RSR Technologies

Rachel Round (22) is a 4^th year student in engineering at York University. Last year, she and two classmates, Jung Shen (23) and Miguel Rodriguez (22), engaged in a hackathon focused on developing entrepreneurial ideas related to the United Nations Sustainable Development Goals. Hackathons represent intense entrepreneurial learning opportunities. Over the three-day event, each of the 72 competing teams came up with an idea, engaged in some preliminary market research, sketched out their business model, and then pitched their idea to a panel of experts. Throughout the process, the teams received guidance from mentors and had access to functional area experts (i.e., marketing, finance, etc.). Another neat thing about hackathons such as this is that the top teams are often awarded a cash prize. In this case; $1,000 for 1^st place, $500 for 2^nd and $250 for 3^rd. Rachel's team finished in second place. But more important, they met other entrepreneurs and got valuable feedback on their idea.

The idea Rachel's team came up with, and has been working on for the past year, focuses on the challenges associated with reducing food waste and is quite simple. They are using microwave technology to change the way food is freeze dried. Freeze drying is a method of preserving food without the need for refrigeration, chemicals, or other treatment. Presently, traditional freeze dryers are large and expensive pieces of equipment. Because of this, food is usually shipped to processing plants to be freeze dried. Typically, these plants are located in major cities. By introducing microwave technology, Rachel, Jung, and Miguel have been able to shrink the size, costs, and energy usage of the machine in meaningful ways. Importantly, these smaller and more efficient machines can be used in remote regions of underdeveloped countries where plenty of food is grown but where shipping it at harvest time can be problematic. Because of this, a lot of food crops go bad before they can be shipped and, usually, they cannot be stored for later use. With the new machine, instead of the food having to be shipped to be freeze-dried, the machines can now be brought to where the food is grown. Local farmers can then use them to produce freeze dried food that is easily stored instead of seeing their crops rot in the fields. This represents an important step in ensuring more sustainable food supplies.

It has taken most of the past year to develop the machine and get it ready to go to market. Even though it is the size of a conventional oven, it is still less than 1/30^th the size of a conventional commercial freeze-dryer. The total variable cost to build the machine based on low volume production is estimated at $2,150. As volumes ramp up and more learning occurs over the next year or two, this cost should drop by at least 25% such that Rachel believes longer-term production costs will be around $1,600 (see table 1 for cost breakdown). Based upon feedback and input from industry experts and those involved in foreign aid and development, it has been determined that a selling price of around $3,500 is not unreasonable because buyers in many countries will be heavily subsidized through government and other sponsorship programs. The $3,500 is the price if sold in Toronto; buyers are responsible for all shipping costs. Perhaps not surprisingly for a group of technology-focused engineers, the plan right now is to sell the machines over the internet and Miguel has already developed a fully functional website. He is just waiting for the team to decide on a company name before the site is launched. The three of them have been going back and forth on names for a few months now but they keep coming back to 'RSR Technologies' as most likely.

While developing the machine, Rachel and her crew have been able to operate in the maker and incubation spaces available on campus free of charge. However, now that they are gearing up for commercialization, they want to move to a new facility and Jung has recently found a small building for lease near his home in Markham. He just happened to be passing it one day but has already toured the facility and says it is laid out in a manner that suites their needs. Moreover, the building is vacant and available immediately with a lease rate of only $2,500 per month. Taxes, utilities, internet, phones, and other fixed monthly fees will total $1,500. Jung estimates the costs of getting everything else they need to set up a production line and an office will total about $40,000. However, because he has never been involved with setting up a production facility before he thinks it is safer to assume that total costs will be closer to $50,000. That might sound like a lot of money for three university students to come up with, but by approaching their family and friends, they have already been able to secure just under $65,000. Rachel remembers a mentor at the hackathon explaining how when money is invested based on the person more than the idea it is called 'love money'. Across Rachel, Jung, and Miguel, the individual amounts of 'love money' raised are $15,200, $38,500, $10,500 respectively. These amounts include some non-interest-bearing loans to the three of them (and non-repayable in some cases) that have been invested as 'owner's equity' into a newly formed numbered corporation (they plan on changing that to a named corporation once a name has been decided upon). As such, after paying some outstanding bills, the company now has a bank account balance totaling $59,273. The fact that it is not earning interest doesn't bother anyone because they all know it will be spent soon to get things set up.

Although everything appears to be progressing well, there are a few issues the three of them need to resolve. For example, one thing they hoped to do yesterday was finalize ownership stakes because they are not in agreement on this. While Rachel and Miguel think everyone deserves the same 33 1/3% ownership share because they all have contributed equally in terms of time and effort over the past year, Jung feels he deserves more because he raised the most money. Unfortunately, with all the snow that fell the night before, Jung was unable to get to Mississauga to meet up Rachel and Miguel for breakfast at the restaurant that has become their second home. They meet there frequently because it is just off the 407 and is easy to get to. It is also owned by Miguel's mother, and she takes very good care of them. At that meeting, they were also going to discuss what salaries they might be able to draw from the business. Here, there is agreement that they each deserve the same amount, but not what that amount should be. Thoughts to date range from $0 (i.e., leave all the money in the business) to $54,000, which is believed to be the average starting salary of a recent engineering graduate. With none of the three having any business education or experience, they are not sure what the best approach is. In striving for a compromise, Rachel has suggested $27,000 for each of them although she was not sure what the implications of that are.

There are also a few things nagging at Rachel. First, although she is very excited about the machine and the contribution it should make to the food waste problem, this whole endeavor has evolved without her taking a step back to see how it fits with her personal life plans. What started out as a weekend hackathon for fun and learning has now taken on a life of its own. Second, the three of them have one more term to complete before graduation and she is concerned about signing a lease to start January 1^st. None of them will be able to commit themselves fully until after April exams. Third, despite agreement to market the freeze dryers on-line, Rachel recalls the industry and foreign development experts telling them that the only way to do this right is to engage distributors in the local markets who actively sell the product. Educating farmers and others will be important to ensure adoption. Distributors also carry inventory to facilitate sales, which the experts expect will be at least ten times higher through distributors than via the internet. Yet, Rachel must agree with Jung and Miguel that $1,050 (i.e., 30% of selling price) is a lot to pay the distributors for all this. It would cut the anticipated profit on each machine by more than one half! Fourth, because Rachel and Miguel live close to each other in Mississauga, they have had more opportunities to meet and talk about things. They are a little concerned that while they look at their investments in the venture as something they can afford to lose and more than offset by the learning experience, Jung does not seem to be in the same position. This is because they know that $30,000 of the money raised by Jung came from a friend who expects it to be repaid with equity like returns.

As Rachel finishes up telling you all this (she must rush off go do a mechanical engineering exam), she asks one last question: "A prof here is pushing us to develop a business plan: do we really need one?" She is gone before you can answer, but you know you want to help her. The problem is where do you begin and what do you suggest? You will have to think this through before you get back to her tomorrow.

What are the five issues in this case study? You are to play the role of a trusted advisor to the entrepreneur and offer insights and suggestions (general and/or detailed as appropriate) that will help her think through some or all of the issues the case touches upon.

Table 1: Variable cost breakdown
	Short-term, low-volume production	Long-term, high-volume production
Material costs	$1,600 (Based on current purchase prices)	$1,300 (Based on volume discounts suggested by current suppliers)
Labour costs	$550 (Based on current assembly time of 37 hours and assuming minimum wage. Currently, this is done free of charge by Rachel and Miguel)	$300 (Based on a reduction to 20 hours assembly time through learning curve effects. Wage assumption is minimum wage paid to employees)
Total variable costs	$2,150	$1,600