Carve your path in the business jungle
Sir Ronald Cohen made a fortune in venture capital. Now he is sharing his knowledge. In a second extract from his book, The Second Bounce of the Ball, he reveals the secrets of successful start-ups
HOW TO SPOT YOUR OPPORTUNITY
BEFORE YOU set out o n a n e nt r e pr e - neurial venture, ask yourself: “Which is the most promising area for me?” The key criteria are the size of the opportunity, your personal aptitude in the chosen market, your ability to recruit suitable talent, the attractiveness of the business model, capital intensity, and the barriers to competition that you can establish.
Why is size so important? It is obvious that the larger the market, the larger the opportunity and the larger the potential reward. Growth is an important aspect of size and, in most instances, the prospect of rapid and substantial growth is attractive to entrepreneurs and investors alike.
Size can also be dictated by financial resources. Software company Autonomy was one of the greatest successes of Apax, our private-equity investment group: when we floated Autonomy on the Lon
I remember having a meeting in an Apax conference room in Portland Place, London: the entrepreneur behind Autonomy, Mike Lynch, and my colleagues John McMonigall and Peter Englander and I sat around a table. Mike Lynch was a fireman’s son who hadbecomeamathsdonatCambridge and was interested in mathematical methods for recognising information patterns. He had developed a technology to identify number sequences, for example car number-plates. He was selling this technology to police forces in Britain. He had had an offer from a large technology company, Racal, to
After listening to him, we said: “Your technology is groundbreaking. Don’t sell out to Racal; let’s build a major company together instead. We will in
John McMonigall spent time with Mike Lynch and his team in Cambridge. They told John that as well as recognising numbers they were trying to see if they could develop a search engine that recognised words.
John returned to the office very excited: the applications for this in the internet age would be enormous. What makes networks like Google, Amazon and eBay unique is that, once established, each enjoys a huge barrier against new entrants. That barrier to competition is the large size of their networks. If you get there first, every- one else is effectively locked out.
The second criterion after market size is your particular aptitude and depth of understanding of your market. Do not enter a market unless you understand it as well as anyone else.
A good example of deep sector expertise is Tim Waterstone, founder of the Waterstone’s bookstore chain. He had worked for the giant newsagent, stationer and book retailer, WH Smith. He went to open their operation in the UnitedStatesandwasfired.Hereturned to Britain and said that he believed that British bookshops were completely outdated. He wanted to break the Net Book Agreement that maintained a cosy price-fixing relationship between publishers and bookstores at the expense of the consumer.
Apax funds invested in Tim’s company when he had only a handful of shops. The whole book trade said: “This is going to fail. Publishers will not work with them.Wholesalers and small retailers will not like it.”
But Tim was right. He realised that, to be successful, he needed sufficient capital to get such a volume of book purchases that the publishers could not ignore him. He worked out that he needed to get to 20 or 30 shops. So he went out and raised the capital to get to the required number of shops in a short space of time. His knowledge of the market dictated his strategy.
The third criterion is your personal ability to recruit talent in the field. Will you be able to hire the calibre of executives and specialist staff needed to build an outstanding business?
A successful entrepreneur who has built a large business will always be surrounded by outstanding executives who are themselves able to operate in an entrepreneurial way: they take initiative, make decisions and provide effective leadership for the people who report to them.
The fourth criterion concerns the business model. By this I mean the elements of the business that drive its growth and its profitability, and the manner in which they fit together.
A good business model provides significant financial rewards if the operations of the company are reasonably successful. A poor business model provides scant rewards even if the operations of the company are outstandingly successful. A leading football club can win the league title and still lose money. Why? Because, with very few exceptions, football clubs do not operate good business models.
When I got married, my wife, Sharon Harel, an entrepreneurial and creative film producer, wanted to continue to be involved in the film industry. But we intended to raise a family, and the prospect of spending months filming on location did not have great appeal.
Sharon had already become acutely aware of the shortcomings of independent film production, which is a very risky business requiring huge effort to raise fresh capital for each new film. So she opted instead to set up a sales and finance company whose business model involved financing films on the back of the sale of their international distribution rights.
That led to the formation of Capitol Films, a successful company from which Sharon sold out last year after nearly 20 years and more than a hundred movies, among them Robert Altman’s Gosford Park and Roman Polanski’s Death and the Maiden.
Sharon’s experience shows the importance of the business model. A model that requires the raising of production finance for each project, and in each case running a risk of great
profit or great loss, is less attractive than a model based on acquiring and pre-selling international rights.
The fifth criterion is capital intensity. Can you raise the necessary capital? Different businesses require different levels of finance.
Sometimes a new factor will emerge suddenly that throws into question the whole calibration of an opportunity. One such event occurred in the negotiation to acquire Bezeq, the Israeli national telecommunications provider, in which we partnered with Haim Saban’s Saban Capital Group and Arkin Communications. Haim Saban and I are twins of a kind. We are the we both spent time in Israel and we both found ourselves looking at Bezeq, which the Israeli government decided
We closed the transaction, in my Tel Aviv apartment, after an exhausting negotiation and a complex tender process. We finally agreed to buy the Israeli billion, with an option to buy a further joint-venture group the largest shareholder in Bezeq. Almost immediately, news came that Bezeq’s management had been interviewed by the police. It was alleged that the company had used private intelligence-gathering specialists to collect illegally information about the market position of its competitors. All of a sudden there was a potential lawsuit against Bezeq.
Our hearts sank. This development presented several potential risks for the investment. A meeting with many participants was held, including Bezeq’s management, our legal advisers and a gifted litigation lawyer and great friend of mine, Dori Klagsbald, as well as the Apax and Saban teams.
The deal was in the balance at the start of the meeting. Someone said: “We are not going to invest, it’s too large a risk.” But Dori Klagsbald counselled that it might not turn out to be such a serious problem. In the end, we concluded that the damage to the company and the danger to our reputation could be contained. We obtained some compensation from the Israeli government to cover our legal exposure and potential expenses, and event, the issue fell away.
Rushing in is not entrepreneurship. At Apax, we had a disciplined process for preparing investment proposals. We ensured that we had the necessary information about the product, the market, the competition, the management and the financing. In every investment proposal we had a section on the imponderables, so that we could isolate those aspects that were unknown or unquantifiable.
Do your homework, do not jump to conclusions, understand the trends, know where you are in the cycle — for your sector and for the economy as a whole — and always try to focus on the next bounce of the ball and how you can take advantage of it. That requires a really deep understanding of the market.
CHOOSING YOUR TEAM
THE FIRST deciding factor in recruiting your team is not about the person you are hiring, it is about what you, the entrepreneur, are offering. Your first and most important offer is your vision. If you want to build a major firm, you cannot do it by having a modest vision. All good entrepreneurs build towards a large scale from the beginning. They do not allow themselves to get bogged down in the minutiae of running a small business. If they did, the business would stay small.
Rather, they are guided by an inspiring vision, one that motivates them and informs all their decisions. It is this vision that initially attracts talented people to work with them.
If you start, say, a publishing business and you recruit bright, young people who are inexpensive, have little or no work experience and, despite their love of books, have little aptitude for business, you are not going to achieve a great deal. The calibre of the team will limit the scope of the business. If you want to get beyond that, you have to recruit a better team.
But how do you attract people of high calibre to a business that is small, has a team of average quality and, as a result, cannot immediately afford to pay the market rate for the best talent? At what point do you decide that you need to recruit higher-calibre people than the ones you have already? It is the scope of your vision that dictates the need for people of a certain calibre and it is also the scope of the vision that attracts those people. The vision excites the talent; the talent is attracted to the idea of achieving the vision.
The second thing you offer is leadership. If you are a leader, you will attract people who believe in your ability to lead them to success. The people who joined me at Apax thought that they would be more successful working with me than they would be working on their own. A star candidate is making an assessment of your business in an interview, just as much as you are making an assessment of him or her.
The third factor is the type of organisation you are building. Talented people will not join an organisation where nothing happens unless the person at the centre approves it. At a certain point in the development of the firm, the founder must adapt, from being the sole decision-maker to being the leader of a team of decision-makers.
There was a time, in the early years of creating Apax, when I characterised myself driving alone in an open-top sports car. I recruited the first employee and he sat next to me. Then I recruited more, and they sat in the back. Then I recruited more and soon I had a car full of people. Before I knew it, it began to feel as if I was out of the car, pushing it uphill with all my team inside.
It was Rhys Williams, who joined - tion as CEO of GEC-Marconi, a very large company, who pointed out to me that it was necessary to develop my ideas on team management. I needed to change the way the company operated; to organise it so as to make it less dependent upon me for every decision.
Over a period of time, I introduced Monday-morning meetings, sector teams with their own leaders, and a number of key committees to deal with investment approvals, exits and operations. I ceased to be the hub; instead I became the leader, moving from the centre to the front of an organisation structured in such a way that leaders of industry teams and operational commit t e e s o r g a n i s e d themselves and made numerous decisions without consulting me.
My role was then to provide leadership, in the sense of motivation and direction, and management of the industry team and committee leaders.
An important aspect of building a business is that entrepreneurs crave a feeling of ownership and responsibility. They have to be in a position of leadership.
My own starting point at Apax was something close to the film The Dirty Dozen, which told the story of a group of tough individualists with complementary skills, who come together to achieve the most challenging of war- time missions. I recommend that film to any budding entrepreneur.
The Apax team comprised former consultants, executives from big business, executives from technology backgrounds and people with highlevel financial skills. Whenever someone did leave, I used the principle of leapfrogging — of using their departure as an opportunity to get someone better. In losing somebody, you have removed a constraint on your progress. It is an opportunity to move forward faster.
You attract the best talent by offering vision and leadership, by delegating to and trusting your colleagues, by creating a culture of empowerment within the firm and a sense of obligation to it, by providing appropriate incentives to maintain the continuity of your team, by building a great brand and by being successful.
Ultimately, the difference between you and your competitors comes down to one factor only: the talent of your team.