First published in the Sunday Times on 2nd August 2015.
“In the midst of life we are in death . . . Earth to earth, ashes to ashes, dust to dust.” Those sombre words, from the Book of Common Prayer, are used during burial services but might equally apply to the funerals of corporate bodies. After all, very few companies live long. They are born in optimism; some prosper, some reach maturity — yet almost all die eventually. But the elements are reused and become part of new enterprises. It is right and proper that companies are not immortal.
This cycle of corporate living and dying is why mankind makes material progress. It is healthy for firms to come and go; if particular businesses endured for ever, they would become over-dominant because of entrenched market shares, retained earnings and so forth. But instead they tend to ossify, which allows fresh talent to seize their markets and disrupt the status quo. Challengers such as Metro Bank, where I served as a director, are helping to force the oligopoly of the clearing banks to improve their service and tech- nology. This is the huge merit of competition in action. Creative destruction spurs innovation, which leads to higher standards of living.
I have experienced my fair share of corporate births and corporate deaths — or start-ups and failures, in the language of business. The closure of a business is always sad, but it is a necessary component of capitalism and a part of how society advances. As Apple’s co-founder Steve Jobs said in his famous address at the Stanford University commencement ceremony: “Death is very likely the single best invention of life. It is life’s change agent. It clears out the old to make way for the new.”
A dynamic economy is one that is spawning plenty of new firms; a country with a low level of start-ups is likely to be in decline.
Innovation in particular comes at a price. Bold ventures are essential if new industries are to be launched and inevitably their failure rate is high. But playing it safe in business, and indeed life, is no way to proceed. As the former US president Ronald Reagan put it so memorably after the Challenger space shuttle tragically blew up in January 1986 with the loss of seven astronauts: “It’s all part of the process of exploration and discovery. It’s all part of taking a chance and expanding man’s horizons. The future doesn’t belong to the faint-hearted; it belongs to the brave.”
The boldest quoted market is AIM, but in general it has been a poor bet when it comes to returns. According to the London Business School, 72% of AIM shares have lost money for shareholders since 1998. It is rather surprising the market has succeeded in raising tens of billions since it was established 20 years ago, with almost 2,900 companies going public on AIM in its lifetime. Arguably the market is a form of quoted venture capital in its high risk/high reward nature.
The distribution of returns I’ve achieved over the years bears some similarities to that of a VC fund, although strictly speaking I would not call myself a venture capitalist. According to the investment adviser Cambridge Associates, more than 60% of institutional VC investments return less than the original capital; 22% return between one and three times; 8% between three and five times; and 7% return more than five times the original capital. And it is this last category that matters — the super-winners. I have had fewer than 10 such big hits in my investing career.
But which firms deserve to survive, and which should be liquidated? Timing and people are everything. Embark too early, with the wrong management, and a project is probably doomed.
A huge array of factors can conspire to defeat any new business and failure is always hard to bear. When companies fold, dreams and savings get washed away, sometimes years of struggle count for nothing. Yet all failure is relative, and mostly temporary. Every top-performing entrepreneur I’ve known has a history of wrecks and hardship. And any success tastes sweeter if it has been gained through striving rather than with ease.
Undertaking turnarounds of troubled companies is another risky activity. Quite often they do not work and the firms go bust. If you are precious about your reputation, steer clear of them.
I have metaphorical scars on my back and actual holes in my bank account from failed revivals. But I take the view that fixing broken businesses is an economically important activity — jobs can be saved, creditors and shareholders’ capital salvaged, and hope for the future restored. As long as an attempted recovery is done fairly and honestly, even if it ends in bankruptcy, it can be a noble calling.
Several venture capitalists I know wear the losers they backed like badges of honour. They understand that there would have been no winners without them. They know the knowledge they gain from the bad investments frequently outweighs the intelligence gathered from the big hits. As Benjamin Franklin, one of America’s founding fathers, said: “Do not fear mistakes. You will know failure. Continue to reach out.”