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Explain ScenarioClarence Chapeau, Bernadette Beret and Karim Keffiyeh were long-time friends and they all worked in the haberdashery industry. Clarence was a sales representative for hat and clothing distributor. Bernadette worked as a designer for a sports clothing business and Karim ran the production floor at the same firm. The three of them loved sports and went together to hockey games, football games and baseball games whenever they could. At one hockey game when the Canucks scored a goal to win in overtime, the three of them cheered wildly and tried to clap. Unfortunately Karim could not because he had a hotdog in one hand. Bernadette had a drink in one hand but tried to clap anyway, spilling it all over her coat. Clarence put his drink down but then inadvertently kicked his Coca-Cola over when he stood up to give the team a standing ovation. Bernadette looked at her jacket and looked around the arena. She saw numerous fans waving foam hands.

This gave her an idea for a new and innovative product. After the game, she discussed it with her friends and they decided to go into business together to design and produce the ‘ClapHat’. The hat would operate by a small unique battery powered motor. This allowed a fan at a football game, hockey game or other sporting event, to hold a hot dog in one hand and still clap enthusiastically using the ClapHat. It was easy enough to design and produce the hat but they had to approach an electrical engineer to develop a unique battery powered motor to operate the hands. The ‘ClapHat’ is demonstrated in the following video.

The other excellent fact about the product was that the hats could easily be product in the colours of various sports teams, such as black, orange and white for the BC Lions and blue, green and white for the Vancouver Canucks.

The trio approached their bank for financing but were woefully unprepared and got turned down quickly by the Loans Officer who thought the idea was crazy. However, they were undeterred and began the business anyway. The three of them used money from their bank accounts and Clarence asked his well-to-do uncle, Merdley Gurdson, for some money. Gurdson was happy the invest a small amount of money. In addition, Merdley was able to tell them about the Development Bank of Canada, a Crown agency that serves as a lender of the last resort. The trio went to the DBC and were able to obtain an unsecured loan of $200,000.00 because they met the six necessary requirements.

Initially, the kept they jobs and worked on a part-time basis until the revenue from their venture could meet their needs. They leased the manufacturing equipment necessary to make the hats, and began to make them in Karim’s garage. The materials and supplies were purchased on 30, 60, 90, 120 days credit and they delayed these payments even longer at the beginning.

The business, which they called ClapHat Manufacturing & Sales, grew slowly at first. However, after a number of years in operation, it was a successfully serving the lucrative Vancouver market which included the BC Lions, the Vancouver Canucks and the Vancouver White Caps. They had moved to a building which they purchased. At this juncture, the company’s accountant recommended that the change the structure of the business from a partnership to a corporation and recommended that they consult a solicitor.

After the meeting with their accountant, Clarence said he could incorporate the company and save money. So, he incorporated a company under the Federal Business Corporations Act. Then the trio went to their lawyer’s office and Bernadette said, “We are partners in a corporation.” The lawyer explained why they should never say they are partners in a corporation and then he asked to see the incorporation documents, but Clarence had neglected to bring them. After he went back to the office and got the documents, the lawyer reviewed the documents and explained that they incorporated under the wrong jurisdiction. He said, “You should have consulted me before doing this.” He got instructions to incorporate the business under BC law and then the lawyer recommended one very important additional document which should be prepared.

Not long after the meeting with the lawyer, they got confirmation that the business had been incorporated under the name the ClapHat Manufacturing & Sales Corp. They were happy about that but upset about the size of the solicitor’s account.

The business continued to grow, and their luck continued. One day Bernadette was in line to buy a cup of Gotta Have A Java coffee and found herself standing beside a man wearing a soccer jersey. Bernadette asked about the soccer jersey and the man said he was an agent for the All North-American Distribution Corp. which sold novelty items to football, hockey and soccer teams all over Canada and the USA. He was in Vancouver to talk to the owner of the White Caps soccer team and sell the organization some novelty soccer balls.

In less than two minutes Bernadette told him about the ClapHat Manufacturing & Sales Corp. The agent asked if the ClapHat Manufacturing & Sales Corp. could supply the hats in the millions because the All North-American Distribution Corp. Bernadette said yes, and they exchanged contact information. Bernadette told her business associates the good news. However, they realized that to take advantage of this opportunity, it would have to expand its current plant and lease space for an additional manufacturing plant. Not wanting to give up control of the business by seeking equity financing, they began to explore other ways to raise the necessary financing. Although the current property had a mortgage against it, they had been paying down the bank and had built up substantial equity in it. The existing equipment was in good condition and free of any encumbrances. With so much raw materials arriving and work-in-progress it has proven necessary to store finished ClapHats in rented warehouse space. Ms. Beret was careful to keep the warehouse receipts in order. And the three were hoping that the significant outstanding receivables with the Vancouver Canucks, the BC Lions and with the Vancouver Canadians would start to be paid. In the way of personal assets, all three had their voting shares in the company and their spouses had non-voting shares. All three of the business trio had been able to acquire some shares in Stardoes Coffee Corp., and Microhard Corp. Their residences were all mortgaged to the hilt but Keffiyeh and Beret had purchased an unencumbered vacant lot as an investment. There only other unencumbered personal assets were the key-person life insurance policies that each had taken out years age when they started the business. Clarence’s uncle, Merdley Gurdson, had no more money to invest but said he was willing to help any way he could.

Over lunch at the Chez Squamish restaurant, the trio argued how best to raise capital. No one they knew wanted to take an equity position in the business and they did not possess the necessary seed capital to get listed on the stock exchange and do a public offering. So their only option was to borrow the funds. They were still arguing when the bill came and they continued to argue but this time over who would pay the bill. Clarence slapped down his MasterCard, Beret said she would pay with her VISA, while Karim said he would pay because he would get ‘air miles’ on his American Express card.

From the restaurant the three went to visit their friendly banker, Calvin Collateral, a Loans Officer with the Gouge & GrabB Bank. Calvin outlined numerous ways the bank might help and the security the bank would require. Calvin also advised the trio that they would have to give the Bank their personal guarantees. As the trio left, Collateral said, “Thanks for dealing with the Gouge & Grabb Bank, where your money is our money.”

Mandatory Question 1.List and briefly explain Drucker’s Sources of innovative opportunities and venture ideas, then indicate where in the list the ‘ClapHat’ might fit and why it fits there. (It could possibly fit in more than one place.)


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