If there’s one thing the Americans are good at, it’s business. They have got it down to a fine art. Take the list of the most powerful companies and of the richest entrepreneurs in the world and the US dominates each. In fact take any industry or vertical sector, and we’re willing to bet that the US is top. So what is it about them that makes them so good at business and what can we learn?
The US was nicely summed up in a speech given by Marathon Oil director, lawyer, marketeer and former US Ambassador to the UK Philip Lader. “America’s trademark openness to innovation warrants emulation. New discoveries are welcomed; risk-takers are celebrated. On any given day, 6% of the adult US population is trying to start their own business. That explains how, in 1995, 13% of American employees worked for businesses which did not even exist in 1990.” So what should we and can we emulate? Over the next few pages we’ve taken some key points on the US and expanded on them. However, this is no substitute for going there. If you really want to learn, get on a plane. It’s cheap and we guarantee you’ll come back full of ideas.
THE LATEST CRAZE
The most obvious thing to learn from the US is what sells and what doesn’t. If you look at any major niche you’ll find that the US has done it first, yet when it comes to moving out to the rest of the world there are very few US companies that will move out further. Why would you bother when you have the largest market on your doorstep?
However, examples of people who’ve gone to the US and brought ideas back are legion. The smoothie market only exists in the UK because Harry Cragoe of PJ Smoothies happened to be at a beach party in California and came across these fantastic new drinks. The UK market for them is now worth £80m a year and growing fast.
Coffee Republic co-founder Bobby Hashemi came up the with idea for the company from a visit to Seattle where you’d find coffee shops on every street corner, and people were addicted to things called lattes. Not all US trends are guaranteed to move to the rest of the world quite so easily, and the US can, and will bite back.
Internet auction site eBay launched in 1995 and FT journalist Tim Jackson saw how well it was doing and launched it’s UK equivalent QXL. QXL did well for a few years until eBay’s French-born founder Pierre Omidyar decided to look at what was happening back in his native Europe, so he passed on control of eBay to Hasbro executive Margaret Whitman and went to Europe.
In an article in Business Week in 2000, QXL chief executive James Rose said: “QXL has the lead, with 5% of the audience, compared with eBay’s 1.2%. eBay will end up being No. 2, but not more.” Since then QXL has had a name change to QXL Ricardo and has gone on to be successful in niche markets such as Denmark, Norway and Switzerland, but it’s a very small player in the UK. However, the overwhelming product placement publicity on US TV and cinema means things that do happen in the US will get a lot of free publicity. Coffee Republic probably owes some of its success to Niles and Frasier Crane’s weekly chat around the perfect Latte.
FINANCE
A root cause of the difference between the US and the UK approach is how entrepreneurs are and have been viewed by financiers. In the US the startup entrepreneur is now part of the country’s DNA. The people who developed new technology in the garage in the 50-60-70s, have now turned into a band of experienced ‘serial entrepreneurs’. These experienced business people have a record with several businesses, either because they keep generating new ideas, or because they have sold their previous ventures and gone on to another new business.
So what keeps these people in the game? Certainly, there are huge potential rewards for success. Founders are recognised, with large grants of share options or stock, that will ensure they grow rich from a successful enterprise. But there is also a high tolerance for failure. Rather than being a stigma, having at least one ‘crash and burn’ under your belt is viewed as a sign of experience.
Investors understand that most new ventures will fail, and so will back entrepreneurs again if it appears they have the tools to succeed later. In the UK, there are comparatively few serial entrepreneurs; many are known only for their failures – their successes too easily forgotten. At IPO stage, founders are often encouraged to stay with the company – with a two year or more lock-in – at a time when their US counterparts would be encouraged to have another go.
The backing given to companies in the US is not simply financial. US venture capitalists have traditionally been highly involved with their investee businesses. Most investments entail, at least, one directorship and the venture capitalist will expect to spend a substantial amount of time with portfolio companies reviewing business plans, offering advice and generally nurturing the development of the company. Investments are viewed as having a relatively long path to exit – usually several years.
While asking for a board seat in the UK is common, it is rare for a UK venture capitalist to exercise that right. Good venture capitalists are actively involved in the management of a company with regular calls and meetings, but this support is still sold as a ‘value-added bonus’.
With the similarity in approach to venture investments in the US has come standardisation of documents. By and large, there is a standard set of terms and standard language no matter what the area of business. Venture documents are so standard that it is often hard to tell which firm has produced the documents. Where as in the UK every contract is different, which means that once the lawyers looking at the contracts are accounted for, doing the deal is more costly, complex, and time consuming.
Typically, investors focus on the following major elements: registration rights, anti-dilution, liquidation preference, drag-along and tag-along rights, whereas in Europe the focus is on more extensive protective provisions and how to claw back founder stock in the good leaver / bad leaver provisions. In the US, even bad leavers keep their vested stock.
WORKING PRACTICES
Be dynamic and flexible. The US approach is to follow the money, if the money moves then so should you, and you can only do that if you’re flexible. The US workforce has become very flexible for two reasons: fear and immigration. More than 43 million jobs were lost in the US between 1979 and 1995, affecting nearly one-third of all American households. The old jobs in old companies were slow to change when the market went under, where as those new small companies who were quick thinking, and even quicker changing management succeeded, and people in all businesses have been quick to grab this.
SKILLED MANAGEMENT
America has more managers than you would imagine, it also spends huge amounts of money on training its managers and everyone else that counts. Which is why America is the world’s largest training market. In 1995 there were 13 million Americans who held the position of executive, manager, supervisor, and other management, and that accounted for 9.92% of the total labour force (132 million). But in 1997, American companies spent $10bn on management training, almost 17% of the budget. But when you compare this to the rest of the world it gets even more interesting. America’s labour force accounts for 4.89% of the total world’s labour force; but America’s labour force training cost accounts for 35.29% of the world’s total training cost.
MANAGEMENT STRUCTURE
Up until the middle of the 1980s, American companies used business practices associated with an industrial economy, such as a corporate bureaucratic heirarchy. These practices were designed to meet the demands of mass production. However, the US is now geared towards a knowledge-based economy, where knowledge is the key factor of productivity and hence learning is a key part of work, particularly higher learning. From a base of just a few in the 80s, there are now more than 1,500 corporate universities in America, not including numerous small training departments affiliated with various companies. Businesses such as Motorola, Xerox, and General Electric, build their corporate universities as learning centres, which is where much of the $10bn of management training money is spent.
WORKING WITH FAILURE
The US accommodates and doesn’t put-down failure. If you have failed, then chances are you’ll bounce back and do better the next time. Fail in the UK and you’re blighted for life. Back to the Ambassador: “There is merit, we know, in the convictions that winning is honourable, that creating wealth is valuable for society, that expanding opportunities through education is imperative. Self-improvement is openly sought by Americans; failure is not terminal.” Take this extract from a 1995 Bill Gates column: “Frankly, one of the challenges facing Microsoft is that many of its employees have not suffered much failure yet. Quite a few have never been involved with a project that didn’t succeed. As a result, success may be taken for granted, which is dangerous.
“With this in mind, we have deliberately recruited a few managers with experience in failing companies. For example, I hired Craig Mundie at the end of 1992 to oversee many of our efforts to develop the ‘information highway.’” A decade earlier, Mundie co-founded Alliant Computer Systems, which eventually went out of business as the market for supercomputers dried up.
“Mundie understands his mistakes and drew keen lessons from them. I think this is a reason he has proven to be among our ablest vice presidents. I’d hire 10 more just like him, if I could.” This would never happen in the UK, and it’s probably one of the reasons why we – as a country – never get truly great companies.
SKILLED WORKFORCE
It’s often forgotten, but your real assets are your people. Knowledge is always embodied in human beings (as “human capital”) and their work. In a knowledge-based economy, the biggest challenge does not come from natural resources and conditions, but rather from a shortage of qualified workers.
In America, as recently as the 1950s, 20% of the workforce was professional, 20% was skilled workers, and 60% was unskilled workers. By 1997, while professionals continued to be 20% of the workforce, less than 20% were unskilled workers, while more than 60% are skilled workers. However, if the skills aren’t there American companies have never been afraid to go and train them themselves. I have sat through lots of interviews where executives have moaned that universities don’t train people for work, and they’re right – that’s what apprenticeships are for.
EDUCATION
There are a few things that it would be nice to learn from the US, but unfortunately the one big thing stopping us from learning those lessons is the government. Entrepreneurship starts young in the US. According to a 1997 Gallup study, seven out of 10 high-school students say they want to start their own business. A survey in the UK would be lucky to find one in 10. But it’s not just the young. The US higher education system is huge, highly motivated and very entrepreneurial. A US professor is an educator and venture capitalist all rolled into one, academics are not dragged kicking and screaming into industry like the UK, instead they tend to be the ones who not only come up with ideas but also finance them as so many of them will have quite close links to the angel and VC communities. In November 2003, Chancellor Gordon Brown made a speech to the CBI, in which he made strong reference to US-UK technology transfer. He said there would be incentives for UK universities to become more entrepreneurial and link research and technology with US universities including specific mention of a technology transfer fund to foster exchange of ideas across the Atlantic. “We are investing an extra one and a quarter billion pounds a year to expand the science research infrastructure and training more skilled scientists and engineers,” he said. So, perhaps, now is the time to ring up Harvard or Stanford and ask if they want to send a few graduates over to the UK.
Lastly, a few myths about the US. American companies do not live in a world free of red tape. In many places in the US, particularly economic giants like California, the levels of government and legal bureaucracy exceed the UK. Plus the individual state and local taxes make anyone contemplating running a nationwide business think again. And lastly there’s no truth in the rumour that George W Bush made the remark to Tony Blair, “The problem with the French is that they have no word for ‘entrepreneur.’”
