Part IV: Lessons Learned

This fourth part of the series chronicling the Fidelity Homes “From The Ground Up” project – Ten Years After – looks at the lessons that can be learned from the Fidelity experience, in terms of what worked, and what didn’t work.

Admittedly, lessons always flow retrospectively from a specific set of factors and circumstances (the subject of Part II). Different times, different opportunities and challenges, would likely produce different results, and those results would likely yield a different set of lessons. That said, David Hunihan and Todd Menke hope that their own experience of success and failure in the extraordinary circumstances faced with their start-up company will prove beneficial to other young, entrepreneurial future homebuilders, who might one day choose to set out on their own journeys, to pursue their own visions and dreams.

For his part, Todd sees the most important lesson of Fidelity as the adequacy of capital and cash flow. “Make sure you have a good base of capital to start”, he wrote, and then, “Pick a safe opportunity that doesn’t put you at all or nothing risk, and then manage your cash flow. I learned a great deal about external market forces and their impact on cash flow planning, and I believe those experiences helped me to think about real estate projects in terms of what could go wrong and how can we prepare for those possibilities. Those lessons have proved invaluable to me during the latest financial crisis.”

David focuses on the type of capital, as well as its adequacy. “DEBT IS BAD”, was David’s first statement. “When we were first going into business and we were interviewing anyone that would talk to us, a developer friend told me that we couldn’t possibly underestimate the cash requirements of this business.”

Thinking about David’s upper-case emphatic on debt, I well remember the wisdom my dad shared with me, one banker to another – one lender to another – before I became a builder, before I became a developer, before I became a consultant: “Son”, he said, simply, straightforwardly. “Leverage is something that makes good times better and bad times worse.” Like I said, lessons flow from the context of the circumstances. Possibly more than in any other industry vertical, leverage cuts both ways in homebuilding; its lure is enormous.

David also says that you have to measure the cost. “I learned that I loved being a builder”, he said, “and I loved creating something that never existed, with other people; I loved sharing a dream. I wouldn’t ever trade the experience of Fidelity Homes, but looking back, I don’t think I could ever repeat it. The price my family continues to pay was too high.”

The lessons came from Fidelity’s team of experts, as well: In retrospect, David Weekley’s admonition – “hope is not a strategy” – is one lesson. Scott Sedam’s counsel to resist being opportunity-driven, to find what you do well, and to align opportunities to your talents and passions is another. There would likely have been accord between Weekley and Sedam in Fidelity’s West of the Trail infill activity, as an example of the type of narrowly-focused, exclusive, niche’ proposition that would have worked, and would have set the enterprise apart. Instead, Fidelity became broader – less focused – and more opportunistic, less strategic in its choice of projects.

My perspective: As one lesson that should emerge, I would repeat (from Part II: Factors and Circumstances) that industry ease-of-entry didn’t demand rigor commensurate with the risk – a risk obscured, in this case, and in this era, by presumptive assurances of business-as-usual.

And, I would add one more lesson: Fidelity’s TQM grounding emphasized quality, not speed. The velocity side of Return on Assets is where the hard work of carving out sustainable competitive advantage needs to be done. Not because good product design, construction quality, and customer satisfaction – hallmarks of TQM – are not important (they are), and not because the margin side of ROA is not equal in importance to velocity in terms of generating economic return (it is), but, rather, because the competitive advantages that those attributes produce are not as sustainable over time. Moreover, achieving very fast – unprecedentedly fast – cycle times would have gone a long way toward reducing working capital requirements in support of operations, critically important with a building company as highly-leveraged and capital-starved as Fidelity was.

Finally, were there any lessons learned from the effects of the “From The Ground Up” project itself, and its team of industry consultants?

“The experience with “From The Ground Up” was both amazing and challenging at the same time”, said Todd. “To meet and work side by side with some the most brilliant minds in the homebuilding industry was a dream come true. However, the ideas from each consultant were sometimes in conflict. Also, the schedule commitments that required us to meet with each consultant and follow-up on their critical to-do lists were at times, burdensome.

“Looking back, it was beneficial because we learned a great deal, but I believe it was probably too much, all at once.”

David agreed: “We couldn’t wait to implement all that we had learned, but I feel it was a double-edged sword. Most entrepreneurs are too busy working in their business to work on their business. The reverse was true for us. In the beginning, we had so much help working on our business that after the PB articles had run their course, we had to focus on working in the business and getting it financially sound.

“Overall it was beneficial. It was just too much, too soon, all at once.”

Next: Part V: Friends