COMING UP FAST: There's no disgrace in an honest business failure

COMING UP FAST: There's no disgrace in an honest business failure - It's how entrepreneurs gain experience. Are our risk-averse investors at last learning to give genuine enterprise a second chance, like their counterparts in America?

by RHYMER RIGBY
Last Updated: 31 Aug 2010

It's how entrepreneurs gain experience. Are our risk-averse investors at last learning to give genuine enterprise a second chance, like their counterparts in America?

Explaining his risk-averse philosophy to his son Bart, who has just tried and failed to become class president, Homer Simpson says: 'You tried and you failed. The lesson is never try.' Now, you might not think that the thoughts of a bumbling, yellow American cartoon character would find much currency with the UK's small business community, but they do.

The fact is that Homer's cynical sentiments will resonate all too readily with Britain's entrepreneurs. As the old cliche goes, if a US entrepreneur approaches a venture capitalist without a couple a failures under his belt, the VC will think something's wrong with him. 'Whaddaya mean, you've never screwed up? Are you saying you're perfect?' Whereas the converse is true on this side of the pond - the VC turns round and says: 'Well, if your last business went down the pan, it all looks a bit risky for me ...'

This might be a well-worn perception, but is it true any more? After all the dot.coms (and subsequent dot.bombs), are we still a nation of bankers who want nothing more than a secure return and who prefer the motto 'no pain, no pain' to the more exacting 'no pain, no gain'?

'I think there's an element of truth in this,' says Luke Johnson, chairman of the Belgo group and certainly no slouch himself when it comes to entrepreneurial activities. 'It's instructive that the founder of Mars went bankrupt twice.

He's an early case study of how taking risks and, if things go wrong, picking yourself up, dusting yourself off and starting again, is all part and parcel of US capitalism.'

But not part of UK capitalism. The UK's dislike of risk is a historic one stemming from a system where old money is somehow the best sort: only in Britain could the phrase nouveau riche be such a damning put-down.

The remains of these attitudes linger: the heart of our financial world, the City, is not a place that rolls out a red carpet for the small businessman.

Even the pin-up of every home-grown entrepreneur, James Dyson, didn't get his initial funding from British backers.

On the plus side, though, says Johnson, matters are improving. 'Particularly with the dot.com boom, attitudes have changed: so many middle-class graduates have gone bust.' Failure, albeit the fashionable kind, is now something that those who would previously have been bankers and lawyers are intimately acquainted with. 'It's refreshing, encouraging and realistic,' he continues.

'To imagine every business will succeed is fantasy.'

It certainly is. The Federation of Small Businesses reckons that a third of small businesses go under within their first three years of existence.

And the roll call of UK entrepreneurs with a dead or wound-up business or two behind them is impressive.

Mike Gooley flunked at prospecting for gold and diamonds and selling cosmetics before he founded Trailfinders, the backpackers' travel agency of choice. Katherine Hamnet, the designer of clothes-for-beautiful-people, ditched her first business, then worked for a French company that went under, before founding a fashion empire that's now worth hundreds of millions.

And no less a luminary than Peter Stringfellow has a liquidation and several closed clubs as well as three months in prison in his past.

Of the closures, Stringfellow said: 'My biggest lesson was in the recession.

Failure wasn't something I had tasted before. I was fighting the whole American economy. I couldn't do anything.'

Bespoke jeweller Theo Fennell, founder of Theo Fennell plc, echoes such sentiments. 'Anyone who has had uninterrupted success is a rare phenomenon. Failure is the only way you learn. The trick is to hurt as few people as possible with that mistake.

'When my jewellery business went into voluntary liquidation 15 years ago, my mistake cost me everything I had. There was almost no point in having a limited company. But I learned a lot and it made a big difference to what I did in the future.' Indeed, to compound his misfortunes at the time, a safe was stolen from his house; the safe was being guarded by his albino Alsatian, Rebel. Fennell returned one day to find both safe and Rebel gone. (And misfortune paid another visit last month when his premises were ransacked.)

'It takes an awful lot to get it right the first time around,' insists Fennell. 'It's a mixture of luck and help, and even then sometimes you have to jump off a cliff and try to fly. It's like trying to drive to the other side of Europe without a map. Often you don't get a second chance. It's something we need to get better at.' Investors, he adds, should be looking beyond nice, steady growth: 'You have to speculate to accumulate. The Americans understand that.'

That said, he continues, it's not as though the US is some sort of Utopia.

He believes that a halfway house between America and Britain is the answer.

After all, not all business failures are honest; companies can collapse for all sorts of nefarious reasons. Fennell has noticed that, when his own copyright has been breached by companies in countries with lax attitudes to failure and he tries to sue, the defendants' businesses mysteriously go bust - only to re-open the next day. And there are, of course, those who bankrupt their businesses just to cheat their investors; we do not want a climate that encourages this.

He also believes the differing attitudes to fashionable failure - 'The kind where everyone says: 'Oh dear, never mind'' - and unfashionable failure are ridiculous. It's a good point. Go bust as a plumber's merchant and people will view you with either opprobrium or sympathy, but if you pissed pounds 200 million away with your dot.com, people probably think you're cool.

On the subject of fraud, Fennell is echoed by Johnson: 'There's a fine line between encouraging risk and not encouraging fraud, because suppliers and so on clearly have to be protected. There will always be frauds and persistently dishonest directors, and these need to be banned.'

But, he adds, if the Government needs to do one thing to encourage an entrepreneurial culture, it is to sort out preferred creditors - that is, deciding who has first call on the monies arising from a liquidation. At present, Government creditors come first on any list; moreover, they are the only creditors who can charge interest in these circumstances. 'Customs and Excise,' Johnson points out, 'participate in more liquidations than anyone else. They force companies to the wall, destroying jobs. In the real world the Government should be the most understanding creditor.

But for all the usual New Labour bullshit, they haven't even acknowledged it.'

Things are bad, then, but getting better. Or maybe not so bad at all. 'The US-UK thing is a hoary old chestnut,' says Sue Birley, professor of entrepreneurship at Imperial College, London, 'and the trouble is that the more people repeat it, the more it becomes true.

But I don't know of any hard, supportable evidence that UK investors would put you down because you'd been in a business that has failed.'

Although media pundits may claim that we are a risk-averse nation, Birley says things have changed. 'Now people are prepared to have a go, knowing that the risks of failure are fairly high. There's a lot of buzz and interest around and we're the biggest VC country in Europe. I wish we could stop trotting out the 'US is wonderful and we're crap' line. As you can see, it's something that bugs me.' Most Brits, she adds, also suffer from a certain parsimony of the imagination when it comes to the US. America is not Silicon Valley, and Seattle has far more in common with, say, Reading than it does with a rural county in Mississippi, where half the populace still bitches about the Civil War.

And if America isn't Silicon Valley, nor is Britain all bankers in pinstripes shaking their heads at the owners of small businesses. In some areas, times have already changed much for the better. Undoubtedly the attention given to dot.com disasters has played a big part in this, but so too has the gradual rise of an enterprise culture, the spread of the American cult of the innovative businessman as hero, and the realization that it's cool - not spivvy - to be rich without being a lawyer or a lord. Moreover, the business community itself is coming round to the idea that sometimes people fail through no fault of their own. Says Fennell: 'You can plan the best open-air pop concert ever and on the day it can still rain.'

And anyway, there is a compelling reason to give those whose businesses have gone south a second chance: they at least know what doesn't work.

Says Johnson: 'You have to encourage people to try again. The history of business shows that people who try again tend to succeed.'

< IF IT ALL COLLAPSES ASK YOURSELF ... - Was it the right kind of business? Were the flaws fundamental or extraneous? - If the problems weren't intrinsic, why did things go so horribly wrong? Was it bad people, poor administration, onerous overheads or leakage? - Did you have enough money? You can't run a restaurant on a shoestring; in fact, you can't even run a shoe shop on a shoestring - Were you doing everything to the best of your ability? HOW TO DO BETTER NEXT TIME ... - Ask yourself: 'Is this really a great idea, or just one me and my mate Bob think is great after we've had a few?' - Decide how much money you'll need. Then double it - Get the right mix of people. If you're a hip and happening creative, you'll need a level-headed finance director to explain that locating your business in a converted windmill is a stupid idea. Also, get some good sales staff; these people are really important - Have a good 1-2-3 year plan for your cashflow. Then look at it every week. The bulk of bust businesses go that way because of cashflow problems

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