So you want to start an F1 team?

So you want to start an F1 team?

Chase Carey, CEO of Formula 1, is reportedly keen on attracting a high profile F1 entrant from the United States as part of his plans to grow the sport. Formula 1 already has an American team, Haas F1, so by ‘high profile’ I suspect he means a household name in domestic automotive, consumer or motor racing circles; an Andretti, Penske, Chevrolet or Amazon.  Bezos F1 anyone?

Formula 1 has plenty of room for new teams. Back when Jordan Grand Prix was launched in 1991 we were one of 18 teams and the entry list then included some long-standing names such as Lotus and Brabham as well as tiny operations now long forgotten. Who can remember Automobiles Gonfaronnaises Sportives, one of the three French-owned and based teams?

For some time now Formula 1 has operated with only 10 teams. The amount of money required to participate has risen thanks to dramatically increased technical complexity while whatever sponsorship there is has tended to migrate towards the larger, more successful teams. The world has changed, and with it the business model of F1.

This has resulted in teams requiring more funding from the central pot of F1’s revenues which are primarily generated from broadcasting and promoter fees. In addition Mr Carey’s predecessor, Bernie Ecclestone, really didn’t see the point in sustaining small teams who didn’t manage to get through qualifying and thus contribute to ‘the show’.

Now, however, F1 is proposing to introduce a USD$175m per annum budget cap which makes a little more sense than the space-race budgets of the past. It makes Formula 1 potentially achievable for anyone – by which I mean a large company, investment group or even nation state – keen to develop a high-end sports business with a global footprint.

How many spaces are available for new teams? Two certainly, possibly three given that Formula 1 happily operated 26 cars-per-grid for many years.

Periodically I get asked what’s involved in setting up an F1 team. This is, in itself, a good start. The last time the sport saw a wave of new entrants, back in 2010, it soon became apparent that few of the owners had asked the right questions (or not been given the right answers!) in order to evaluate the size, complexity and timescales required to develop a credible, sustainable business.

They didn’t know what they didn’t know.

When I headed Cosworth’s F1 business unit I recall being told by one of the new team bosses that he would not need our engines until January when the chassis would be ready for the engine to be ‘dropped in’. Considering that the engine is a fundamental part of the chassis and efficient powertrain integration critical to car design, the alarm bells rang.

So what is involved and what should a potential entrant consider?

Timescales

Formula 1 is a relentless business, with 21 – soon to be 22 – races per season, one or two weeks apart, from March through to November each year. There is no time to play catch-up once the first race in Australia is underway. Therefore you need to be absolutely clear that pulling a team together a matter of months before you start competing is one of the largest and most common mistakes you can make.

Effective preparation takes years. At least two, preferably three if you really want to hit the ground running. All the other items flow from this requirement. As Virgin Racing, Hispania Racing and Lotus Racing all discovered in 2010, the sense of euphoria at being granted an entry the previous June was actually the first sip from a poisoned chalice. In reality none of them ever recovered from the haste of entering Formula 1 at 9 months notice.

Leadership

There has been a tendency in recent years for some Formula 1 teams to over-complicate their management structure. In some ways this is understandable as teams have grown in size to become medium sized engineering and technology companies. However the fact remains that there are six primary leadership roles from which everything else flows; CEO, COO, CMO, CIO, CFO and CTO. Ideally all should have experience in top level motor sport, and most certainly in Formula 1 itself in the case of the CEO, CTO and COO. The ‘C’ in C-suite should never standing for Learning Curve.

If there was a seventh individual I would have at the top table it would be a head of HR because, for all that the others may wish to talk about finance, technology, product and programme delivery, this is a people-business.  Just like all businesses.

People

As any business start-up manual will tell you, successful entrepreneurs surround themselves with the best talent they can get their hands on, and this is another reason why timescales are important. A Formula 1 team is only as good as the experience held by the people managing and operating it. If staff are on a learning curve, mistakes will be embarrassing and expensive. The team that made a car with a fuel tank too small to finish a race back in 2010 will know what I mean.

To design, develop, manufacture and operate two Formula 1 cars require several hundred staff. The top team employ around 1000, while a team such as Haas F1 operates with around a fifth of that thanks to buying-in technology from Ferrari. The slight problem with the Haas model is that most of what you are working with is someone else’s tech, but it is certainly a less costly way of participating.

Whatever the case, those timescales will have a direct bearing on the quality of the people you can attract. A short lead-in means you will be employing those who are available rather than those who are the best. Considering that top talent in F1 will have notice periods of between three months and a year, your preparation phase should benefit from having these people on board, rather than disrupted while they fulfil non-compete clauses and take gardening leave.

Facilities

A Formula 1 team is a low volume, high-end technology business integrating solutions from aerospace, automotive and IT in order to create a fully connected, 350kph inverted jet fighter. There are a number of areas critical in terms of vehicle performance and over which teams have control, most notably in aerodynamics, chassis design and tyre-usage, while the largest teams also manufacture their own power unit (hybrid petrol-electric engines) and gearboxes.

The facility needed to enable the necessary R&D, design and manufacturing will be significant both in terms of size and complexity. Again, all of this needs to be up and running long before you race. Calibrating factory operations to deliver a ready to race product takes time.

One of the most important facilities will be a wind-tunnel. The demise of wind tunnels has long been forecast, particularly as the move to computational fluid dynamics and other sophisticated tools took hold in the 2000s, but the thinking remains that you need both. One to complement the other, to validate development and ensure that the part which arrives at the track is going to deliver the aerodynamic performance for which it has been designed.

Location & Supply Chain

Back in 2000 I visited the Toyota factory in Cologne, Germany, with a view to furthering discussions about them partnering with Jordan in F1 rather than going it alone. It was a pointless exercise because Toyota’s leadership had determined that it would do everything in-house and essentially ‘out-Ferrari Ferrari’ in ‘the Toyota way’. In the subsequent 8 years of its participation in Formula 1 Toyota never won a race and subsequently withdrew in the wake of the financial crisis and world-wide recession in 2009.

Toyota faced many obstacles in Formula 1, including in its leadership, culture and the degree of empowerment from head office, but there is no question that choosing to be based in Germany played a part in its struggles. One of the reasons 8 of the 10 teams currently competing Formula 1 have either their headquarters or operational facilities in the UK is that it benefits from an industry-leading technology cluster located within 75 minutes drive of Oxford. Essentially Formula 1’s Silicon Valley.

One of the central benefits of this cluster is a highly developed supply chain – everything from raw carbon fibre through to fuel cells, electrical wiring looms to specialist catering services – and this is critical when building a Formula 1 operation. Not only do you need to surround yourself with talented people, but a supply chain that completely understands the demands of an industry in which deadlines and compliance are non-negotiable. As an engineer once told me, the most important part of a Formula 1 car is the part that has not turned up. This is why you need a supply chain fully integrated into your operations, aligned with your plans and able to respond with the necessary speed and agility.

This is not to say that a Formula 1 team could not be started in the USA, the Gulf or anywhere else, but at the very least a UK hub is likely in order to access experienced suppliers and talent.

Money

I have left this to the last because – although you might think it a ‘given’ – the way in which a Formula 1 team is financed such as to become a sustainable, profitable business, is quite different to how people imagine.

One of the questions I often ask audiences is ‘how does a Formula 1 team make money?’, and nine times out of ten the response is ‘sponsorship and advertising.’ Unfortunately, while that used to be the case, a sequence of events outside of Formula 1’s control rather ended our heavy reliance on third-party corporate sponsorship for funding.  Events such as the DotCom bubble may have led to the loss of funding from companies such as Nortel and Lucent but Formula 1 has arguably never fully recovered from the ban on tobacco advertising in 2005 nor the collapse of sponsorship from banking and financial services in the wake of the 2008 crisis. The pickings have been decidedly thin for the last decade.

Changes in corporate governance, limitations on the use of corporate hospitality, accountability on the part of senior executives for how they choose to spend company money – all of these, and more, have had an affect on the ability of Formula 1 team’s to attract sponsorship. It is an expensive sport, and for many brands the need to sponsor a winner means gravitating towards one of three teams currently – Mercedes, Ferrari or Red Bull.

For a new entrant, therefore, the financial requirements are clear. The up-front funding to build a new facility of the kind described, employ the team and prepare for a two year period means accepting that there will be no revenue until Year 3 at least.

Sponsorship will provide a proportion of your revenue requirements once the racing starts, but only if your CMO knows their stuff, has the lead-in time required and a proposition that is attractive to partners.  Another contribution can come from driver-funding, and I say this unashamedly because ‘pay drivers’ have something of a negative connotation. The fact remains that all drivers will have generated funding to develop their careers in the lower formulae and some of them have the wherewithal to extend that funding into Formula 1.

Formula 1 drivers tend to be famous, particularly in their home countries, and can therefore attract the support of businesses which may be based in their native country but operating internationally. With two race drivers plus a reserve or test driver, the revenue opportunity from drivers could be at least as much as team sponsorship, often more for the smaller teams in the sport.

So where is the rest of the revenue to come from – by which I mean up to 60-70%? Three areas in the main. The first is your share of payments from F1 itself, which means agreeing terms with Mr Carey over the point at which your new team may become eligible for a share in the sport’s central revenues. This requires the existing teams to accept that the cake is going to be sliced more thinly, but F1 remains hopefully that the newly proposed budget cap can reduce the cost of entry and thus unlock the potential to support new teams.

The second area is from licensing, merchandising and the sale of other rights in relation to your team’s brand and its presence in the sport. This is going to loose change in real terms unless your company has the benefit of a recognisable brand name which will help drive consumer demand, or else becomes a competitive team. It is extraordinary the degree to which even a modicum of success drives merchandise sales.

Thirdly, and perhaps most tantalising, is the opportunity to drive revenue from using Formula 1-related technologies and capability to develop world-class products and services. Williams has done this through its Advanced Engineering business, McLaren with Applied Technologies and Red Bull has recently done the same through its work for Aston Martin. You could, of course, follow the McLaren route of developing road cars – an altogether more ambitious and daunting long-term strategy – which mirrors Ferrari’s approach and used to be the basis of Lotus’s participation in the sport.

Whatever the case, the one certainty is that to start a Formula 1 team requires significant shareholder funding, and a preparedness to keep putting in the funding at least for an initial 5-year term. By that time a competently managed team should be covering its racing costs and making a profit from across its diversified income streams. The key word is competence because Formula 1’s history is littered with dreamers who thought that, perhaps because they had been successful in some other form of business, Grand Prix motor racing would be easy.  It isn’t.

Being passionate about the sport is most certainly a prerequisite for establishing a team, but the moment that passion blinds you to the realities of running a business that will cost a million a week just to keep the lights on, the doors open and the staff employed, it will be game over.

So is there are reason to do it?  I believe so because, aside from being able to create a sports business with a truly prestigious world-wide presence, in this technology-focused world there is nothing quite like a Formula 1 business to stimulate opportunities if the best people have the right investment and support behind them.

My view is that the opportunity to use Formula 1’s focus on rapid prototyping, technical innovation and integration of solutions in new product development remains in its infancy. In a world of digitalisation where consumer expectations and business challenges are changing faster than ever before, a Formula 1 approach to growing a technology business has more relevance than ever.

Perhaps that’s the ultimate argument for creating Mr Carey’s vision of a new entrant into Formula 1, whether as a US-based team or not.  Creating a globally successful sports business is one thing, but if you also want to grow a technology business fast, why not start by developing the fastest of all businesses in the first place?

-ends-