One out of the box

Telcoinabox sprang into life financed in part by founder Damian Kay’s credit cards. He tells AMANDA GOME the lessons he learnt on the way to making his business a multi-million dollar success.

By Amanda Gome

Telcoinabox sprang into life half a decade ago, financed in part by founder Damian Kay’s credit card. He tells the lessons he learnt on the way to making his business a multi-million dollar success.

Damian Kay was in his early 30s, working in the telecommunications industry with Damien Gould, when he met Morgan Duncan. At the pub they drew up plans for the business Telcoinabox and then spent six months planning the new business before it was launched in 2003, financed by credit cards.

Turnover is now $20.1 million, expected to rise to $50 million in 2008-09.

Damian tells Amanda Gome how he grew the business, the trends he sees in the telco universe, and where the company is headed to from here.

He is willing and keen to share his knowledge with you. Got some questions for Damian? Email them to feedback@smartcompany.com.au before the end of business 2 May.

Amanda Gome: What was the original idea and how much did it cost to launch?

Damian Kay: The idea was to allow anyone to become a telecommunications company. It had never been done before. We needed $80,000 and every time we ran out of money we got another credit card.

And then you franchised?

Yes. We provide franchisees with packaged services that let individuals act as telecommunications companies offering fixed line and mobile services.

We let our franchisees come up with their own brand identity and we supplied the telecommunications infrastructure, the billing systems and process to sell those products.

The franchisees come up with their own pricing models and sales and marketing strategies and resell telecommunications minutes to customers at normally cheaper rates than the major players like Telstra.

Is that all you do?

No, that’s half the revenue. The other half of the revenue comes from a wholesale offering, providing services to telcos.

Why don’t you franchise your brand?

We don’t want to be responsible for all the marketing components. In any major branded franchise like Bakers Delight, the biggest point of contention and grief is marketing and the marketing levy. You take away a lot of grief by removing that component from the relationship.

Also it is a very competitive industry so it works having very niche players in niche fields marketing to their members. For example one franchisee is a small religious group raising funds through a small telecommunications company to help missionaries

I knew this was never going to be a mass market. We were never going to compete with Telstra and Optus. So why not take the other point of view and get people to set up niche guerilla and direct marketing on the ground close to end users.

Our guys understand SMEs, because they are SMEs.

Does it matter where people are based?

No. We have Perth franchisees with customers in north Queensland

What percentage are profitable?

Very few are unprofitable because you can run this from your bedroom. It costs $45,000 for a franchise and we expect them to have $50,000 for working capital and to grow the business.

About 10% of franchisees haven’t achieved what they like to, but we have a low conflict rate. We know that because we use the franchising research to benchmark.

On the other hand a high percentage of the franchisees get high returns. We have 65% or 70% making $50,000 plus profit a year – some make in excess of $200,000 a year.

What has not worked?

The biggest challenge has been to train non-telcos. The goal is to get a return on money and have a self-sustaining business.

So we give them six days of intensive training and they also have a one-on-one with a business accountability manager who explains what is going to happen.

Then they go into a business prosperity program. There are other events such as two road shows and a national conference that is not just on telecommunications but also on personal development, developing business acumen and cash flow management.

So you take a wider approach?

Yes. We also try to involve their families and get their support. At our national conference we ask them to bring partners, and that’s subsidised.

That’s worked really well. Many of our franchisees have had enough of working for the man and have taken redundancies or sold investment properties to buy in.

What’s critical to franchises success is friends and family support, especially at the start when they work long hours.

Many franchises are having problems recruiting people. Have you?

No. We have 60 franchisees in the pipeline and we maintain that number.

How many acquisitions have you done and what have you learnt?

Four – and I hate the shit fight afterwards. We have learnt to acquire on cashflow, not just revenue. The business must be cashflow positive.

We have also learnt that you have a business plan before the acquisition, and that you should not be scared to operate the business separately for a while.

Can you maintain your fast growth?

In two to three years time we want to be a $100-million-plus company, so we would like to see 250 franchisees.

We have just launched in Britain, rolling out the wholesale business, and we will roll out the franchising side soon.

I am off to New Zealand on 7 May to bed down arrangements there. We are also looking at Canada, Germany and Holland.

Will the downturn hurt?

We are not seeing any signs of a downturn. About 96% of our end users are small and medium businesses, so in times of downturns they look to save money so we benefit in a difficult trading environment.

What is the biggest strategic mistake you have made?

We invested in a fitness company. We tend to be fairly fit and we work hard, play hard. So we invested in a couple of licenses into a boot camp type operation.

But our focus and understanding was very poor and we relied upon someone we contracted in, but he wasn’t a particularly good fit and we didn’t have the passion and dedication to do it ourselves. It was stupid; call it youth.

Another mistake?

Putting up with outstanding debts longer than we should. We now get paid first and are very strict on terms. Money supply is crucial to the business. I trained as an accountant so I know that.

What brings you down to earth?

My family and friends. I am pretty driven and don’t think I will ever retire.

But family brings you back to earth. You cut a $60 million deal with Telstra and Optus and you go home and a three-year-old and one-year-old crawls all over you.

I also run, every day between 4pm and 5pm religiously, in the Botanical Gardens. Then I go back to the office, read my last emails and get home by 6.30pm to 7pm to play with the boys. I am up at 5am, spend time on the business and then time with them before I am at the office at 8.30am.

How do you stay up to date?

I do an enormous amount of reading. I read SmartCompany, all the newspapers and get a gut feel for current news, technology trends and regulation. I love SmartCompany because I can see what other entrepreneurs are doing and it reinforces what we are doing or sparks an idea and creates creativity.

You went to CeBIT in March. How as it?

It was amazing, but there were hardly any Australians. The whole Australian contingent pulled out. It was expensive and many couldn’t be bothered. But I went because I was looking for new technology. I didn’t find any that I needed to be worried about.

But the enormity of it was amazing. Think Jeff’s Shed (Melbourne’s Exhibition Centre) – there were 28 of those.