Newcastle Encounter 20 May 09

[Vince Taylor]

Hi

Thanks to all who turned up tonight, especially to Kate, who set us some new challanges and managed to hold everyone's attention for an extra hour at least! Thanks to Judith for the vittals.

I think we learnt several things about different approaches to enteprise and entrepreneurship - and the distinction between the two - and some important stuff on the ethos of the RSA from Paddy and Peter who illustrated the RSA's long history of transformational intervention very well, I thought.

I will certainly follow up the opportunities we discussed about international internships with Kate and think hard about what you all said about what is required to motivate people to make more of their individual prospects.

Happy to report back on where we get to. I'd also better say that I am interested in the wide range of other issues that we can consider at future meetings. See you all in June.

Vince

[Peter Churchill]

Vince thanks for that. I wonder if people would like to continue the (very interesting) conversation here on-line - it might attract some other contributions (especially if we whipped up some support).

I thought Kate's insistence that the key was an ability to sell had a ring of truth about it - but at the same time as was said (by you??) an excellent salesperson may not have the broader picture that enables them to steer a business.

Also the notion that entrepreneurs may be made or lost at 11 or 12 was startling.

[Trevor G. Evans]

I was unable to attend the event last Wednesday due to business commitments but would be interested in hearing more having been involved with my own businesses for many years. Some of the comments contained in the already posted items are tantalizing in their inference and I would like to hear more about what was discussed, online or otherwise. I shall try to ensure that I am able to attend the June encounter.

[Vince Taylor]

Because several Fellows were unable to join us, I have summarised some of the points I made at the Newcastle Encounter below - and added a few more. This reflects a discussion that I had with RSA Felloew David Johnson a few months back. I am grateful to David for various enhancements made at that time, which I have incorporated. Please feel free to use it as the basis for developing this discussion, as Peter and Trevor have suggested.

1) The UK depends upon entrepreneurs for its future. That is widely accepted but not well understood. True entrepreneurs build successful businesses. They develop the abilities required to do this and frequently apply those abilities to a sequence of business ideas and opportunities throughout their life (i.e. successful entrepreneurs are usually serial entrepreneurs because most business ideas have a limited shelf life). Entrepreneurship in the UK is sometimes confused with invention. Inventors often have a single momentous idea, but little to follow up with in business terms.
2) International evidence (GEM/London Business School) shows that the UK is middle-to-low ranking as a country when it comes to entrepreneurship. This is not inevitable in a mature economy. We talk about the UK lacking an entrepreneurial culture, but ‘culture’ in this context is perhaps a mis-used term. Actually all we can really talk about are the collective mindsets of the population. Although there are lots of initiatives and organisations who promote enterprise they do little to affect the mindsets of the population. Because many business support programmes are paid according to ‘hard’ outputs achieved in the short term, they end up ‘doing it’ for the nascent entrepreneur, thereby perpetuating dependency.
3) Although entrepreneurship rates are higher in more prosperous parts of the country, again this pattern is not inevitable. Desire and necessity are both important drivers of business start up. Risks can be lower for those on low incomes (unless the benefit trap is evident in which case relative risks soar).
4) At any one time, around 10-12% of the UK population are self-employed or in business for themselves. Therefore, about one-third of UK adults will be in business at one time or another in their lifetime. Our education system is not geared up for this. The Davies report introduced more and better enterprise education but much of that is really about working in business for someone else rather than being in business on your own account. Much of it concentrates on the functions of business. Little of it focuses on understanding the underlying business model, or developing an entrepreneurial way of thinking amongst those who are ready to do something.
5) There is widespread suspicion of entrepreneurs in Britain in a way that is much less common in other parts of the globe. I would include within this schoolteachers who often see making a profit as ‘grubby’. Many other public sector workers also hold this view, as do many politicians. Witness how many Labour Ministers quickly shift their focus to social enterprise, when they begin to talk about enterprise. They don’t mind business, but would prefer it to be ‘not-for-profit’.

[Kevin Robson]

I too was unable to attend the last Newcastle Encounter and, although, I had another unavoidable commitment, I'm rather disappointed that I couldn't be there because, having made my career as what I suppose many would call an entrepreneur in my own business, this is something very close to my heart. So much so, that after selling out my business interests, I authored and delivered an MBA Elective course at Durham University Business School on this very subject.

Nobody has ever really nailed down a satisfactory definition of entrepreneurship, and over the years I suppose I have come to the conclusion that the nearest we can get to describing the ‘condition’ is that the entrepreneur is what you are; and enterprise is what entrepreneurs do i.e. enterprise is the practical expression of the entrepreneur.

Having said that, I am convinced that many people start businesses (and make them successful) without possessing any entrepreneurial characteristics at all (at least as measured by what we would normally think of as entrepreneurial characteristics such as opportunism, powerful imagination, the ability to spot niche opportunities, ego-drive etc.) In fact, today, as the psychological contract between employer and employee has shifted: from the one offering long-term security in return for the other's long-term loyalty (with a wage/salary/pension as the consideration); to the one offering short-term opportunities in return for the other’s specific skills at the time; many people are slipping, sometimes inadvertently, into a form of enterprise. Many carry on with their chosen careers as free agents, offering their services to a variety of employers on a transactional basis: the classic portfolio career. Does that make them entrepreneurs? I don't really think so. But are they enterprising? Of course they are.

It seems to me that the popular concept of entrepreneurship has within it the idea that sooner or later the entrepreneur within you will somehow have to break out as it were, but quite often people experience a precipitating event in their lives that forces them into self-employment/business for themselves, not necessarily them spotting a major market niche. The most common event is, of course, redundancy.

However, the idea that entrepreneurs are good at selling things (not least themselves and their ideas) seems intuitively about right to me. Although I have to say that there is a business age/stage issue here. At the beginning i.e. at business start up and early-stage development, the driving, sales-focused, push is essential. However, once the business is off the ground and has moved into maturity, to have someone at the helm who remains just a sales person is very dangerous. The old adage that turnover is vanity when profit is sanity applies here.

This raises the issue of personal development in the entrepreneur/enterpriser. Can he or she for example acquire broader business skills? Is there an ability to see the need to acquire such skills? My intuition tells me that it is in this area that the most important focus of intervention/assistance should be directed, not the business start-up stage, as is the case at present in this country. I have to say that much of what I see being offered as support for entrepreneurialism/enterprise/business start-up is often irrelevant to the star-up situation, pitched at a level that is, frankly, infantile and offered on a “we know best” basis by people who patently do not know best, and with the implied assumption that those who start ‘small businesses’ are in need of help. Surely that goes wholly against the very grain of what entrepreneurs are/do?

[Kate Gordon]

Hi
Firstly thanks for welcoming me to the RSA and I did appreciate the discussion thoughts and look forward to more to come.
On the subject of entrepreneurship and the comments made in this discussion, then I'd add the following:

I do believe sales skills are key to being a successful entrpreneur, but mainly due to the ability to communicate and read other people and their motivations. If you're able to understand other people's motivations and drivers it helps when it comes to thinking of a good idea, invention, innovation and even with the best of ideas, you need to be able to communicate this to your target audience. For example, if Bell described his telephone to people as "a device to transmit or receive electronic encoded sound between two or more people" then this wouldn't have engaged the mass public, his target audience, to go out and buy it. If Bell described is as "a way to chat to your mum from a distant place" then arguablly it'd have a greater appeal to the target customers and the take-up of the idea would be greater and quicker. So ultimately, ideas are great. But these need to be communicated to the customer. Without sales, there is no business.

On another note, I think it's key to have a good idea, which many UK people do have. But where we've lacked over the years, is the ability to innovate and put ideas into a commercial setting. This pattern has been seen on many occassion where it's typically the Brits who invent the idea and the Americans who make money from it! To question why this is the case, then I think it's not because we aren't able to do this, but arguably because it's not encouraged and this boils down to the British culture. Having lived, worked and studied abroad, then I've been lucky to experience other cultures and compare this to the UK, learn alot about myself and also the way we live in the UK. As a country, we do seem to enjoy self-depreciation. This is either through comedy and sarcastic remarks or through other elements such as the media. For instance, take the European football, the media loves to build up the English team before the event, but you almost feel that they're waiting for the team to fail in someway and when that happens, they pounce on it and pull the team to pieces as opposed to picking out the good parts of the tournament. For instance, the media might report that we've lost again on penalties and why didn't they practice more. But ultimately, it might be we lost on penalties, but the good point is we made it to the semi-final, which meant we were in the top 4 and ultimately this should be celebrated. So for me, it's a question of outlook and how you view something.

So bringing this back to entreprise (sorry for the football digression), then if people have an idea, they need an environment in which they can be encouraged to pursue their dreams, this just doens't have to be financial support (though that helps) but also with mentors and a supporting culture of success. We need an environment where it's Ok to make mistakes as ultimately we all do, but the key to making a mistake is to learn from it and move forward. In the UK, it sometimes feels like if you make a mistake, then it's unforgiveable and you should give up or people mock you so much, some choose not to embark on that journey again. When this attitude is applied to enterprise, then the entrepreneurs might give up on the first occassion and not try again, which is wrong. In the US, they don't mind people failing in business and it's almost expected it'll happen on your first try. In the UK, when funding is linked to short term results, there's no room for failure as the funders want results and this to some degree stiffles the entrepreneur to actually try things out. Ironically, the funding can, in some instances, suffocate and have the opposite results to its desired effects.

Apologies for the long post, but it's a few thoughts for discussion at any rate. In summary we need:
-an environment which encourages enterprise
-support to entrepreneurs in terms of mentors, friends, family, teachers, society in general
-a culture which doesn't deride failure, but accepts that to fail is sometimes part of the learning process to figure out what works and what doesn't
-a little bit of optimism and a smile!


I look forward to the discussion continuing.....
...see you at the next meeting. Thanks

[Kevin Robson]

Ahh Kate! Would that it were so.

Your comments about the ability to communicate and read other people reminds me very much of Daniel Goleman and his concept of Emotional Intelligence.

[Kate Gordon]

Glad to see there's a diagram to sum up my mass of text!

[Trevor G. Evans]

To be entrepreneurial means that a gap in the market has been spotted for some particular product or service [Product]. Without that there is no entrepreneurial activity.

After the ‘Product’ has been defined, analysed and concluded as being ‘Profitable’, then there is usually a need to find the right type of ‘People’ to assist in the business venture. These prerequisite three ‘P’s are underpinned by the need for adequate funding.

In the UK, for the vast majority of fledgling businesses, it is the lack of adequate/flexible funding that causes many of these new businesses to falter, wither and die.

It is likely that all different types of personality and intellect spot Product gaps in the market. Some of these people will be blessed with the range of entrepreneurial skills required to make a success of their product; many, from the numbers of failed businesses that are reported each year, do not. Those that do make it through are grappling with the basic issues of sales and cash flow and have little time to reflect upon management theories.

In trying to assist the broader range of entrepreneurs to succeed [I am discounting here the geniuses and the lucky for whom success tends to be a natural outcome], there is a need to assist in the initial assessment stage [putting the non-starter ideas out of their misery] and developmental stage of each venture. This assistance also means ensuring that adequate finance is available. Better thought out Government assistance will probably be required as it is unlikely that the private sector will provide the type of nurture required.

[Kevin Robson]

As long ago as 1931 The MacMillan Committee identified what they called the “MacMillan Gap”, an equity gap that they saw as a core constraint to small firm development. In 1979 The Wilson Committee came to the same conclusion: that small businesses were characterised by the method by which they were financed i.e. an over reliance on short term bank finance and trade creditors, and the inability to raise risk capital from the general public. Nothing much had changed in almost 50 years.

Today, 30 years on, small businesses are still in the same situation and it is this intangible characteristic which, in my opinion, defines above all others, what has come to be called the Small and Medium Enterprise sector.

The inability of SMEs to access and retain “Patient Money” (an Aston University definition of 1991 for investment on which returns may take longer than five years to appear), and their enforced over-reliance on UK clearing banks who are only interested in providing short-term money (mostly overdraft and asset-linked finance), seems to be an enduring and apparently insoluble problem.

During good times, when the economy is expanding and the economic tide is high, expanding businesses can handle the high gearing which results from borrowing; profits are made by using easily available money from clearing banks and the treacherous rocks of the underlying capital inadequacy are well covered. However, in the SME that profit is more often than not instantly translated into owner-manager wealth, rarely are adequate funds retained in the business for hard times. That is the nature of the entrepreneurial animal – risk and hard work demands reward.

However, when the downturn inevitably arrives, when profits suffer, small firms cannot sustain high levels of debt repayment and difficulties arise. “They lend you umbrellas when it’s sunny and take them away from you when it rains” is an often heard cry. But this betrays a naive understanding on the part of owner-managers of the banks’ business model and of the inadequacy of their own business’ capital structure to see them through hard times.

On the other hand, it also betrays a fundamental inability of the clearing banks to provide holistic finance to the SME sector. We have to face it, unlike in Japan for example, British banks do not take equity stakes in small firms. Their market power, their application of uniform national policies which allow no flexibility in individual cases or local conditions, their short-term view of lending depositors’ money, and the distance they deliberately maintain between themselves and their SME customers means they don’t want to (actually they don’t have to).

What’s more, British clearing banks make little effort to understand the, often, volatile trading conditions in which small firms operate. (And they fundamentally distrust small firm owner-managers because of their fierce independence and their reluctance to disclose the sort of information banks need for comfort - the so-called Information Asymmetry problem.) So they approach the whole sector with long barge poles, imposing high, risk-related interest rates and ensuring that they reduce their risk to an absolute minimum by enforcing watertight security against tangible, sticky assets (like property) when they do lend. They also seek to lift the corporate veil and take legal charges on personal assets of the business owners, which I think is an abuse of the power they have in what amounts to a oligopoly position as the only accessible providers of business finance.

Then, when the good times stop, they become ruthless in protecting their shareholders’ interests and they take away their support. Interest rates go sky high, overdrafts are involuntarily reduced or removed overnight (they are after all repayable “on demand”), assets are repossessed, and businesses with otherwise good long-term profit-making potential go bust because of inadequate short-term liquidity.

That there is a chronic market failure of small business finance, therefore, is undoubted. Even government interventions cannot address it because of the need for public accountability when expending tax-payers’ money which, in any case is not there for equity funding (unless you happen to be a bank, of course!). And in the meantime, during periods of severe financial constraint, such as now, small businesses, valuable to the economy are going to the wall thus leveraging the economic difficulties for all of us.

So that seems to me to beg many questions. What should be done about it? Can anything be done about it? Is there a better way? Can the RSA help? Should the RSA help? Anyone with any ideas?

[Lynn Broadbent]

This very interesting thread has been picked up on the American Coffee House - how could we resist Kate's reference to the Americans making money off all the great Brit ideas? :-)

http://www.blog.rsa-us.org/2009/05/entrepreneurship-and-why-some-go...

[Kevin Robson]

Like the jet engine? (wry smile)

[Trevor G. Evans]

Picking up on Kevin's comments of last Friday [only saw these this evening], we seem to be moving along the basic notion that lack of cash resources is the biggest killer of SMEs and new enterprises. Further, given Kevin's historical perspective in connection with business funding, it seems as though, given the natural conservative/taciturn approach of banks and other private sector SME business funders to SME development, that we have no option but to prevail upon government and its business focused wings - e.g. UKTI and Business Link - to take a few risks on cash drained SMEs and fledgling businesses, knowing that there could well be failures. Given the recent massive handouts to banks [and MPs!], this is the least that government can do to try and stimulate business in the vital SME sector.

Maybe the RSA can be instrumental in such an initiative by working directly with government to set up some form of regional bodies [as a pilot effort] to assess a small number of business cases [both established and new SMEs] with a view to ensuring that the funding required to develop or launch these businesses is provided responsibly. Through its ranks, or possibly the wider connections of its members, maybe the RSA can also secure the input of very successful entrepreneurs to commit a little bit of time and effort to assisting these identified businesses to become successful, without having to risk their own money.

If such an exercise works well then larger, more permanent regional 'business assessment and developer' bodies should be created.

The underlying idea is to get the government to provide funding a little more directly to SMEs, cutting out the middleman function of banks with the supply of very few or no strings attached funding; that is if the SMEs do well, they pay back all of the money; if they fail the cash is lost by government [i.e. ourselves]. If the RSA can also facilitate the input of free sage advice from well established businessmen/entrepreneurs then we should witness much better and consistent performances from the SME sector in the future.