The Entrepreneur in Adversity


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Written by the Economist Intelligence Unit on behalf of Barclays Wealth, this seventh volume of Barclays Wealth Insights examines the characteristics and motivations of entrepreneurs in a challenging economic environment.

It is based on two main strands of research. First, the Economist Intelligence Unit conducted a survey of 2,300 affluent and wealthy investors with investable assets ranging from £500,000 to in excess of £30 million. Among these 2,300 respondents, 960 were entrepreneurs. Respondents were spread across a number of key international markets, with the highest numbers of respondents from the United States, India, United Kingdom, Singapore, Hong Kong, Canada, Switzerland, Spain, the United Arab Emirates and Monaco. The survey took place between March and April 2008.

This was supplemented with a series of in depth interviews with experts on entrepreneurship. Our thanks are due to the survey respondents and interviewees for their time and insight.

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The Entrepreneur in Adversity

  1. 1. Barclays Wealth Insights Volume 7: The Entrepreneur in Adversity In co-operation with the Economist Intelligence Unit
  2. 2. About Barclays Wealth Barclays Wealth, the UKs leading wealth manager with total client assets of £133 billion globally (as of 31 December 2007), serves affluent, high net worth and intermediary clients worldwide. It provides private banking, fiduciary services, investment management and brokerage. Thomas L. Kalaris, the Chief Executive of Barclays Wealth, joined the business at the start of 2006. Barclays Wealth is part of the Barclays Group, a major global financial services provider engaged in retail and commercial banking, credit cards, investment banking, wealth management and investment management services with an extensive international presence in Europe, the USA, Africa and Asia. It is one of the largest financial services companies in the world by market capitalisation. With over 300 years of history and expertise in banking, Barclays operates in over 50 countries and employs over 134,000 people. Barclays moves, lends, invests and protects money for over 27 million customers and clients worldwide. For further information about Barclays Wealth, please visit our website About this report Written by the Economist Intelligence Unit on behalf of Barclays Wealth, this seventh volume of Barclays Wealth Insights examines the characteristics and motivations of entrepreneurs in a challenging economic environment. It is based on two main strands of research. First, the Economist Intelligence Unit conducted a survey of 2,300 affluent and wealthy investors with investable assets ranging from £500,000 to in excess of £30 million. Among these 2,300 respondents, 960 were entrepreneurs. Respondents were spread across a number of key international markets, with the highest numbers of respondents from the United States, India, United Kingdom, Singapore, Hong Kong, Canada, Switzerland, Spain, the United Arab Emirates and Monaco. The survey took place between March and April 2008. This was supplemented with a series of in depth interviews with experts on entrepreneurship. Our thanks are due to the survey respondents and interviewees for their time and insight. For information or permission to reprint, please contact Barclays Wealth at: Barclays Wealth Insights, Barclays Wealth, 1 Churchill Place, London, E14 5HP Tel. 0800 851 851 or dial internationally +44 (0)141 352 3952 or visit www.barclayswealth.com1
  3. 3. ForewordAt Barclays Wealth, we are focused on providing our clients with the resources and knowledge to manage theirwealth effectively.In this endeavour, we have partnered with the Economist Intelligence Unit to develop research that delves intowhat it means to be wealthy in the 21st century.In this volume of the Wealth Insights series, ‘The Entrepreneur in Adversity’, we build on the earlier findings ofVolume 1, which showed that wealth is increasingly generated from entrepreneurial endeavour, in order toestablish a deeper understanding of the entrepreneur.We compare the conditions for entrepreneurship around the world, and explore the characteristics and motivationsthat shape their behaviours. As the global economy remains turbulent, we reflect on how entrepreneurs will fare.Our findings indicate that for many, a testing environment can be a time to create a winning business strategy.As well as consulting with 2,300 wealthy individuals around the world, including almost 1000 entrepreneurs, theEconomist Intelligence Unit worked with a panel of experts, drawn from academia, industry and financial circles, toprovide additional insights and perspectives.I hope you find this report an informative and entertaining read.Thomas L. KalarisChief ExecutiveBarclays Wealth 2
  4. 4. Our Insights Panel Fouad Alaeddin, Managing Partner of Ernst & Young Middle East Gerard Aquilina, Head of International Private Banking and Vice Chairman of Barclays Wealth Fergal Byrne, Report Author Tony Cohen, Head of Entrepreneurial Business at Deloitte Charles Collier, Senior Philanthropic Adviser at Harvard University Sherry Coutu, Serial Entrepreneur and Active Business Angel Investor Didier von Daeniken, Chief Executive of Barclays Wealth Asia Pacific Paul Graham, Partner at Susan Mackenzie, Director of Philanthropy UK Tom McKaskill, Serial Entrepreneur and Author Richard Moross, Founder of online printing company MOO Sean Phelan, Founder of Ramesh Prabhakar, Managing Partner of Rivoli Group Professor Kenneth Preiss, Zayed University in Abu Dhabi Danny Rimer, Partner at Index Ventures Kanwaljit Singh, Co-Founder of Helion Venture Partners Professor Rama Velamuri, Associate Professor at the China Europe International Business School3
  5. 5. IntroductionOver the past decade, entrepreneurs have becomeincreasingly important – and visible – players in the globaleconomy. Ongoing programmes of liberalisation,privatisation and economic reform in many countriesaround the world have democratised entrepreneurship,creating a fertile environment for the development of newbusiness ventures. Today, the world’s most successful,and wealthiest, entrepreneurs are just as likely to originatefrom India, China or the UAE as they are from the moreestablished markets of the US, UK or Japan.But while the broad trend around the world has been While success is far from guaranteed in thesetowards a more conducive environment for conditions, entrepreneurs should recall that previousentrepreneurship over the past decade, recent turmoil in downturns have been fertile breeding grounds for thethe financial markets has altered the landscape for the strongest ideas and enterprises.funding and development of successful ventures. Today,entrepreneurs must contend with an ongoing contraction The aim of this study, which is produced by theof credit, declining consumer and business confidence Economist Intelligence Unit on behalf of Barclaysand a sluggish forecast for growth in OECD countries. Wealth, is to examine the current environment forEven in fast-growing emerging markets, such as China entrepreneurship around the world, and to explore theand India, economies are expected to cool as a result of determinants of success for entrepreneurs in both gooddeclining demand for exports. In combination, these times and bad. Based on a global survey of more thanfactors will undoubtedly create more difficult conditions 2,300 high net worth individuals, including 960for many entrepreneurs over the next few years. entrepreneurs, the report also explores the impact of recent financial turmoil on the world of entrepreneurshipHowever, for some entrepreneurs, a challenging and asks if the current environment should be seen aseconomic environment is a time of opportunity. The one of opportunity, as well as just adversity.characteristics that we most associate withentrepreneurs – risk-taking zeal, self-belief and theability to think differently from the herd – come intotheir own at a time when more conservative businessesare pulling back from investments and avoiding risk. 4
  6. 6. Executive summary Perseverance becomes an essential quality for …but in others there are concerns about certain entrepreneurs in a challenging environment aspects of the business environment Every start-up faces its share of barriers, obstacles and The more mature markets of Western Europe and naysayers, but in more challenging economic times, these North America remain highly attractive regions for problems are all the more difficult to overcome. The most entrepreneurs, thanks to their strong institutions and traditionally recognised entrepreneurial traits – a availability of capital. There are grumbles among some willingness to take risks and creativity – can help entrepreneurs, however, that certain aspects of the entrepreneurs to steer round some of these challenges, business environment are becoming more difficult. but a thick streak of tenacity is also required to succeed in Almost 40 per cent of respondents from North America the current environment. As a result, survey respondents and Western Europe say that the regulatory rate perseverance as the single most important quality environment has deteriorated in their region over the required by today’s successful entrepreneurs. past decade, while a similar proportion have concerns about the cost of doing business. The ability to make money is not the main factor motivating entrepreneurs The credit crisis has resulted in a less favourable In the public imagination, entrepreneurship is often climate for business exits linked with financial success. Our survey suggests, Conditions for exits have become less favourable in however, that money does not play as important a role recent months as the impact of the credit crisis has in motivation as many would believe, with just under filtered through to the real economy. When looking to one third of respondents saying that the possibility to exit their business, the most important factors for make large sums of money is an advantage of being an entrepreneurs in the survey are the value of the business, entrepreneur. While there is no doubt that money is the point in the business cycle and the level of interest vital for an entrepreneur to achieve his or her vision, our from buyers. In the current climate, all three will have research suggests that it is more an indicator of success deteriorated for most entrepreneurs, so it is likely that rather than the prime motivation. any who were planning a sale will be putting plans on hold. That said, only a minority of entrepreneurs create a The conditions for entrepreneurship are business with an exit in mind. For most, the motivation is improving in some regions… to build a successful business over the long-term. Respondents cite the Middle East and North Africa as being the region that has seen the biggest improvement in the environment for entrepreneurship over the past decade. Although conditions vary from country to country, it is clear that ongoing economic reform and political support for enterprise is leading to widespread change, fuelling many new opportunities for entrepreneurs both within the region and internationally. Asia-Pacific also performs well on this measure, no doubt reflecting the strong economic development and liberalisation that is taking place in the region’s powerhouses of India and China.5
  7. 7. The personality of theentrepreneurAlthough entrepreneurs vary considerably in theirmotivations and aspirations, it is widely assumed thatthe most successful share certain personality traitsand attributes. Distinctions are often made between‘managers’ who work for someone else andentrepreneurs who create and lead their ownbusinesses. As such, two characteristics that standout are the entrepreneur’s willingness to bear riskand his or her ability to create and execute new ideas. 6
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  9. 9. “You can always find people who tell you that your idea or your business won’t work, and who don’t believe in your business. Tenacity is the key to success.” Sherry Coutu, Entrepreneur and Active Business Angel Investor 8
  10. 10. Defining entrepreneurship We may feel that we know an entrepreneur when we More recent definitions have attempted to combine see one, but entrepreneurship as a concept remains these two strands, pointing out that elusive. Despite decades of academic research into entrepreneurship depends both on opportunities that the subject, there is no clear consensus around the can be converted into innovation, and the kind of qualities that make a successful entrepreneur and individual who is prepared to take on the uncertainty debates continue to rage about how exactly an involved. Yet despite this progress, a consensus on entrepreneur should be defined. definition remains elusive. Phenomena such as ‘intrapreneurship’ and the corporate entrepreneur – Perhaps the two most influential voices in this the promotion of entrepreneurial tendencies in large argument are the 20th century economists Joseph organisations – muddy the waters still further. Schumpeter and Frank Knight. In his 1911 book, The Theory of Economic Development, Schumpeter In our survey of 2,300 high net worth individuals, suggested that the key characteristic roughly half considered themselves to be of an entrepreneur was that he or she was an entrepreneurs, and half did not. Yet not all the innovator, who creates a new product or service, a individuals who classed themselves as entrepreneurs new method of production, or opens a new market could be described as such in the classic sense. or source of supply. It is Schumpeter who coined the Among the 1,174 who said that they were term “creative destruction” to refer to the process entrepreneurs, 16 per cent were company employees, whereby an entrepreneur develops an idea that 13 per cent were family members within a family renders an old way of doing things obsolete. business and seven per cent were either retired or not currently working. Self-selecting entrepreneurs, it For Frank Knight, it is the entrepreneur’s response to seems, are more widely distributed in the economy uncertainty that is the defining characteristic. In Risk, than classical definitions would tell us. Uncertainty and Profit, his 1921 work, he argued that the main function of an entrepreneur was to assume For the purposes of this study, we have taken a more the risk and profit from the uncertainty associated narrow definition of entrepreneurship. When we refer with certain situations, such as a change in to entrepreneurs who took our survey, we refer to a customer demand. combination of owner/managers, company founders and partners/owners in a company that the individual has purchased. What is your current work situation? Graph 1 – Respondents who class themselves as ‘entrepreneurs’ I am an owner/manager 26% I run/am a partner in a company of which I was a founder 18% I do not own a business but am an employee 16% I am a family member within a family business 13% I run/am a partner in a subsidiary of a larger group 10% I run/am a partner in a company that I purchased 8% I am retired 4% I am not currently working 3% 0 10 20 30 40 50 60 70 80 90 1009
  11. 11. The importance of tenacityAmong the 960 entrepreneurs surveyed for this report, In more testing economic circumstances, tenacity is anthe most important characteristic required to create a especially valuable trait because the kind of obstaclessuccessful enterprise is believed to be perseverance. that stand in the way of a successful venture are more“Tenacity is hugely important to succeed as an prevalent and frequent. With funding more difficult toentrepreneur,” says Sherry Coutu, a Canadian serial come by, and with a decline in sales and revenue moreentrepreneur and active business angel investor who likely as consumer confidence dips, entrepreneurs requirenow lives in the UK. real grit to stick with their idea and ride out the storm.Paul Graham, a Partner at, aninnovative American start-up incubator, who hasworked with a large number of start-up businesses, hasdiscovered first hand the importance of perseverance.“At first, we thought that intelligence would be thebiggest predictor of start-up success,” he says. “Wenow think that determination and persistence areactually more important. The will to keep going and notgive up is crucial – particularly when you feel like youare doomed, which is something that happens topractically every start-up.” Which of the following characteristics do you think are most important to be a successful entrepreneur?Graph 2 – Entrepreneurs only Perseverance 44% Willingness to take risks 35% Creativity 33%Comfort and skill in making decisions 25% Ability to adapt to change 24% Motivated by new challenges 23% High degree of competitiveness 21% Strong financial acumen 19% Strong desire to make money 19% Leadership skills 18% Other, please specify 2% 0 10 20 30 40 50 60 70 80 90 100 10
  12. 12. Risk-taking and creativity The survey respondents saw willingness to take risks as “Entrepreneurship is all about being the second most important characteristic of an entrepreneur. Experts distinguish, however, between solving problems that other people taking risks and managing risks. “In my experience, many entrepreneurs do enjoy risk,” says Tony Cohen, can’t. Without creativity, new Head of Entrepreneurial Business at Deloitte. “But they plan for it and mitigate risk. Most entrepreneurs say businesses wouldn’t be able to that they are not risk-takers, but they will take calculated risks. They have done their research before dislodge customers from big they make decisions.” behemoths.” Respondents rated creativity as the third most important quality. “Entrepreneurs tend by their very nature to be creative,” says Didier von Daeniken, Chief Executive of Ms Coutu believes that creativity is an often underrated Barclays Wealth Asia Pacific. “Of course there are many driver of entrepreneurship. “Entrepreneurship is all different ways to be creative. Entrepreneurial creativity is about solving problems that other people can’t,” she not the same as artistic creativity. It’s more about using says. “Without creativity, new businesses wouldn’t be creativity to solve problems. Entrepreneurs come up with able to dislodge customers from big behemoths.” She new questions that other people don’t see – and they adds that creativity can be defined in many different need ingenuity and creativity to solve these problems ways. Some entrepreneurs may be creative in their use and realise their ambitions.” of technology, some may be creative in terms of new product development, while others may be creative in terms of bringing teams together.11
  13. 13. Money isn’teverythingIn the public imagination, entrepreneurship is often For Richard Moross, the founder of online printinglinked with financial success, no doubt because the company MOO, money is not the reason why he is anrewards are very visible, especially at a time when entrepreneur, but he adds that he does expect to beentrepreneurship has been so widely celebrated in the rewarded for the long hours and hard work that he hasmedia. Despite this link, the survey suggests that put into the does not play as important a role inentrepreneurial motivation as many would believe.Only one in five respondents stated that a strong desire “I do like making money but for meto make money is a fundamental characteristic of beingan entrepreneur. it is an indicator that you have got it“You have to remember when you look at successful right. It means that you have a lot ofentrepreneurs that there is what’s called a survivorbias,” says Mr von Daeniken. “This means that for every satisfied customers who are buyingfinancially successful entrepreneur you see, there aremany others who have not been so successful. There is your product.”no doubt that money is important to entrepreneurs – itis necessary to build the business and realise their The extent to which money is a motivating influencevision, and also reflects how well they are doing their does vary according to age. Our research suggests thatjob. So clearly, it can have a big impact on an money is more of a driver among younger entrepreneursentrepreneur’s life but it’s rarely the thing that gives than older: 57 per cent of those under 50 say it is anthem the most satisfaction.” important motivation to create and protect wealth, compared with 48 per cent of those over 50. As theSeveral entrepreneurs interviewed for this report concur older respondents tend to be wealthier, it is likely thatwith this view. “I do like making money,” says Ms Coutu, they feel they have met their financial needs, whereas“but for me it is an indicator that you have got it right. It the younger, less wealthy entrepreneurs are at an earliermeans that you have a lot of satisfied customers who stage of their career when money matters more.are buying your product.” 12
  14. 14. Richard Moross, founder of Richard Moross is the 30-year-old founder and He also agrees with the respondents in their view of Chief Executive of, a venture-capital the importance of determination and perseverance. backed on-demand printing company. Mr Moross “Starting a business is like running a marathon,” he had the initial idea for MOO – personal business says. “Actually, it’s more like running a marathon in cards – in 2003, when he was 25. A few months the dark, with no indication of where you’re going, later he came up with a unique process that uses where your competitors are or how long the race a proprietary digital printing technology to will take. It takes incredible determination, bloody- mass-produce short-run, variable print jobs. mindedness some might say, to bring something like Today, MOO has 35 employees and has shipped this to life.” its products to more than 181 countries. Before setting up MOO, Mr Moross never thought of “The bigger the idea, the more himself as an entrepreneur. “I was driven by the power of an idea,” he says. “As soon as I had fully likely people are to say it’s crazy.” thought through the idea, I was compelled to set up the business. I had no choice but to take my life in this direction. It became an act of self-fulfillment.” Like many entrepreneurs, he considers the independence of the role to be one of the key benefits. “You get to be your own boss and impose your vision of the world,” he says, “and that can be “Starting a business is like running very liberating. Of course, there are also the financial rewards if your company is a success, but you also a marathon. Actually, it’s more like have to love what you do. The end-game [an exit] could be years away, and it’s no fun playing for running a marathon in the dark, money if you don’t enjoy the game itself.” with no indication of where With increasing sales and new products reaching you’re going.” new markets, the company is at an exciting stage of its development. “The proof of the pudding will be in the exit,” says Mr Moross. “Ultimately we will see In common with the survey respondents, Mr Moross how successful we have been and how much value believes that self-belief is critical to entrepreneurial we have created when we sell the business.” success. “Being an entrepreneur can be a lonely business,” he explains. “To be genuinely innovative, you have to take a new idea along wild tangents and can wait months or years to demonstrate the real value of it to people. The bigger the idea, the more likely people are to say it’s crazy. Believing in yourself is the only way you’ll get through the criticisms, knock-backs and distractions that sharing an idea for a business can generate.”13
  15. 15. Believingin yourselfEntrepreneurs require perseverance and tenacity to Again, there is a difference between younger and olderovercome the obstacles that stand in the way of entrepreneurs, with those under 50 more likely thansuccess, but they also need to have confidence in their those above that threshold to believe that their successown abilities. Serial entrepreneur Sherry Coutu sees depends more on ability than luck. This could reflect theself-belief as the bedrock of entrepreneurship. fact that the experienced, older entrepreneurs have a“Self-belief and self-confidence are crucial for an more realistic assessment of the relative importance ofentrepreneur,” she says. “If you don’t believe in yourself, luck and’s hard to succeed.”Most successful businesses depend on a combination “Self-belief and self-confidence areof skill and good fortune. It is clear, however, that themajority of respondents to our survey see their success crucial for an entrepreneur. If youas being achieved via their abilities, rather than throughluck. Two-thirds believe that their success is down to don’t believe in yourself, it’s hardtheir own skills and around one in five believe that theirsuccess has been largely due to influences outside their to succeed.”control. This finding is consistent with the perceivedimportance of self-belief; entrepreneurs need to haveconfidence in their abilities, even if this means It is also important to note that, while self-belief isdownplaying the role that good timing or fortune have clearly important, there is a limit to the amount that isplayed in their success. rational. In the context of entrepreneurship, too much confidence is just as damaging as a lack of self-belief, as the owners of many failed businesses have found to their cost. 14
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  17. 17. The environment forentrepreneurshipMost entrepreneurs understand that the quality of thebusiness environment in which they operate can makethe difference between success and failure. If a robustpolitical, economic, financial and regulatory framework isin place that supports innovation, then entrepreneurshipwill thrive, but if there are deficiencies in the businessenvironment, then even the strongest entrepreneurs withthe best ideas will founder.Early-stage entrepreneurs are particularly susceptible to stone of a thriving investment community madeshortcomings in the external environment. Unlike larger up of business angels, venture capital firms andcorporates, they lack the safety net of resources to deal well-resourced banks, entrepreneurs simply cannotwith complex or inconsistent bureaucracy, and they get their ideas off the ground.may be more dependent on the support and advice ofexternal intermediaries. And without the foundation 16
  18. 18. Entrepreneurship and the economy There is a growing body of research that links levels of In order to reinforce economic development through entrepreneurship with economic development. The entrepreneurship, it is key that the business environment Global Entrepreneurship Monitor, a research consortium must support not just early-stage entrepreneurial led by the London Business School and Babson College activity, but the ability for those businesses to be in the US, describes how, in countries with low per nurtured and grow to the stage where they can capita GDP, the economy is characterised by large generate wealth more widely. One of the main factors in numbers of small, entrepreneurial businesses. facilitating this transition is government support. As income increases, the process of industrialisation To create the foundations for successful and economies of scale allow the development of larger entrepreneurship, governments must perform a range of businesses, which can employ a higher number of functions, including the development of infrastructure, people. This causes the quantity of early-stage the removal of obstacles, the elimination of bureaucracy entrepreneurial businesses to fall. Then, as income and investment in education. The benefits of this increases further, levels of entrepreneurship rise again as approach can be seen in countries around the world, a more developed economy and robust set of such as Singapore, the US and, more recently, the institutions enable more opportunities for the United Arab Emirates, which owe part of their population. Thus, in relation to economic development, development to a sustained focus on these factors. levels of entrepreneurship follow a U-shape of high initial levels of entrepreneurial activity, followed by a drop, and finally a subsequent increase as an economy matures. To create the foundations for successful entrepreneurship, governments must perform a range of functions, including the development of infrastructure, the removal of obstacles, the elimination of bureaucracy and investment in education.17
  19. 19. The role of governmentand societyResearchers have found that US policies, in particular, the extent to which society regards the pursuit ofhave provided strong support for entrepreneurship. For opportunity as socially legitimate will impact the level ofexample, the government has enabled the creation of entrepreneurial activity. A set of social and cultural valuesfinancial markets to fund growth companies, such as that encourages new enterprise is a prerequisite ofNASDAQ, the provision of protection for research and entrepreneurial activity and a defining feature of andevelopment and intellectual property, federal and other entrepreneurial society.”stimulation of high-tech research, and the opening ofnew markets through deregulation. The government has The media has an important role to play in thealso made the process of incorporating a business development of these social and cultural values. In recentrelatively straightforward. years, there has been increased coverage of entrepreneurship in many parts of the world, not only inSocietal values can also enhance, or deter, the the financial press, but on television and other populardevelopment of entrepreneurial activity, as Michael media channels. Increasingly, entrepreneurship isCamp, a GEM Project Director and Head of Research at something that is celebrated and seen as an aspiration,the Kauffman Center for Entrepreneurial Leadership, while successful entrepreneurs have become mediarecently pointed out at the launch of a recent GEM study. celebrities in their own right.“No matter how rich a country is in opportunity and howwell endowed it is with capacity for business start-ups, Compared with 10 years ago, what change has there been to the following aspects of entrepreneurship?Graph 3 – Entrepreneurs only Scope for developing original ideas 21% 38% 26% 10% 5% Options for raising finance 17% 36% 27% 14% 6% Options for selling a business 17% 32% 30% 15% 7% Options for expanding internationally 28% 37% 20% 9% 6% Overall environment for entrepreneurship 16% 38% 27% 14% 4% Cost of doing business 10% 25% 28% 26% 10% Complexity of business relationships 12% 28% 28% 23% 10% Regulatory environment 10% 25% 31% 23% 11% Availability of talent 11% 28% 31% 22% 8% 0 10 20 30 40 50 60 70 80 90 100 Significant improvement 1 2 3 4 Significant deterioration 5 18
  20. 20. Regional developments In the most general terms, just over half of He adds that the government in China is adopting a entrepreneurs questioned for this survey believe that the top-down approach to encouraging and nurturing overall conditions for entrepreneurship have improved entrepreneurship. “Innovation is on the national agenda over the past decade. Respondents from Asia-Pacific in China,” he says. “The government is investing in and Middle East and North Africa are most likely to universities, encouraging the Chinese diaspora to return, report an improvement, a finding that can be attributed and setting up new technology parks on a massive scale. to the fact that many countries in these regions are at an It is not unusual for these parks to contain more than earlier stage of their economic development. As the 500 businesses being incubated at one time.” political, regulatory and economic institutions that support entrepreneurship become more established, it is The Middle East and, in particular, the six countries of natural to see conditions improve more rapidly than in the Gulf Co-operation Council, is a region that has the more mature markets of North America and Europe become far more conducive to entrepreneurship over (where respondents are also most likely to report a the past decade (although there is considerable deterioration in the overall environment). variation from country to country). Ongoing liberalisation and privatisation programmes, the development of major financial centres in the region “We are seeing people with and a greater willingness to attract foreign investment have all contributed to an increasingly fertile university degrees and deep environment for successful entrepreneurship. At a time when major global economies are slowing and tipping industry knowledge starting a into recession, the GCC also benefits from its high level of capital reserves and the recent high price of oil. wide range of ventures in China.” In China, opportunities for entrepreneurship are “Innovation is on the national broadening considerably thanks to government support and ongoing liberalisation. Professor Rama Velamuri, agenda in China. The government is Associate Professor at the China Europe International Business School, points out that entrepreneurship in investing in universities, encouraging China has changed from a predominantly subsistence- driven model, to an opportunity-driven one. In other the Chinese diaspora to return.” words, individuals are becoming entrepreneurs out of choice rather than because they have no option. “We are seeing people with university degrees and deep industry knowledge starting a wide range of ventures in China,” he says. “Many are giving up lucrative employment to launch these businesses. Another trend is that more and more are first generation, so they don’t come from established business families.”19
  21. 21. Charts for entrepreneurship The overall Enterprise Environment IndexGraph 4 – This chart uses a simple formula to illustrate the extent to which entrepreneurs perceive the overallenvironment for entrepreneurship to have improved over the past decade. A higher score denotes a morewidely perceived improvementMiddle East and North Africa Asia-Pacific North America Europe 0 10 20 30 40 50 60 70 80 90 100 Middle East and AfricaGraph 5 – Entrepreneurs from Middle East and Africa onlyOverall environment for entrepreneurship Availability of talent Regulatory environment Complexity of business relationships Cost of doing business Options for expanding internationally Options for selling a business Options for raising finance Scope for developing original ideas 0 10 20 30 40 50 60 70 Improvement Deterioration 20
  22. 22. Asia-Pacific Graph 6 – Entrepreneurs from Asia-Pacific only Overall environment for entrepreneurship Availability of talent Regulatory environment Complexity of business relationships Cost of doing business Options for expanding internationally Options for selling a business Options for raising finance Scope for developing original ideas 0 10 20 30 40 50 60 70 Improvement Deterioration North America Graph 7 – Entrepreneurs from North America only Overall environment for entrepreneurship Availability of talent Regulatory environment Complexity of business relationships Cost of doing business Options for expanding internationally Options for selling a business Options for raising finance Scope for developing original ideas 0 10 20 30 40 50 60 70 Improvement Deterioration21
  23. 23. EuropeGraph 8 – Entrepreneurs from Europe onlyOverall environment for entrepreneurship Availability of talent Regulatory environment Complexity of business relationships Cost of doing business Options for expanding internationally Options for selling a business Options for raising finance Scope for developing original ideas 0 10 20 30 40 50 60 70 80 Improvement DeteriorationIt is interesting to note that the Middle East and North In addition to its high score for enhancement of theAfrica is also perceived as the region that has seen the overall environment for entrepreneurship, respondentsbiggest improvement in terms of the scope for point to the Middle East and Africa as having improveddeveloping new ideas. Entrepreneurship in the Middle most in terms of the scope for developing new ideasEast has, until recently, been slow to develop. One and second most in terms of options for expandingreason for this is the high proportion of steady, internationally. Fouad Alaeddin, Managing Partner atwell-paid public sector jobs, which can prove to be a Ernst & Young Middle East, points out thatstrong disincentive to take on the uncertainty of entrepreneurship is much more widely discussedbecoming an entrepreneur. “One has to balance the in the region than a few years ago.personal motivations and risks of creating a businessagainst the security of receiving a significant monthlywage over one’s working life,” says Professor Kenneth “Entrepreneurs all over thePreiss of Zayed University in Abu Dhabi. Middle East have been encouragedBut in the past few years, this situation has started tochange. Oil wealth is being directed into education, to tell their stories – which were awhich is gradually encouraging the development ofstart-ups. Although the scope for developing original well-kept secret for too long.”ideas in the region is starting from a low base, it is clearthat an upwards trend is underway. 22
  24. 24. “One has to balance the personal motivations and risks of creating a business against the security of receiving a significant monthly wage over one’s working life.” Professor Kenneth Preiss, Zayed University in Abu Dhabi23
  25. 25. 24
  26. 26. The UAE: A fertile environment for entrepreneurship If the Middle East and Africa have seen the biggest But there remain some significant hurdles to improvement in the climate for entrepreneurship, then entrepreneurship in the UAE in terms of infrastructure, the United Arab Emirates is the country within that bureaucracy and intellectual property. According to region where change to the business environment has Professor Preiss, one of the biggest challenges is the been most dramatic. The 2006 Global perceived risk of starting a new business and fear of Entrepreneurship Monitor study, an influential report failure. “If a new venture fails in the UAE, there is a on enterprise around the world, ranked the UAE tremendous risk under the current legal system that 41st out of 62 countries for the promotion of an one could be sent to jail if there are any unpaid debts. environment for start-up businesses and It’s not like in the US, where after bankruptcy, one can entrepreneurial activities. In the 2007 study, it had start up another venture a few years later.” risen to 25th. Professor Preiss of Zayed University, who co-ordinated “I spend a lot of time thinking the UAE GEM study, says that the role of the government has been crucial in enabling this change. about how we can recruit and “There is immense government support for entrepreneurs in terms of finance and educational keep the best people to build programmes within the UAE,” he says. “The government is highly motivated towards the business.” strengthening the basis of the economy, and in so doing there may well be a shift in the balance from the public to private sector. While the public sector in In the long-term, availability of talent is also likely to be many countries has been a very strong recruiter of an issue. “Good people are essential to deliver the graduates, in the future, the private sector is expected kind of service excellence that we as a company to take up a more active and important role in hiring expect,” says Mr Prabhakar. “There is a relatively and recruitment.” limited labour market in the UAE and a lot of competition for good people. I spend a lot of time thinking about how we can recruit and keep the best people to build the business, about how to share my “There is immense government passion and commitment to outstanding quality with everyone in our business.” support for entrepreneurs in terms of finance and educational programmes within the UAE.” Ramesh Prabhakar, Managing Partner of Rivoli Group, a luxury goods retailer with around 300 stores across the Middle East, agrees that there has been a sea change in the business environment in the UAE over the past decade. He puts this down to the partnership between government, public and private sector. “The government strategy has been far-sighted. The commitment to create a world-class infrastructure for business – in terms of communications, rapid public sector decision-making, banking and finance – has clearly paid off.”25
  27. 27. “Entrepreneurs all over the Middle East have been “I dont think the legislators who wrote Sarbanes-Oxleyencouraged to tell their stories – which were a well-kept meant to kill the IPO market,” says Mr Graham, “but ifsecret for too long,” he says. “The positive economic they could overhear the conversations of start-updevelopments and significant growth enjoyed by the founders, theyd be shocked. The word on the streetMiddle East in the past three years has opened the door now is that you shouldnt even think of going public [infor private and family-owned companies to start going the US] and that the only exit is to get bought.”public to help finance their needed expansion and,most importantly, to institutionalise ownership and Europeans, who were most likely to believe that overallcreate the right governance.” conditions for entrepreneurship had deteriorated over the past decade, were less sanguine about manyNorth America, a region that historically has been aspects of the business environment. In particular, theyclosely associated with support for entrepreneurship, were worried about the cost of doing business, withcontinues to perform well according to respondents four out of 10 reporting a deterioration in this aspect ofbased there. It shows most improvement in terms of the environment. Although input costs are rising foroptions for raising finance – starting already from a very businesses all around the world as a result of recenthigh base in terms of availability of venture capital and surges in commodity and oil prices, companies inother sources of funding – while the majority of Western Europe in particular face more expensiverespondents continue to see improvements in the labour costs than many other regions, as well as a highscope for developing new ideas and options for cost of living. The Business Environment Rankings, runexpanding internationally. annually by the Economist Intelligence Unit to measure the quality of the business environment in 82 countriesIt fares less well on the regulatory environment, where around the world, finds that Western Europe scoresonly 31 per cent have seen an improvement over the poorly on these two measures when compared withpast decade. Although the US has traditionally been other regions.known for its light-touch regulation, interventions suchas the Sarbanes-Oxley Act of 2002, a set of rules A survey conducted in October 2008 by the Federationenacted in the wake of the Enron scandal to improve of Small Businesses, a UK member organisation,probity and transparency of governance, have highlights some of the concerns. Asked whether theydramatically increased the regulatory burden for listed had seen the cost of operating a small businesscompanies. This, in turn, has discouraged some increase in the past 12 months, 84 per cent agreed,entrepreneurs from flotation as an exit possibility, a while 46 per cent reported a decrease in trade.trend reflected in the fact that North America is seen asthe region with the least improvement in terms ofoptions for selling the business.“I dont think the legislators who wrote Sarbanes-Oxleymeant to kill the IPO market, but if they could overhear theconversations of start-up founders, they’d be shocked.” 26
  28. 28. Respondents in Asia-Pacific, like those in the Middle “The exit scenario in India has been good for some East and Africa, are in general confident about the way years,” says Indian Venture Capital Investor Kanwaljit in which the business environment has improved over Singh, co-founder of Helion Venture Partners. “There the past decade. A strong majority thinks that it has have been many Indian IPOs, supported by a stock become easier to conduct business internationally, market with a good appetite for exciting high-growth which no doubt reflects the ongoing integration of this companies, which are still in the minority on the stock region into the global economy, as well as the huge new market. Also, as many industries are in an early stage of opportunities that have opened up for reciprocal development, mergers and acquisitions are a common investment between the west and the east. way for companies to grow and scale their business, offering another exit possibility.” “Until quite recently, many In India, perhaps the biggest change in recent years has been cultural. “Until quite recently, many communities communities in India looked down in India looked down on entrepreneurs,” says Professor Velamuri. “But now, it is becoming much more socially on entrepreneurs. But now, it is acceptable and financially viable.” becoming much more socially Certain factors continue to dissuade entrepreneurs in India, however. For example, bankruptcy laws are highly acceptable and financially viable.” cumbersome, and it can take up to 10 years for an entrepreneur to extricate himself from the complex legal issues involved. This engenders a fear of failure Inward and outward foreign direct investment in Asia and discourages some entrepreneurs from the safer continues to reach record levels. In 2006, according to path of full-time employment. World Investment Prospects, an Economist Intelligence Unit publication, FDI inflows to Asia were US$238.6 billion, compared with an average of US$116.2 billion between 2001 and 2003. China has been far and away the largest recipient of this inflow of investment, accounting for US$78.1 billion in 2006. What is interesting about FDI flows in Asia is that much of the activity takes place within the region – intra-regional investment currently accounts for around half of all flows. Out of all four regions examined for this study, Asia-Pacific has also seen the biggest improvement in terms of options for selling the business. Recent years have seen a deepening of capital markets in countries such as India and China, with record numbers of IPOs generating significant wealth for local entrepreneurs, and growing interest from global private equity firms in the region, especially as their more traditional markets have cooled.27
  29. 29. Money mattersEnterprising individuals, the right opportunities and the From his perspective in the UK, Deloitte’s Mr Coheninstitutions to support entrepreneurship may be agrees that a broader range of financing options haveessential ingredients to turn new ideas into successful become available for entrepreneurs. “There has been abusinesses, but they are not sufficient on their own. In lot more money available for entrepreneurial companiesorder to convert concepts into reality, entrepreneurs and many new sources of capital,” he says. “The growthneed capital. And in societies where funds are readily in private equity in recent years is incredible. Also, thereavailable for deserving enterprises through venture has generally been much more acceptance of privatecapital, private equity and a host of other channels, individuals going into illiquid private businesses – that’sentrepreneurship is likely to thrive. what private equity is mostly about.”According to our survey, which was undertaken prior to Danny Rimer, a Partner at Index Ventures, one ofthe most recent turmoil to hit global financial markets, Europe’s largest venture capital firms, echoes this point.53 per cent of entrepreneurs believe that the options for “Over recent years, so many different funding optionssecuring finance have improved over the past decade. A for companies have become available. For example,key change during this period has been an increase not there is AIM in the UK, or NASDAQ in the US, a trade saleonly in the availability of capital, but in the range of and refinancing with a private equity house. There is alsostructures by which investments are made. a trend for secondary offerings, where the investor buys shares off the founders so that incentives are aligned.”“There has been a lot more money Although the overall trends over the past decade have been positive, recent events have transformed theavailable for entrepreneurial financing landscape. Today, sources of credit have slowed to a trickle and entrepreneurs have far fewercompanies and many new sources funding opportunities. “There is no doubt that the credit crisis is having a major impact on entrepreneursof capital. The growth in private looking to finance their business across Europe,” says Deloitte’s Mr Cohen. “The truth is that a lot ofequity in recent years is incredible.” organisations are less willing to take risk and they are increasingly looking to back their investment with assets. This is very different compared with just a few“IPOs and private placements have always played an years ago when money was being lent against theimportant role in financing growing entrepreneurial business itself.”businesses, and have done so particularly in recentyears,” says Mr von Daeniken. “However, in terms ofraising finance, the balance has recently shifted towardsprivate equity and hybrid hedge funds, with high-networth individuals and family offices also gettinginvolved. Co-investment is also a trend. Certainly,finance options have become broader.” 28
  30. 30. Availability of venture capital, previously seen as the The size of deals being executed by private equity firms lifeblood of new entrepreneurial ventures, has in many has also fallen since mid-2007. According to Zephyr, a countries declined considerably. According to Library data provider, there were 1275 private equity deals House, a research organisation, there were 357 venture globally in the third quarter of 2007, falling to just 705 in capital deals in the second quarter of 2008 in Europe, the third quarter of 2008. Deal value has shown an even compared with 447 in the first quarter. Investment in more dramatic decline, with total deal value reaching venture capital has also fallen, from €1.43 billion in the US$447 billion in the third quarter of 2007, and first quarter of 2008 to €949 million in the second quarter. dropping to US$57 billion in the third quarter of 2008 (see chart). There is a general trend among venture capital firms to move away from early-stage investments, with many citing concerns about excessive risk and poor returns. For example in March this year, 3i, which was once a powerhouse of the venture capital industry, announced that it would abandon early-stage investment in start-up companies. This is a very different scenario to 2000, when the company managed 750 technology investments valued at US$4.8 billion. Private equity deals by quarter, 2007–2008 (number of deals and known deal value) Table 1 Time period No of deals Total known deal value (Announced date) (US$ million) Q1 2007 1245 234,817 Q2 2007 1275 447,173 Q3 2007 1192 156,834 Q4 2007 1093 128,142 Q1 2008 1028 77,370 Q2 2008 1063 134,306 Q3 2008 705 57,134 Despite this bleak funding picture, other sources of While it is not impossible to secure funding in the finance may go some way towards filling the vacuum. current environment, it is clear that investors will be Gerard Aquilina, Head of International Private Banking much more discerning about where they put their and Vice Chairman of Barclays Wealth, points to the money and the conditions on which they do so. growing ambitions of sovereign wealth funds as one Entrepreneurs seeking capital will need to get used to interesting trend, and suggests that these may in some far more searching questions about the track record of cases replace private equity and hedge funds as the management team and future prospects for the providers of capital to ambitious enterprises. business. They will also need to explore the available options more thoroughly, and consider less traditional funding options in order to realise their ambitions.29
  31. 31. Opportunity in adversityAt first glance, a downturn may appear to be the worst “Entrepreneurs are by their nature good at adapting totime possible for entrepreneurs. Capital is hard to come changing business conditions,” says Mr Aquilina. “Thereby, consumers and businesses are reining in their will always be some who can take advantage of theexpenditure, and investors are looking for save havens situation and use the environment to enhance theirfor their money. But for many entrepreneurs, a testing strategic position.” He adds, however, that investors willeconomic climate can be the time to create winning become much more discerning – and scarce. “In casesideas. “If we look at history, the most interesting where investors will make funds available, they will lookinnovation always comes out of a crisis,” said Davide for entrepreneurs who know how to survive and thriveSola, Associate Professor of Strategy at ESCP-EAP in testing conditions, who know how to be frugal, andEuropean School of Management, in a recent who have the capacity to sustain themselves.”Economist Intelligence Unit webcast. “People seem toreact quite positively to adversity. And the reality is that A downturn also presents bold entrepreneurs with ainnovation, most of the time, is the result of creativity, wide range of opportunities. Business and office spaceand creativity is triggered much more when there are a can be acquired more cheaply, and suppliers will belot of difficulties around you.” more likely to discount in order to secure business. Competition may be less fierce in some sectors. Entrepreneurs may also see the current climate as one“If we look at history, the most in which to acquire at attractive valuations. In a survey of board-level executives conducted by the Economistinteresting innovation always Intelligence Unit in April 2008, 51 per cent said that they thought the current environment had madecomes out of a crisis.” conditions more favourable for the strategic acquisition of assets.When capital is abundant and consumer confidence is Canny entrepreneurs with a stomach for risk and ahigh, entrepreneurs can make big bets and the chances strong team of managers and investors alongside themof those being successful are fairly high – sometimes in will undoubtedly be able to profit from currentspite of the quality of the strategy and business plan. conditions – provided they can overcome the majorBut in a more difficult environment when credit is obstacle of securing access to the capital they require.scarce and confidence low, there is no longer a rising As these entrepreneurs take the plunge, some will notide to lift all boats. This will certainly lead to more doubt be mindful of Warren Buffett’s famous adage:business failures than in the past, but this could be “Be fearful when others are greedy and greedy whenregarded as the “creative destruction” that is required others are fearful.”for economies to shed unproductive and unprofitablecapacity. In such an environment, the best ideas will riseto the surface because those responsible have carefullythought through their business plan, partnered withdiscerning investors and made sure that their strategyis appropriate not just in a booming economy but inmore testing times as well. 30
  32. 32. The realisation of wealth31
  33. 33. As well as facing a tighter funding environment,entrepreneurs are also getting used to a narrower set ofoptions for exiting an investment in the current climate. Untilrecently, there were good opportunities for entrepreneurs toachieve partial or full exits on the back of buoyant stockmarkets, strong economic growth, good corporate liquidity,and an active mergers and acquisitions market. Now, thereare fewer opportunities as buyers tighten their belts and asstock markets remain unattractive for flotations.Exit by IPO, which was once seen as the Holy Grail for exit or ‘liquidity event,’ has been the prize for theentrepreneurs, has become all but unattainable. “There successful entrepreneur, when years of hard workare no IPOs taking place at the moment,” says Mr translate into the realisation of wealth. “When you lookAquilina. “M&A figures have fallen dramatically, at exit planning,” says Mr Cohen, “what you find is thatvaluations continue to be extremely challenged and most entrepreneurs don’t plan it at all. It’s veryentrepreneurs are postponing exit plans for the opportunistic. Their focus is on trying to buildforeseeable future.” something of high value and they are not thinking about or planning to sell in three years. First andData from Library House show that there were 63 exits foremost, it’s about building a valuable business.”in Europe in the second quarter of 2008, and only threeof these were IPOs. In the same quarter in 2007, there Tom McKaskill, author of several books on selling andwere 31 IPOs in Europe. In Asia, IPO activity is valuing companies, echoes this idea. He says that in aconsiderably more robust, but even in this fast-growing recent workshop with around 100 entrepreneurs, heregion there has been a decline in activity. According to asked how many expected to sell their business in thethe European Venture Capital Association, a total of 41 next few years. Around 10 per cent indicated that theycompanies went public in Asia in the third quarter of planned to do so. He then asked how many thought2008, down from 98 in the second quarter. they might get an offer. In this case, around 80 per cent put up their hands. “Generally few entrepreneurs, apartBut while the current climate may have temporarily from venture capital-backed companies, really spend areduced the flow of exits, the question of what drives lot of time thinking about selling,” he explains. “Mostentrepreneurs to exit and the plans that need to be put are optimistic, however, that they will get an offer.”in place to extract maximum value from thetransaction, remains highly relevant. For decades, the 32
  34. 34. To sell or not to sell According to Mr McKaskill, there are effectively three When it comes to selling the business, the main fear of scenarios when entrepreneurs might sell their business: entrepreneurs in the survey is that the business would be first, when the business has problems and is struggling sold too cheaply. Asked about the factors that might to survive; second, when someone makes an offer at a deter them from making a sale, concerns about failure to price that is difficult to refuse; and third, at a time of the maximise value are also high on the list. But while entrepreneur’s choosing, when they might want to economic considerations are clearly important, many pursue another opportunity or spend more time with business owners also retain a strong emotional link to their family. “It’s only in the last case that you have some their company. An important concern among the degree of choice and time to do the process,” he says. “I respondents is that, if they were to sell, the new owners would say that this third scenario accounts for maybe 20 would restructure, lay off staff or break up the business. per cent of all exits.” Index Venture’s Mr Rimer puts it Moreover, the main deterrent preventing respondents succinctly: “In the main, companies are not sold; from selling their business is that they have unrealised companies are bought.” ambitions for the business. If you were to sell (or have sold your business), what would be/were your most significant concerns? Graph 9 – Entrepreneurs only Risk of selling too cheaply 29% New owners would restructure and lay off staff 25% Potential for the business to be broken up 16% New owners would change strategy 13% Lack of confidence in new management 9% Not sure of how to spend time 7% Other, please specify 3% 0 10 20 30 40 50 60 70 80 90 100 Which of the following factors would be most likely to deter you from selling your business? Graph 10 – Entrepreneurs only Unrealised ambitions for the business 19% Fear of selling too cheaply 17% Expectations of strong future growth 17% Loyalty to employees 15% Too attached to the business 13% Unsure of what to do next 10% Reluctance to lose control of business 8% Other, please specify 1% 0 10 20 30 40 50 60 70 80 90 10033
  35. 35. “Entrepreneurs have a strong emotional bond with their seen as the main objective, with the need to focus onbusiness,” says Mr Cohen. “They care about the fate of new challenges the next most important. The surveythe company and employees. I frequently see reveals that a lot of factors are influential in determiningentrepreneurs who won’t sell because they don’t believe when to sell. Chief among them are the value of thethat the buying company will treat their people well.” business, which 85 per cent see as important, the point in the business cycle, which 72 per cent see asIn cases where entrepreneurs in the survey have sold or important, and the level of interest from buyers, seen asintend to sell the business, the realisation of wealth is important by 71 per cent. How influential were/would the following factors be in determining your decision to sell the business?Graph 11 – Entrepreneurs only Value of the business 50% 35% 11% 2% 1% Point in the business cycle 30% 42% 21% 4% 3% Retirement plans 20% 30% 24% 15% 11% Options for succession 16% 33% 29% 12% 10% Influence from stakeholders 12% 30% 34% 17% 7% Growth ambitions 21% 41% 25% 11% 3% Legislative changes 11% 24% 32% 19% 13% Desire for new challenges 29% 41% 20% 5% 4% Level of interest from potential buyers 31% 40% 22% 5% 3% 0 10 20 30 40 50 60 70 80 90 100 Very important 1 2 3 4 Not important 5If they were to sell a business, younger and older Mr Singh of Helion Venture Partners remains relativelyentrepreneurs have somewhat different motivations. optimistic about prospects for the Indian market.Younger entrepreneurs are more likely to consider the “There is no doubt that the current financial andpoint in the business cycle and growth ambitions as economic conditions have dampened the appetite forbeing important, while older entrepreneurs place more IPOs and other exits in India, but we believe that will notweight on their retirement plans, the desire for new last for too long – and is the result of an external factorchallenges and the level of interest from potential buyers. out of our control. Although the US market is clearly important for many Indian companies, the emergenceLooking to the future, the current state of the of a large Indian domestic market will becomeinternational capital markets, general financial instability increasingly important.”and stalling economic growth will have temporarilycurtailed most exit plans. Mr Graham says, however, Mr Rimer also takes a longer view with his venture capitalthat this should not necessarily have a negative impact investments. “We work on a seven-to-ten year horizonon the exit prospects for the current wave of start-ups. with our businesses and are not changing our investment“You need to remember that it takes at least four to five approach, nor indeed are any of our peers. Our goal is stillyears on average, and sometimes longer, for a start-up to finance entrepreneurs that are passionate aboutto succeed,” he says. “It’s a very rare economic cycle that building big, world-changing businesses.”lasts five years. You can be pretty sure that the stage ofthe economic cycle when they’ve succeeded will bedifferent from where it is today.” 34
  36. 36. Exit strategies: Sean Phelan has spent the past 12 years building UK selling their business was to increase from 10 per cent online mapping company into a to 18 per cent. “This helped focus my mind,” says Mr leading online supplier of mapping information. This Phelan. “We knew that if we didn’t close the deal by summer, he had the opportunity to spend some time 5 April 2008, we would be liable for the higher rate. indulging in one of his favourite hobbies – sailing – That wasn’t the motivation for going for a full sale but following the sale of his business to Microsoft, the it was perhaps the straw that broke the camel’s back.” world’s largest software company. By the October 2007 deadline, there were several Mr Phelan set up Multimap as a one-man operation in offers on the table. The Multimap board accepted the a spare room in 1996, funding the business initially Microsoft offer, which was in excess of US$50 million, from his savings. The company offers two different even though it was not the highest. “Microsoft services: a free general service for the public that invested a lot of time early on and really did their provides street maps and driving directions, and a homework to understand the business and work out more customised offering for businesses that need to how Multimap would fit into their company,” says Mr show their map location on a corporate website. Phelan. “It understood and valued what we had Multimap became profitable in 2003; by mid-2006, it created: that was very important to us. It was never was receiving some 8 million unique visitors a month just about the money. We didn’t want to sell to to its website and generating about £9.5 million in someone who didn’t share the same values. We felt, revenues, with about 60 per cent of these coming all in all, that Microsoft was the best home for the from customised services. company in every sense.” Multimap’s growth was self-funded, apart from one After the sale of Multimap in December 2007, Mr substantial outside investment of £1.9 million in 1999 Phelan was flexible about his ongoing involvement in from TV production company Flextech (now Virgin the business. “I offered to stay on for as long as Media Television), which was interested in integrating Microsoft wanted in whatever role they wanted,” he the service within its cable television offering. In early says. “But I think having founders around is not really 2006, Virgin decided to exit the business, which a great thing after buying a company. It usually goes prompted Mr Phelan to start looking for a new well until the acquiring company wants to make some investor. The goal initially was to sell 30 per cent of changes that the founder doesn’t like. Founders are the company, including the 25 per cent Virgin holding, not good at toeing the line and not very good at but with the board’s input, the company decided to hiding how they feel.” Today, Mr Phelan’s ongoing consider all the different options available, from selling involvement is mainly public speaking, and he is a block of shares through to an IPO. leaving the company on amicable terms. The board eventually decided to undertake a parallel Aware that he would have to deal with some unusual strategy to sell the Virgin block of shares at the same pressures following the sale of the business, Mr time as looking for buyers for the entire business. Mr Phelan made some rules for himself. “I set three rules Phelan was sanguine about the prospect of the sale of that were to last one year after the sale,” he says. “The the business at the time. “I knew that sooner or later first rule was not to try and start another business. we would exit, so it wasn’t an emotional wrench for The second rule was not to try and buy a business. me when I thought about selling the entire business,” And third: not to make any mad acquisitions – aircraft, he says. “We had some pretty clear financial criteria, super-yachts or cars you could not safely park on the but more importantly perhaps, I was very concerned street. This third rule hasn’t been a problem at all. But about what would happen to the team and the I do think there is a temptation when you have just business after the acquisition. That became a crucial sold a business to think that you know everything, a factor to consider in any effort to sell the business.” possibility of overconfidence. These rules are useful for any entrepreneur.” A week before the deadline for offers, Mr Phelan, together with other UK entrepreneurs, received some worrying news. Capital gains tax for entrepreneurs35
  37. 37. Life after the exitExits may be difficult in the current environment, but the they want to do with their lives after their liquiditypatient entrepreneur who succeeds in selling his or her event,” he says. “Many entrepreneurs understandablybusiness has a variety of options in which to channel are keen to spend time with their family, particularlytheir new-found wealth and freedom. Some after they have invested a lot of time in building up theirentrepreneurs will dive straight back into founding business. But it’s important for those entrepreneurs withanother business, while others will prefer to spend time younger children to instil a work ethic by going out towith family or invest in leisure pursuits. Some will seek the office every day.”to mentor up-and-coming entrepreneurs or becomebusiness angels, while others will adopt a portfolio Serial entrepreneurship, a trend that has already beenapproach, playing several different roles at once. observed for some time in the US, is also becoming more prevalent in countries such as the UK. “In the past, manyOften, the most immediate question for an entrepreneur entrepreneurs in the UK used to build the business, sell itwho has gone through the exit process is the nature of and then live off the proceeds,” says Mr Cohen. “That’stheir ongoing relationship with the business. This can be changed now. More people want to get involved in newtricky. “There are emotional issues for an entrepreneur ventures, leading to more serial entrepreneurs. We arewho stays involved in the business after the exit,” says seeing many more entrepreneurs that have a muchMs Coutu. “It can be difficult for them, as inevitably the bigger appetite to do something again.”company will want to make some changes.Entrepreneurs need to learn to distance themselves In Asia, a strong culture of family business ownershipfrom the business.” and succession means that serial entrepreneurship is less widespread. “If they go through an IPO, AsianCharles Collier, Senior Philanthropic Adviser at Harvard entrepreneurs often sell the minimum number of sharesUniversity, who works with many US entrepreneurs after necessary to float the company and will keep tightthey have exited their businesses, stresses the control of the business,” says Mr von Daeniken. “Myimportance of keeping a work ethic after the exit, sense is that there is less serial entrepreneurship in Asia,notwithstanding the desire to spend more time with although entrepreneurs may become involved in othertheir family. “It can take a couple of years for an projects within the family group after the IPO.”entrepreneur to really get an understanding of what If you have (or were to have) more free time as a result of selling your business, how do/would you spend it?Graph 12 – Entrepreneurs only Travel 20% Spend more time with family 20% Setting up a new company 17% Taking on an advisory role in another business 15% Hobbies/leisure activities 15% Philanthropic activity 11%Taking on an operational role in another business 4% Oher, please specify 0% 0 10 20 30 40 50 60 70 80 90 100 36
  38. 38. Good business: The rise of philanthropy Philanthropic activity may be fairly low on the list of Many donors with a background in business expect post-exit priorities for entrepreneurs in the survey, but philanthropic organisations to be run efficiently and the number that are dedicating at least some of their will measure performance by looking at outcomes. time to charitable work is on the increase. Moreover, “Businesses and charities are not the same but they the way in which entrepreneurs are approaching both need transparency and quality governance,” philanthropy is changing, with many seeking to apply says Ms Mackenzie. She also believes that newly the lessons they have learned in business to the way wealthy donors are more willing to support in which they give. Although many of the trends innovation in philanthropy. “You need to be able to described below are most advanced in the US, where take risks to find new ways of doing things,” she the state has traditionally played a relatively minor role explains, “and donors are looking at more innovative in the provision of welfare, they are spreading more ways of spending their money.” widely, including to the key emerging markets of Brazil, China, India and Russia. Some donors will be willing to fund overheads, by investing in computer systems for example. Others will look to explore a broader range of financing “There is a trend for donors to options, such as loans and ‘quasi-equity’ (debt that has equity characteristics), to fill gaps in the become more involved in their traditional funding market. donations. Philanthropy is “You need to be able to take risks becoming a more important part to find new ways of doing things of donors’ lives.” and donors are looking at more Susan Mackenzie, Director of Philanthropy UK, a leading source of advice to donors and aspiring innovative ways of spending donors who want to give effectively, believes that the world of UK philanthropy is in the midst of a sea their money.” change. “The biggest difference is a demographic one,” she says. “A tremendous amount of wealth has Although there is still a general reluctance among been created over the past five years. Traditionally, wealthy donors to speak publicly about their most wealth in the UK was passed down the philanthropy, another trend is that donors are generations. Now it is mostly new wealth, and many becoming more willing to discuss and be open of those entrepreneurs have different priorities and about their motivations. “This is partly because they ways of engaging in philanthropy.” see others doing it,” says Ms Mackenzie, “but mainly it is because it helps the causes that they are One major change that Ms Mackenzie sees is that supporting. Press coverage has undoubtedly had a donors are more likely to give within their lifetime role to play here.” than to leave a bequest, which has until recently been the more traditional approach. “There is a trend for donors to become more involved in their donations,” she says. “Philanthropy is becoming a more important part of donors’ lives. One of the main reasons is because they enjoy it. Donors get satisfaction from mingling with their peers, meeting like-minded people and, very importantly, seeing the impact of their giving.”37