Entrepreneurs are well known for their positive outlook, but how have recent economic events affected them? At the second meeting of its Entrepreneurs' Confidence Panel, Director found out
independent VC consultant
Simon Biltcliffe, managing director, Webmart
Dean Brown, director, StatPro
Kat Callo, director and strategy consultant, Rosetta Consulting
Natalie Campbell, entrepreneur
Richard Cree, editor, Director
Steve Everhard, associate director, Grant Thornton
Rebecca Harding, founder, Delta Economics
Ross Marshall, director, Palatinate Group
Bill Morrow, founder, Angels Den
Keith Pollard, managing director, Intuition
Trish Traynor-Watson, managing director, LiquidSpace
Erika Watson, founding executive director, Prowess
Richard Cree Since we last met the economy seems to have turned on its head. Is it possible to still be positive?
Steve Everhard Grant Thornton and Delta Economics recently conducted research among 750 founders and owners of companies with a turnover between £5m and £100m. This was about understanding the psyche of entrepreneurs, rather than pulling out facts from what's happening in the market. While no one was blinded to the challenges, there was a strong feeling that there are opportunities. If your plan was to exit your business over the next year or two, then you probably don't have that option if you want to realise full value. So pragmatism comes into play. It's like the housing market, where people decide not to move but build an extension instead. Now is the time to consolidate and look for alternative growth options rather than an exit.
Rebecca Harding Entrepreneurs are amazingly gutsy about staying in business. We found 70 per cent of respondents will stick with their business come what may. That might be because they have no other choice. We put together an index where 100 was neutral, with the economic climate having no effect on entrepreneurs. Anything below 100 is negative and anything above is positive. This time, the index comes out as 112 overall.
Simon Biltcliffe I imagine there is a big difference between self-funded businesses and those with big debts. Those who leveraged themselves up are going to be worried, while those who kept the cash in their business are now resilient.
Erika Watson Things are going to get worse. The markets aren't happy and the government needs to focus on infrastructure to kick-start the economy. Our system has been focused on the wrong types of incentives. People are getting paid bonuses for short-term performance. They are not taken back when things go down. It should be based on share value over a longer period.
Dean Brown But for entrepreneurs there is always a short-term goal. I agree that we are still on a downward trajectory, but things are cyclical. There will be light at the end of the tunnel. I started my first company during the internet boom and then the bust happened. But we focused on core competencies, got through it and managed to exit in February, just before the current bust. Short-termism keeps entrepreneurial drive alive.
Erika Watson I agree that entrepreneurs are innately short-term, but what I am talking about is the environment we operate in and where the incentives are.
Keith Pollard People at the moment are less prepared to take a risk. I want entrepreneurial staff. I'll give them a share of the business through options. But people aren't interested at the moment. They want cash, because they have to pay a mortgage. They want salaries and bonuses. Options are a nice idea long term, but people don't want the risk.
Rebecca Harding Is finance harder to find now?
Keith Pollard We are a founder-investor in another business that is trying to raise £5m. It's a good product, with a good team and a bunch of founder-investors who have put a decent amount of money in. A year ago we would have raised the money without a problem. Now we are not getting anywhere.
Steve Everhard The decision points for investments are more complex than they have been. Companies that aren't close to their banks are finding that facilities are being withdrawn. This is part of a root-and-branch assessment by the banks of the way in which they see their investment in businesses. We recommend dialogue between businesses and their bankers at this point.
Rebecca Harding And margins are being squeezed. Costs are going up—and our entrepreneurs predicted that would continue. They are not passing increases on to customers in order to maintain market share. They are maintaining market share and turnover, but that leads to problems with cashflow and profitability.
Keith Arundale As things get tighter at the banks, people will look to equity finance. We have lots of stories of the banks reining in loans even though they are well secured. Things are going to get a lot tougher from the banking point of view for small businesses. They will seek VC and angel finance. But while there is money available for the start-up side of things, once you get beyond start-up it is difficult to raise finance. We have always relied on angels for that sort of finance. Because of what's happening, are there fewer angels?
Bill Morrow No, there are still lots of angels. Our registrations are up. If you have £250,000 in the bank, what are you going to do? You might spread it across five banks. But no one likes the idea of pimply youths in the City losing their money for them. There is something un-British about it. People want to be captain of their own ship. Company valuations have collapsed. Where you were paying £9m, you are now looking at £4m. It's not that angel funding is less risky, but it's relatively less risky.
Simon Biltcliffe But you've got to put the time in. If you are watching so many plates spinning, this is another thing to do. That's different from the good times, where things go along without you having to watch every facet of the business.
Ross Marshall VCs are looking for opportunities to break people's balls. We've spoken with a few to get an understanding of the market. My business is worth less than I thought it was. Everyone is looking for a good deal, from consumers to investment houses. If they give you money, they want a deal. On the banking side, the relationship matters. If you have been a good client and you've shown you can control your business and you've been open, the banks are more likely to support you.
Steve Everhard That goes for both sides. Banks are guilty of moving around business relationship managers too much. As a result they lose contact with the businesses they invest in. And there is a panic in the banking sector. We have seen banks withdrawing facilities because they don't understand a business enough to be confident in the position they have adopted.
Bill Morrow Our call centre is getting an average of 18 calls a day from people saying they have had credit lines withdrawn. I know someone who has been banking with a very large banking group for 34 years and still the bank pulled the credit line. That was after 34 years of relationship banking with a bank whose Tier 1 capital is looking OK.
Keith Arundale In terms of the VC deals that are happening, environmental technology is a major area. There are a number of investments taking place in the clean-tech sector.
Bill Morrow But there is a difference between what people say and do. It's trendy to say "oh, yeah, green is groovy". But when it comes to investing in green things with lower rates of return compared to the returns you can get on a bunch of other deals, they aren't putting their money where their mouths are.
Trish Traynor-Watson When I am dealing with small companies that are moving into new buildings they do have an interest in green issues. But a lot of the major things, such as solar panels and turbines, have to be driven by the landlords and they aren't willing to pay the money. Even though they want to do the right thing, small companies are often limited as to what they can do.
Dean Brown The green sector will be big, but I don't think it will be as big as everyone thinks. It's just another facet of the economy, in the same way multimedia has come through.
Rebecca Harding There is a view that the recession is something happening in the male-dominated City environment. How will it affect female entrepreneurs?
Erika Watson We need to get to some more long-term thinking and I think that women are more interested in the long term.
Bill Morrow Women take fewer risks. Because they are less leveraged, they are going to see out the recession better than the blokes, with their testosterone-fuelled economy. Women are less comfortable putting the house on the line. Women don't need so much capital and are more penny-pinching and cautious.
Kat Callo I take a less bullish view. If you talk to men and women who would have been prime candidates to leave the corporate world to start their own businesses, they have run for cover. They are not leaving the comfort of a multinational, at least not by choice. While there is risk-aversion among female entrepreneurs in general and they want less debt, we will see a drop in the number of women prepared to take the initial leap.
Natalie Campbell Among younger female entrepreneurs the propensity to take on a high level of risk is the same as for men. I put everything on the line to start my business and lost it all. And I would do it again tomorrow. I know other women who would do the same thing.
Erika Watson At times of recession, more women go into business, because they do whatever they must to get bread on the table, whereas men who are not already entrepreneurs lag a bit. Men nurse wounds and try to hold on to their old industries, a bit like in the Full Monty.
Steve Everhard I don't see any discernible difference in behaviour between men and women. There are as many successful, hard-nosed and powerful women as men. The access to liquidity and the attitude of banks to women as recipients of loans has always been more challenging, which is why some of these special funds started.
Rebecca Harding Is it still possible to grow your business in the current climate?
Kat Callo We see this as a time of opportunity. We run a face-to-face property consultancy, but we are about to launch an online business that will present a more cost-effective offering to a larger number of clients across the country. It matches the climate perfectly, because people want to pay less for a service.
Ross Marshall I have bought three companies in the last three months. They were cheap. And our cashflow is good. I am trying to buy as much of our markets as I can. Things are going to get worse, but people will make a lot of money in this environment. We are looking to take as much of the market and grow our business, so that when we come out the other side we will be stronger. It is survival of the fittest and we'll be the fittest.
Simon Biltcliffe We have grown organically, we are now 30 people but with a £30m turnover. But I want to buy people. I can get people now that I couldn't have previously afforded.
Richard Cree But are businesses going to invest in people?
Steve Everhard The entrepreneurs we researched had a strong focus on people. There is a view that as soon as there is pressure on profits the first thing to go is training. But we didn't see that, with 98 per cent feeling responsible for the future of their employees. There is a large proportion looking to develop people as part of their ongoing business process.
Keith Pollard Don't entrepreneurs always invest more in their people? I invest in people better than most corporates, because people really make a difference.
Simon Biltcliffe I think the quality of training is shocking. I've put two people through a business school elite programme and it's stuck in the 1970s. The case studies make you weep. These are £15,000 courses and they come back thinking like 1970s managers from ICI.
Rebecca Harding A lot of respondents also said they weren't thinking of shrinking their workforce. Will it get easier to recruit?
Dean Brown It is already. I work in banking and investment technology and redundancies in the sector have been an issue for the last year. It's only come to the fore recently. But firms have been making lay-offs just below the mark at which they have to make it public. We are seeing more people with lots of experience applying for jobs in smaller companies.
Keith Arundale There are increasing numbers of senior people coming out of technology firms at vice president level who are all very keen to get into the VC and entrepreneurial area.
Rebecca Harding This downturn seems to be different from sector to sector. Is that the case?
Ross Marshall Yes. You talked about margins. My margins are going up. I'm a middleman and my hotels, golf courses and spa resorts are coming tome. Where they were squeezing us on margins, now it's the other way. They are desperate. There are opportunities.
Dean Brown It is all about opportunity. If you get the timing right you can accelerate out of this market.
Bill Morrow The question really is whether this recession is going to be a V-shape or a U-shape, where we all trawl along the bottom and then come back up. Interest rates are going to head down, inflation is going down, and it's looking kind of good. If there is this bounce back up and greed comes back, I can see this being quite short.
Ross Marshall Society is different now. No one I speak to wants to stop having a good time. People have made a lot of money over the last 15 years and essentially none of my friends want to go back to a situation where they ar worrying about going out.
Simon Biltcliffe But your friends haven't been through a recession. You don't know what it's like.
Ross Marshall We haven't been through one, but the point is that young people don't want a recession.
Erika Watson No one wants a recession.
Simon Biltcliffe It's how you deal with it. And those that haven't been through it will cut their cloth later and discover that if you cut it early you bounce back out of it.
Richard Cree Is this recession different?
Erika Watson Yes, it's much faster.
Keith Pollard It's 10 times the speed. That's due to media and the internet.
Simon Biltcliffe Hopefully we'll come out of it quicker as well.
Kat Callo It feels less painful, having been through the ups and downs a few times. You remember and know what to prepare for and you can also see through to the other side.
Steve Everhard The outcome of this is going to be a sense of the value of cash over credit. This means that those that have been here before and act early will be in a better situation because they will have restructured their debt while they could.
Richard Cree Who feels optimistic about the future?
Dean Brown Optimism is one of the key traits of being an entrepreneur. If we weren't optimistic, we wouldn't be here.
Kat Callo It's like asking a runner if he or she will win the race. We wouldn't run if we didn't.
Bill Morrow A recession is not necessarily a bad thing. Great things happen in hard times. That's why I am so optimistic.
Click here to see the results of the first Grant Thornton Entrepreneurs' Insight survey