An oft-heard debate when it comes to start-ups is why is it that the US appears to be more entrepreneurial and encourage more aspirant business owners to take the plunge than in the UK.
Is it that there are greater levels of venture capital support? Is there simply more money available? Does it come down a greater tolerance for risk and less fear of failure?
One person who should know is John Bailye, a naturally driven Australian entrepreneur who shifted himself and his family to the US in the mid-1980s in order to launch what would become a billion-dollar Nasdaq-listed pharma supplier Dendrite International. He set up in New Jersey – “that’s where the US pharma industry is” – and ended up forming the New Jersey Technology Council which now numbers over 1,500 entrepreneurs as members.
Pointing to the difficult process of companies transitioning from the start-up and scale-up phase through to large-scale revenue commercialisation, he says that in the US 75% fail at this stage whereas in the UK that figure stands at 98%.
“In my view it’s not because the US is smarter or because there’s more capital,” he says. “I think there’s plenty of both here. But it’s very much easier in the States, as an entrepreneur; it’s in the air.”
In the States, as an entrepreneur, it’s in the air
There is a “background of expectation” around how a company will grow and this has particular resonance with his new venture where Bailye’s attention is now turned to the UK.
He has launched the Side by Side Partnership’s new SBS Later Stage Enterprise Investment Scheme (EIS) fund designed to identify companies at the aforementioned transformational stage, providing not just investment but also “high touch” support and advice.
The fund picks up on a theme that runs through the UK government’s recent Patient Capital Review which identified the building up of large-scale businesses as an area where the UK could do more. That report suggested that fewer than one in ten start-up businesses reached a fourth-round of investment compared to a figure of more than twice that for the US.
In this new venture, Bailye says he is again an “outsider looking in” with all the freedom that gives, when necessary, to “call a baby ugly”.
The EIS scheme was always going to produce more start-ups – and hence more successes – but it would do nothing about the failure rate
It also gives him a great perspective on the whole EIS scene which, he says, “was always destined to do two things,” and it’s not what the government might have thought.
“It was destined to work, because the UK (has always been) a country with a lot of innovation potential but not much risk capital.” EIS marks 25 years since launch this year.
But more importantly, perhaps, he says that the EIS scheme was always going to produce more start-ups – and hence more successes – but it would do nothing about the failure rate.
Certainly, there is more money available – helping some companies that “really have legs” – and what the money really does is simply create more start-ups. “It hasn’t to my knowledge yet produced more successful start-ups per pound employed,” he says. “It’s produced many more successful start-ups because many more started, but it’s a 98% (failure rate) of a bigger number.”
This insight is perhaps something that policy-makers might want to consider. Everyone wants to be supportive of new companies and a tax-incentive scheme is a good way to encourage investment. But within the companies themselves, the entrepreneurs have to be very hard-nosed about how to drive their business forward.
Bailye is a great believer in the Peter Principle – stating that employees tend to rise to ‘their level of incompetence’ – and it is his belief that in the US business founders tend to be much more dispassionate about replacing even long-standing employees if they don’t look likely to step up to the next level.
The value of having detachment, whether that is around hiring and firing decisions or investment in infrastructure, is something he came across by accident but which now is central to his business philosophy.
“The secret to survival was the accident that we had that you had to detach value from things that had been important in the past. The more you have tentacles holding those in, the more likely you were not to make a change and then that was the start of the end.”
Translating this to the venture capitalist realm, he says “the fund’s interest is not the entrepreneur”, it’s the business and how that business can best be supported regardless of personnel.
“If you’re a VC of any sort, your job is to ram as much money in as early as you can and just hope that one of the 50 works because you own enough of it now that it will carry the fund,” he says.
If you’ve been in business and you’ve got to make payroll, then the only way you’re going to make payroll is because the customer buys what you’re selling. That little secret is lost in almost every private equity company I’ve ever been to
In fact, they key person with any business, he adds, is the customer. “The customer had always been, for me, at the centre of any value created,” he says.
“When a company is going through these early stages of growth and survival means that you’ve found somebody who will buy what you’re doing, but the next person comes along and wants something different so you’ve got to be able to change it, modify it and improve it,” he says. “Your business is totally centred around your product.”
“If you’ve been in business and you’ve got to make payroll, then the only way you’re going to make payroll is because the customer buys what you’re selling,” he adds. “That little secret is lost in almost every private equity company I’ve ever been to.”
Nurture and nature
Without mentioning a name, Bailye says he was helped when in New Jersey by an investor who, when he got involved, joined the board because, as Bailye puts it, “he knew my foibles.”
“That turns out to be pretty important for anybody that the entrepreneur is actually going to listen to: the first box to tick is does he know me? Does he accept me for what I am?”
He says that at board meetings he was “the kind of adult in the room”. “He taught me about planning the next (funding) round before I priced this round. He taught me a few things that are intrinsic in successfully funding companies today and of course there was no manual.”
Bailye is talking here about the late 80s when there were “only about 50 or 60 VCs” around but that manual is now much more advanced. Though Bailye himself opted for New Jersey for his business, he does have a view on why Silicon Valley has been the standout hotbed of tech entrepreneurship.
Pointing to the calibre of people that have come out of Stanford University – the founders of Instagram and Snapchat as well as LinkedIn, PayPal, Netflix and, of course, both Sergey Brin and Larry Page from Google – he says it is a philosophy to forming businesses that provides the key difference. “The philosophy of Stanford was always nurture businesses close to ground and keep nurturing and nurturing,” he says.
The eight companies that the Side by Side Partnership are already invested in for the EIS fund will be hoping for the same hand-holding treatment.