Wednesday 20 July 2011
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Wednesday 20 July 2011 |
By Luke Johnson
Everyone is a chancer when they start their own business. It is only later that they can afford to be respectable. That is why the truly revealing chapters in a tycoon's biography are always at the beginning - those that deal with the formative period, when naivety, impatience and a lack of money often lead to slightly questionable behaviour and sticky situations. Consequently, the first million is not only the hardest but the most interesting.
When he was 20, Richard Branson ran an illegal record exporting scam, avoiding purchase tax. Virgin was raided by the Customs & Excise; he was arrested and forced into a substantial out-of-court settlement to avoid a criminal prosecution.
Mark Pincus, boss of social network gaming group Zynga, which is preparing a multibillion dollar initial public offering, recently stated about his initial endeavours: "I did every horrible thing in the book . . . just to get revenues right away."
Even Jean-Paul Bucher, founder of the Flo restaurant group, is said to have pushed the boundaries of what is acceptable in business early in his career before later reforming his methods.
Building an enterprise from scratch is always difficult, and the temptation to cut corners is almost irresistible - especially for entrepreneurs, who are by nature rebels and rule-breakers. A few are outlaws, most are in a hurry, and sometimes they let their ambition get the better of their morals. After all, in real life issues are often shades of grey.
Moreover, if everything was done precisely according to the book, few start-ups would have time to actually make and sell any goods. For example, in Britain, founders must cope with the new Companies Act, the largest piece of legislation ever passed by any UK government, and a tax code that is the longest in the world. I don't believe anyone involved in devising such monstrosities could possibly know what it is like to struggle to make a payroll. Given such onerous impositions, no wonder only those who are cunning and lucky remain solvent.
The most useful attribute in the early days of any undertaking is not an all-embracing sense of ethics but rather an ability to bluff with conviction - "sure, we can deliver to that deadline" - when in fact you have no idea how the task can be done. At that stage in the life of a company, shortcuts and a little sharp practice are almost obligatory. You need to persuade customers to trust you, suppliers and landlords to have faith in you, staff to work hard for you and banks and investors to back your vision. Carrying all that off is a high-wire act of chutzpah, exaggeration and a series of compromises between doing the ideal thing - and survival.
I have less sympathy for those in giant organisations that are found to have transgressed. They possess the resources and systems to do the right thing and have fewer excuses for straying across the line. And society is becoming very unforgiving: look at the recent uproar over the News Corp and BP scandals.
Of course, some sanctimonious critics expect universally angelic conduct from every company. Indeed, many corporates are now so weighed down by governance zealots that it is a surprise they are still permitted to make a profit. But, as businesses grow up, they do have to acquire a culture of unquestionable legitimacy, which is part of the price of scale and success.
Ultimately, commerce benefits from the rule of law and tax-compliant citizens - as long as the burden is proportionate. A successful entrepreneur of my acquaintance explained that in Russia, where he ran a trading business, few proprietors paid much tax or gave any attention to planning or health and safety legislation. Yet owners feared the authorities' demands for bribes, and no one valued corporations on decent multiples of earnings because of the risk of expropriation and corruption.
Business is about exploiting market imperfections ruthlessly, while staying within the law. It is not a vocation for the saintly; it is, however, the engine that has driven human progress for the past two centuries.
The writer runs Risk Capital Partners, a private equity firm, and is chairman of the Royal Society of Arts