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

The Jewish Chronicle - - Features -


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.


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.


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