of
their venture, they can possibly identify some of the challenges they are facing and
use the associated strategies and recommendations to deal with them.
The report will start with an overview of the industry, including its emergence, the
players and a competitive analysis based on the five forces model of Porter. Secondly,
the opportunities and possibilities within the flexible office space will be discussed;
containing practical information, such as the dimensions along one can differentiate its
business model. Afterwards, the main challenges are listed, as well as proposed
solutions to tackle them. Lastly, the skills and characteristics of a typical entrepreneur
within this industry are indicated, as well as a future outlook including both a short-
and long-term vision.
3.2 The Industry
How economic change led to a diverse customer base
Over the past decades the demand for flexible office space has rapidly increased. One
of the first companies to address this need was Regus in 1989, identifying the trend of
long-term rental contracts becoming less attractive. Simultaneously, people started to
recognize and adopt the concept of “the new way of working”, further strengthening
the demand for flexible office space. This enabled the company to become a worldwide
player, currently providing office space in more than 100 countries. Determinants of
recent industry growth are shown in Figure 3.1.
Figure 3.1: Growth determinants in the flexible office space industry
When the financial crisis hit in 2008, high rates of unemployment pushed people to be
self-employed and work on several small projects as freelancers48. These individuals
also occasionally wish to have the professional atmosphere of an office, without
committing to fixed, long-term and expensive rent contracts. In addition,
48 Hoesel, van P. and Thurik, R. (2009). ‘Ondernemerschap en de crisis.’ September 11, 2014.
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entrepreneurs and start-ups manoeuver the deep waters of financial uncertainty for
the first years of their existence, which forces them to be as efficient and agile as
possible. An expensive rent agreement for a traditional office building is an unwanted
financial commitment for a firm starving for funds (or one that does not know if it will
exist in three months). On the other hand, start-up employees and entrepreneurs do
need to work somewhere. These types of potential customers have also driven the
rapid emergence of this new real estate marketplace.
Not only young start-ups and freelancers enjoy the newly discovered benefits of
flexible office space. Established small and medium businesses find the flexibility and
build-in services, together with lower prices, very appealing. And, surprisingly enough,
larger companies are also direct and indirect users of such spaces. Nowadays, many
big corporates organize meetings outside the office, simply to “change atmosphere”
from their offices. Additionally, the shift towards a 24/7 economy has driven many
companies to operate non-standard schedules. Employees find themselves working on
hours that fall outside the 9-to-5 workday. To ensure a healthy work-life balance, not
to mention save money, many employers allow work from home. Employees choose to
work in flexible open office spaces to enjoy a “fresh” work environment, a convenient
meeting point when necessary, and the possibility to network with other
professionals49. To give more insight into the customers and their characteristics, one
can find an overview containing the five most common generalized types of customers
that can be found in the industry (Table 3.1).
Table 3.1: Typology of customers in the flexible office space industry
Type Description
The needy socializer Is unemployed, but has a business idea he wants to develop. Wants to work in
an environment outside of his house and also needs the social interaction with
similar aspiring entrepreneurs and their expertise of certain areas. He needs a technical partner for example, to develop part of his business idea.
The focused
Einzelgänger
For example a software developer, working independently, needs a space
outside of her house to work, however prefers a private environment where she
can focus on her work. Feels there is no need for social interaction.
The butterfly start-
up
A small and very new firm that does not want to enter into a long-term real
estate contract but needs offices for its employees with the flexibility to make
the decision to grow in offices or downsize in the short term. These have a
great potential to become larger customers as they start flying higher.
The medium sized
hipster
This label described the small and medium-sized firms that may be established
already but like to work in cool and inspiring environments, and at the same
time want to benefit from the flexibility and perhaps cost savings that the
flexible offices offer. These could have longer-term contracts.
The modern old guy Large corporate, possibly international firm that has previously housed its
employees in traditional real estate options but feels the pressure to stay
flexible. They typically occupy a certain space in the building for a relatively long period of time.
The Players
When trying to sketch a picture of the different players in the industry, several
distinguishing factors can be identified. The first distinction to make is the one
between independent start-ups and corporate entrepreneurship. The majority of the
players were start-ups at some point in time, either starting with the idea or a
building that needed to be filled. However, in both cases there was one entrepreneur,
or a few, that started building the business from scratch. On the other hand, there are
also examples of corporate entrepreneurship that can be found in the flexible office
space industry. An example of corporate entrepreneurship is HNK or “Het Nieuwe
Kantoor”. This company is part of a large real estate company that found flexible
office space to be the best option to fill their empty office buildings.
49 Vrande, van de, V. (2013) ‘’Coworking’ good voor freelancers’retrieved September 17 from
http://www.eur.nl/alumni/alumni_nieuws/detail/article/55892-coworking-goed-voor-freelancers.
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The second distinction to make is between companies with a social focus and those
with a purely commercial focus. The companies with a social vision in this industry do
focus on a commercial exchange, but social goals are prominent among other goals of
the company50. These firms typically invest more in the creation of a strong
cooperating community by facilitating the sharing of knowledge and networking
among their members. An example of a flexible office providers with a clear social
focus is Seats2Meet. Seats2meet rather sees itself as a knowledge center than as an
office supplier, and has the goal to connect people and faci litate knowledge sharing.
However, the majority of the companies in the industry has a commercial focus with
profit-making as the prime objective. This is the case in particular for the spin-offs of
existing real estate companies that want to improve their bottom line by finding
alternative ways to fill up their buildings.
We can further distinguish by looking at size, which is closely related to location.
Some players have only one location that addresses local needs, whilst others have
multiple locations within the Netherlands and Belgium, such as The Office Operators.
Lastly, there are the large international players operating on a worldwide level, such
as Regus. Another important distinguishing factor is of course the business model,
which will be elaborated upon in chapter 3.
The Competit ive Environment
To give a better insight into the competitive environment, Porter’s five forces model
will be used. Each of the five forces is important to consider when starting a business
in this industry, as each of the forces can form a threat that should not be overlooked.
Below we look at the importance of those five forces for the flexible office industry.
Threat of new entrants. The threat of new entrants can be considered high, since
the industry is growing, it may be very appealing to aspiring entrepreneurs to start in
this industry. Additionally, there is still a lot of empty office space available, so finding
a location should not be too difficult. The entry barriers are however not very low,
paying for the building means that the start-up costs can be very high. This of course
is not the case for real estate firms or other firms that already own buildings, for them
the entry barriers are much lower, and therefore the threat of entry for this group is
higher.
Threat of substitutes. The threat of substitutes depends on the added value of the
individual businesses. As was said by many of the entrepreneurs interviewed, anyone
can open a location and provide offices or desk space, but that does not make for a
successful business. In fact, that would be an example of a very replaceable business.
Building a strong community is an example of adding value to the business in a way
that it becomes very hard to replace or substitute.
Bargaining power of suppliers. The main suppliers for businesses within the
industry, which are the suppliers of the building, have quite a lot of power. Location is
very important, and you would want to be able to stay in the same building for as long
as you want to. If the entrepreneur is also the owner of the business then suppliers
have very little power, office supplies and décor related items can be bought from a
lot of different places.
50 Peredo, A. and McLean, M. (2006) ‘Social entrepreneurship: a critical review of the concept’ retrieved
from journal of world business vol. 41, issue 1, 56-65.
43
Bargaining power of buyers. For the flexible office providers that have a few large
corporations as their main source of customers, the customers, or buyers can have a
lot of influence. And any decisions they make will have a great impact on the
company. The majority of the companies in this industry however have much smaller
or even individual customers, which have very limited power. Any strategic decisions
they make individually are not likely to have much impact on the company and its
profitability.
Competitive rivalry within the industry. Currently there is not much rivalry
between the different providers, all of the competitors believe in the uniqueness of
their business. However in the nearby future, as more players will enter into the
industry competition will certainly increase. We also expect more heavy competition
on prices, something that is currently not the main focus.
Box 3.1: Entrepreneurs’ view on competition
When interviewing the different parties, several questions were asked regarding the
increasing competition in this sector. The general view on the subject was quite surprising:
While some of the companies were able to identify their main competitors, they also
believed that additional players in the industry would be beneficial to their business. The
reason for this being that it is a new industry of which a lot of potential customers are not
yet aware that it exists or how it works. Increasing competition would then make more
people aware of the concept and will enlarge the customer base within the country.
3.3 Opportunities
The main opportunity in the flexible office space industry lies in its large variety of
applicable business models. A business model can be described as the rationale of how
an organization creates, delivers, and captures value in economic, social, cultural, or
other contexts51. Choosing the right business model is crucial, especially in an industry
where entry barriers are fairly low, competition is fierce and supply and demand drift
apart. “Flexible office spaces are popping up like mushrooms; every day one”52. This
implies that concepts are easy to copy and prices for services can be compared in a
very short time. Consequently, the only way to protect margins is through business
model differentiation. Differentiation in the flexible office space market can be
achieved by focusing on pricing and costs through the use of different revenue
models. Secondly, one can distinguish from competitors by creating a unique product
offering. Lastly, one could differentiate by communicating a particular vision, thereby
attracting a particular target customer, such as women or expats. However, for a
business model to be successful, the entrepreneur should find a combination of these
differentiating factors that leads to a unique and appealing concept that customers
appreciate.
Differentiat ion by revenue models
In the flexible office space industry, one can find different models to generate
revenues. Below one can find the revenue models that are most commonly used.
Subscription. The subscription model is the most common model in the flexible office
space industry. In order to use the services of the company, the client becomes a
member and is paying a recurring fee. That is why it is also called the Recurring
51 Morris, M. Schindehutte, M. and Allen, J. (2005) ‘The entrepreneur’s business model: toward a
unified perspective’ retrieved from Journal of business research vol. 58, issue 6, 726-735. 52 Goodplace2work (interview), Rotterdam, September 22, 2014.
44
Revenue Model.53 The aim of the model is to secure the client for a longer period of
time, assuring he is consuming the service well into the future. Often this model
entails a reward for the client, making other services cheaper or even giving them
exclusive offerings. An example is the membership for the use of the flex-desks at
HNK. Here, one pays a monthly fee for the use of separate window desks a faster
Internet connection, and a 50% discount on the rent of the meeting rooms. One can
instantly see that a business rarely offers a membership that includes all services, but
rather provides many options for add-ons.
Add-On. In combination with the Subscription Model, this model can be spotted
throughout the industry. The idea is to offer the core service at a competitive price or
even below and drive revenues up through offering additional services or products. In
the flexible office space industry, popular add-ons for generating more revenue
include the renting out of separate meetings rooms, selling food and beverages or
offering communication services (remote receptionist or phone answering services).
The popularity of this model stems from giving customers the option (but not the
obligation!) to choose what extra services they want to take on, enabling them to
control their costs.
Freemium. In this model businesses give something away for free and in return
collects personal details.54 These are then used to build a relationship with the
customer and lock- in future sales. Examples of using this model successfully are
Spotify or Skype. Their cost structure is such that serving an extra customer will add
little to no costs. In the flexible office space industry this model gets more and more
popular, even though for them serving extra customers entails extra costs. An
example of this model is Seats2Meet, providing free working space and free lunch,
coffee and tea. Their customers, in return, are expected to pay with what they call
“social capital”. This means that customers should exchange their knowledge, creating
a buzz that attracts other customers. In the end, they transform the “social capital”
into “economic capital” through renting out meeting rooms at premium prices.
Franchise. This model entails buying a working business model in a particular
industry and paying royalties for the privilege to use it. We find this model in the
flexible office space industry; however, it is not yet too common. The goal is to create
a network of providers, so members have access to working space in many different
places. Seats2Meet uses this model, with franchisees mostly being small, independent
meeting room providers. Being part of the Seats2Meet network requires the
franchisees to facilitate free catering (coffee, tea, lunch) and to convert at least 20%
of their seats to “social capital seats”55.
Pay-as-you-Go. In this model customers only pay for what they actually use, which
in the flexible office space industry often considers the factor “time”. This model is
often posed as a direct concurrent of the subscription/add-on model, forcing
customers to make a choice. By offering these models alongside each other, the
businesses are forcing the customer to actively think about their willingness to commit
for a longer time and how much they want to pay for that.
53 Danaher, J. (2002) ‘optimal pricing of new subscription services: Analysis of a market experiment’
Retrieved from Marketing science vol. 21, No. 2, 119-138. 54 Teece, D. (2009) ‘Business models, business strategy and innovation’ retrieved from Longe range
planning vol 43, issues 2-3, 172 194. 55 Dullroy, J (2011) ‘ ‘free’ coworking: the Dutch experiment’ Retrieved September 28, 2014 from
http://www.deskmag.com/en/free-coworking-the-dutch-experiment-183.
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It quickly becomes apparent that revenue models in this industry are rarely installed
separately. Combinations are the norm and a multitude of them are possible. The
most common mix is a Subscription, Pay-as-you-go, Add-on Model, with the main aim
to address a larger customer-base that generates more revenues. In the industry
profits will not come easily, but finding the revenue model that fits your customers
can differentiate the business, as well as give an advantage over others.
Differentiat ion by type of working space
Besides the choice of different revenue models, businesses in this industry can use
product differentiation. In order to do so, one needs to realize that the core product
ultimately delivered to the customer in this industry is working space. When it comes
to working space, one can provide various product offerings that are all characterized
by the flexibility in renting periods.
Flex area: Open spaces with either the option to rent out desk space through
memberships or provide them for free.
Managed offices: Variable-sized closed offices that are ready to use, as all office
furniture is provided.
Communal offices: Variable-sized closed offices that can be shared among
individuals that merely seek desk space, but also prefer having a bit more privacy.
Customized offices: Variable-sized closed offices that can be furnished according
to the customer’s wishes and desires.
Virtual office: A virtual office provides communication and address services
without providing dedicated office space.
Meeting rooms: Variable-sized meeting rooms to be rented out to either members
or external parties.
Businesses can concentrate on one offering, a combination of them or simply provide
all of the offerings in one building. In the industry most spaces have the option for
meeting rooms with one or more other offerings combined. HNK Rotterdam offers on
the lowest floor a large open café-like space where desks open for everybody and
some are reserved for their paying members. Different meeting rooms and desks in
smaller offices can be rented as needed. On the higher floors separate offices in
different sizes, managed or customized are supplied. The concept behind this layout is
creating the buzz on the ground floor and give individuals and businesses the option
to “move up” according to their needs. Seats2Meet concentrates mainly on open
flexible spaces and renting out meeting rooms, whereas Regus and The Office
Operators mainly derive their revenues from renting out separate offices and meeting
rooms, and through the provision of virtual offices.
Additionally, one needs to determine the level and quality of service and the different
“add-ons” customers can choose from. Zaamen, for example, offers a broad range of
catering services, such as sandwiches, soups, and pre-packed meals, all of excellent
quality and prepared by a well-known Dutch chef.
Another feature of the product offering is the building layout and interior design. Here
the creative element of the business becomes visible. One should first consider the
customer it wants to attract and then adjust the inside of the building accordingly.
Again, HNK with its open café-like main hall has chosen an industrial “cool” design,
attracting relatively young entrepreneurs, whereas Regus has a more conservative
business-like design, attracting more corporate clients. Zaamen, in Haarlem, is
located in a monumental canal-side house and has paid attention to all details in the
building layout, making sure it satisfies its customers, being mostly the city’s young
urban professionals and entrepreneurs.
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Lastly, location is central to the business offering. Flexible office spaces need to be
able to be reached by different transportation modes so should be strategically located
near freeway crossings, airports or train stations. Other considerations could be the
availability of (free) parking space and the direct building surroundings and
environment.
Differentiat ion by vis ion
Another way to distinguish your business from the competition is through the
communication of a unique vision/ulterior motive the entrepreneur might have for
setting up the business. An example of a flexible office space that is driven by such a
distinct vision is Good Place 2 Work. This company focuses on women, with the
objective to create a “female-friendly” workplace. Having such a distinct vision or
objective might help the entrepreneur in different ways. First and foremost, it assures
that the entrepreneur sells something that is in line with his/her values and believes.
This often translates into increased enthusiasm and a customer base that shares these
believes, and therefore chooses your business over competitors. Secondly, having a
distinctive vision also leads to increased media attention and (free) publicity. This can
be illustrated by the example of Seats2Meet, as they were the first flexible office
space to provide free workspace and lunch, while only charging for meeting rooms.56
The concept received (international) online and offline media attention, and was
nominated for several business awards. To see how a vision can contribute to the
successfulness of your business, see the case below about the vision of the business
owner of Good Place 2 Work.
Box 3.2: Empowering women
GoodPlace2Work is a flexible office space specifically addressed towards women. It was
started by Noëlla de Jager with the aim to empower women. Now, one may ask what
flexible office spaces have in common with empowering women. However, Noëlla is
convinced (and has experienced) that women are more likely to succeed and, in turn, help
other women to accomplish their goals in a work environment exclusively for women. To
create the right work environment she decided that women were better off “keeping to
themselves”, helping each other and providing each other advice. Consequently, she only
has female members; thereby creating a strong community that promotes female
entrepreneurship and knowledge sharing
3.4 Challenges and strategies
Starting a business always comes with many challenges. While it is natural to face
them, having the right strategies is where it can go right or wrong. This chapter tries
to point out challenges that are specific to the industry for flexible office space.
Afterwards, possible solutions are listed to overcome them. Most strategies are not
only specific to the challenge they are matched with, but can be used for other
difficulties as well. Furthermore, challenges encountered when starting a business are
different from those while growing a business. Therefore, a distinction between these
two important phases in the early years of a new business is made.
Start-up challenges 1: Start-up costs. A complicating factor for each start-up is the limited financial
resources available. Entrepreneurs within this industry usually face high start-up
costs, due to recurring rent. In this industry, location determines part of your success,
56 Dullroy, J. (2011).
47
and the better the location, the higher the price. The traditional real estate suppliers
are unfortunately not as flexible as the business one is about to start, so both the
length of the contract (usually long-term), as well as limited growth opportunities
might be problematic. After securing the availability of real estate, one also needs to
invest in furniture and overall design, which initially can cost a lot. The entrepreneurs
must therefore carefully assess whether he/she has sufficient financial means to cover
these costs, as well as how and for what to use the money.
2: Finding the right business model. As one can see, there are many business
models possibilities within the flexible office space industry. These were thoroughly
discussed in Chapter 3 and can contain different revenue models, building layout and
interior designs, as well as a unique vision. Finding the right mix between those
components sets the bases for the whole business and should be selected carefully.
One needs to make sure that the business model offers something unique that attracts
your target customers; while at the same time it follows the overall vision and
strategy.
3: Find a matching organizational structure. Closely connected to the right
business model is the organizational structure. Organizational structure defined how
activities such as task allocation, coordination and supervision are directed towards
the achievement of organizational aims. Choosing an organizational structure that fits
the business model is crucial, since changing it later is very difficult. Once the owner
and employees are accustomed to it, changes will take time and effort. The bigger the
organization, the more challenging this will be.
4: Getting customers into your building. Even though the industry is rapidly
growing and awareness is increasing, the majority of the working population is not
aware of flexible offices, nor are they even conscious that this new concept could be
of interest for them. The part, which is conscious about the industry, needs to be
reached through different channels to ensure that they chose the right provider.
Getting the first clients to come in is normally the hardest part since they do not have
the possibility of asking other clients for experiences.
5: Competition. On the one hand the industry is still very young and awareness is
still growing, on the other hand competition is already existent. Most companies are
under the impression of being very unique in the market and therefore do not fear
competition. Sooner then later, also these companies will realize that just with being
situated in a niche will not be enough. Having the right strategy to fight the
competition and setting the own business apart from the others within the niche, is
key. As many interviewees indicate that there will be many businesses “popping up”
but many will also fail, due to abundant supply, while the demand is not yet fully
developed.
Strategies to overcome start-up challenges
1: Partnerships. In order to overcome the high start-up costs faced in this industry,
an entrepreneur could consider a strategic partnership with a real estate company.
These companies are gradually becoming aware of the possibilities of providing
flexible office space, but often do no have direct experience in the hospitality or
service industry. An entrepreneur with experience in the industry and having a clear-
cut strategic business plan (including sound financial projections) might therefore try
to collaborate with these companies. While this way, one might avoid the high start-
up costs and secure future growth options, there are also downsides to this approach.
With the real estate company not being in charge of the daily management of the new
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venture, potential principal-agent problems may arise. These problems arise because
sometimes the agent, or the entrepreneur in this case, is motivated to act in his own
best interests rather than those of the principal, or the real estate company. In order
to align these interests, the contract could include profit sharing agreements or
performance-based evaluation.
2: Design thinking/lean start-up approach. This strategy can be used both to
choose the right business model (Challenge #2), as well as to beat the growing
completion (Challenge #5). One should first make sure the business model fits the
entrepreneur. Start with yourself, and check your personality, your skills, your
passions, your values and your ambitions, and start creating a business model from
there. Secondly, make sure to know along which dimensions you can differentiate your
business model (see section 3) and match these to both your personal, as well as your
target customer’s preferences. Third, to make sure your business model actually
makes sense and creates customer value; one could engage in design thinking or
apply the lean start-up approach. Both methods have customer focus, either by
observing the customer in their natural environment or interviewing them to reveal
their true needs and wishes. Within this young industry there are still unmet needs,
although the customer might sometimes not realize it. Continuous customer feedback
will assure your value proposition, and provides you with the flexibility to change
certain things as needed (for more details, see theleanstartup.com).
3: Think about your organizational blueprint first. One should clearly define the
goals of the company and adjust the organizational structure of the company to match
these objectives. One should select an organizational model that fits the current, as
well as the future strategic ambitions of the company, as this will have an enduring
impact on the firm’s development. Changing the organizational structure of a firm at a
later stage has proven to be disadvantageous to firms, possibly leading to reduced
credibility and increased employee turnover. The web offers a free overview of
possible organizational blueprints, distinguished along the dimensions of staff
attachment, staff selection and staff coordination57.
4: Networking, events, actions and media attention. Getting your customers to
your building requires strong networking and communication skills. One must find
creative ways to bring your business under attention and could do this, for example,
by organizing events. While these events might not always create direct revenues, it
does attract potential customers that you would like to get into your building. Another
option is to generate media attention, by approaching local heroes or other well-
known people and get them to attach their name to your business. Zaamen, for
instance, is run by a prominent chef, who shot the pictures for his new cookbook on
site, and HNK provides office space to the Dirk Kuyt Foundation.
Growth challenges
Having survived the start-up phase and successfully established a business, further
challenges will be encountered. When demand is increasing and the original office is
not sufficient anymore, that is the latest moment when businesses should realize that
they need to grow. Many will tackle this issue long before capacity issues will arise. In
this industry growing will most of the time mean, that the original office will grow in
size, if additional office space is available but most often it means additional location
will be opened, regularly multiple at once. New challenges specific to this phase will
arise and those will be elaborated in this part.
57 Baron, J. and Hannan, M. (2002), ‘Organizational blueprints for success in High-Tech Start-Ups’ retrieved
from California management review vol. 44 no. 3, 8-38.
49
1: Manageability and quality assurance. When opening additional new locations,
entrepreneurs and managers explained, that keeping an overall quality standard in all
location is very important but at the same time very difficult. With quality is meant ,
delivering the same service level, being able to work in a similar environment and
having same level contact personal. The reason for the difficulty is that in the original
office, the entrepreneur or manager was in charge and could concentrate on daily
business. When starting an additional location, matters change and extra employees
need to be hired. Making sure that all employees follow the same quality standards
and having the same understanding of what the business needs, is a tricky issue.
2: Assuring the (original) value proposition. A value proposition is the promise
that value will be delivered to the customer and entails why a client should use the
service of one business over another. When growing the business, entrepreneurs and
managers often lose sight of what they originally wanted to deliver to the customer.
While concentrating on many activities connected to growth, keeping always an eye on
the value proposition is fundamental; otherwise businesses face the problem of losing
customers or serving the wrong customers.
3: Retaining and hiring high quality employees. One of the key strategies for
multiple challenges when growing is retaining and hiring quality employees. At the
same time this is also a major challenge. Knowing what employees are needed,
attracting the right ones and making sure that they stay needs a lot of attention and
knowledge. A manager from HNK explained that employees are important in any
position; front desk personal should know just as much about clients’ issues as the
location manager. Therefore having the right strategy to solving these issues is of
outmost importance.
4: Physical growth. As mentioned in the above points, growing often entails opening
additional locations or increasing the current one. This is not always an easy task
since finding the right location can be difficult. Also growing or changing the current
location can be a hassle when one is locked into long-term rental contracts. Therefore
following some of the strategies when starting a business is also an advantage when
growing.
5: Securing additional finance. Opening multiple new locations or just increasing
the size of the current location means further investment is needed, and often
involves a multiple of the capital that was needed to start with. Personal capital is
likely to be exhausted by now, and current profits are not high enough to support the
growing needs of your customers.
Strategies to overcome growth challenges
1: Establish clear rules and procedures. From the moment you start operating
your business, try to establish certain rules and procedures. Find out what the best
way is to approach new customers, how to register new members/clients, and how to
assure all your clients pay you for the services/products they consume. Write down
these procedures or even create a manual; this will save you a lot of time when
preparing new staff members for your growing business or opening a new branch.
Additionally, create clear house rules to set boundaries for your customers and make
sure these are communicated to them. New businesses within this industry could
easily appear a bit messy with the lack of clear rules and procedures. It could even
convey unprofessionalism; something you would want to avoid at all times.
50
2: Continuous customer feedback. In line with the design thinking/lean start-up
approach, make customer feedback central to your business. Make sure customers
have the possibility to voice their opinion and carefully listen to them if they do. There
are several feedback channels that could be installed, including both online and offline
formats. Examples of online channels are email, contact forms and surveys. A more
personal approach could include focused customer interviews, but one can also
acquire much information from casual small talk with customers throughout the day.
3: Stay true to your organizational blueprint. Your organizational structure
determines a great deal of your HR practices. As shown in figure 3.2, one should think
of how to attract personnel, how to keep them attached to your company and how to
coordinate them58 before starting the business. This, in turn, will help you to attract
and retain the right employees. Additionally, to guarantee uniformity and quality,
communication between the different staff members is crucial. The organizational
structure should facilitate direct flows of communication, as the lower level employees
(reception, lower level managers) are often closest to the customer.
Figure 3.2: How to attract, attach and coordinate personnel 59
4: Partnerships. In case your current location does not present opportunities for
expansion, one could possibly look for a nearby location that does support growth and
try to move the business. This is not ideal and should be avoided at all times, so, as
mentioned before, one would be wise to articulate the strategic ambitions of the
company upfront. However, growth in this industry usually signifies the opening of
additional branches, possibly in the same city or in other cities throughout the
country. As this is a costly adventure (remember the high initial start-up costs), one
could create partnerships. These partnerships could be with real estate companies,
but also with other local individual flexible workspace providers. Being able to serve
your customers at multiple locations is a great advantage over many other local
businesses, and gives you the opportunity to create a clear brand.
5: Alternative strategies to secure capital. Growing the business requires
additional capital injections. However, being in the growth phase is a big advantage,
as one now has a proven business model to present. This means there are other
options, besides one’s own savings, to raise new capital. Whereas banks are usually
reluctant in providing loans to start-ups, their willingness increases once your
58 Baron, J. and Hannan, M. (2002), op cit.. 59 Source: Baron, J. and Hannan, M. (2002), op cit. (page 11).
51
business becomes more stable. Additionally, the odds on successful crowd funding
campaigns also improve, as these small investors are (just like traditional equity
investors) found to place increased focus on financial roadmaps and risk factors60.
3.5 The entrepreneur
To successfully incorporate a chosen business model as well as start or lead a
business, certain skills and characteristics are convenient to possess. Having these
skills and traits does not mean guaranteed success; just as not having them does not
directly imply business failure. However, they might aid the entrepreneur in
overcoming some the challenges mentioned in the previous chapter. From the
interviews, a list was derived containing the most important characteristics and skills
for entrepreneurs operating within the flexible office industry.
Characterist ics
Charismatic: Within the flexible office industry, charisma is very important, as one
needs to convince customers to come in by communicating the unique features of
the product offering. In addition, one needs this ability to lead the people within
the company. As one entrepreneur mentioned: “The whole team should be up to
date on the progress within the company, and the decisions that are being made
by the different layers within the company.”
Persistent: Most interview partners stated persistence as a key to success, as one
should continue to try even if there are problems or difficulties, and not give up
instantly. Looking at the growing competition in the industry, there will definitely
be bigger hurdles; therefore it is crucial to turn lemons into lemonade.
Resourcefulness: Especially for starting entrepreneurs it is crucial to know which
resources are needed, where to look for them and how to manage them. Be
inventive: Do you need legal advice? There must be a lawyer that could once in a
while use a meeting room to meet with his clients. Find them and offer an
exchange, so you can focus on what you are really good at.
Open-Mindedness: Not getting too self-centered on critical issues where feedback
is relevant. Entrepreneurs working alone or in a closed team, often run into that
problem. They have a hard time listening to the recommendation of others. In the
flexible office industry it is very important to listen to your clients and work with
their feedback. Interviewees explained that one key characteristic starting
entrepreneurs should have is being able to listen and cater to the needs. Further
entrepreneurs should be open for new ideas and at doing things differently.
Skil ls
Communication: As obvious as it might seem, being able to talk to all stakeholders
involved is vital. When growing a business it becomes even more important.
Companies opening multiple locations reported that one of their biggest chal lenges
is to offer the same service everywhere. They stated that the key solution was to
structure effective communication channels.
Sales: Without selling the service, there is no business. Optimally, the service
should sell itself but that is rarely the case. Therefor being able to persuade a
customer, investor or any stakeholder is worth millions. Potential clients have a
wide variety of suppliers, so the sales team can make or break the deal.
Strategy: Connecting the present with the future. Having everything under control
right now does not mean that everything will be running smooth next year. That is
60 Ahlers, G.K.C, Cumming, D. Guenther, C and Schweizer, D. (2012), “Signalling in equity
crowdfunding”, working paper, SchulichSchool of business, York University.
52
why constantly having an eye on the business strategy is beneficial. Many
entrepreneurs stated that having the right clients is very important. Without
having a strategy and knowing where one wants to go, taking in any client might
seem like a good idea but if these clients represent the wrong image, your
business will not head where it was supposed to go.
Finance: Keeping the cash flow running is key when starting a business. This is
true in any industry. Still many interviewees mentioned this explicitly. Not having
huge revenues means that the way to be becoming profitable can be long and
rough. Therefore managing finance well and knowing before when problems can
occur can save the business.
3.6 Future outlook
The market for flexible office space is currently still growing and developing, and both
supply and demand are not yet stable. For the direct future, many more players are
expected to enter the market: The growing customer base, combined with relatively
low entry barriers and a seemingly easy set-up of the business attracts many aspiring
entrepreneurs. However, the former chapters indicate that starting a business in this
industry might be quite complex, requiring a suitable business model and a fitting
organizational structure. Therefore, not all new players will be successful, and not all
concepts will work, and time will assure the chaff will be separated from the wheat.
Additionally, the majority of the current players are relatively young, and only time
will tell whether their business model is differentiated enough to remain ahead of the
growing competition. Secondly, among the new entrants there will be many spin-offs
of existing real estate companies. Despite the economic recovery, the real estate
market for office space lags behind, and real estate companies will need to find
alternative ways to fill up their buildings.
Box 3.3: Key recommendations to nascent and start-up entrepreneurs
Engage in flexible real estate contracts- not only should your customers have access to
flexibility, so should you.
Treat all customers well. All of them want to feel welcomed, and all can be valuable to
your business.
Build a pleasant and open working environment.
Do offer extra’s, so that the customers will not get charged for every copy they make
or every cup of tea they drink.
Do not forget about your cash.
Try to get customers in for longer periods so that there is a guaranteed cash flow.
On the longer-term, the number of businesses will stabilise, with a few big player
surviving, and a number of smaller firms serving particular (local) niche markets.
Moreover, as the industry develops, there will be room for new business models.
There could be, for example, the option of focusing purely on price with a pay-as-you-
go model, targeting customers that do not care about add-ons, extra service and
communities, but instead just want a desk and a coffee machine. Furthermore, with
the trend of the 24/7 economy continuing, more flexibility in opening hours might be
required.
Overall, the industry of flexible office space will grow, develop and change, requiring
flexibility from existing players and a differentiated business model from new
entrants. Use the information provided in this report to your advantage and keep
these last words of advice in mind: “A guarantee in this life: Change! Flexibility is
better than predictability!” (Evinda Lepins)
53
Acknowledgements
We would like to thank all our interviewees, who agreed to cooperate with us and
provided us with all the necessary information we needed. For this, special thanks to;
Vareska van de Vrande, Sipke Feenstra, Wouter Broekmeulen, Dominique van
Elsacker, John Gerdsen, Elma van Boxel, Nella de Jager and Marloes te Riele.
55
The results of Panteia/EIM's Research Programme on SMEs and Entrepreneurship are
published in the following series: Research Reports and Publieksrapportages. The most recent
publications of both series may be downloaded at: www.entrepreneurship-sme.eu.
Recent Research Reports and Scales Papers
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56
H201215 22-11-2012 The Production Structure of Small, Medium-sized and Large
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