m ■. /..iW HF 5500 A96l ^' %a3AiNn-3Wv >&AbVjian-^^'^ ^(^AiivaaiH^ o "^/^aBAINH-^WV ^^llIBRARYQr -^^lllBRARYOc ^(i/OJITYDJO^ ^.!/0JllV3JO^ ^^.OFCAIIFO/?^ ^WE•UNIVER% o vvlOSANCElfj> o ,^;OFCAllF0/?;i^ >;;OFCAllF0ff^ %aaAiNa]WV^ '^ %a3AiNn-3W^ ^HIBRARYQo ^^^IIIBRARYQ^^ aWEUNIVERJ/a vjsclOSANCElfx^ ^' ^' ^Til^ONVSOl^'" ^/^a3AINn-3WV ^lOSANCElfX/ o %a3AINn-3WV ^•OFCAUFO/?^ ^OFCAL[FO% "^OAavaaiii^^ "^ "^^AavaaiHS^^ ^\\EUNIVERS/A ^lOSANCElfj> o ■^ ^ ^ - > so ■^/5a3AiNn-3WV^ ^^UIBRARY<9/^ ^^WEUNIVERJ/^ ^^lOSANCElf/^ ^JO^ .>j.OFCALIFO% > ^^^E•UNIVER5/A v>:lOSANCElfj> f y^ — .^ ;,.OF-CAIIFO/?^ 4? ^^AHvaan-i^ >&Aavaani^ ^lOSANCElfj> Q -^lllBRARYOc ^lllBRARYOr^ ^\^EUNIVERS'//, ^lOSANCElfj> o ■ LauncKin^ a Ne^v Enterprise By MOiS H. AVRAM, M. E. President, M. H. Avram & Co., Inc. Member, American Society of Mechanical Eng,ineers. Member, American Association for the Advancement of Science. Lecturer on Industrial Engineering, New York University AMERICAN INSTITUTE OF FINANCE BOSTON "rOMPLRTE EDUCATIONAL COURSE" IN THE SCIENCE OF MAKING MONEY MAKE MORE MONEY This list is arranged in the order of proper reading. The books are accompanied by a series of test questions, key prob- lems and analyses outlines, enabling the student to apply the knowledge acquired to immediate stock market and investment contiitions. 1. Developiug Financial Skill 11. Investment Securities 2. Forces Which Make Prices 12. Business Cycles 3. Manipulation and. Market 1^- Measuring and Forecasting General Business Condi- tions Leadership 4. Handling a Brokerage Ac- count 5. Market Information 14. The Technical Position of the Market 15. Money and Credit 6. The Essential Features of ^^ Business Profits Securities 7. The Value of a Railroad Security 8. Industrial Securities 9. Oil Securities If). Mining Seen rities 17. Launching a New Enterprise 18. Securing Capital for Estab- lished Enterprise 19. Internal Financial Manage- ment 20. Search for Bargains Copyright, 1922, by American Institute of Finance TABLE OF CONTENTS Chapter I. Essentials of a Business Enterprise Pa^e Development of New Enterprises . 5 The Personal Equation 6 Profits, the Business Man's Test 6 What are the Potential Profits? 7 Essentials to Consider 7 What are the Essential Factors? 8 The Undertaking Itself 9 Management .... 9 Finances 10 Starting Under Favorable Conditions 11 What Steps to Take 11 Chapter II. Testing the Soundness of an Enterprise Variables Encountered 13 Investigation Required 13 Expert Investigation 14 Findings 15 Recommendations 15 Engineering Report 15 Patent Situation 16 Investigation of the Commercial Field 18 Findings of a Commercial Nature 19 The Result Sought 20 ^ Chapter III. Competent Management Growth of an Organization 21 Departments and Specialized Duties 21 Managerial Positions 22 Organization Building 23 Building from the Top Down 24 Sales 25 The Directorate 26 Choosing an Executive Committee 27 Functions of the Management 27 V 447466 4 Table of Contents Chapter IV. Raising Capital Pa^e Mow Secure Funds? 28 Three Essential Elements 28 What Constitutes a Banking Proposition? 29 A|)i)roaching the Right House 30 Securities Adapted to Prospective Purchasers 31 Requirements of the Business 32 Determining the Corporation's Financial Structure 32 Chapter V. Variations in the Promotion Plan Public Utilities 34 Railroads 35 Industrials; Mining and Oil Property 35 Consolidation 37 Present Attitude Toward Consolidations 37 Chapter VI. Work of the Promoter Three Essential Steps 38 Inventors and Promoters 38 What the Promoter Ensures 39 Assembling the Proposition 40 "Selling" the Financial Interests 41 Patents and Patent Protection 41 Promoter's Use of Options 42 Initial F'inancing 42 Whom to Interest 43 Over vs. Under Financing 43 Guarding Expenditures 44 What the Promoter Does 45 Justification for Promoter's Profit 46 Test Questions Answers to Starred Questions Key Problem CHAPTER I ESSENTIALS OF A BUSINESS ENTERPRISE ''There is nothing that the world admires so much as brains. The man without brains, and with money, cannot keep the money. The man with brains, and without money, can soon get the money, if he chooses to go after it hard enough.'" — Charles M. Schwab, Chairman of the Board, Bethlehem Steel Corporation. Development of New Enterprises There is in this relatively new and expanding country a very large number of openings for the establishment of a busi- ness. Men of imagination, energy and the courage of their con- victions find opportunities seemingly without limit. While much has been said of the fabled wealth of Galconda, enter- prising business leaders of America surpass it by far in their matter-of-fact corporation statements and balance sheets. These opportunities, in far greater degree than usually is considered, are within the reach of every one. Their successful exploitation depends almost entirely upon the ability of the in- dividual to grasp the principal features of his undertaking and hew unrelentingly to the line mapped out. The greatest enemy to business success is lack of sustained enthusiasm over the difficult and prolonged period when discouragement and falter- ing confidence creep in to induce relaxation of effort. Those enterprises which have shown the least promise in their initial stages and have had the most difficult beginnings have — due to the energy and persistency of their sponsors — often made our greatest commercial successes. Courage, enthusiasm and unfaltering confidence in self are the keystones upon which those who would launch an enterprise must build. 6 La i( }i c h i u ^ a N cw E n te r pr i s e The Personal Equation The character of a business in which a man engages is naturally limited largely to his temperament and quality of imagination. What it becomes, however, is the result of individual charac- teristics and tendencies. A shoe business may be confined to one store in a dark alley, from which the owner is able to eke but a meagre living, or it may become a national institution such as the W. L. Douglas Shoe Company. Douglas could have remained a cobbler all his life, but his imagination and his energy carried him forward to the establishment of a great cor- poration, not only manufacturing shoes but selling them through its own stores. Woolworth could have lived and died in Lancaster a hopeless bankrupt and his great idea of a chain of five and ten cent stores remained locked in his own breast, but despite failures and ob- stacles his spirit carried him forward to a success seldom equaled in any business. Hence we can see that the possibilities for establishing businesses are limited only by the capabilities of the individual himself. Profits, the Business Man's Test What has been said, while essentially true and demonstrated so in career after career, must not be permitted to obscure certain facts which though somewhat less pleasant to contem- plate are none the less important. What represents the test of a successful enterprise? The answer is "profits." But what are profits? It would seem this question would require no answer, but experience dis- closes that even among big business men there is a tendency to consider a business a profitable enterprise which shows any sort of earning. Hence, it should be definitely understood that profits is the sum remaining after deducting from the gross income the total amount of expenditures necessary to the con- duct of a business. This includes every item spent from the company's treasury. This is a point which is often confused so long as the gross sales exceed the gross expenditures. There are Essentials of a Business Enterprise 7 many items, however, which must be charged against expendi- tures even though they do not represent money actually paid out. When this is considered many companies ostensibly making profits would be found actually to be operating at a loss. What are the Potential Profits? "What are my potential profits?" thus becomes the most vital of all questions to the man who contemplates launching an enterprise. If he cannot answer this question, how is he to know what his project is worth as an investment? Does he know whether there is an actual commercial demand for his new product, or whether such demand could be created? What planned methods of development have been adopted to insure the shortest route to quantity production and the market with the least outlay of time and money? Are plans made for stand- ardization and interchangeability of parts. Incidentally, what knowledge has one concerning prior patents covering the basic plans of his machine or device? Unless these, and similar questions, can be answered, upon what basis is the person judging the financial expenditures he proposes to make on development? All these questions should, in fact, be answered with reasonable definiteness, so that the financial expenditures are surrounded with less risk and the highly profitable enterprise expected may in reality develop. Essentials to Consider Very fortunately, there are specific principles and measures which, when employed correctly, enable the business man to test a proposed enterprise in the way just suggested, and, if satisfied with the result, to proceed with increased certainty. The prin- ciples underlying all business undertakings are essentially the same. They may vary as to form, according to the character of the business to be undertaken, but rarely as to method. Occasionally an enterprise is encountered in which the main factors have been so submerged beneath a multitude of details 8 L II II }} c h i n g a New Enterprise as to be barely recognizable. This is usually due to the fact that in the beginning its sponsors have failed to determine upon a fixed method of operation and it will generally be found that in direct ratio to the number of details with which the operation of the business is burdened, confusion as to the company's purpose reigns in the mind of its leaders. It is thus essential first of all, when considering the launching of an enterprise, to look carefully into the nature of the business which it is proposed to undertake. It can be safely said that nine-tenths of the business evils of today are due to haste and immature consider- ation in getting a business under way. Men meet, discuss what they consider an attractive possibility for a profitable enter- prise and before one can say "Jack Robinson" they are in busi- ness. It is then their troubles begin. Since our aim is not merely to avoid these troubles but to build solidly, and with profit, let us raise this fundamental inquiry, What are the essen- tial factors in a business enterprise? What are the Essential Factors? The viewpoint with which we approach this question, is important. It ought to be considered, before dissecting a business into its essential factors, that the basis upon which a permanently stable and profitable business rests is after all its good-will. A good-will in any business cannot be built up with- out a thorough understanding of its sponsors of their moral responsibility to themselves, their business, their competitors and the community as a whole. A business can only prosper in direct ratio to its qualities of inherent excellence, either in its products or in its business dealings generally. There should be no seeking of advantage by ulterior acts, or efforts "to put it over" their competitors or customers in any way but by fair and honorable dealing. The effort should be always to build a substantial good-will and repu- tation for a business. Enterprises founded on such principles will stand when others, for a time being more prosperous, perhaps, fall. Essentials of a Business Enterprise 9 With this in mind, the essentials of an enterprise are briefly: 1. The undertaking itself. 2. The management. 3. The finances. The Undertaking Itself In considering an undertaking, its selection depends almost entirely upon the adaptability of the parties interested. We often hear people speak of the things they like best — the same applies to a business. An enterprise so initiated begins with the first essential of success, because the work entailed becomes play to those interested; 1. They like, to an extreme degree, the work they are assum- ing. 2. They usually know the subject thoroughly. Because of these tendencies many propositions which were but paper plans have developed to gigantic institutions. We have examples of this in the International Correspondence School, the Alexander Hamilton Institute, the American Surety Company, The Postal Life Insurance Company and the Bethle- hem Steel Corporation. In the case of the last named, the Bethlehem Steel Company, when Charles M. Schwab took hold of it, was but the shell of a manufacturing plant. What it is today needs no explanation. It was Schwab's imagination, initiative, joy in the work and faith in himself coupled with a full knowledge of the necessities of the business that carried it through. We could mention hundreds of other great enterprises in which the spirit and love of the work made of them the concerns they are today. The first essential of an enterprise then is the idea and the driving force back of it. Armed with these two, seemingly im- penetrable fetters of organization difficulties may be overcome. Management No results of a profitable nature, however, can be expected even when energy and faith stand at the helm of an enterprise 10 La u u ching a New Enterprise unless its performance is based on sequential management. In other words, management is the keynote of success in business. Too much stress cannot be laid on thi^ point. Unless an organization is so linked up in its sequential operations or acts that the result is not only a good one but a profitable one, it cannot be a success. Management is, in the simplest form of its definition, the operating of the various departments under responsible heads who so correlate their efforts with final responsibility to a chief executive that the sum total of effectiveness is balanced and constantly progressive in the good-will of the business. Finances A business usually is the result of some one's initiation whose mind is seeking that form of undertaking which by every form of estimate will yield the largest profit. When a plan is finally devised every one is willing to go into it and work out its every detail, but few are willing to undertake the responsibility for financing. As a result of this attitude, to use the vernacular, of "letting George do it," it is not long after its launching that the business finds itself in need of funds. George had done it — perhaps to the best of his ability — but for lack of co- operation in this most important detail he has not done enough of it. Instead of figuring how much was actually needed, the system has perhaps been, how much the business could get along without. When this difficulty is met the managers of the enterprise usually exclaim that a good business is going down because of the lack of money and the investors begin to inquire how good the business really was from the start. That money will be required to sustain the new enterprise before it reaches a paying basis, is a fact which ought to be recognized candidly at the start. And the means for securing it ha\c to be provided if there is to be assurance of ultimate profit- able success. Essentials of a Business Enterprise 11 Starting Under Favorable Conditions Each of the foregoing factors, undertaking, management and finances, has an ecjually important position in the field of business or industry. None can stand alone without the other two. From an investor's point of view — in this regard is meant an individual contemplating investment in an enterprise already operating but seeking additional capital — • the manage- ment should receive the closest scrutiny. From the point of view of the sponsors of an enterprise, the field for its activities and methods of bringing their prospective company to success should receive first consideration. These factors, however, are usually thought of too late. Financing, usually thought of first, should be preceded by an investigation of the other two factors. With the idea of building up good-will as an underlying con- sideration, we may conclude, and with a clear cut view of 1, undertaking; 2, management; and 3, finances as the three ele- ments which must be dealt with and co-ordinated in the pro- posed enterprise, those responsible for its ultimate results are fairly embarked upon their project. One of those associated with the enterprise should have a thorough understanding and knowledge of the line of business, its product, its field and methods of operation. Another should be thoroughly informed on the subject of finances. And it is desirable that another should be widely experienced in sales and sales methods and markets. No allowance is made here, of course, for those foolish individuals who attempt a business of which they know nothing, because it is seldom that they remain in it very long anyway, but with the above point thoroughly understood, and with its sponsors endowed with vision, tenacity and purpose — a vision that sees beyond the difficulties and ob- stacles of the moment to the golden opportunities beyond, and a tenacity to follow that vision despite all drawbacks, to the purpose in view — a business so established bears every likelihood of success. What Steps to Take What has been said so far outlines the problem with which we are faced and the methods in general for dealing with it. 12 Launching a New Enterprise Tlic chapters \vliich follow deal with these topics in greater detail: 1. The Enterprise. How test its soundness? What elements should be scrutinized? What are the most feasible methods of investigation? How secure, and use properly, the expert's resources? What safeguards should be employed to protect the new enterprise? 2. The Management. What offices should be provided for? W'hat duties pertain to each office? How should an organization be built? What special difficulties are commonly encountered in organizing a new enterprise? 3. The Finances. How much money will be required and when? What represents a suitable financial structure for se- curing this money? Which methods in selling securities ought to be adopted? What special methods of handling the finances need to be followed at first especially? CHAPTER II TESTING THE SOUNDNESS OF AN ENTERPRISE Variables Encountered When a new enterprise is proposed, its backer can expect to meet first of all this question, Will it pay? Should others not raise this question, he should put it to himself, nevertheless, fully as insistently. What is wanted, in other words, is an accurate estimate of the possibilities of profit in advance of the project's full development — or non-development, as the case may be. There exists in every new project, both because of its newness and the always more or less changing nature of business itself, certain variables or elements whose operations only later will become evident. Were the enterprise proposed a brick making plant, for instance, these variables would in all probability be few in number and relatively unimportant. Were the enter- prise, however, to have for its basic commodity an inventive product or a new product of any nature, especially in the mechan- ical, electrical or chemical field, variables of the most intricate nature are likely to be encountered. These variables, by their presence or relative absence, determine in large measure the extent of the investigation required in determining the sound- ness of the project at hand. Investigation Required It is possible that, so well is the proposed enterprise under- stood by those who conceived it, that a brief examination of conditions and a few hours figuring over costs, markets, initial capital, etc., are sufficient. Whatever further investigation occurs is primarily for assembling data with which to impress the possible financial backer, than with a view to rendering the 14 La a u ching a New Enterprise project less risky. But this is rather the exception, than the rule, with new enterprises today. The attention of business men are drawn very largely at present into the field of industrial manufacture, in which the variables encountered are numerous and complex. Due to this situation, this field abounds in pitfalls, into w^hich thousands of apparently promising ventures have fallen. Hundreds of millions of dollars are being wasted annually through ill-con- sidered participation in undertakings of this nature. Expert Investigation An inventor not long since brought into being a multiplying machine, which appeared to possess merit. While the matter was still in the incipient stage, the possibilities of the machine were examined by an engineering firm, which specialized in the investigation and development of mechanical devices. The report of this firm will be presented here, since it covers prac- tically every phase which enters into an expert investigation, preliminary to attempting to place a new device on the market. The writer has omitted those portions of the report which he considers are not needed to make the whole situation, and the methods employed, perfectly clear to the reader. REPORT ON BACON MULTIPLYING MACHINE June 29, 1917. Mr. George M. Bacon, Salt Lake City, Utah, Dear Sir: Your instructions under date of March 22, 1917, requested that we assume for a period of one year the management of your problem, a "direct multiply- ing machine" — patent application in U. S. Patent Office, Serial No. , dated Nov. — , 1916, for which you supplied us with plans, specifications and other information of a technical nature. To arrive properly at definite conclusions, we have proceeded to carry out our investigation and recommendations along the following lines: 1. Analysis of the initial plans submitted. 2. Preliminary patent investigation. 3. Investigation of the commercial field. Soundness of an Enterprise 15 4. Model making. 5. Manufacture of tools. 6. Manufacture of finished machines. 7. Marketing. The problem submitted to us for analysis is one where we had to make certain of the first three steps before you could be advised to proceed safely and properly with the expenditures involved in development work. We have fully stated our recommendations at the close of this report. Findings : Our general findings are: 1. That mechanically the device is new in its plan of construction. 2. That from the preliminary examination of the prior art, it stands alone from a patent law point of view. 3. That the commercial investigation fully brings out the fact that no direct multiplying machine has been built or placed on the market, and that there is a demand for a small and a large listing machine of this type. Recommendations : Our general recommendation is: That a small three-place direct multiplying machine be redesigned and built to include all such features as are found necessary to render the machine operative in accordance with the principle laid out in the invention. During the period of three months, from March 25th to June 25th, 1917, we have been able to cover the following: (a) Study of the initial plans — or engineering report. (b) Preliminary patent investigation. (c) Investigation of the commercial field. This work was carried out by four departments of this concern; and at least one hundred individuals and heads of concerns, in some way identified with computing machine devices, have been interviewed. Engineering Report: In examining the preliminary data submitted we have divided the work into two parts: 1. An analysis to determine whether the machine as originally designed would perform its functions. 2. An analysis to determine what changes, if any, would have to be made to bring about a perfect functioning in the machine. Careful preliminary study proves that in principle the machine will 16 L a II n c h i n g a New Enterprise perform its functions substantially as outlined by you, except in two particu- lars, which would fail of their objects, i.e., (a) The order in which the multiplicand and multiplier dials are set. (b) The order in which the multiplicand and multiplier dials are reset. (Here follows the detailed report of how these changes and other objections in the design would be overcome, all of which is technical and unnecessary to print in order to render the illus- tration plain. The engineering report is qualified by the follow- ing statements) : 1. The general arrangement of the mechanism is comparatively simple. 2. Regarding approximate sizes of machine, it will be necessary to enlarge diameters of differential wheels slightly, as present diameter of low ratio is impracticable. 3. The machine should be inclined at an angle to facilitate readings. This would increase the height, but the machine may be considered portable if limited to the number of digits we recommend. 4. The principle of the machine will permit of increasing the number of digits by additional differential units and transfer mechanisms. 5. There do not appear to be any unusual problems involved in tooling for manufacture. 6. At the present time it would be difficult to make an estimate on cost of production. This can be done accurately, both as to tools and manufacture, upon completion of final shop drawings. 7. The general design of the machine is such that the finished product may be made very pleasing in exterior appearance. 8. The following are among the mechanical difficulties anticipated: (a) Possibilities of excessive friction. (b) Lost motion in the intermittent differential gears. (c) Possibility of overthrow on the product dials. 9. The machine is capable of functioning as described, but discrepancies may be encountered which can be determined only as the develop- ment work and tests progress. Patent Situation: We have studied carefully the reference cited in the rejection of Jan. — , 1917, in the matter of the patent application Serial No. — , filed Nov. — , 1916, with the exception of the Vermehren patent of July 10, 1906, which in the rejection is not identified by a number and no copy of which patent accom- panied the papers submitted to us. We have, however, looked up this patent in the Patent Office Gazette and understand its relation to the art. None of the patents cited by the Examiner meets the broad idea of Bacon's invention; that is, employing a plurality of Series of differential gears co-operating with Soundness of an Enterprise 17 a corresponding series of pinions adjustable radially to the respective differ- ential gears and shafts connected with product dials adapted to be driven by one or more pinions to accumulate the product. This arrangement of gears seems to be new with Bacon, for the Patent Office has not cited anything like it, and in our examination of the art on multiplying machines, we have been unable to find any patent showing a machine operating in this manner. Vermehren shows a staggered arrange- ment and interconnected gear mechanism in his patent No. 1,134,169 of April 6, 1915 (not a reference), but in the machine illustrated in this patent he multiplies by partial products instead of full and complete rotation, as is done in the Bacon mechanism. The Examiner is justified in rejecting most of the claims 1 to 14 of Bacon, in view of the Heberling et al., and Vermehren patents, because these patents show that the use of concentrically arranged crown and spur gears correspond- ing to the differential gears (B) of Bacon was not new with Bacon, and there- fore he is not entitled to claims covering the use of such a wheel in computing mechanisms. In view, however, of the fact that with the exception of claims 24 and 25, claims 15 to 26 inclusive are considered allowable, the staggered or diamond arrangement and the interconnection of the differential gears seem to be new with Bacon. In our opinion the claims are too specific, and in further prosecution of the application, an effort should be made to obtain broader claims on the combinations of mechanisms shown to be essential to the proper operation of the Bacon machine. The Examiner objects to the claims on the ground of multiplicity, because the claims recite specifically some old mechanisms. For this reason broader and more generic claims should be inserted. The specification in the Bacon application contains numerous mistakes and errors in description and should be revised and corrected. The question also arises in connection with this application of eliminating therefrom all references to the zero resetting mechanism of the multiplicand dials, because this mechanism, as shown and described, is inoperative, and if this feature is retained, it will result in invalidating all claims including this feature or claims relating thereto. An examination of multiplying machine patents and the claims thereof fails to disclose any claims which in our opinion would interfere with the Bacon multiplying mechanism, or the improvements suggested in the engineers' report. The Bacon machine is not a key machine, neither is it handle or power operated. For this reason many of the patents of modern commercial machines do not contain claims pertinent to the Bacon mechanism. So far as we have been able to discover, there are no so-called "direct" multiplying machines in any way resembling the Bacon mechanism on the market today. We have heard of several said to be direct multiplying machines under development, but their principle of operation and stage of advancement is not known to us. 1 S L a 11 11 c h i no a New Enterprise Several patents have been issued on machines having some of the features of direct multiplication, and we call attention particularly to the following: Patent to Saunders, No. 775,939. Patent to Rosenthal, No. 1, 168, 745. Patent to Crumpton, No. 1, 174, 831. Patent to Verniehren, No. 1, 134, 169. We might mention several other patents on multiplying machines, but we deem it unnecessary since they do not involve mechanism similar to that of Bacon, and those mentioned illustrate what has been done. Referring to paragraph 4 on the patent situation, an opinion was sub- mitted based upon Mr. Bacon's specifications, relating to the resetting of the multiplicand dials, said opinion being that this mechanism is inoperative and ineffective as described. From our drawing "A" attached, it will be noted that this fault is obviated. The patent examination indicates that the application would have to be redrawn to some extent, to cover broader generic claims, and also to cover the additional refinements and improvements that will be added during the process of redesigning the machine. A great deal of refinement is necessary, but we are convinced that ample ground work exists to warrant further study and development with the view of increasing the capacity of the machine, and at the same time keep within commercial limitations. We therefore recommend that no action be taken by your attorneys until December of this year, the latest date for submitting an application to the Patent Office being January — , . Investigation of the Commercial Field The investigation to determine the commercial possibihties of the Bacon Multiplying Machine was conducted in the follow- ing manner: 1. By interviewing a large number of adding machine com- panies and studying the literature they publish. 2. By interviewing all individuals whom it was thought were in any important way connected with the manufacture, designing or developing of "direct" multiplying machines. (The names of thirty-eight companies were then listed, with those which have machines with multiplying features which claim either direct or indirect multiplication being indicated by a (*). Three other concerns were cited as claiming develop- ment of direct multiplying machines. And the patent report cites machines patented but not yet built. Soundness of an Enterprise 19 The report then gave a general description of the multiply- ing features of the machines that multiply, and all significant points in connection with these machines, and those approaching the direct multiplier were noted. Findings of a Commercial Nature 1. That there was merit in the direct multiplying machine. 2. That so far as it was able to find, there was no so-called "direct" multiplying machines in any way resembling the Bacon mechanism, on the market. Several machines said to be direct multipliers were found to be under development, but their principle of operation and stage of development were unknown. 3. That two types of multiplying machines would be in demand — a small inexpensive type and a large listing type. 4. That the high cost of the indirect multiplying machines prohibited a large distribution of the same, and that for this reason a moderate priced machine would find a market. 5. That the immediate market demanded a small machine with five digits in the multiplier and se\'en in the multi- plicand. 6. That the weight of the small machine should not exceed twenty-two pounds. 7. That it should not cost more than twenty-five dollars, when made in large quantities. 8. That it should sell for at least one hundred dollars, and not more than two hundred dollars. The report closed with final recommendation that in order to avoid a large unnecessary expenditure, a machine be designed and built, having but three places each in the multiplier and multiplicand to prove the principle of the invention, and in- cluding the mechanical recommendations, after which a com- plete machine could be built for commercial exhibition. 20 L aunchiit g a New Enterprise The Result Sought Well organized technical investigations, of which the above instance is typical, cover roughly these factors: 1. Investigation to determine the patent situation with special reference to the prior art in similar products to guard against all possibility of infringement that no complications may arise to interfere with the continued operation of the enterprise once its product is on the market. 2. Thorough investigation of the product itself to determine its actual mechanical worth and practicability and ability to meet all the claims made for it as a commercial commodity. 3. Investigation of the market possibilities to ascertain the presence of a demand for such a product, or whether, if an active demand does not already exist, if a demand could be created. The above facts should all be determined prior to any defi- nite steps being taken to create an organization to manufacture or market a commodity. The tests which have now been indicated represent means, highly important as a rule if the project is to move forward as it should, for the more accurate estimation in advance of the possibilities for profit which exist in a given undertaking. As such, inventors, promoters, bankers and investors are coming to place increasing dependence upon them. CHAPTER III COMPETENT MANAGEMENT Growth of an Organization While the soundness of an enterprise is being tested, thought needs to be given, at least in a tentative way, to the building of an organization. Usually, especially in corporations, the management revolves around some individual who from the beginning has a thorough understanding of the aims and business of the enterprise. As the necessities require, governed largely by the nature of the company's activities, there is gathered around him a number of individuals who in their turn should have a special knowledge of the various operations of the busi- ness. These men are usually the heads of departments, known not only for their ability in their particular field, but possessed of an ability to organize their facilities thoroughly. As a rule, this ability soon displays itself in stimulated activity and prog- ress of the enterprise. Whenever a department is headed by a man who is not producing results personally that man is not fit for the place or his department is not needed at all. Departments and Specialized Duties It is a truism, however, that a manager should manage. Therefore, a manager should so organize his department as to automatically care for its routine activities without his special attention, that his own time may be left free for the larger work of creative effort, which finds its effect usually in creating new channels for enlarged activity. If a manager does not manage and insists on passing on the routine matters of his department, he becomes then merely a high-priced clerk. There was once a $25,000 a year manager who insisted on seeing every single order that came into the house and there 22 L a II u ch i n g a New Enterprise were ihousancis of iheni. He was asked why he wanted to make a clerk of himself and he said that some of these orders were worth thousands of dollars and would need his personal attention. The orders were analyzed and it was found that the average order was about $50 and of the exceptional kind he mentioned there were only two or three a week. Before he was told these facts the view was expressed to him that more really big problems could be found in a week than he could solve in six months. He found them and is now earning his $25,000. In another case there was a department entirely disorganized and the cause was that the manager insisted upon handling indi\idually a lot of detail that he could have taught his clerks to handle. As a clerk he was probably worth about one-quarter of his salary, but as a trainer of men he was worth more than he was getting — provided he could train others to do his work. Now that executive is managing, not clerking, and his depart- ment is running smoothly. Managerial Positions The practice in establishments of any size is to vest the chief authority and responsibility for the management of an enter- prise in an executive usually known as the president, chairman, or managing director, from whom instructions emanate and to whom all necessary information comes. There should be no conflict of authority and an intelligent and experienced execu- ti\e makes his plans and decisions as to the immediate and future necessities of the business. His is the responsibility for organ- ization. The details of a management devolve upon the heads of departments who are chosen by the chief executive. It is here in the deputization of work to assistants that the organizing ability and genius of a chief executive is most emphatically dis- played. The author has been told time and again that certain powerful heads of important institutions were fortunate because of their assistants — that without them they would have been adrift upon an uncharted business sea. It was pointed out Competent Management 23 by the author, however, that it was in that fact alone that the ability of a chief executive was indicated. In the administration of modern enterprises, the heads of the important departments are usually vice-presidents. This is a practice of comparatively recent adoption but it is my firm belief that it is to the advantage of any organization to place as vice- president men whose responsibility as officers of the company not only increases their incentive but willingness to assume full responsibility for their acts. In a manufacturing enterprise we would thus have: 1. A Vice-President in charge of production. 2. A Vice-President in charge of sales. 3. A Vice-President in charge of purchases. If the president is not in charge of the plant, a vice-president acts as general manager of the factory. Although it is not the general practice, the position of Controller should be consolidated with that of Treasurer, but because of short-sightedness, the position of Treasurer is usually parceled out to a man of promi- nence, who, because of outside activities and connections, can give little but the use of his name to the company. The same procedure is often noticeable in the selection of a president or chairman. These practices, however, are slowly being elimi- nated, and the important positions in a business organization given to the men actually engaged in the business and who rightfully are entitled to them. Organization Building As a concrete specimen of the way in which a successful organization is created we will consider an actual case in which for the purpose in mind the name is unessential. The plan was for an experimental laboratory where the development of new devices could be properly conducted surrounded by all the safeguards and knowledge of modern engineering and scientific facts. Knowledge and concrete facts based on past experience were to be pre-eminent points in conducting the enterprise. Therefore, it was necessary to base the work on a comprehensive 24 Launching a New Enterprise and intelligently organized engineering department, and mechani- cal shop with compact but excellent equipment, as well as a department to sell the servdce in each instance. The heads of the major departments were of paramount importance. It was realized that the engineering department could not suffice for the service planned unless its chief were a man not alone thoroughly experienced, but with an understanding of the aims of the organization. The same applied to the selection of the chief of the shop and the head of sales. The organizer had performed his function well when he selected these three men. It, of course, remained for the future to tell just how closely all these points had been met. In this particular instance the selections proved fortunate, for the man who had created the organization found in the three men selected an un- excelled wealth of accomplishment, ambition, energy and management ability. Around the chief of the engineering department grew a large designing department wath as many as sixty engineering drafts- men, and a department of research and an estimating depart- ment. Around the mechanical superintendent grew a plant that ultimately employed not the six mechanics originally en- gaged with proportionate machinery equipment, but one that employed some six hundred men housed in a plant especially erected at a cost of half a million dollars. Building from the Top Down Any new undertaking, even though it is intended from the beginning to conduct the enterprise on a large scale, must of necessity branch from the heads of the principal departments. In a manufacturing industry the heads are naturally the pro- duction man or chief engineer, as the head of the engineering department; the factory manager, in some cases called factory superintendent. It is not necessary to discuss the financial man or the activities emanating from him, such as the control of finances or the auditing department which in some instances conducts the cost control of the manufactured parts. When in- dustries are initiated by one man he usually assumes the financial Competent Management 25 burden of the work and it devolves on him either to conduct this work alone, with a bookkeeping department, or empioy an ac- countant who will develop a cost keeping department in addi- tion to opening a proper set of books to cover all branches of the business. Having shown how a business from its smallest beginning attains to the magnitude of an enterprise, the author is content to leave the management in the hands of the heads above re- ferred to without showing how each department is divided and sub-divided under assistants with a proper relation to the various heads and all of them under a general manager, usually the president. Sales This is a subject worthy of special statement. The increasing competition in all lines of commercial activities and the growing discrimination of the so-called "purchasing public" in the selection of its purchases is a vital factor. In the last analysis the success of an enterprise is dependent largely upon its sales department. Hence it should be organized with the greatest care. The head of the sales department should be a man not alone of great creative ability, but also an organizer. He is called upon to meet and cope with problems not met in other divisions of business — problems of influencing a public to buy an article for which, in many instances, a ready demand does not exist, hence he must educate it to its need. In this latter regard advertising is playing a more and more important part. Hence advertising and sales usually can be centralized under one head. When not placed in the hands of one man their activity should at least be closely co-ordinated and work closely in harmony with the balance of the organiza- tion. The development of modern sales methods has extended into fields not heretofore considered susceptible of modern sales treatment. As an instance, who would have conceived a few years ago that banks would maintain sales and publicity departments? What do they sell? Service only; but it is a 26 /. (I u 11 c Ji i 11 ii a Nc IV Enterprise sen ice which is being brought to the attention of the i)ul)lic in clear, concise language and throiigli a high (jiiahty of salesman- ship; progressive banking institutions with new ideas and new plans are constantly showing them to the public in a way that has pro\en most practically profitable by attracting those in need of funtis for their business to the banks where they more than often stay as depositors. Organized sales, therefore, must be as far in advance of old time methods as are the production methods of today com])ared with those of years ago. Business is conducted on an extremely small margin of profit, and the aim, therefore, is a larger \()lume of sales. In this regard, good-will, built up through honest advertising of an honest product, is most prolific of ])ermanent success. The Directorate The foregoing officers arc elected by, anfl their activities in general are under the supervision of, the directors. These di- rectors need not necessarily be investors in the company with which they associate themselves, but once they become directors they are expected to supervise its operations, establish its poli- cies and pass upon the acts of the officers periodically, at eciual intervals. It is, therefore, advisable that the directors be se- lected carefully for more reasons than one. First, because the c|uality of the directorate establishes beyond question the calibre of the enterprise with which their names are associated; and second, because it brings to the conduct of the enterprise the benefit of c-xperienced judgment, and hence, matured adxice. A properly selected board of directors is one of the most im- portant assets with which a firm can supply itself. It stops discussion and inquiry from outsiders who know that men who are jjrominent would not ally themselves with enterprises not of the highest (luality, and that it will live up to the letter of its agreement, and conduct its affairs on the highest plane of business ethics. C 111 p c t c n t M a ii a g e m ent 27 Choosing an Executive Committee Where a board of diicclors is i)arli(iilarly larj;t' aiul where its members are occupied in (Hversified activities, one of the best methods of directors' control is to ai)point a small executive committee, endowed with the authority of the entire board, to meet with the executives weekly. It is then necessary only to submit to the board important matters where the approval of the entire board is necessary. At all times, however, regular monthly reports of the activities of the comi)any should be sub- mitted to the rest of the board by the president or executive committee. These reports should include not alone the acts of the company but contemplated acts requirint; the ai)pn)\al of the board. This form of management enables the board to judge of those matters at its leisure and apart from the hurried meetings of directors where often matters of gravest impoilaiice are not given the consideration they require or merit. Functions of the Management There exists in the jjrojt'ct certain possibilities of j^yrofit, as revealed by the tests already considered; the managenienl has for its task the making of these potential profits real prolils, exhibited in the company's balancx' sheet. When the organiza- tion is well built and in elTective operation, the directors will have laid before Iheni that whicli constitutes the ri-al ti-st of a management, the actual attainment in satisfactory degree of the i)rofit possibilities open to the enterprise. CHAPTER IV RAISING CAPITAL How Secure Funds? The enterprise, in consequence of the investigation and the efforts of those responsible for its success, as managers or other- wise, we assume in due course reveals possibilities of profit which appear to justify its financing. How shall these funds be secured? The too frequent practice in attempting to launch an enter- prise is to all but ignore the other consideration, and to devote attention at once to this question of how to secure funds. The would-be promoter under these circumstances interviews one moneyed person after another, with as a rule indifferent results. Were he to continue undiscouraged and ponder the outcome of these various interviews, there would at length dawn upon him that his efforts to raise capital were not prop- erly planned. There were, in other words, certain requirements in the minds of those upon whom he called, which have to be met before the funds desired are forthcoming. Three Essential Elements Viewing these points in the light of what was said in the two preceding chapters, it appears that the man trying to interest capital should be prepared to discuss as convincingly as he may these matters: What are the possibilities of profit? Those who advance funds do so for the sake of the returns, or income an- ticii)ated, and hence the size of these returns represents a matter of decided importance. Who determined how the enterprise is to be conducted? They want to know who exercises control, whether this control promises to be wise or not, and whether it could be Raisi 71 g Capital 29- changed should the best interests of their investment warrant. What is the risk encountered? Though risk characterizes every venture, there are, needless to say, variables of greater number and complexities in some enterprises than others; and the question is where this particular project stands, relatively speaking. Prospective suppliers of funds, in other words, when they think clearly upon projects presented to them, balance three elements; income, control and risk. In view of this situation^ to whom should the appeal for funds be made? What Constitutes a Banking Proposition? The fact that banks are the reservoirs of funds suggests that application be made to them in the financing here considered. But does this particular enterprise constitute a banking proposi- tion? There are tw^o kinds of banks represented : Those institutions which are chartered by the several States or by the Federal Government and therefore under the strict supervision of State or Government; and private bankers, made up of individuals who bring capital together to create a considerable investing amount, depending upon the nature of their financial activities. The former are permitted by their charters and the banking laws- by which they are regulated to invest along only those certain conservative channels which will yield a commensurate net profit on the public and private moneys entrusted to their care. This profit is derived from legal rates of interest on loans, and for this reason the collateral accepted must possess a high degree of safety. The earnings therefore depend upon a large turnover of loans based upon large deposits. On the other hand, while private bankers are at liberty ta make indiscriminate investments, reputable houses are most careful in the selection of their investments, particularly as they do a large amount of underwriting which is covered by the funds of their clients, the profit thereon coming in the form of a com- 30 Launching a New Enterprise mission depending upon the hazard and the size of the under- writing. Their very existence depends upon the confidence of their cHents, both with regard to the securities that they market and the handHng of the capital entrusted to their management, otherwise it would be impossible for them to obtain capital to carry on their business. Occasional mistakes of judgment cannot be avoided, but even one error of this nature has sent to the wall many a firm which previously enjoyed an enviable reputation. It will be seen, therefore, that when the important private banking houses seek private, particularly industrial, investment, it must be of the highest character both as to safety and potential profits. Approaching the Right House Merit in a project does not in itself constitute it a banking project, even though it be completed to the last stage of refine- ment. Rumors often become current that a certain prominent banking house is behind some particular invention, but it will be found upon proper inquiry that some individual connected with such a firm of bankers is doing the financing entirely on his own responsibility, and independent of the funds of his concern. As a matter of warning, an inventor should not consider it appropriate to expect financial aid from such firms, nor should an indi\idual interested in such banks permit any inference which would identify his own personal investments with those of his own banking house. Such rumors militate against the standing of these institutions. Upon the assumption, however, that the enterprise under consideration has been in existence some little time — perhaps a partnership being incorporated or a consolidation being formed — banking interests very properly should be approached. The proposition should be submitted in much this form, with such variation as would meet the particular case: 1. Monthly sales for previous two, three or more years. 2. Monthly expenses for corresponding period. 3. Contracts on hand. Raising Capital 31 4. Balance sheet showing each year's condition, after deduct- ing for depreciation. 5. A concise explanation as to exactly how the additional capital which is sought is to be used, whether for enlargement of business or to liquidate accounts payable. 6. Present capitalization and bonded indebtedness. 7. Proposed capitalization and bonded indebtedness. Needless to say, an investment banking firm is not interested in every project submitted, even though the soundness of the same has been in evidence through a period of years. Speciali- zation has taken place: Certain firms confine themselves to railroads, others to public utilities, others to industrial, and still others to mines or oil enterprises. Some will handle nothing but bond issues, some will arrange for preferred stock issues as well, and others are open to common stock. The reason for these differences, and restrictions in the scope of the firm's operations, lies in the character of the clientele which the particu- lar house wishes to cultivate. Securities Adapted to Prospective Purchasers The corporate form of organization, at the same time, due to its flexibility enables those engaged in raising funds to appeal to several groups of security purchasers. First mortgage bonds, designed to appeal to the investor or institutional purchaser of securities, can be issued as a part of the capitalization. Con- vertible bonds will appeal to other purchasers; preferred stock and common stock likewise broaden the appeal. What the desires of the investors and speculators are, have been so fully described in preceding Texts that the matter need not be further discussed here. Persons interested in securities are the probable purchasers, or sources of funds; and when it comes to the prepara- tion of the company's financial structure the three factors — income, control and risk -^should be adjusted so that the ap- propriate appeal is made. 32 Launching a A^ew Enterprise Requirements of the Business The attempt to render securities attractive to investors and speculators ought to be made with due regard, at the same time, for the needs of the enterprise itself. Were bonds in undue amount to be disposed of, for instance, fixed charges during periods of depression or of unexpected difficulties, would threaten the company's solvency. Were only common stock issued, in the case of a well established business, the cost of raising the capital would be more than were bonds also issued, which here would be taken by investors at relatively high prices. What elements are involved in working out the correct proportion of securities to issue, so that the corporation's financial structure will be effective? Determining the Corporation's Financial Structure Income, control and risk, as has been pointed out above, are the three essentials; they refer both to the possible purchaser and the issuing corporation, and decision upon them in practice represents skilful bargaining. What types of securities — first lien bonds, junior bonds, preferred stock, etc. — will likely appeal best to the pro- spective purchaser of this company's issues? What represents the correct relation with respect to these different types of securities, judged by the company's assets and earning power? Usually the result worked out is a compromise. However, ex- perience has shown that the following represents sound practice : Bonds outstanding ought not to exceed 50 to 75 per cent of the value (actual) of the company's fixed assets; fixed charges should fall comfortably under the company's assured income. Preferred stock outstanding (and income bonds and other contingent obligations) should not be greater, and prefer- ably considerably less, than the value of the fixed assets (actual) plus net current assets; contingent charges ought to be well under the income which is reasonably expected. Raisi 71 g Capital 33 Common stock outstanding plus the foregoing fixed and con- tingent obligations ought not to exceed, and preferably will be under, the value of the company's assets, tangible and intangible; dividends on the common should at least be satisfactorily based on the probable income, the latter conservatively estimated. With this much said of the conditions faced in the preparation of the financial plan and of the factors involved in its practical operation, let us examine more specifically in the chapter which follows the methods employed within certain lines of industry, viz., public utilities, railroads and industrials. CHAPTER V VARIATIONS IN THE PROMOTION PLAN Public Utilities Financial promotion of public utilities enjoys an enviable position among high grade enterprises. Their financing depends, of course, to a large extent upon the territory to be served. An important feature, naturally, as in any other undertaking, is the character of the management, which is regarded by financial houses as well as the investing public as an important feature as it determines in a large measure its further future possibilities for success. An experienced analyst would, of course, be retained to set up an estimate of anticipated earnings. If a gas, electric light or power plant is to be organized at a specific location the following factors would be considered as indicative of its possibilities in this regard: 1. The cities to be served and their respective location. 2. Possibilities for their future growth. This would be de- termined in a large measure by transportation facilities. The normal growth expected can be approximated by recording and averaging the statistics covering a period of years. 3. Other local conditions bearing on cost of operation de- pending on primary source of power whether water or steam. With data obtained as a result of their investigation, ex- perienced engineers could then obtain a set of figures which would aid the promoter in establishing the feasibility of the promotion of such an enterprise. Variatio7is in the Promotion Plan 35 Railroads The promotion and financing of railroad public utilities have become a comparatively simple operation. Years ago both passed from the realm of speculation and are now looked upon as prime investment property. In the early days of both, however, they occupied in the public mind about the same position as is held today by investment in industrials, oils and mine property. Such investment is usually considered speculative in nature. The utility field has been reduced to one of standard facts and statistics, however, which permit of accurate valuation of prop- erty and good-will clearly indicating the earnings to be expected from the time promotion and financing is begun. In the promotion and financing of railroad property, prac- tically the same form and method of investigation is made prior to launching, as for utilities. The field in both is highly special- ized, however, and calls for specific treatment. While it is true both serve the public, it is in a somewhat different sense. One is a carrier and all conditions of transportation, both of passenger and freight traffic, must be taken into account. The various Interstate laws are also an important consideration. The other serves homes and factories, supplying light and motive power to our industries but are subject, however, only to local ordi- nances and local conditions. Industrials; Mining and Oil Property The promotion of industrials, especially in mining or oil property, presents an entirely different aspect from the foregoing. The possible evaluation of such projects can be controlled only by the individual imagination. Even experts, armed with knowledge, experience and statistics, cannot fathom the secrets of the earth since an approximation of value is merely a question of judgment based on experience and data at their command on the geology of the territory in which the project is to be located. If it is a subject for investment one can depend only on the in- dividual sponsoring the property. The financing of oil or mineral property therefore, is a rather 36 La 11 11 chin g a New Enterprise difficult proposition. It is usually done through direct appeal to the public, or to brokerage houses who arrange the under- writing. In any ev^ent, the public is soon asked to participate. The path of such an enterprise, however, is eased materi- ally by participation in its development by a known group of men. As an instance, the author knows of two distinct oil companies, both having started in the same way in the purchase of leases in respective oil regions. Both were managed on a most economic basis, no salaries being paid to any officers, and both having approximately the same quality of territory. One of these com- panies has as its head an oil executive of prominence and ex- perience, whose family were identified in former years with the Standard Oil Company. This fact alone, coupled of course with his knowledge of the management of oil property, made it extremely easy to raise money by subscription. In fact, it took but a few days to raise half a million dollars by offering approximately one-seventh of the company's authorized capital. The other company, while ha\ing a most honorable group of men conduct its affairs, did not prosper so easily. None of these men were oil men and, in spite of the fact that their properties were double the extent of the other company and located in about as promising and proven territory, their efforts to raise the necessary funds for the de- velopment of their properties have met a difficult and struggling career. There are few brokers, too, who would handle such securities on any but a large percentage basis, principally because they are forced to pay high selling costs in placing such securities before the public. A large share, too, must go to themselves. As much as sixty per cent is frequently asked for the financing of oil or mining property. While the stockholders must eventually pay for the selling of such securities, it is argued that earnings are frequently so high that the brokers' commissions are quickly made up by profits. This argument is without substantial basis as the assumption must always be that the enterprise may not be successful. Variations in the Promotion Plan 37 Consolidation Many of the largest promotions have been consolidations of operating enterprises. As a rule these consolidations are actu- ated by the fact that by so doing great economies can be effected. As a result of these economies the sponsors of such promotions usually acquire large interest in the management of the consolidated enterprises. Men have made millions as a result of a single transaction. As an instance, in effecting the consolidation which resulted in the United States Steel Corpora- tion, J. P. Morgan received for his services $80,000,000 worth of common shares. There are many times when consolidation is necessitated tO' effect economy in production, distribution and general reduction of overhead, due to the relegation of management to a central location rather than distributed among several. The individual concerns represented in consolidations of this character could hardly survive as individuals but under one management could become both profitable and productive enterprises. Present Attitude Toward Consolidations As a consequence of considerations such as these, a good part of the odium usually attached to mergers of this character has disappeared. Often times it is possible to bring together two companies, or even more, where one or the other represents en- terprises with superior plants and facilities both in point of loca- tion and equipment, and others, superior products lending them- selves readily to manufacture and sale. The profit accruing ta all through these means is readily discernible. The industrial and economic needs of the country today are not so much for more industries as for more industries manufac- turing a greater number of necessary goods with increased productivity and profit. As this need becomes more clearly felt, in the future we can look for an increased number of con- solidations. The effort of executives of industrial corporations to effect this end is already noticeable to a marked degree and has proven to be justifiable by the results obtained. 447466 CHAPTER VI WORK OF THE PROMOTER Three Essential Steps What has been said in the preceding chapter indicates that various matters must receive attention and satisfactory solution when one undertakes to launch an enterprise. Surveying broadly these matters now in this concluding chapter, into what essential classes do they fall? What are the main things to be done from the time when the basis of a profitable business is supposedly located until there has been brought into operation a going concern? These essential steps are: 1. Investigation of the project. 2. Assembling of the proposition. 3. Financing the enterprise. While these have all been discussed, they will be considered now more specifically from the viewpoint of promotion. Inventors and Promoters The basis of the project consists essentially in some idea. Perhaps it is the conception of a new process, or a new device, or an impro\ed method of co-ordinating several factories hitherto competing. However that may be, this idea represents someone's initiation. Eventually, let us assume, it wall evolve into a prosperous business establishment. Who will see that this result does actually take place? Who will secure the profit when it does? We have current among us colorful tales of men who rise from obscurity to wealth through some happy stroke of inven- tion. And since the inventor typifies the man of ideas, we may look into this matter more closely. Work of the Promoter 39* The United States Patent Office has to date issued more than 1,200,000 patents, and it is quite safe to approximate that not more than ten per cent of this vast number have ever truly seen the light of day. A far smaller percentage have reached the market as commercial successes. Irrespective of the initial expense connected with this annual flood of patents, which, as- can readily be seen, is enormous and for the greater part lost, we must consider the millions upon millions of dollars that have been and are still being wasted upon the development of these abortive projects. The causes which are to the largest extent responsible for this high percentage of failure are many, and some of a character difficult of definition. The temperament that tends toward creative genius is seldom combined with sound business judgment or intuition, while the element of suspicion is frequently highly developed. This last characteristic has led to unending loss and disappointment. There is no avenue of human activity more crowded with men unconscious of the difficulties they must overcome to reach their goal than the tortuous road of the inventor. Ignorance,, in fact, plays an astonishingly large part, not only in the con- ception, but in the promotion of new inventions. The inventor is often an idealistic dreamer, unable to grasp the true economic value of his problem, and with his eyes focussed on but one phase of a situation, which should be viewed from many angles. Quite as fatal to his success is a lack of knowledge of design, or of a thorough acquaintance with the history of devices kindred, to that which he seeks to create. What the Promoter Ensures The man who conceives a project originally tends without doubt towards the view that he himself should profit from it; and naturally regards with some little bitterness the fact that others do in practice secure what seems clear to him undue profits at his expense. But one has to recognize that profits, are due not to the conception itself but to the conception commercially available. Should he see to this commercial 40 L a U11 c h i 11 g a New Enterprise availability himself, his profits will increase; for commercial availability represents the thing basically important, and ■\vhoe\er ensures it deserves to be rewarded. We have described in a previous chapter how projects are tested for soundness, and have pointed out here certain reasons why inventors do not, so well as other men often do, apply these tests with proper rigor. This explains at the same time why, -with respect to essential step No. 1, investigation of the project, there should be what we term a promoter. Once this promoter, whether an engineer, banker, lawyer or business man, locates the project and undertakes its investigation properly, its profit possibilities or degree of commercial availability will tend to "become established. Assembling the Proposition The end toward which we are working is the establishment of a going concern, and its proper financing looms ahead as a decidedly important problem. But just what is to be financed? Were the funds secured, is there assurance that those otherwise connected will not back out? What is to prevent the proposi- tion from slipping out of the promoter's hands into the control of those who provide funds, thus leaving him without reward for his effort? Correct assembling of the proposition represents the solution of problems such as these. The experience of bankers and brokers, is that most projects are laid before them in such a way that little or nothing definite can be made out of them. Haze envelops the average proposi- tion and its would-be promoter, as well. Extended interviews and often an independent investigation are necessary before these financiers are in position to pass judgment upon it at all. Since these men are busy and, in view of their experience with other projects, most of which they reject, are inclined to view with distrust the average proposition, it occurs that many a meritorious undertaking has been refused because poorly pre- sented. Work of the P r omo\ter 41 * 'Selling" the Financial Interests The promoter ought to look upon his work, after investiga- tion has tested the soundness of the project, as high grade salesmanship. Not all persons are good "prospects" when it comes to the raising of funds, but good prospects can, neverthe- less, be located. Like the skilled salesman he ought to be, the promoter should approach these prospects with his proposition, convince them that it is to their best interests to become iden- tified with this proposition and that there exists no other way than that which he offers whereby they can become identified. Where is he to secure these "selling points"? The investigation itself provides considerable information; and the promoter need only marshall it in the proper order as a rule in order to make use of it with telling effect. The plans devised for the operation of the proposed enter- prise affords the promoter another excellent opportunity to convince those whom he would interest. What arrangements have been made for the management of the enterprise? What are the probable costs? Demand? Marketing methods? etc. When it is borne in mind that profits are produced only by a going concern, the promoter will appreciate the importance of bringing forward evidence that the enterprise will "go". Patents and Patent Protection The proper protection of the enterprise under consideration, is a matter also of decided importance. Suppose the plans con- template the marketing of a new device, only recently perfected. Here the question of protection by means of a patent at once occurs. A valuable invention often times is lost, and all its potential possibilities gone for naught through the attempt of an inex- perienced man to prosecute his own patent claims. Above all other considerations the inventor should understand that the important thing is not merely to obtain a patent per se, but to secure one which will afford him real protection. Such patents can rarely be obtained except by persons who have made a 42 L a n 11 chin g a New Enter pr i s e professional study of the patent question, and of wide experience in patent practice. The work is at once technical, intricate and exceedingly difficult. Of course, a commercialized invention may fail for lack of merit, but, if successful, there will be imi- tators unless the patents concerned indicate that no expense or effort has been spared to obtain the broadest protection. Such patents are less likely to be infringed, particularly if the manu- facturing investment required is large. Promoter's Use of Options The promoter who was attempting to organize an oil com- pany, let us say, into which three existing companies were to be consolidated and new acreage secured, would have little concern with patents. Those whom he approached would, instead, expect him to have options on the various holdings under con- sideration. The option is a privilege, secured by consideration, which gives its holder the right to purchase certain specified property or items of value within a fixed period of time at a stated price. Should the option not be accepted, it expires at the end of the period specified. But should the holder of the option choose to exercise his rights, he notifies the giver of the option to that effect and the instrument thereupon becomes a binding contract. Options when used in promotion should be drawn so as to include the right to assign. This enables the promoter to transfer them directly to the new corporation should he so elect. Initial Financing Usually the promoter steps in when an enterprise is in its embryonic stage, that is, when it represents but the idea or skeleton of an organization. It is his duty to give it form and build its financial structure in such a way as to make of it an operative enterprise, capable of meeting all the natural vicissi- tudes to which all new enterprises are heir during the initial stages of their development and growth. The raising of money is always a question of first importance especially when launching an enterprise. At such times it is Work of the Promoter 43 impossible to obtain money from the usual sources — banks, investment houses and kindred institutions — because of the fact that by virtue of their position in relation to the banking law and to the investing public their activities must of necessity be confined only to channels of known worth and reliability of profit, going concerns showing a record of profits over a period of several years in which there is every likelihood for continued successful operation. Whom to Interest It is in the obtaining of those who would interest themselves financially that a promoter functions chiefly. A conscientious promoter, however, would not undertake this work until after he had exercised the most scrupulous care in determining the exact value and possibilities for the ultimate success of the enterprise. As a rule, a promoter engaged in the promotion of legitimate enterprises, meritorious in character, enjoys the confidence of substantial investors. His success depends entirely upon his ability to influence capital and he can only continue to be success- ful so long as his reputation for honorable dealings is maintained. As this is the case, promoters rarely interest themselves in any enterprise that will not stand the white light of a most rigid investigation. For this purpose he depends not upon his own judgment, but employs specialists in such work. If an enter- prise having as its basis the manufacture of a mechanical, elec- trical machine or device or chemical process, he would retain an organization possessing a knowledge and experience which would reduce that enterprise to its component factors, beginning with a scientific analysis of the product, methods of production, the markets, equipment, plant and property, organization and management. The findings resulting from such an investiga- tion would prove the basis for his participation in its promotion. Over vs. Under Financing As a broad expression of facts, it is far better to be over- financed than when after a business is well under way to find 44 L a n nchin g a New Enterprise one's self in straits for funds. Money is comparatively easy to raise at the outset of an enterprise because of the enthusiasm surrounding its organization, but when it is necessary to raise additional funds on an under-financed undertaking it is found exceedingly difficult. Aside from the effect upon the morale of the business because of the feeling of insecurity it is then in, it becomes an added burden upon, perhaps, an already overharassed official of the company directly distracting his attention from the work of building his organization to the worries and under- taking of raising money and necessities of making explanations to stockholders or others who seek to know why the money supplied in the beginning has not sufficed. Where support is looked for it is usually found that confidence has gone and skepticism taken its place. For these reasons alone the beginning of any enterprise should be reduced to an understandable formula of operation and financing which would carry it through all natural vicissitudes to the time when it can be brought to the position of a success- fully operating business. Guarding Expenditures The above considerations emphasize the necessity for guarding expenditures. Relative to this a specific case might be mentioned where this was not observed. Recently the writer was asked to analyze the finances of a promising corporation manufacturing a machine much in demand, but due to delay in obtaining production and difficulties of financing, had become quite entangled. Investigation disclosed that while it was true that delay in production had set matters back, the indebtedness was chiefly to banks and men not to an inordinate extent. It was easily discernible, however, where the weakness laid. The managerial department had for eighteen months previously been paying salaries to unnecessary employees which, if saved, would have kept the corporation free of debt and with a considerably enhanced borrowing capacity necessary to meet all needs at the time of the examination. And yet, Work of the Promoter 45' because of an improper distribution of work and responsibility, the company had been brought to the brink of disaster. The relative credit value of an enterprise is enhanced in proportion to the restrictions placed on just such elaboration of expenditures in the initial stages of an enterprise. Those who supply the funds, whether private individuals or bankers, have developed a sense of quickly determining the manner in which a company's money is spent. It is constantly becoming a more common practice, too, to employ expert investigators to make an examination of an industry or an enterprise requesting loans or financing prior to advancing the funds. In this way, before assuming risks, everything to be known about an enterprise,, from its management to its product, is placed before the indi- vidual or institution contemplating advancing funds. It can readily be imagined what effect the above extravagant practices, would have upon the prospective investor. What the Promoter Does What has been said so far of promoters' activities indicates clearly their importance, and the fact that without them numer- ous enterprises of merit never would be launched. The term "promotion," however, has in its generally accepted meaning surrounded itself with a certain degree of odium. There are reasons why this condition prevails. Through lack of knowledge on the part of those responsible for them, many profit-producing enterprises seeking capital often fall into the hands of promoters who take advantage of them. The promoter has often-times secured his profits through de- ception, rather than service. Projects have been "discovered" which never should have seen the light and what purported to- be the results of "investigation" were cleverly contrived false- hoods. The assembling of these ill-conceived projects proceeded in a similarly delusive way. And the financing which followed was characterized by two unnecessary ingredients, "ballooa juice" and "water." 46 La notching a New Enterprise Justification for Promoter's Profit The description of what technical and honest promotion •does, renders it evident beyond doubt that legitimate promotion services are worth all they cost. Inventors and other evolvers and initiators of new processes are enabled to turn over to the promoter activities with which they are not competent to deal, yet the handling of which is essential if the project is to become a going concern. Owners of oil lands, oil fields, coal beds, and factories which should for the sake of economy and profits be — '> I' 5 ^^Aavaan-# ^ .^ummo/:. #UBRARYQr .^WEUNIVER% o ^J^3DNVS01^ ^^MEUNIVER% < ^TiiaoNVSOl^ ^•lOS-ANGI i ^lOSANCI O ^ 6 ri-t ^MEIINIVER% ^lOSANCElCr^ ^iimmo/r^ ^. L 006 850 239 2 FACILITY