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Illustration Paul Lachine

Alberta’s labour market has experienced some wild swings over the past decade. Not that long ago stories were circulating about McDonald’s offering signing bonuses and Tim Horton’s closing locations because they simply could not find enough staff. Opportunities in all fields seemed plentiful and employees felt secure in their ability to walk out of one job into another. Many employers, on the other hand, were near panic mode as they struggled to hire and keep their businesses running competitively.

Right now we are experiencing a swing in the other direction as the Alberta labour market sheds tens of thousands of jobs. Experts are predicting that the unemployment rate in the province, which was under five per cent in 2014, could soon approach eight per cent. The construction industry, which is the top employer in the province, provides a particularly stark example as a recent report from Build Force Canada predicts 31,000 jobs in Alberta will be lost in construction alone over the next three years.

Yet that same report predicts another severe labour crunch in the construction industry in early 2020. As the economy picks up again and firms shift back into hiring mode, many will find themselves unable to attract the people they need. A variety of factors contribute to this problem, including the current downturn pushing workers into other fields and discouraging potential employees from entering the relevant training programs, as well as an aging workforce that will see a large number of workers retiring this decade.

It seems that firms are being forced into a wild cycle defined by periods of panic hiring and manic firing. This is an environment that begs for a forward-looking strategy that acknowledges Alberta’s economy is prone to often dramatic and challenging economic shifts, but nevertheless takes a longer term view. As difficult as it is today to think five years down the road, now is the time to lay the foundation for a brighter future.

But it’s the rare organization that has the foresight to plan ahead for hiring. Instead, most forget about or ignore the ebb and flow of economic cycles. When times are tough the focus is on shedding jobs. Little effort is given to recruiting because with more job seekers it is relatively easy to fill vacant positions. Then when things are booming employers begin to panic and desperation sinks in. We certainly see this pattern play out again and again with our university graduates. Firms that were clamouring for an audience with our students only a year or two ago are now hard to get on campus. They don’t have an immediate need to hire, so little thought is given to post-secondary recruiting. At the same time, our students were surprisingly relaxed – possibly even a little arrogant – about finding a job a few years ago. Today they are graduating with increasing levels of concern and trepidation.

The current, chaotic environment presents an opportunity for firms to build their brands as employers of choice. Companies adopting this approach should begin by defining who it is they want to attract and then positioning their offer uniquely for those target audiences.

Continuing with the example of soon-to-graduate university students, concerns over potential employment have pulled the door wide open for firms willing to engage.

Consider the approach ATB Financial has taken to building its brand at the University of Alberta. Rather than the traditional route of information sessions and job fairs, ATB has made a substantial investment in being part of campus life. This includes providing judges for case competitions, executives for advisory boards and guest speakers for classrooms. Going further, ATB has set up unique on-campus branches that offer traditional banking services, but also act as a centre for campus engagement. As a result, rather than waiting for a flood of cold resumés in the spring as graduates earn their degrees and head into the job market, ATB has been working with students throughout the year. It has established relationships with many of the best and brightest recruits. This spring, ATB may have more applicants than they have jobs, but at some point that trend will reverse and hiring will once again become highly competitive.

Other firms ranging from PCL Construction to PepsiCo to the big five accounting firms have similarly gone above and beyond to engage with the university community. As a result, I suspect they will continue to be able to hire in good and bad times. That won’t be true for everyone. Building a powerful brand as an employer of choice takes time. Unfortunately, by the time many realize the opportunity they have missed, it may be too late.

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illustration Ally Reeves

The idea that retaining a customer is more profitable than acquiring a new one has become a marketing cliché, and it has never been more true than it is right now. As competition intensifies, getting the attention of prospects and converting them into customers is an increasingly expensive proposition. In fact, best estimates suggest that it is six to seven times more expensive to acquire a new customer than it is to keep an existing one.

Research has also shown that new prospects are more difficult to convert into buyers than are your existing customers. When considering a new purchase, customers who have bought from you before tend to convert into buyers 60 to 70 per cent of the time. In contrast, new prospect conversion rates are much lower, in the range of five to 20 per cent. And even once the decision is made to buy from you, an existing customer will spend approximately two-thirds more than a new customer. That is, existing customers are dramati­cally less expensive to convert into buyers and when they do buy, they spend substantially more than new customers. It should not be surprising, then, that on average a five per cent increase in customer retention rates can increase profitability by nearly 100 per cent. Customer loyalty has real, tangible value.

It is not, however, as simple as a loyalty program. There are more than three billion loyalty program members in North America. That averages out to just under 30 programs per household. In Canada, many of those programs – including Cineplex’s Scene, Shoppers Drug Mart’s Optimum, Loblaw’s PC Points, Air Miles and Aeroplan – are world-class examples of loyalty cards that are valued by customers. Nevertheless, most of us have a pile of other cards that we have thrown into a purse, wallet or junk drawer, never to be seen or used again.

The key to loyalty is not signing people up to a loyalty program. True loyalty comes from the overall value proposition. In 2013, I published The Retail Value Proposition, which provided a framework for creating value for Canadian customers. This summer, the second edition of the book will be released, focusing on the American market. From the research that went into both books, it became obvious to me that the future of competition was not in the location of your business or the products you put on the shelf, but in the ability of your company to use the information that was being made available through loyalty programs and other “big data” initiatives to better understand your customers. I am not the only one to have made this claim, but my research points to a different approach to marketing for many organizations. Specifically, most Canadian and Albertan businesses need to quickly become much better at data analytics.

In Alberta, we clearly have the talent. As Canada’s Prime Minister talks about resourcefulness and the Government of Alberta looks to diversify our economy, we all too often forget about the world-class talent we have in marketing, analytics and consumer research. At the University of Alberta, we have some of the world’s leading researchers in consumer marketing and analytics and a history of sparking new ventures through advances in management science. One local example is Darkhorse Analytics, which was spun out of a research lab at the University of Alberta in 2008. At the cutting edge of using data to drive business decisions and visualize opportunities, Darkhorse has quickly made a name for itself with a client list that ranges from Enbridge to Finning to Procter & Gamble. Advanis, which celebrated its 25th anniversary last summer, is another example of a data analytics and research company with roots in Alberta. Even undergraduate students are getting in on the action and have formed their own research and consulting group (sorconsulting.com).

Building on our historical strength in this area, the University of Alberta’s School of Retailing recently hosted its second annual Thought Leadership Conference. The event brought retailers and consumer marketing executives from across Canada together with local business people and university students. We spent the day talking about innovation in Canadian consumer marketing and, in particular, the ever-increasing importance of customer analytics. The audience heard from leaders like Bryan Pearson, CEO of LoyaltyOne, and Jan Kestle, CEO of Environics Analytics, who talked about the impact Canadian companies can have on a global stage.

The practice of loyalty marketing is in the middle of a dramatic transformation driven by technology and the availability of big data. As Albertans and Canadians, we have an opportunity to play a leading role in this revolution by continuing to leverage our academic, analytic and entrepreneurial talent.

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illustration Ally Reeves

In the mid-1990s, the business world was awash in hype and hyperbole. E-commerce was going to change every aspect of our lives from our relationships with friends and family to the way we shopped and spent our leisure time. Billions of dollars were invested in companies that had no viable business plan.

Then the dot-com bubble burst and sentiment swung hard the other way. The technology failed to live up to the hype and investors pulled back. Most of the business world returned to focusing on traditional ways of working.

We now know, of course, that the technology didn’t go away, and that it has dramatically changed our lives. Amazon survived the crash and has grown to be one of the world’s most influential and powerful retailers, last year surpassing Walmart’s market capitalization. Google, which was incorporated in 1998 just before the dot-com crash, has become an integral part of most people’s lives, and its parent company, Alphabet, is the world’s second most valuable public company (behind Apple). More than 1.2 billion people use Facebook every month! Looking back, the expectations of the mid-1990s were not as outlandish as they seemed.

Today, as these companies plan for the future, virtual reality (VR) is the technology they believe will revolutionize the way we interact with the world. VR allows users to enter a computer-generated environment that is immersive and interactive. Rather than just watching what the camera is pointed at, you can look all around you in a way that feels like you are actually there. By putting on VR gloves, you can touch and manipulate virtual objects.

In 2014, Facebook paid $2 billion for Oculus, a VR company that is now taking orders for its first headsets. This spring, Facebook gave all 2,600 software developers attending its F8 conference a VR headset because CEO Mark Zuckerberg believes that one day physical objects like televisions, tablets and phones will be a thing of the past. They will be replaced by $1 apps downloaded to your VR glasses. The idea is that the virtual world will replace much of what we now do in the real world. We may not be there yet, but we are not as far away as you might think. Consider, for example, that in the fall of 2015, Google teamed up with the New York Times to distribute its cardboard VR headset to more than one million people. We are also seeing the first truly market-ready applications in television, movies and video games. In the long term, Zuckerberg and others believe VR will be part of our daily lives. In much the same way we had no use for Facebook just a decade ago, yet hundreds of millions of people now use it everyday, VR will fill a lot of space.

Imagine shopping with friends at a new Hudson’s Bay while each of you are sitting on a sofa at home, possibly in different countries. You can travel around the store, talk to each other, pick up and look at clothes, even try them on, all in a virtual world. Maybe you would prefer to spend an afternoon shooting pucks with Connor McDavid or getting a tour of the International Space Station with Chris Hadfield or attending a private concert with Drake. That type of virtual tourism is relatively straightforward. Longer term VR technology has the potential to revolutionize entertainment, education, healthcare, retailing, and manufacturing in ways we can’t yet envision.

Right now, outside the tech community, business leaders appear to be treating VR much like they did e-­commerce in the early 1990s. Back then, many were pointing to the chat boards of AOL or the failure of e-commerce pioneers like Peapod and laughing off the long-term impact the internet was likely to have on business. This is similar to stories about K-Mart and Sears executives showing a complete lack of concern about that five-and-dime business Sam Walton was running in Bentonville.

Today, most people don’t have computers with the high-end graphics cards required to run Oculus VR, and the smartphone-based headsets from Google and Samsung offer a considerably weaker VR experience. In my lab at the University of Alberta’s School of Business, we are running focus groups and some preliminary tests to begin to understand how VR might affect the future of business. So far I have used VR to be present at an Occupy Wall Street rally in New York City and to ride a rollercoaster, which was just as nauseating as the real thing. But I suspect that in a decade or two I will be using VR for all kinds of things that I can’t imagine today. Much like the impact of e-commerce, the VR transformation of everyday behavior will usher in a new era of creative destruction, leaving some companies behind and growing new ventures to unprecedented heights.

The post The similarities between VR and early-1990s e-commerce are striking appeared first on Alberta Venture.

Kristina Milke is an executive in residence with TEC Edmonton, president of K-GAR Consulting and a member of VA Angels.

Alberta Venture: When an entrepreneur or business owner is pitching their idea to you, what are some of the quickest ways they can convince you to not invest in them? What are some red flags?

Kristina Milke: When their valuation is overinflated or they don’t have any idea what their customer-acquisition strategy is, so they don’t have any paying customers yet. And then they predict all this revenue, and you ask, “OK, so what is your customer-acquisition strategy?” and they give you a deer-in-the-headlights look.
We recommend 30 to 40 per cent of your time is on your product or service that you’re going to sell, and the remaining 60 per cent is about your business model, the deal that you’re offering and how investors are going to get their money back, plus returns, and when that might happen. You also have to demonstrate that you understand your competitive landscape, and how you think the company is going to be looking from our financial perspective two or three years out.
AV: What kinds of figures or projections do you absolutely need?

KM: We want to see some pro forma financials – we want to know you’ve gone through the effort of trying to map out what the prospective revenue streams are going to look like and how many customers or units they have to sell to generate that revenue. What we don’t like is when entrepreneurs come in and say, “I’m going to make $100,000.” Then we ask, “How are you going to do that?” and they say, “I just know.” We want to know you’ve thought about it, and the only way we can find that out is if we can see something on a piece of paper, or in a slide, that represents some kind of modeling you’ve done.

AV: There’s a disconnect between entrepreneurs and investors – entrepreneurs seem to value sweat equity almost above all else, while investors, for the most part, don’t take that into consideration at all.

KM: We don’t care about sweat equity. We. Do. Not. Care. I can’t tell you how frustrated we get when we hear that. But this speaks to something else, too: if they don’t have any skin in the game, and I mean hard-earned money, we won’t be happy about that, either, and we won’t invest. I’ll tell you why – because it’s really easy to lose other people’s money. I can’t make it any simpler than that. They’ll come back and say, “Oh, but we put in sweat equity.” Yeah, but it’s still really easy to lose other people’s money!

If we have a really young entrepreneur, for example, who has a great idea, and they’ve only been able to put in $10,000 of their own money when they’ve only got $10,000 to their name, we say, “OK, great – they have a lot of skin in the game and they have a lot to risk.” Compare that to someone who puts in $10,000 and they’re a multiple-time entrepreneur with an exit, and they want you to put in $1 million.

AV: Since life is unpredictable, I’m going to assume you’ve made what seemed to be a secure investment only to lose it, or, conversely, you’ve invested in what seems like a long shot and it worked out. What did you learn from that?

KM: Absolutely – the first investment I ever made, which, of course, is long gone. I made two mistakes: One, I followed another investor and didn’t do my own due diligence. I think I was just excited to write my first cheque and to play the game because I thought it was pretty fun – and I still think it’s really fun. The second mistake is kind of a subset of the first; now, I know that the coachability of an entrepreneur is key for me, and I won’t invest in an entrepreneur who isn’t coachable. I was involved in a company that had, in aggregate, 125 years of business experience between us, and the entrepreneur continued to think he knew better, and he refused to take anybody’s suggestions. Well, our money is long gone – and so is his company.

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Stress will kill you, so you’d better write your own obituary.

Maybe that sounds harsh. Let Tina Varughese explain.

Varughese is the president of Calgary’s tWorks, which she founded nine years ago. Her company focuses on cross-cultural communication and she hosts seminars on the importance of work-life balance – which, unless you’ve been working under a rock, you know is a concern du jour of employees and businesses the world over.

More than two-thirds of us, in fact, work more than 45 hours a week. Of OECD countries, Canada is ranked 11th for its percentage of employees working 50 or more hours per week, and 31st (of 38) for its time devoted to leisure and personal care. That’s a lot for professionals like Varughese to work with.

Although her clients span all sectors, there’s one subset that could really use her advice: entrepreneurs like Jo-Anne Reynolds. As the CEO of SpikeBee, an online platform that connects parents with a network of children’s summer camps and activities, Reynolds has been working full tilt to get her startup off the ground. But now, one year later, she’s exhausted from balancing family responsibilities with professional ones. “I feel like my burn rate is extremely high,” she says. “I never see my friends anymore, I’m too tired to go out in the evening, I don’t go on dates with my husband, I’m on email 24/7. Weekends, evenings, you name it – I feel like I’m drowning.”  

That’s where Varughese comes in. When she founded tWorks, “I was making no money in the beginning,” she says. “My husband used to joke that we should change the [company] name to tWorks Not So Much.” What kept her going was the fear of failure – as an entrepreneur, her entire business and reputation rested on her own shoulders. The ethos of an entrepreneur, in fact, is almost inherently at odds with any semblance of work-life balance. It’s about self-imposed martyrdom, feeling guilty for every waking moment you’re not working. After nine years, “I still struggle with the guilt of being away from my kids,” Varughese says.

Does Reynolds feel that same fear of failure? “One hundred per cent,” she says. “I feel like I’ve got one shot at this.”

So how can an entrepreneur reconcile the two? Varughese begins with three questions: Does the cost of saying ‘yes’ outweigh the cost of saying ‘no’? Is failing fatal? And, lastly, when do I surrender?

Notice a theme? Varughese’s questions aren’t about how to succeed – they’re about letting go. She tells Reynolds that she needs to give herself permission to say no, or to take time for herself and her family. And, paradoxically, Varughese says that thinking with the end in mind actually helps you focus on day-to-day tasks – not with abstract goals like “get rich” or “be successful,” which can lead to a manic pursuit of unreachable greatness, but with practical ones. Like, for example, what you might read in an obituary.

“It really does work!” Varughese says. “If you work backwards, your obituary is ultimately your own vision for life. If you want it written in your obituary, you have to start working towards that goal.” Will Reynolds want her obituary to cite SpikeBee’s revenues or the fact that she was a loving and caring mother? She obviously wants SpikeBee to prosper, but Varughese is saying that by focusing on her “obituary goals,” she’ll be a better-rounded person, which, in turn, will prevent SpikeBee from exploding under pressure.

There’s no easy answer for maintaining a work-life balance. But if you work with the end in mind, Varughese says, it’s easier to start.

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Illustration Ally Reeves

When you think about innovative organizations, governments are probably not at the top of the list. Yet, in recent years, governments from South Korea and Germany to the U.S. and the U.K. have been remarkably innovative when it comes to changing people’s behaviour without relying on laws, rules or regulations and without limiting the choices available to citizens. Underlying this success has been a new approach that applies advances in behavioural science to “nudge” people towards certain choices and away from others.

As a simple example, consider plastic bottle recycling. It turns out that a surprising number of people throw their used bottles in the garbage bin even when it is right next to a recycling bin. However, if the garbage bin is relabeled “landfill,” then a significantly greater number of bottles are recycled. This approach to influencing behaviour is known as “libertarian paternalism” because it doesn’t limit the choices that people have (libertarian), but it does nudge people towards particular behaviours that the government would like to encourage (paternalism). If you want to throw your plastic bottle in the landfill bin, then you can. But it turns out that many people were throwing bottles into the garbage without really thinking about it at all. A key feature of this approach is that it doesn’t cost any additional money and the government doesn’t have to introduce any rules or regulations. In the case of plastic bottles, when garbage bins are replaced they get a new label and, as a result, recycling increases and the amount of plastic that ends up in the landfill decreases.

These ideas began to take shape decades ago, when a branch of ­psychology, led by Amos Tversky and Daniel Kahneman, challenged the traditional assumption that people are rational decision makers. In 2002, Kahneman won a Nobel Prize in economics for this work, which over more than 40 years revealed many biases in the way humans think and behave. Recent research in this area has focused on how to help people overcome those biases.

For example, in 2003, researchers at Columbia University’s Business School published a seminal paper in the journal Science that demonstrated the real world power of simple government nudges. The article was entitled “Do Defaults Save Lives?” and it examined the impact of a common decision that governments around the world have to make: do citizens opt-in to organ donation or opt-out? Governments have to decide if people don’t take any action should they be listed as organ donors or should organ donation require citizens to explicitly agree to be on the list?

The researchers found that 85 per cent of Americans approve of organ donation, but only 28 per cent had opted-in and signed their donor card. The same study reported that more than 5,000 people die every year in the U.S. waiting for an organ. In comparison to other opt-in countries, Americans are actually good about choosing to be donors. The study found that in Denmark only four per cent opted-in, in ­Germany 12 per cent and in the U.K. 17 per cent. However, in most of the countries that had an opt-out ­system – that is, citizens had to take explicit action to remove themselves from the donation list – the percentage of people who gave consent for organ donation was over 99 per cent.

This and similar studies have had a real impact on how governments think about the way they present choices to people. In the U.S., Cass Sunstein, a professor at Harvard’s Law School and co-author of the book Nudge, spent three years applying the principles of ­libertarian paternalism as the head of the White House Office of Information and Regulatory Affairs. The U.K. government created a specific Nudge Unit – also known as the Behavioural Insights Team – which focused on enabling people to make ­better choices for themselves. That unit has since been spun off as an independent advisory business that works with governments around the world.

Many for-profit businesses have also adopted this approach. Google has nudged its employees towards healthier eating habits. Banks and pension funds have improved the savings and investments decisions their customers make. Even health clubs and personal trainers are using nudge techniques to motivate individuals to exercise.

Some observers have expressed concern that this approach will become more paternalistic than libertarian. But nudges work because they move people towards doing things they want to do – recycle, donate, save money, make better investment decisions, exercise regularly and so on. It is far more difficult to nudge people towards things they do not want to do. Remember that a nudge doesn’t restrict choice. If people want to throw their bottles into the landfill or opt-out of organ donation those options are still available to them.

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Illustration Marc Nipp

Given the substantial amount of time we spend online, it’s not surprising that marketers have joined us there. TV, radio, newspaper and direct mail marketing are in decline while digital advertising continues to grow because, while mass broadcasting is good for getting a message out to many people, digital media give marketers the power to target their messages to the right people and then measure the return on their investment.

Yet, with all of the change that digital marketing brings, the key to success remains the same. Great marketers tell powerful stories that engage and resonate with the target audience. Every day, millions of those stories are told over social media – from our family vacations and kids’ hockey games to tales of Olympic glory and global politics. A few of those stories break through the clutter of our digital feeds to grab our interest and prompt, or even provoke, us to pass the message on to someone else.

Those are the stories that marketers aspire to tell. Although this is a relatively new area of study, early research consistently indicates that there are a few critical commonalities between the most successful social media campaigns. First, they tend to be remarkable. They stand out from the rest of your feed in a way that is intriguing and captures attention. Second, they are honest and authentic, rather than feeling contrived or misrepresented. They are not just a sales pitch. Third, and possibly most important, the message is visceral. Great stories tend to evoke intense emotional responses. This is the REV model for social media: remarkable, engaging and visceral. Research indicates that these factors underlie marketing campaigns that are more memorable, persuasive and likely to be shared.

The WestJet Christmas Miracle, for example, has quickly become a classic case study in successful digital storytelling. The video has been watched on YouTube more than 44 million times. It has more than a billion Twitter impressions and millions of views on Facebook. It is remarkable, engaging and visceral. The story also fits well with the friendly, fun-loving and caring brand that WestJet has crafted over many years. As it turns out, that fit between the brand’s image and the story being told is an essential ingredient in authentic advertising. A similar approach can be seen at the Facebook page of the Running Room’s John Stanton, which illustrates the power of a good fit between the brand and social media. The page connects, engages and informs thousands of runners in a personal way through pictures, comments and stories from the company’s founder. Keeping it personal and interactive, posts to the page are typically replied to within an hour.

Social media has also opened the door to government and other not-for-profit organizations that need to reach a target audience, but do not have the big budgets required for traditional mass broadcasting. The recent work by the government of Alberta on the dangers of distracted driving or the standard of care at the Royal Alexandra Hospital are great examples of digital storytelling.

The same techniques can be effective for entrepreneurial companies. From the Rocky Mountain Soap Company and Suits by Curtis Elliot to breweries like Minhas and Alley Kat, Alberta-based companies are competing in markets dominated by global giants. Although they are relatively small, they are able to REV up their local marketing message, while much larger rivals struggle to tell equally engaging and personalized stories.

Of course, social media can also create challenges. In a previous column I discussed the rise of demon customers, who have a negative experience and then actively work against a company through digital and social media. Those customers are telling their stories, as are activists, bloggers, the mainstream media and almost everyone else with an internet connection. Earls Restaurants recently found out the hard way that even when you are trying to do the right thing, doing it the wrong way can lead to a loss of control over the story you want to tell. While many people like the idea of moving towards Humane Certified beef, Albertans were not happy with the decision to move away from local sourcing. Earls’ side of the story got lost in the social media maelstrom that ensued. This is not to say companies should move away from what they believe is right for their customers and their businesses, but it does highlight the importance of being able to use digital and social media to effectively communicate why it is the right thing. We call it social media because it is a dialogue, not a lecture. That means not just telling your story, but listening and adapting, as Earls did and other successful companies have done.

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Very few of us don’t feel the impulse to move somewhere else at some point, to self-exile ourselves from the humdrum of our quotidian lives. Whether it’s for a culture change, better work opportunities or to chase a love interest, sometimes we admit that maybe, after all, Alberta isn’t the centre of the world. Or, sometimes we arrive from somewhere else only to second-guess ourselves once we’re here. That’s the case for Jo-Anne Reynolds, the CEO of SpikeBee. Her company is a dyed-in-the-wool tech startup – an online resource that aims to connect summer camp providers with parents itching to keep their kids occupied. The natural home for startups like hers is, of course, Silicon Valley. And it’s not like she didn’t consider it when she was leaving England for a new chapter in her life.

But, years later, she’s happy in Calgary. She has a family and a home, and SpikeBee is growing. Yet there’s a nagging concern that she’s missing out on greener pastures. She regularly travels to the U.S. and feels like there’s a marked cultural difference. “In Silicon Valley, on every corner and in every coffee shop, there’s a constant buzz of excitement you can easily fall into,” she says. She wants to stay in Alberta, she really does. But she’s one of those entrepreneurs who can’t sleep at night thinking she’s passing up better opportunities. Her main goals with SpikeBee are to scale quickly and keep up momentum, and in Calgary, where the energy-sector downturn has brought the city to a crawl, she feels stuck in neutral. “Sell me the Alberta dream!” she pleads, begging someone to talk her out of her indecision.

Is her frustration common? Pieter Boekhoff, a Calgary-based entrepreneur who’s also the co-founder of AcceleratorYYC and a board member of Startup Calgary, says he runs into this “pretty much once a week.” And he gets it – to an extent. There are cities known for particular industries – New York for fashion designers, Hollywood for entertainment, our beloved Calgary for oil and gas – and if you’re in one of those industries, you’ll naturally be drawn to those cities. But sometimes you just need to look harder.

“It’s better to be a big fish in a small pond,” Boekhoff says, “and that’s never been truer than in this period, when Alberta is redefining its diversification and economic strategy.” These days, there are all kinds of financial incentives for companies like SpikeBee, from the Scientific Research and Experimental Development tax incentive, which helps small businesses with funding for research and development, to the new $90-million Alberta Investor Tax Credit (AITC), meant to facilitate investments in small- and medium-sized tech firms.

All well and good, Reynolds thinks. But is it enough to compensate for the startup culture she’s missing? Boekhoff lets her in on a secret: It’s right here in Calgary, too. Reynolds says when she talks tech, people’s eyes glaze over; when she riffs on oil and gas, they light back up. But Boekhoff says that’s why the startup culture isn’t as immediately visible – Calgary business has been dominated by oil for so long that all other sectors have ended up in their own little bubbles, hosting their own private meetups and speaker series. And even other entrepreneurs who moved away are returning.

“They’re coming back, and there are a lot more success stories coming out of here,” Boekhoff says. “We just need them all to be in the same room.” Now the only question is, Will Reynolds show up to the party?

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The Play

Looking back, I find it strange that the best horizontal oil play in North America isn’t the one that was first developed. The Bakken got rolling in 2007 and accelerated once we got through the global financial crisis and oil prices rebounded. The Eagle Ford started having significant production in 2011. The Permian came last with the real increase starting in 2012. It was last, but isn’t least.

Over the last 18 months, the Permian has emerged as the most profitable place in North America to drill horizontally for oil. The share prices of Permian-focused players speak volumes. While much of the industry has fallen apart, Permian pure-plays have had no trouble going to market to raise cash at reasonable share prices. Asset sales in the region are still valuing Permian acreage as though oil is a commodity that we won’t forever have a supply imbalance of.

If this is truly the best horizontal oil play on the continent, then the companies that have several years’ worth of drilling locations in it should be the best producers to own over time.

Let’s have a look at one.

The Pick

Earthstone Energy (NYSE: BHI)

I’ve decided this business of oil and gas production is a very difficult one to invest successfully in.

First, every company claims to have assets that provide economics in the top tier of the industry. That means that 90 per cent of these companies are exaggerating (my polite word for lying) or simply don’t know any better. Second, even if the company truly has some great acreage, there is no guarantee the management team can make the most of it: You can drill poor wells in a good play. Third, should you find a company that has both great acreage and the right operational expertise, things can still go wrong. There is always a chance that a company’s risk mismanagement of its balance sheet catches them on the wrong foot in a commodity price collapse. Getting all three things right isn’t easy, so how does one go about finding a combination of great assets, good operating ability and careful balance sheet management?

There are no guarantees, but I think the only way you can have some sort of confidence that you are doing this is by sticking with proven management teams.
Like the one at Earthstone Energy.

This team has built and sold five energy producers. You can get lucky once or twice, but five times seems like skill. And yes, they sold the companies for a profit (that is kind of important).

The Earthstone team just acquired Permian-focused Lynden Energy and now has a presence in the Eagle Ford, Bakken and Permian. Production and reserves are roughly 70 per cent weighted towards oil. Roughly 56 per cent of production is from the Eagle Ford, 25 per cent is from the Permian and the remainder is Bakken.

Lynden was a sleepy company sitting on a pretty good land position in the Permian. Getting these assets into the hands of Earthstone’s management group is likely good for both companies.

Perhaps more importantly, it gets Earthstone’s management a foot in the Permian door. Based on what the company said in its last conference call I would say we can expect more Permian acquisitions: “We will diversify our asset base and move into attractive acreage with significant horizontal potential in the Midland Basin,” said president and CEO Frank Lodzinski. “We intend to expand our presence in West Texas and pursue operated properties and acreage as our management team has done in each of our four prior public companies.”

Sounds good to me. This has to be a good time for a team that has proven it can create shareholder value through acquisitions to be doing exactly that.

The Postscript

Earthstone’s leadership group has bought nearly $1 million worth of Earthstone shares in the open market over the past six months. There is really only one reason to do that and it is to profit from the share price going higher.

The nice thing for investors here is that since this management group has built and sold five prior companies, you know there will be an exit point where they realize profits. That will be a catalyst to move the share price to a point where the company is fairly valued. Given management’s buying of shares I would expect that to be a share price that is higher than where it is today.

The post Earthstone Energy has promise in the Permian appeared first on Alberta Venture.

Illustration Marc Nipp

Too often, when people think about branding, they think about logos or colours or tag lines. There is little doubt that the Nike swoosh, the UPS brown and BMW’s “ultimate driving machine” have been effective marketing tools. In fact, they have been so effective that we tend to forget that those elements of the brand are really just cues for the strong associations we already have with the companies. Nike is about sport, UPS delivery and BMW luxury vehicles. The value of a brand is rooted in this type of association and how easily certain companies come to mind when people consider running shoes, delivery services or high-end cars.

And that value is real. Last year, Interbrand estimated BMW’s brand to be worth $37 billion, Nike’s $23 billion and UPS’s $14 billion. All of which were well behind the top global brands: Apple at $170 billion and Google at $120 billion! Clearly, strong brands add value.

Of course, it is not only corporations that benefit from branding. Not-for-profits from the New York Metropolitan Opera to the World Wildlife Fund have built a base of patrons and donors that are brand loyal. Donald Trump and Justin Trudeau use brand-building techniques to boost their popularity. Cities are working hard to manage their brands based on attributes that range from economic opportunity to arts and culture. Ultimately, cities would like to be known as places people want to live.

When young Albertans dream about jobs in Hong Kong, London, New York, L.A. or San Francisco – or even Toronto, Montreal or Vancouver – they are imagining more than work. They are thinking about what their lives would be. Great cities enjoy powerful lifestyle brands. They have vibrant arts scenes, professional sports, world class retail, and unique tourist attractions. They are interesting and exciting places to be.

Calgary and Edmonton are on the cusp of joining this global club, but entry is not cheap. Consider, as an example, Edmonton’s Ice District. Spending hundreds of millions of dollars to build a new hockey arena has people talking. The development brings new office space, residential towers, retail and, of course, a new home for the Edmonton Oilers. It is exciting for the city. The downtown core has been transformed. As the NHL season gets underway, the building (plus Connor McDavid) might even create a little envy here and there.

It will undoubtedly lead many to ask if it is worth the cost. Study after study has indicated that the direct economic benefit to a city of a professional sports franchise is minimal and does not justify spending public money. Of course, if cities made spending decisions based only on direct economic benefits, we would live in dramatically different urban environments. How would investments in libraries, art, public transit or parks measure up?

In fact, city budgets tend to be spent on things that do not have a direct or immediate return on investment. Schools, roads and sewers are not profit-driven enterprises, yet without them it is hard to imagine attracting people and businesses. The very real, although indirect, economic benefit of these investments is in making the city attractive to people and businesses. Although there are many things that go into making a city successful, appealing to talented people is at the top of the list. Talent attracts investment and generates entrepreneurial opportunities, which in turn build a diversified economy. As a result, the competition to attract people and investment is as intense as it is global. Talented people can choose where they want to work and they are looking for more than just jobs.

I realize that large investments without a direct benefit can be a tough sell to taxpayers who are constantly squeezed. In the current environment, it seems sensible for Calgary’s city council to balk at CalgaryNEXT’s price tag. But, longer term, cities have to consider how they are going to compete for talent on a global scale.

Alberta has a lot to offer. Our population is young, affluent and well-educated. Many of the key ingredients are here, including quality healthcare and education, a vibrant arts community and an inclusive sense of civic pride. To get to the next level, we need to take some risks. Superficial slogans and updated logos are not enough. Our cities will need to invest in what makes us unique and attractive. For different people that will be different things, ranging from Grande Prairie’s new dinosaur museum to the Calgary Philharmonic to the Oilers. As citizens, we need to actively support investment in the evolution of our cities and tell others why Alberta is such a great place to live and work.

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Volterra Oil and Gas

CEO: Bradford Goetz
Employees: 15
2015 revenue: $10.2 million
2014 revenue: $16.6 million

Bradford Goetz* is the last person you’d expect to see flailing in the trash heap of failed juniors. Usually, the all-star of Albertan junior oil producers, who landed in Fairview with his parents when he was six, is the one lending a hand to someone in sad straits. Or at least that’s how it seems to him; his peers would preferably characterize the longtime oilman as a vulture circling on high. From the early 1990s on, the brash Goetz led a host of takeovers under the auspice of his exploration company, Siena Energy, which was mostly active around the oil plays near Lloydminster and Macklin. Goetz earned his standing as a calculating, farsighted executive who could wrangle deals from oil-and-gas careerists. “The owners of these companies hated to sell their business at such a discount,” he says, declining to name his sorrowful vendors of days long gone. “But hey, it was a lot better than not selling it at all, right?”

Years after Siena hits its stride, however, a major industry player made him an offer for Siena that he couldn’t refuse, and he got the taste for selling. With some of the $100-million proceeds he bought two companies within five years and enacted cost-cutting measures that seemed draconian until shareholders saw the balance sheets. “When I bought Living Sky Energy for $10 million, it was just enough to stave off bankruptcy for them,” he says, referencing a 2008 deal. “But those assets had paid for themselves by the end of the financial crisis. I knew they would.” Since then, his modus operandi has been to buy overleveraged companies, fine-tune them to a state of relative profitability, and then discard them for robust returns. Goetz’s prowess has caused industry investors to follow his trail like a pack of scent hounds.

There’s just one problem: now he’s the overleveraged one.

That brings us to Volterra Oil and Gas, Goetz’s most recent – and longest-lasting – producer. Like Siena, Volterra found success drilling around the oil-rich areas near the Alberta-Saskatchewan border. But it also has land holdings in the southern Alberta fairway near the Bakken shale formation, which is blotted across southern Saskatchewan, Montana and, predominantly, North Dakota. In predictable fashion, Goetz had ratcheted up Volterra’s bottom line over the course of several years. When he bought it in 2011, it had assets valued at less than $15 million; by September 2014, that amount had nearly doubled. Some of the investments were deemed risky, which meant that with dampened enthusiasm Goetz injected some of his own money to fund new projects he had faith in. It paid off – soon, Volterra was producing more than 1,500 barrels of oil per day.

But by the end of that year, oil prices were starting to tank. The company’s debt-to-asset ratio began to reverse itself. By mid-2015, Volterra had almost $20 million in liabilities and its 2015 assets shrunk by $5 million. Months later, it took out a production loan for $7.8 million. That, in the end, would prove to be a potentially fatal move. Because by the time the price of oil had made some modest gains, it was too late. Volterra wrote down a $5-million loss in 2015 and broke the capital covenant for its $7.8-million loan, and though the bank granted Volterra a temporary waiver, Goetz – a creditor – and Volterra now need a plan to pay it back, and fast.

Or is there another way?

Wellington Holbrook is executive vice-president, business and agriculture, at ATB Financial. He has more than 20 years of experience in commercial debt. He says that in a period of extended downturn such as this, it’s increasingly common for small- and medium-sized businesses – especially junior oil and gas producers like Volterra – to renegotiate the terms of their loans with lending institutions. And the banks are all too happy to oblige, because their financial health rests, in part, on the success of these companies. “We’re all in, we have to be,” he says of ATB Financial and the province’s energy sector. “This is our market, this is our province, this is the only place we have to do business. If we ever gave up on the energy industry, we’d be giving up on our own business!”

Not that help comes easy. Holbrook says renegotiating “is an art as much as a science.” But even art has rules. The company needs to demonstrate to its lender that it will return the money in a reasonable fashion. He uses a few different guidelines to judge this. First, does the company have any capacity to generate revenue from its assets? And how long will it be before the company can provide the bank with some kind of comfort that the value of those assets will rebound? But most importantly, “How committed is management to making the tough decisions that are often necessary to get the company back on solid footing?” Holbrook asks. “That’s the biggest piece that financial institutions are looking for.” Management needs to present a plan and act on it; reputation is, perhaps, the most important type of credit. (Goetz’s prominence in the oil and gas sector will surely help him.) And putting off commitments grinds that reputation down, because it clouds the transparency that ought to exist between the company and the lender floating it.

A bit of goodwill never hurts, either. A business could, for example, sell some redundant assets that were part of a previous strategy. Volterra, in fact, has some assets in southern Alberta that fit the bill. Goetz is holding onto them in the hopes that they’ll be productive once the recovery gets into full swing. But Holbrook says now might be the time to get rid of them. “As a note of goodwill, [Volterra] could sell those assets, take some of that capital and give it back to the financial institution, because they understand that [the bank’s] debt is a priority,” he suggests. “It’s often acts of good faith of that nature that buy a lot of good faith. And the banks are often willing to extend credit lines, waive capital requirements or other types of conditions on whatever financing is in place, to give the company breathing room.”

It ultimately comes down to deal making, which is music to Goetz’s ears, master negotiator he is. “Can you make a deal where both parties feel they have the opportunity to come out of it successfully? If you can, you’re going to win,” Holbrook says. The crash in crude prices often feels like a war of attrition. It’s a relief to Goetz to know it can be won.

Follow Volterra throughout Management Intel as it …

• Examines strategic alternatives to increase shareholder value
• Decides how to maximize new capital
• Prepares for the next oil boom (fingers crossed)

The post Terms of survival: renegotiating a business loan appeared first on Alberta Venture.

The Play

The Delaware Basin, in southwest Texas, has long played second fiddle to the more prolific Midland Basin located 100 miles east. Both are part of America’s largest oilfield, the Permian.

With acreage costs below those of the Midland and a recent change in drilling results, the Delaware is starting to get a lot more attention.

Devon Energy reported at an investor conference last month that wells it is drilling in the Delaware are generating twice as much oil and gas as wells drilled there two years earlier. Resolute Energy just had its share price surge on its second quarter operations release that said production beat expectations by a wide margin and that Resolute expects ultimate recoveries from its Delaware wells to be 50 per cent higher than previously expected.

With these increases in productivity, and cost efficiencies improving all of the time, the Delaware is now one of the lowest-cost places to drill for oil in North America. There is no better indication of how attractive this play has become than who just decided to join the party.

The Pick

Silver Run (NASDAQ: SRAQU)

While such titles aren’t presented, Mark Papa is in the running for the best shale oil executive in the U.S. award. While running EOG Resources a decade ago, Papa realized the U.S. oil and gas industry was going to flood the market with shale gas. He gathered his troops together and told them to stop looking for gas immediately and start finding oil.

They did as instructed and EOG locked down best-in-industry land positions in the Bakken and Eagle Ford before most competitors had a sniff of what was going on.

Of course this didn’t save EOG from the result of a commodity price collapse. The industry, fueled by easy money, managed to collapse the price of oil just as it had natural gas.

What further set EOG apart was how Papa built the company. With a focus on return on capital invested rather than pedal-to-the-metal growth, EOG has weathered the oil collapse better than most.

Papa retired from EOG in 2014 but returned this year with a company called Silver Run Acquisition Corp (SRAQU). Silver Run is what is known as a “blank cheque” company. It comes public with a bank account full of cash and no actual operations. Its mandate is to take that cash and make attractive acquisitions.

In the case of Silver Run, Papa had $450 million at his disposal.

So here is the set-up.

The top shale oil CEO is given $450 million to go out and buy a shale oil asset. Not only that, he gets to do it two years into an epic oil collapse when sellers are desperate to sell and asset prices are as depressed as they could possibly be.

What does Papa buy? A private Delaware Basin producer. If there is a better indication of the true quality of this play, I don’t know what it would be.

The private company that Silver Run acquired is Centennial Resource Production. Papa’s comments on the acquisition tell the story: “Since our IPO, we have been searching to acquire a meaningful position in one of North America’s premier oil shale basins. There has been a lot of recent excitement about the Delaware Basin, but we believe its potential is still significantly underappreciated. Centennial has an enviable position in the Delaware’s southern oil-rich core.”

The Postscript

To help fund this significant acquisition, Silver Run raised $1 billion of cash to go with the $450 million it already had. After closing, the company will have a debt-free balance sheet with $100 million in the bank. Silver Run will adopt the name Centennial Resource Development and trade on the NASDAQ stock exchange under the ticker symbol “CDEV.” It has about 7,200 boe/d of net production and 48.6 million boe of net proved reserves. All of this will position the company as one with a great asset base, a great balance sheet and a great CEO. With a little help from the price of oil, this could be a great long-term story.

Jody Chudley doesn’t own shares of SRAQU

The post Silver Run’s asset base, balance sheet and CEO are all top-of-class appeared first on Alberta Venture.

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