entrepreneurship

No age in history has spawned more successful entrepreneurship than the present. The reasons are plain to see. There’s a super-abundance of capital looking for a happy home. There’s an explosion of new markets, new technologies and new ideas. The once formidable barriers erected by large, entrenched corporations have crumbled. Business schools have poured out armies of would-be millionaires.

Where society once deplored the antics of ‘malefactors of great wealth’, gigantic amounts of personal riches now pass without comment. I’ve yet to read, for example, any critique of so-called ‘private equity’. Once upon a recent time, the players in this fruitful game were known, by themselves and others, as ‘venture capitalists’.

Their backing led to the superb growth - from zero - of high-tech marvels like Apple, Compaq and Digital Equipment. The wealth made by the promoters was sanctified by the contribution made to the new innovatory economy.

But the entrepreneurial universe was not composed of these super-stars: nor is it today - not by a long shot. Thousands of people in all countries, and in business areas ranging from the exotic to the humdrum, have shown the two attributes required: enterprise and enterprise. In its first meaning, the word refers to the risk taking energy needed to set the venture in motion. That means building an enterprise, the second sense of the word; meaning an organisation that is fully capable of taking the venture forward into maturity, if not beyond.

PRIME MOVER

You typically need a prime mover, even where (another typical condition) the venture resembles a partnership rather than a military hierarchy. That’s where trouble starts. The prime mover tends to gather self-assurance and power as the enterprise reaps success, and this won’t work for ever: the three hero companies mentioned above - Apple, Compaq and Digital - all ran into grave setbacks when the prime mover outreached the limits of his ability, experience and personality. It seems that there are three broad types of entrepreneur. Which of the types are you?

• Type A: those who can create new concepts
• Type B: those who can acquire new concepts and take them forward by good management
• Type C: those who can both create new concepts and take them forward.

I owe these definitions to David Jones, a Briton who has spent his career in retailing (both mail order and stores), and who thinks himself a Type B. Jones came to fame at Next, the smash-hit fashion business created by George Davies, whose flamboyant and dynamic power eventually brought him into head-on conflict with the down-to-earth Jones.

In his autobiography, Next to Me, the latter minces no words in describing his ex-boss: ‘not temperamentally suited to running a public company for the long haul under pressure from shareholders and the City’.

To be specific, Jones writes that ‘George suffered from two flawed beliefs: because he had one very good idea, all his ideas must be good; and because he was able to run one business well, he could run any number of businesses equally well’.

Not that Davies has suffered at all (except emotionally) by his dismissal from Next. Asda, now the UK offshoot of Wal-Mart, hired him at great cost to devise and launch a newline of clothing: and then Marks & Spencer followed suit (or suits), finally buying Davies out for a cool $125 million.

The crucial point is that, second and third time round, Davies stuck to his Type A last. ‘Know Yourself as You Really Are’ is solid advice for a would-be entrepreneur. As a backer, you need to identify this self-image and check its validity and its true business value. Very few people thought that Jones, who describes himself as a ‘grey’ accountant, had the ability to outdo Davies at Next, especially since the latter, largely through bad corporate buys, had left such a mess for Jones to clean up.

ABILITY TO EXECUTE

The Type B entrepreneurs, however, have the ability to ‘execute’ - to get things done, or ‘make it happen’, by mastering and living by the facts, getting good people to work hard and well for them - and themselves working harder than anybody else. Such pearls are invaluable, but are often much harder to identify than the high-flying Type A entrepreneur.

The high-fliers may lead you away from safety to other areas that you don’t understand. That’s why Warren Buffett, the patron saint of private equity, refused to invest in the new technology, even in that of his good friend Bill Gates, the hero of Microsoft. Backing a business without knowing its opportunities and risks in full is potentially a mug’s game. And Buffett is no mug. He founded his magnificent fortune on finding investments where good businesses could be bought for a good price - good, that is, for Buffett.

You truly can find excellent bargains. One common example arises when some sizeable corporation, for good or bad reason, wishes to dispose of one of its subsidiaries. The classic purchase involves the sitting management, which puts up some of the equity from its personal assets, and borrows the bulk at fixed interest through the good offices of the eager private capitalist. The latter doesn’t need to invest its own money, naturally. The loot comes from a fund, financed by institutions, which locks up the money for years, pays no interest, but then hopes to reward its investors by phenomenal rates of return.

HANDSOMELY REWARDED

The private capitalists do, of course, take apiece of the action for themselves, while also being handsomely remunerated for running the portfolio. One of the high priests, Henry Kravis, is supposed to be worth some $2 billion as a result of this business model, which is almost foolproof. Provided you don’t overpay for the investment, its managers need show only moderate competence to raise business performance to a level that will enable return to the stock market, or disposal to another private buyer - very possibly to a fellow player in this highly lucrative game of private equity.

The talents required by the players start with the ability to persuade institutions and other investors to hand over very large sums of cash. Charm and persuasion, of course, only last until the first results appear. The second talent is the ability to assess both the business ideas brought to your door and the people who will manage your investment. In their venture capital days, the private capitalists laid many eggs - nine, it was said, for every one success.

Nursing small start-ups is a tricky operation, beset with people problems and technical difficulties. Also, it doesn’t absorb very large sums of capital. So the venturers wisely changed course, switching from start-ups to buyouts. Here you buy an established business whose managers have a track record and who (see above) don’t have to perform miracles to make your (and their) millions. Remember the basic rule: getting from zero to mediocre is at least as profitable (and usually easier) than getting from middling to marvellous.

The sensational rise (120-fold) of Next shares from a mere 7p reflected, not just the executive powers demonstrated by Jones, but also the basket-case status he inherited from Davies.

Jones’s sole lingering regret is that, had he been able to take the company private, he would have received far greater personal reward. The model he has in mind is presumably his friend Philip Green, the stores tycoon, who in October this year was revealed as having received a bonus, £1.2 billion, that surpasses even the generosity towards himself shown by Lakshmi Mittal, with a £1.1 billion dividend the previous year.

The twain have an important similarity. Both made their sky-high private piles by obtaining respectable returns from businesses where others had been unable to win respectable yields - reinforcing my observations above. Mittal’s beaten-up old steel plants and Green’s under-performing store chains, both now managed with simple, strong methods, became goldmines. Since the empires are private, neither man need bother about investors or other unwanted interference in their affairs.

The London Times recently included the pair in a list of seven multi-billionaires. Sergey Brin and Larry Page, co-founders of Google (£6.2 billion apiece) and Jeffrey Bezos (£2.7 billion), the Amazon chief, capitalised their businesses on the stock market. As for the others, Roman Abramovich seized the rich chances created by the collapse of the USSR to build a £7.5 billion fortune on oil - just as Oleg Deripaska won his £4.3 billion mostly from Russian aluminium. George Soros bet his own and other rich men’s money on reading financial markets more effectively than other speculators; just as Warren Buffett’s fortune (much bigger than any of the above) was built on quoted investments which were easily available to anybody reading Thinking Managers.

To capitalise on his investments, though, Buffett had to establish a business model as powerful as those above - putting his private investments into a public company, Berkshire Hathaway; and to disobey virtually every precept of what traditional investors wrongly regard as sound practice. This is his advice:

• Invest in no more than five or ten shares
• Only buy if you are prepared to invest at least 10% of your net worth in the stock
• Expect to hold your investments for ever
• Only invest your cash when you can find something worth buying
• Do your own research - and do it thoroughly
• Always have sound, well-argued, well-researched reasons for your investments
• Ignore the market, the crowd and the fashions

The rationales behind each of these seven policies are obvious and irrefutable. Yet George Davies, having raised Next so high, brought it low by investments which disobeyed four or five of the seven commandments. Then, when the Davies aftermath had forced a reluctant sale of a valued subsidiary, a large British retailer called Sears, outbid at £175 million, could have recouped by buying the whole Next empire for £200 million - but missed the chance all because of failure to research properly into the Next debts.

SEIZING OPPORTUNITIES

More recently, the same Sears inadvertently provided the opportunity for Philip Green to step into the big time. He bought the company and promptly freed £200 million by sale-and-leaseback of its many properties.

Opportunity is the key word here. The entrepreneur may not be any more able than the less successful. The difference is that venturers spot their opportunities, and having done so, seize their chances.

This is where the business model comes in. You must combine your adventurous opportunism with sound, conservative accounting based on cash flow, and you consistently apply a trading formula that maximises profitable sales. Warren Buffett, for example, would surely approve the conservative Jones formula for running Next:

• Aim to achieve consistent long-term growth in earnings per share.
• Never compromise on quality.
• Give customers a wide choice of well-designed, high-quality goods and services.
• Optimise customer value by passing on all cost reductions through price cuts and/or higher quality.
• Only expand on the basis of strict financial criteria.

There is, of course, far more to management than these five points, vital as they are. They serve as beacons, guiding the entrepreneur towards the ambitions which are essential if you want to achieve ambitious results.

Those seven multi-billionaires instinctively followed Buffett’s advice. They concentrated on businesses they knew backwards and forwards. They thought big -in general, only small achievement flows from small ambitions. They managed for the long term. They did their home-work, using their own minds, and those of others, to discover and understand the realities.

It’s an education in itself to read Jones’s accounts of the fact-finding expeditions which identified follies (of which every organisation is guilty) and established the correct solution to the problems created by foolishness. Following that approach will often result in contrarian policies and practices that go against the crowd. So much the better, in most circumstances. The conventional wisdom is seldom wise. Finally, remember the three types of entrepreneur. There is actually a Type D, who can neither create a concept, nor acquire one, nor manage the concept’s necessary development. You are surely not one of those. But you have to prove it!