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November 8, 2007 6:16 pm

How to be an entrepreneur

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Sir Ronald Cohen

What are the secrets of being a successful entrepreneur? Sir Ronald Cohen, one of the founding fathers of the British private equity industry, is well placed to answer. As co-founder of Apax, one of Europe’s largest private equity groups, he is a successful entrepreneur in his own right. And the nature of that business means he has spent several decades observing and working alongside entrepreneurs backed by Apax.

What does it take? An eye for an opportunity and an appetite for risk, Sir Ronald argues in his new book, The Second Bounce of the Ball . He believes a greater number of people could successfully set up their own businesses than do so today. So how should you pitch business ideas? How do you win financing? How do you grow sustainably?

Read an extract from The Second Bounce of the Ball

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Do you think the UK regulatory and tax environment will be conducive to future entrepreneurs and start-ups after reading into the lines of recent government suggestions on amendments to taper relief and CGT etc?
Vijay Thakur, Spain

Sir Ronald Cohen: Yes, I do believe so. The outcry against the increase in CGT makes me very hopeful that governments will now pursue pro-entrepreneurship agendas, whatever their political complexion.

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I have been offered a business opportunity to purchase a restaurant franchise from the US and roll it out across London (with a view for expansion to the rest of the UK the next 5 years). I have a strong background in the hospitality industry, having run some of London’s top members clubs including having opened my own, aged 24. I am 27 and the time commitment for this project would realistically eat up the next 3 years of my life, into my 30’s.
The dilemma for me as an entrepreneur is that my heart wouldn’t really be in this project, as my reputation in the hospitality industry is built on cool/creative projects, of which this particular one is not. I am attracted to the earning potential of the franchise business but I am afraid of losing the creative freedom I will have if I developed a new concept. My real passion is to open up my ‘opus’. Do I put that dream on hold and gain more ‘corporate experience’ where the money would easier to come by (although less stimulating)?
Jasper Tay, London

Sir Ronald Cohen: I think you should go with something that really excites you and that has significant long-term potential. I think I would therefore pass up the opportunity of the franchise business and work to develop your new concept. Get on a main line now rather than going for a provincial one.

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I have an internet venture that could easily be a global business within two years. However, the risks around it are, as usual, high and I would like some advice on how to fund its initial product build phase. We estimate it will cost 50k and take four months to build it and get to market. I understand that commercial funders (such as your own business) won’t consider investing until we have a viable, live product and business. But I then have a funding gap to get it to launch - a catch-22.I have tried public funding (e.g. grants) without success. I have to say there are a lot of nice government words about supporting technology ventures but the reality is that there is very little viable support. Do you have any suggestions how I can raise the initial funding?
Neil, Midlands

Sir Ronald Cohen: You are really looking for angel finance which could benefit from tax benefits under the Enterprise Investment Scheme.  You can also meet angels through different angel networks.  This is the sort of finance which in the US would be provided by the successful executive who lives next door.  Mike Lynch of Autonomy raised the £2,000 which set him off on the road to success from someone he didn’t know over a drink in a pub!

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How do I look for finance without the risk of people stealing my idea?
Tom, London

Sir Ronald Cohen: People tend to over-estimate the risk of being copied. If your idea is just an idea you are not really running a big risk because the minute you get close to the marketplace it can be copied. Your best protection is to put together a team that stands a very good chance of success. You’ll then be able to attract capital when others don’t. In general, big companies are very slow to copy, they start off with the assumption that new things will involve a high risk of failure.

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I am an IFA and have been, over the last 10 months, developing a client base in the South East with aspirations to collect my business nationwide. I have collated my current client base through referrals rather than advertising in the belief that the personal one-to-one service I provide is better advertised through recommendation rather than pure in your face sales. What organisations in the UK bring referral-driven businesses together? Are these recommended and what tips would you give to somebody wishing to introduce (referral-based) advertising into their inter-business relationship strategy?
James Mulholland, Tunbridge Wells, UK

Sir Ronald Cohen: I think you should concentrate on the internet, while expanding your network of personal contacts. Word of mouth is crucial to the marketing of financial services. You may also think of publishing a piece by you on the net which describes what you can do for your clients.

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Does blind luck play a major part in the initial story of any successful entrepreneur? And if so, surely the best strategy for success is continual pro-activity and risk-taking to take advantage of this. Do you think luck played any part in your success?
James Cochrane

Sir Ronald Cohen: Blind luck only rarely plays a role in entrepreneurial success because its occurrence is so rare. Most of the time it is a question of putting yourself in a position to take advantage of opportunities which will arise in a field that you know well. This is why in “The Second Bounce of the Ball” I refer to the fact that luck is seldom just a matter of chance. If you can anticipate what is going to happen in your market then you can position yourself so that you can advantage of that next bounce of the ball. Take alternative energy. Everyone knows that the pressure to move away from oil will now lead to a host of ventures in new forms of energy. If you expect electric vehicles to emerge, then how can you position yourself to take advantage of their emergence? If you can position yourself so that you can offer a worthwhile service, you will look lucky when the time comes.

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It seems to me that success in a complex business world should be dependent on a continuous ability to assess the landscape and respond accordingly, but I see many successful entrepreneurs who have a very simple and fairly fixed views of the world. So would you prefer to back a single-minded, bull-headed, black & white type of entrepreneur, or a thoughtful, analytical, open-minded type? Are both types represented among the successful entrepreneurs you have seen, or is one more common?
AJ Polo, South Africa

Sir Ronald Cohen: I think that it is important to be both focused on a major opportunity and at the same time flexible in adapting to a changing enviornment. Changing focus constantly is, not in my experience, the road to success. You need to find an opportunity that is there for the long-term, preferably and stick with it. It is important, however, as you implement your strategy to take advantage of that opportunity that you be responsive to the reactions of the marketplace. In a sense, you are looking for open doors that can be pushed wider rather than closed doors that will take a huge effort to open. The best entrepreneurs I have come across were quick to realise where market acceptance was greatest.

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To what proportion would you say entrepreneurship is innate in people as opposed to being a learned skill?
James Nichols, Kingston Upon Thames

Sir Ronald Cohen: In ”The Second Bounce of the Ball” I point out that entrepreneurship can be largely taught, like any profession. What is common among successful entrepreneurs, however, are characteristics such as hard work, perseverance, determination and resilience in the face of temporary setbacks. My view is that many more people could be successful entrepreneurs if they thought more deeply about the opportunity they picked, the road they are likely to travel and the solutions that have been brought to similar problems before. For instance, many entrepreneurs have tended to pick up opportunities that came there way instead of focusing on identifying the right opportunity for their set of skills. Go for something for which you have unusual ability. It will make it easier for you to define a way of winning and to recruit those you need in your team.

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What does the statement “a successful entrepreneur” mean for you in terms of personal qualities, business performance and community contributions?
Viktor O. Ledenyov, Ukraine

Sir Ronald Cohen: For me a successful entrepreneur is someone who has been able to build from scratch or otherwise develop a business of significant size and who has done so in an ethical way. The best entrepreneurs have set out wanting to be one of the leaders in their field. This does not necessarily mean size alone but in most cases will involve being one of the largest. It often involves developing leading expertise in a field. At the end of the day, the way of keeping score for an entrepreneur is generally measured by the gain but there are lots of instances today where people are turning themselves into successful social entrepreneurs and there the benchmark becomes their social impact. In terms of personal qualities, thinking big and sticking with it is a common feature of successful entrepreneurs.

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Do you think we have an overcapacity in investment companies for asset management?
T Safam, Wimbledon, London

Sir Ronald Cohen: The investment management market is growing in size, but also in complexity. The development of derivatives is now providing an important and challenging new dimension for all investment disciplines. The property market is a case in point: we see a trend of increasing momentum in new quoted vehicles which hold properties that could previously only be bought as buildings. The increasing liquidity of the shares in these vehicles will provide scope for much greater use of derivatives. Since property is a cyclical area there is therefore new scope for investment managers to try to make gains on the down cycle. A similar approach can be applied to various types of equity instruments. In summary, we are a long way from investment management overcapacity.

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I am an entrepreneur with access to a lender for environmental projects. They are looking to scale up dramatically over the next 18-24 months and we have a unique opportunity to feed projects to them en masse. My question is: How can I approach the VC/Private Equity world in a way that they will understand, yet encourages them to relinquish deal flow to us. My thought was to encourage the ability to cash themselves out with a loan from the lender, while retaining the equity in the projects. (The problem, or opportunity, is that the minimum loan size is USD 100m with no max.) I would appreciate your insight and guidance as we look to help a lot of other fledgling entrepreneurs over the next few years.
Robert Underwood, Wind River Group, Inc.

Sir Ronald Cohen: It’s quite easy to identify private equity firms which are interested in environmental projects through the national organisations that exist, such as The British Venture Capital Association in the UK. You should then contact them explaining that you have access to debt for their ventures.

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I agree with your viewpoint that entrepreneurs are driven by the need to do their own thing, benefit of not having to take orders from others, and other rewards. I myself recently formed my own firm for the same reasons. One of my goals also is to develop inner strength and character, which will allow me to survive the ups and downs. Can you share with us your thoughts on how to develop inner strength and other qualities so as to survive over the long run?
C.H. Seowm, Singapore

Sir Ronald Cohen: I have found that inner strength comes from confidence that the opportunity that you have picked is the right one and from surrounding yourself with a team that is capable of making the opportunity a success. In my experience, leaders are optimists who see the glass as half full rather than half empty. Those who worry about the glass being half empty, or the water in it even evapourating, seldom have inner strength. This may mean that they are unsuitable to be the leaders of a venture, although they may still have a useful place in an entrepreneurial team because of their tendency to look to the downside and to protect it.

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With a weakened US dollar and the issues with the subprime market, I believe there are many buying opportunities to purchase real estate, whether as property, distressed debt, and/or companies with a real estate component at steep discounts. What is the best way to put together a private fund to take advantage of these opportunities? What sort of people to I need to recruit to make this a reality?
Michael, Irvine, California

Sir Ronald Cohen: I agree that there is an opportunity. Most often, it can only be taken advantage of if you have a credible track record in investing in the area on which your fund will concentrate. Your challenge is that unless you do have this expertise, it will be very difficult for you to recruit people who have it into your team. Investors will look for expertise before they part with their money and the investment business requires financial credibility which can only be achieved over a period of 5 or more years. Assuming you have the expertise in the team, you could talk to an investment bank about raising money for you or if you know potential investors about their participating in setting up a new fund. If you offer them a share of the equity in the management company, this will generally make it easier to attract them.

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Congratulations on your new book! When asked about entrepreneurship and risk, Dan Lufkin, one of the co-founders of the investment bank Donaldson Lufkin Jenrette, once said: The only risk an entrepreneur can take that is untenable or stupid is to go ahead without having enough capital [...] to really see their venture work or not work. That’s exactly what makes fundraising for founders so difficult! It’s not enough to find investors. You need patient (!) investors. My experience is that most founders, for this very reason, regard VC firms as backers of last resort - except those serial entrepreneurs specialised in quick-flip ventures. Venture capitalists are considered too hands-on and too impatient. Moreover, as it turns out, especially in Europe, VC firms tend to reallocate their funds to later stage investments. Conclusion: their seems to be a genuine mismatch between both founders and VC. Question: Given that even Apax recently announced that they would stop making early-stage VC investments, which category of patient capital source would you turn to if you’d be 26 again trying to launch your own business?
Thomas Tengler, Corp. Dvpt. Advisor, Austria

Sir Ronald Cohen: As I say in my book, I think you are much better off as an entrepreneur raising smart money than just money. I know that Europe is still miles behind the USA in terms of early stage investment, but there are still venture firms that specialise in early stage. Alternatively, there are networks of angels, often successful executives who have accumulated capital, in each country that provide a useful source of start up capital. If you have a credible track record to date you stand a good chance of raising money, although it is never easy.

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