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MANGING KNOWHOWbusinesses like building yachts or running sail-training courses. A company pub- lishing cookery books might decide to open a restaurant or sell gourmet holidays.
It happens. The two British companies which publish The Economist maga- zine and the Jane's defence titles both offer specialist consultancy services based on their knowhow.
The specialist publishing company will often have a unique vantage point within its industry because of the broad spread of its interests and, more specifi- cally, its total overview of technical development. This valuable, generalised knowhow is locked up in the heads of a few of the company's senior journalists.
With proper management it can be developed into consulting, venture capital or new companies formed to exploit new technologies. But entrepreneurs are needed for this kind of business development and most publishing companies lack entrepreneurs. Without them it can be dangerous to adopt this kind of busi- ness development based on professional rather than managerial knowhow.
The new media - videotex, cable TV, satellites, computer networks and databases - offer publishing companies a cornucopia of new opportunities to exploit their professional knowhow in media other than the printed word. Some publishing companies have responded to these possibilities in one way or another, by venturing into databases and videotex for example. So far - largely because of a chronic lack of the entrepreneurial resource - the results of such diversifications have been indifferent.
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disaster) and had observed there was nothing like it in the provinces.
Working in the evenings he wrote a 26-page business plan entitled 'Proposal to establish a chain of fast food bars'. He approached the only two UK venture capital organisations prepared to invest in small, high-risk businesses - ICFC (now part of Investors in Industry or '3is') and the Small Business Capital Fund (now Development Capital Ltd.) but was turned down by both.
Advertisements in the Financial Times and the Daily Telegraph plus other contacts elicited, after numerous setbacks and disappointments, the £26,000 of start-up finance needed. 'Cary's' restaurant opened in Bristol in March 1973.
After a hesitant start it made a small profit in year two and by 1976 there was enough cash to open a second restaurant. This was instantly successful and a third opened the following year.
In 1978 Cary sold two of the restaurants and went into publishing. He had developed a completely different business idea involving the exploitation of the knowhow he had accumulated during his search for start-up finance.
He reasoned that if there had been a simple way for him to present the bones of his restaurant business proposal to 200 or so 'people of the right sort', investing institutions and wealthy individuals, instead of having to rely on the 30 or so respondents to his advertisements, he would have been able to raise the money he needed more easily and more quickly.
So Cary founded the monthly Venture Capital Report to provide, as he put it, 'a marketplace in which people seeking risk capital and other resources for their business could present their propositions in some detail to several hundred potential investors, each of whom would be able to provide money, and many of whom would also be able to provide other resources'.
VCR now has about 900 subscribers, paying £180 a year each. Companies featured in the report are charged a nominal £100 cost-recovery fee and if they succeed in raising money as a result of appearing in the report they pay a per- centage commission to VCR on a sliding scale beginning at 4% of the first
£10,000 raised and reducing to 1% on sums over £30,000.
The company also sells over 1,000 copies each year of its £25 annual 'Guide' to venture capital.
In recent years Cary has found another, much more profitable use for his knowhow. His long experience in venture capital has convinced him that despite the great strides the UK venture capital industry has made in the 1980s there remains a serious financing gap at the bottom end of the market. Entrepreneurs and inventors with a new product idea find it very hard to raise the money needed, (typically £20,000), to finance the building of a prototype. The sum is too small for established funds to bother with and generally speaking such pro- jects are too risky for all but the very well-heeled private investor.
So Cary has leveraged his knowhow by connecting it with financial capital.
He has raised two specialist funds, Seed Corn Capital Ltd. which began with
£200,000 to invest and, more recently, Seed Investments Ltd. to which one of Britain's largest venture capital firms, APA, has subscribed £250,000. APA's leader, Ronald Cohen, acknowledges the venture capital industry's neglect of
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MANGING KNOWHOWthe small start-up and recognises how well equipped Cary is to run such a fund.
Cary and Cohen both realise that the size of the initial financing requirement has very little to do with the ultimate value of the investment. Cary is fond of citing the example of ARD, the US firm that contributed £25,000 to the start-up of Digital Equipment Corporation and whose investment later became worth more than £200m.
From Cary's point of view fund management dovetails very neatly into VCR.
The publishing side, though much less profitable, generates the 'deal flow' for the funds.
The structures of the two funds provide an interesting indication of how the relationship between knowhow, represented in this case by Cary, and financial capital, represented by the subscribers to the funds, is changing. Cary received a 10% 'carried interest' (that means he gets 10% of the capital gains without having to invest) in the first fund set up in 1983 but won a 20% carried interest in the APA-backed fund set up three years later. In venture capital, at any rate, the bargaining power of the professional seems to have doubled in three years (see Chapter Fourteen for a fuller discussion of changes in bargaining power).
• Venture News
If Sweden has an equivalent of Lucius Cary he is 34-year-old Lars Lindgren. He has been on the move for most of his life and has always been interested in information and in starting new projects. When still at university he got a part time job as a public relations manager for the quoted Swedish development company, Hexagon. He learned to handle networks of both the computer and personal kinds and picked up knowhow about producing reports, press releases and newsletters.
His entrepreneurial qualities began to blossom during the venture capital boom in Sweden in 1982-3 (the British venture capital boom had begun a few years earlier). Venture capital appealed to Lars Lindgren. There was a pioneering feeling to it, a flexibility, and an emphasis on human contacts that suited his inclinations and aptitudes. He wanted to be involved and felt that with his back- ground some sort of information activity would be most appropriate. While pondering how to start he made contact with Venture Economics of the US, an information company that had built a database containing information about US venture capital suppliers and all the companies they had invested in. Venture Economics also publishes newsletters coveting recent investments and statistics about the venture capital industry culled from its databases. Perhaps, Lindgren suggested, this could be something for Sweden. Venture Economics, which had just started up in the UK, advised him against it. Founder Stan Pratt said the Swedish market was too small.
But Lindgren was not to be deterred so easily. During 1984 he collected together as much information as he could about the Swedish venture capital market and in the autumn of that year he left Hexagon to start his own company, Venture News. The first year was spent collecting addresses and phone numbers, making contacts and building a simple database containing all the
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companies Swedish venture capital firms had already invested in. In the process he learned to handle a personal computer.
The first year's revenues were about £40,000 in the form of subscriptions to his newsletters and access fees to his data and files of clippings from newspapers and magazines about venture capital all over Sweden. Stan Pratt was impressed.
He appointed Lindgren the agent of Venture Economics in Scandinavia with the rights to sell the US database.
The following year Lindgren began to build a similar Swedish database on his computer, started constructing a pan-Scandinavian network of partners and set up a Venture Capital Club where venture capitalists meet for lunch once a month.
In 1987 Lindgren's entrepreneurial spirit alighted on another enthusiasm. He bought a TVR, a specialist British sportscar, and was so impressed by it that he requested and was granted the agency rights to sell the TVR range in Scan- dinavia.
• Lessons to be learned
Venture Capital Report and Venture News are good examples of what knowhow- orientated business development is all about.
An entrepreneur finds an unexploited knowhow area, collects as much infor- mation about it as possible, establishes a network of contacts, finds tools to process the information, constructs a vehicle or vehicles for selling it and goes ahead. It matters little, for the purposes of our argument, whether Lucius Cary's nine-year old VCR and Lindgren's much younger Venture News continue to prosper, though we personally hope they will. What is interesting about the examples is the light they shed on the methodology of knowhow company formation and development in the information society.
Let us try to summarise the characteristics of the knowhow company that shape the methodology of its development:
LITTLE NEED FOR FINANCIAL CAPITAL The need for financial capital in new knowhow companies is normally very low, consisting of little more than money for a small computer and a living wage for the first year. The entrepreneur may supplement revenues by consulting in the beginning but if the business idea proves viable he or she will normally, after the initial period, concentrate wholly on developing it.
LOW BARRIERS TO ENTRY It is easy to start a knowhow company if you have the knowhow but though the need for financial capital is normally fairly low, ideas are very easy to steal. The entrepreneur must therefore find ways of protecting his niche from competitors. It is rarely possible to patent abstract business ideas of this kind so effective defences are more likely to be found in agreements with suppliers or clients about exclusive rights, or something unique like a database, rare personal knowhow or ability or an unusually large and valuable personal network. Taken together these defences can prove just as strong as patents and may last much longer.
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MANGING KNOWHOWINTERNATIONALISATION The business ideas of Cary and Lindgren are simi- lar; the supply of information and related services about venture capital. Neither of the business ideas are restricted to the UK or Scandinavian markets. It is theoretically possible either to export knowhow about UK and Swedish venture capital abroad (not a large market) or to start similar operations in neighbouring countries. Venture Economics of the US has already begun to 'internationalise' its service and thus to export its knowhow. Cary and Lindgren have similar opportunities. There are always numerous possibilities for business development in knowhow companies. Ideas are seldom the limitation.
HUMAN NETWORK New knowhow companies characteristically try to reach agreements and form friendly relationships with customers, suppliers and other companies in similar industries. This is a way of reducing risk, of course, but it also helps to expand the network through which flows the information that is the knowhow company's raw material. Cary's relationship with APA is a good illus- tration of an interactive network. APA began as a customer of Venture Capital Report and has now become a joint venture partner. Cary has leveraged his knowhow by winning access to APA-raised capital and APA has leveraged its capital by gaining access to cary-accumulated knowhow.
LOW LEVEL OF MANAGERIAL KNOWHOW A knowhow company is rarely started by an entrepreneur with a high level of managerial knowhow. More often than not the companies are set up by professionals who see a chance to develop into entrepreneurs. The first years of the young company will be riddled with mistakes resulting from its lack of managerial knowhow. It makes no difference whether the company consists of chartered accountants or advertising copy- writers; they invariably fall into most of the traps that lie in walt for inexperienced managers.
DUAL EXPERTISE The most important task in the start-up phase is to master both the professional and the managerial skills. The former can be more or less taken for granted; it is lack of the latter that makes the early years so risky. A study by statisticians at Britain's Department of Trade and Industry based on VAT returns has shown that the first three years of a young company's life are by far and away the most risky. Corporate mortality rates drop dramatically thereafter. In this respect knowhow companies are no different from any other kind of company although it is probably true that they are more at risk from managerial mistakes than most and, because they should not be great cash con- sumers in the early stages, less at risk from the classic cash flow crisis. Most start-ups in knowhow areas consist of groups of skilled professionals who break away from existing organisations and begin with virtually no managerial skills.