Chairman's letters

24 January 2019

Guy Hands' speech at the LSE Alternative Investments Conference: Entrepreneurs and what makes them tick

Good morning. It is an honour and a pleasure to be here again, and to be speaking to such ambitious and intelligent people, and to the 0.00015% club. In terms of academic success, you are a rarer group than billionaires, sort of in the Kardashian-type level of rarity, or maybe I should say royalty. 

Today I would like to start by asking you the following question. How many of you are aiming when you leave your academic endeavours are planning to start up a small- or medium-sized enterprise (an SME)?  Please put your hands up. 

Of those who have put their hands up, how many of you had wanted your own business by 16?  Today, I am going to try and get you to think about starting your own business, and motivate you to reject the 'dark arts' of finance, management consultancy, law and accounting for the enlightened mission of being an entrepreneur.

Before I lost my way and moved to the dark side and became a financier, I was innocent. Indeed when I was 13 years old, I took a job at a local newsagent opposite the railway station in Sevenoaks, Kent.

It was a classic ‘open-all-hours’ enterprise run by a classic entrepreneur whose family had arrived as Jewish immigrants from Germany in the 1930’s. It opened at 4:30am in order to be ready to collect newspapers when the newspaper train arrived from London and did not close until after 10:30 each night when the last of the commuters had gone home.

I did several jobs at the newsagent, marking up newspapers for delivery, going out on the paper rounds, stacking shelves, but I was best behind the counter: I felt energised interacting with customers and practicing my banter, and I was fascinated by what they bought, even if it was only spending a few pence on sweets or a couple of shillings for a magazine. I was also allowed to sell some products that I produced or purchased myself in the shop. I worked there through to leaving school and loved it, in contrast to school, which I hated. At one point, I found myself working 40 hours a week: I’d be there before school, after school and on weekends.

My experiences with entrepreneurialism began early, not just through watching the owner of the shop choose stock, banter with his customers and motivate his staff, but also by working as an entrepreneur myself.

I started my own photography business at 16. Photographing weddings, portraits, and, the bane of my life, pets. But my most successful financial experience in photography started as an accident and is today what the norm is when doing school photos.

I was asked to shoot an entire school to provide student portraits for the proud parents, and unfortunately the photo-processing lab misread my badly written instructions and underdeveloped all the rolls of film.

As it was not possible to arrange a reshoot, I decided to send all the parents the pictures at a knocked-down price of £1 per child; normally I would charge £5. The take-up was almost 100 percent, whereas my normal take-up was between 10 and 20 percent.

Net-net, I made more money and had less hassle, even though the children’s photos were very, very, very grey.

It was a great business lesson for me and one I would use in the future: it’s not immediately obvious that reducing prices by 80 percent will lead to greater profits, but as industries like technology and the finance industry have shown over the last 20 years, there are a remarkable number of areas where it will.

Before landing my first post-university job that ultimately led me to founding Terra Firma, I tried my hand as a door-to-door salesman, selling double-glazing, encyclopaedias, cleaning products and eventually artists’ paintings. I opened my own gallery in Oxford while there as a student.

I cherish this period of my life prior to working in finance because I learned so much and had so much fun. Designing a sales pitch, learning to read people’s reactions, discovering what makes a sale and what destroys one, and just how much in sales comes down to emotional connection and how little any of this had to do with intellect, was a revelation. No one likes to admit they bought a pair of shoes because they liked the sales person's banter but I have some powder blue crocodile shoes which perfectly prove the point.

If I hadn’t joined Goldman Sachs after graduating from Oxford in 1982 I would have moved down to Cornwall opened an art gallery and a wine bar, learnt to sail and continued with my photography. A large part of me still hankers after this dream.

I feel this way even though the recession of the early 80s left me £40,000 in debt. It didn’t put me off following an entrepreneurial path, it just delayed it for 12 years.

I founded Terra Firma’s predecessor, the Principal Finance Group at Nomura in 1994; this was my chance to try entrepreneurism on a much larger scale than the gallery. I arrived at Nomura having left a secure job at Goldman Sachs as their Head of Global Asset Structuring. Leaving meant taking a pay cut of 95 percent and taking full responsibility for the pay and costs of my team. I was taking a huge risk, not just for myself but also my family. If this didn’t work out I would have had to sell the house and give up on my dreams. But I had to try: the urge to be an entrepreneur was just too strong and only by creating something and taking risks was I going to have any chance of being satisfied. Thankfully, it did pay off, and my passion for building businesses has never abated.

'Britain', Napoleon famously said, 'is a nation of shopkeepers'. This theme was picked up by Margaret Thatcher. Her parents ran a grocery store in Grantham and she applied some of the common-sense skills of running a small business to the nation’s affairs with enormous success. When she came into power in 1979 she transformed ‘enterprise’ from a dirty word into a favourable one. I was 19 at the time and her tenure as PM had a profound effect on me.

In the UK, small businesses account for 99.3 percent of all private sector businesses in 2018 and 99.9 percent are considered small- or medium-sized. The total employment in small- and medium-sized enterprises were 16.3 million: 60 percent of all private sector employment in the UK. These companies make up the very fabric of Britain and are central Britain’s economy.

It’s brilliant that we have so many successful FTSE firms operating country-wide, but it’s smaller businesses that not only generate wealth for the country but also are the true drivers of innovation and ideas. Napoleon’s remark was meant as an attack on the UK. Actually, it’s something we should have enormous pride in and take as a huge compliment.

And it’s not just in the UK: small businesses are incredibly important across the world. Healthy SMEs are essential for delivering a more humane and inclusive approach to globalisation and driving growth at a local level. While large international businesses get the headlines and have the ears of governments, the reality is that just as in the UK, internationally SMEs are the predominant form of enterprise. They account for 99 percent of all firms, and provide the main source of employment, around 70 percent of jobs across the world, and yet they have almost no voice.

You will hear a lot this week from the mighty and the great, who are attending Davos. They will tell you and the world what will make a better world, and yet, the people that will create that better world will not be heard. 

SMEs contribute collectively more to innovation, are central to efforts on sustainability and growth, and have been champions of diversity by creating opportunities for minorities and women. Sometimes SMEs grow into world beaters: take the likes of Dyson and Virgin, and do become the headline makers, but there are hundreds of thousands of small businesses in the UK alone that you will never hear of that are also incredibly successful.

Small businesses often have advantages over the bigger companies: their ability to think on their feet, take risks, create, invent, focus on the long term and give the finger to The Man. The company that would become RockStar Games was founded in Scotland in 1984 by a set of friends aged 19 to 20. They created games that changed the video game industry, games that were both iconic and controversial at the same time, such as Grand Theft Auto.

Big companies have many advantages that simply are not available to firms starting out or that are smaller. SMEs, for example, are less likely to obtain bank loans and have less access to credit than larger institutions. However, improving access to finance and finding solutions to unlock sources of capital is crucial to enable this dynamic sector to continue to grow and provide jobs. The government must address these issues, from the way businesses are taxed, how rates are applied, through to the fact that regulation is far more difficult for a SME to deal with than a large multinational.

With all these challenges, why on earth would someone want to become an entrepreneur and what does it take to run a small- or medium-sized enterprise?

The only thing I can tell you is being an entrepreneur normally gives you very little bragging rights at the sort of dinner parties the great and the good attend. Working at Goldman Sachs, McKinsey or a top law firm has kudos. Providing over 2 million meals a year, which the average McDonald’s franchisee does, is seen as a role that no one I’ve met at London dinner parties wants for their children, so why do it?

At the heart of it is the word entrepreneurism. Ambition, a willingness to take risks and super-human drive are key factors along with hard work and a willingness to make sacrifices. Since leaving Goldman, long hours have always been a part of my life, while Goldman often consisted of 80-hour weeks, running one’s own business is 24/7, 365 days a year; not even Christmas Day is sacred. Additionally, you will miss out on the things that in an institutional role, you can take for granted.

But hard work alone is not enough. Many people have the stamina to do long days, weeks and months. So why are they not all successful?

In the end it’s about creative ideas, innovative strategies, and setting achievable but tenacious goals. Ray Dalio, the founder of Bridgewater, the world’s largest hedge fund, says the key to effective goal setting is, and I paraphrase him, ‘pain plus reflection. It’s about adjusting your business principles each time you fail, and yet after failure, setting yet more audacious goals.’

But ideas, strategy and goals are no use without excellent execution. And often the best entrepreneurs are not the best operators. They need to build a team around them who can execute. Entrepreneurs are often mavericks who may be seen as wild and unrealistic. But with help from the right people their vision will often become reality.

They need help from practical people who can deliver on the vision, fleshing out the detail and making the dream a reality.

There is a tendency to see coming up with ideas as glamorous and alluring, as a more exciting part of businesses and the real reason things get done. But ideas alone are simply dreams, someone needs to be able to make things happen and good entrepreneurs learn this. Hopefully, quickly. 

In my case, for nearly 20 years I have had a vision for creating a unique wine and leisure development in Tuscany.  Finally, after 15 years, I have put in the right team, with the right winemaker, and I now have world-class wines scoring 95 points and up, but it took me five management teams to get there. I was the third person to take it on, the original entrepreneur tried to get planning in 1984 and finally, the leisure development, after 35 years in planning, hopefully will go ahead next year and it’s only in the last two years that I have finally got a team that can work together. I could speak for hours, maybe days, on the lessons I have learnt over the last 40 years and it’s the lesson you learn that will enable you as an entrepreneur to eventually succeed, though very few entrepreneurs ever succeed in achieving their own ambitions.   

One lesson I took a long time to learn is that as an entrepreneur you are the leader of your tribe, and you personally have to take responsibility for taking the team with you on the journey. You also, as an entrepreneur, need to be able to diminish their fears of failure in this uncertain world. The more difficult the situation and the more uncertain the environment, the more important this is. You need to take the calculated risks required to succeed. While being able to look at things differently and hold a contrararian point of view in the face of, sometimes, everybody else’s opposition. You need to break the norm yet reassure those investing alongside you, either with their money, or their careers, that it is all doable, it will be successful and it will be profitable.

I’m often asked if entrepreneurs are born or made. My feeling is that entrepreneurs are largely formed by the end of childhood. Yes, they are born with some of the personality traits that are needed, but most I’ve met, were heavily influenced by their experiences as a child. By 16, there has to be an innate desire to be entrepreneurial. A willingness to go out on one's own, to take risks and look for opportunities others might shy away from, a curiosity and creativity to extract value from places others might not look.

But alongside taking risks they have to have a desire to survive and for self-preservation and to temper things so as not to risk everything on a single throw of the dice, even though to outsiders, it often looks like they are. In reality, most entrepreneurs have a realistic Plan B, even if Plan B might, for most people, be a path they would not wish to tread. Then they need to surround themselves with people who have different skill sets and different areas of interest. People will provide a breadth of information from which to gather insight needed to create one's vision. Insights come from the most unexpected places, be it while standing in line at a coffee shop or talking to the stranger sitting next to you on an airplane.

Entrepreneurs have to remain open and receptive, willing to change direction as the situation changes, or to get new information. Unlike operators, who look to create consistency of action, entrepreneurs are looking to make changes continually.  

The world’s largest fast food service, McDonald’s started with two brothers, Richard and Maurice McDonald. In 1940 they opened their first restaurant. They had something that combined the two areas of entrepreneurship I have mentioned: a radical idea and a practical application. They called it the ‘Speedee Service System’ and it would eventually revolutionise the fast food industry. They met with a man called Ray Kroc who went in to partnership with them. Kroc was a serial entrepreneur who at 57 had a lifetime of failures behind him. Failures he had learnt from, and meeting the McDonald's brothers was his shot. You may have seen the film ‘The Founder’, which tells the story. Kroc saw the potential to franchise the business and he went to work with great gusto, eventually buying out the two brothers. Today he is recognised as the founder of what McDonald’s went on to become.

McDonald's is the world's leading global foodservice retailer with over 37,000 locations in over 100 countries. More than 85% of McDonald's restaurants worldwide are owned and operated by independent local businessmen and businesswomen. 

In 2017, my family and I became the Development Licensee for the Nordic markets for McDonald’s which covers Norway, Finland, Denmark and Sweden. I did the deal along with my wife Julia and my son Richard; we are all very proud to be involved in a business that was borne from—and supports—entrepreneurs. The Nordic countries consist of approximately 427 restaurants of which more than 95% are franchised and is the clear number one Quick Service Restaurant operator in the region. That franchise system means McDonald’s is packed to the brim with entrepreneurs. Yes, they have a fantastic and established brand to work with, but work they very much need to do.

There are far more fast food options in the market now than there were in the 40s and 50s. So McDonald’s needs to keep on competing, and that’s where the entrepreneurial drive comes into play time and time again. In the less than two years we have been Development Licensee for the Nordics, we have introduced table service, vegan meals, and happy meals for children with no fries, no milkshakes and vegetable protein as more and more children are choosing not to eat meat, and to eat healthier. Indeed across our restaurants as a whole, beef is less than 50 percent of what we serve. What we’re proudest of is the number of employees who are sponsored to go to university, who otherwise would never had had the opportunity. 

The franchisees I meet are passionate. Their attention to detail is acute. They good ones are pained if they see a dirty table top or a burger with the wrong amount of sauce on it. It’s focusing on the details that make a business great rather than just good.

Many of you are thinking that once you leave academia, you will go out and join Goldman Sachs, JP Morgan, Shell, or another large corporation. My point today is that there is an alternative world out there, the one of small business, and I do hope that some of you will choose a more entrepreneurial path. You will always have people telling you that the safe path to success is to take the standard investment banking, finance, or private equity route, and I can’t tell you that those roles won’t have better bragging rights. But I hope you will consider the alternative of becoming an entrepreneur.

Thank you very much for listening.

Parts of this text were originally used in a speech at the LSE Alternative Investments Conference on 21 January, 2019.

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