Where now for Britain's global ambitions?

Two recent business reports have made me reflect on the future of British business in the global market place.

HP's acquisition of Autonomy and Eric Schmidt's (the Chairman of Google) delivery of the MacTaggart lecture shows how we can create fantastic companies but we may not have the vision to create world leading businesses.

Britain is the birthplace of some of the world's greatest inventors. From Lord George Murray's invention of Britain's first optical telegraph, to John Logie Baird's first practical television, to Sir Tim Berers-Lee's creation of the world wide web, we have proven time and time again that we are capable of being at the cutting edge of thought, technology and commerce. Yet in today's global market place I struggle to name a world beater to sit alongside Google, Apple and Microsoft!

The Thatcher years (and the subsequent Blair/New Labour project) as discussed by the then Chancellor Nigel Lawson told us to focus on services and manufacturing - "There is no adamantine law that says we have to produce as much in the way of manufactures as we consume. If it does turn out that we are relatively more efficient in world terms at providing services than at producing goods, then our national interest lies in a surplus on services and a deficit on goods". We could be market dominant in banking, legal and accountancy. The problem as I see it is that unless we have industries to service we have no need of a service industry (and I include computing and the "cloud" as manufacturing industries).

"We can service the world" I hear people say, but why should others use us once they have sucked the knowledge from us?

As a personal example of this, I was CFO of Laird plc's European Technology business. I asked Sir Nigel Keen (Chairman) and Sir Peter Hill (CEO) how long Laird could stay UK and independent. The Technology business was head-quartered in the United States, its major manufacturing units were moving to China, where its major customers were based. Within eighteen months we had shut down all the UK manufacturing and R&D plants and all that was left was the offices in Pall Mall. Peter's response was that London is where the money is. I pointed out, that, when the customer is in the Far East, the development is overseas and the manufacturing is in the Far East, it won't be long before the money comes from there as well.

Recently Laird itself was the target of a hostile takeover bid by Cooper Industries, which it managed to rebuff, but the problem still remains, with little IPR retained in Britain and the finance world moving towards Hong King and Asia, how long can we last on the world class stage?

Against this backdrop Eric Schmidt gave his lecture, citing Lord Sugar's comments on the Apprentice that "engineers are no good at business" (err...Steve Jobs, Larry Page, Bill Gates, James Dyson...absolutely Lord Sugar!) and Schmidt went on to point out that there was not enough emphasis on technology in today's schools "I was flabbergasted to learn that today computer science isn't even taught as standard in UK schools," he said. "Your IT curriculum focuses on teaching how to use software, but gives no insight into how it's made.". This is shocking and does not bode well for our future generations.

He also touched on something that I have felt for some time "The UK does a great job of backing small firms and cottage industries, but there's little point getting a thousand seeds to sprout if they are then left to wither or transplanted overseas. UK businesses need championing to help them grow into global powerhouses, without having to sell out to foreign-owned companies. If you don't address this, then the UK will continue to be where inventions are born, but not bred for long-term success." As proven by the sale of Autonomy to HP.

I don't know the answer, but it must start with education. If you have any thoughts please feel free to post below or email me directly at michael.pay@emcltd.co.uk.

Do you LinkIn? Really LinkIn?

As an earlier adopter of LinkedIn, I was always impressed with the concept. Originally, it was heavily used by recruitment consultants to find permanent and contract staff, over the past five years since I joined, the user base has exploded and now has over 100 million users - my own network of 320 gives me access to a staggering 5.25 million of these!

The interesting thing for me, though, is not how it has grown, but how people use it.

As those of you who are LinkedIn to me will know, I am a prolific poster of updates, blogs, snippets and polls. I use it as my primary networking tool to promote our business, my clients and, of course, myself. However, a large amount of users only "LinkIn". They see it as a race to get the network base up and then do very little else.

I expect that many of you will know these things but I thought I would put a few tips, based on my experience, of how I get the most of it.

• Build your profile and focus it on what you want to use LinkedIn for. It is not a resume, but should give the reader the ability to engage with you at the level you want. The new "skill" section is very useful for promoting yourself in searches. 

• Get your headline right. I have seen some great headlines and some really awful ones. The headline is the bit that comes up when people view you in searches, etc, and like any advert should stand out from the crowd. Just having "Manager - ABC" does not say a lot about you, especially if "ABC" is not a known name - a better one would be - "Manager responsible for Finance at ABC, specialist in pharmaceutical research". 

• Choose your connections. The quickest way to find people that you know is to import them from your mailbox. Under "Connections" use the "Imported Contacts" tab to select and invite people who you already do business with. 

• Tag your contacts. Tagging contacts into groups allows you to sort your own list and allows you to promote yourself in different ways. For example I use "Introducer" to promote our services, "Client" to keep them informed of business issues and discussions, and "Professional" to seek advice; 

• Join a Group...and actively take part in discussions. This helps to build your credibility both inside and outside your network, increasing your "digital footprint" and proving that you are an influencer who is able to assist potential targets. 

• Search for targets. LinkedIn is a business tool - it's not Facebook or Google+ -it is about promoting you and your business, so search for relevant people using the search tool and then work out the best way to interact with them. If they are a premium user they will see that you have looked at their profile, and may well, as I do, contact you to find out why you viewed them. Alternatively email them through "Inmail", LinkedIn's email system, or ask to be referred to them through a contact. But, make sure you are polite and explain why you are interested in contacting them.

• Participate and share. If you see something interesting or relevant to others, pass it on. The best networker off the web that I know, never asks for anything, he just connects people who always remember that so and so introduced them and they benefited from it, In the longer term he always ends up getting business from them. Do the same on LinkedIn - help others to promote themselves and they will do the same for you. 

• Post up dates - if you are active on LinkedIn you will be seen by your contacts and by doing so you will stay at the front of their mind. When people ask for help it is usually those nearest to hand - the web is just the same. 

• Find out who is Linking to you and why. LinkedIn is not a race to have the biggest network. It is about creating a network that is a quality one, where you can help the network and the network can help you. So, if you do not know someone and can not understand why they are trying to connect to you, ask them and, of course, if subsequently you find out that they don't benefit your network, purge them to keep your contacts relevant. 

And finally, pay for it - yes, I can see that that may surprise some of you, but for $40 a month it increases what you can do massively...

Death by a thousand patents.

The announcement by Google to acquire Motorola Mobility on 15 August 2011 for $12.5 billion has included much speculation and discussion about the patent library that comes with it. During the investor conference call, Larry Page noted the importance of Motorola's patents and how it would help defend Google in the ongoing patent infringement law suits from Apple and Microsoft. The deal itself follows July's announcement that the bankrupt Nortel Networks had sold its patents to a group including Apple, Sony, Microsoft and RIM for $4.5 billion.

So, you may ask, what has this to do with me? Big companies, doing big deals and fighting each other over patent infringements..."Plus ça change".

Whilst the headline numbers are beyond many people's comprehension the underlying impact on technology and software companies is potentially far reaching in terms of future innovation, investment and reward.

I didn't realise until reading an article about Facebook's search patent, which was granted in February, that these mega technology companies were patenting "ideas" that you and I take for granted. The latest to be approved for Facebook "Giving gifts and displaying assets in a social network environment" describes itself as follows:

"A system and method is described for giving gifts via a social network and displaying icons representing assets that have been acquired via the social network. In various embodiments, the assets include real assets, digital assets, and virtual assets. Digital assets that have been acquired via the social network environment may also be displayed. In some embodiments, the assets are received as gifts or in trade from another user of the social network environment."

Now, I am no patent lawyer, but this latest one, which has taken over four years to be granted, sounds like it changes the landscape for many companies. Just think, if there is a social element to a site, where you can give a gift voucher or buy and sell products or, services, then this now, potentially, infringes Facebook's patent. Even if your site was created five years ago it now faces the threat of infringing one of the biggest company's in the world's patents!

Patent "Trolls" are busy applying for, and the US Trademark and Patent Office is granting, patents that appear to be just ideas and bear no commercial reality. The statistics on the value of infringement claims bears this out - according to PriceWaterhouseCoopers report on patent lawsuits - between1995 and 2001, practising entities were getting an average of $6.3 million compared to non-practicing entities being awarded $5.2 million. Between 2002 and 2009, the practising entities fell to $3.9 million, while the non-practising entities soared to $12.9 million.

The impact of this is that with large companies spending mega-bucks on buying defensive patents investment in new technology must reduce, and with patent trolls and even the likes of Facebook, creating patents on what I consider to be commercial ideas, innovation due to the the threat of infringement will at best be hampered. Taking the argument to the "n'th" degree the reward will end up going to the already largest companies, such as Facebook, Google and Microsoft who can pump patents and stifle competition from whatever quarter.

Do we have Venture Capitalists in the UK?

I recently carried out a poll on LinkedIn asking are UK Venture Capitalists worthy of the title "Venture"?

Having spent twenty years in business working with everything from start-ups to multi-nationals, it struck me that the UK appears to have had fewer "game changing" businesses in the last 30 years than we have historically managed to incubate. Why is this? A lack of finance or a lack of ambition? 

Certainly we have had the ideas - Sir Tim Bernards-Lee is the father of the world wide web and whilst, he never wanted to make money from it, it shows that we are not short of the world changing ideas. 

We can even create the initial monetisation of other peoples ideas - Friendsreunited.co.uk was one of the first social networking sites to make money. 

So, is it that because the new generation of internet/web entrepreneurs on the other side of the Atlantic are more interested in creating a world changing business than making money, recognising that that comes later, whereas we, the previously philanthropic Brits, are all about cashing in the chips? Just look Tweetdeck who sold for £25m. It had the best application for using twitter, and commanded is believed to have controlled the highest areas of monetisation through its userbase - surely that must have been worth more that £25m to a billion dollar twitter?

Anyway, back to were I started...skoosh.com is one of these businesses - a game changer - disruptive to the likes of expedia.com, lastminute.com and booking.com. The technology has all been developed in-house and the business is making money and should be in the Sunday Times Fasttrack 100 next year. Most of its sales are overseas and the model is proven to be incredibly scaleable. So, earlier this year, we (I am the FD) decided to look at the possibility of taking in some VC money to accelerate the business. What became apparent during the beauty parades, was that there are very few venture capital firms in the UK. As one leading (true) venture capitalist put it "everybody from a growth fund, to a VCT, to corporate fund adopts the moniker VC". So it made me start to re-evaluate the moniker "Venture" capitalist and I asked a poll on Linkin whether the VC's were worthy of that title. 

Eight out of ten respondents thought not. One person commented: “In my experience as a commercial lawyer most VC funders are aghast at any concept of risk-related lending. They often seek to impose belt and braces conditions which, in short, turn the whole approach to that of a fully secured lender but at rates of return which suggest otherwise.”

Another added: “VC's in the UK are risk adverse, stay away from medium/long-term projects and anything that isn't providing positive cash flow within months is rejected promptly. In addition they are expecting returns greater than 18%.”

A third person commented: “I'm not sure there was ever really that much. Until the early 80s 3i were more or less the only show in town, and for a while in the late 80s there were a few small funds looking at early stage stuff, but they disappeared in the early 90s downturn. Ten years on, a few flung money at dotcoms, but otherwise the real risk capital has always been provided by the 3Fs – family friends and fools!”

In America, the market is booming. Bubble or not, VCs battle with other funds and entrepreneurs to invest large amounts in pre-revenue start-ups, social commerce and technology businesses. 

They obviously have the money; it’s is estimated that Sequoia Capital invested $18m in Google and Facebook and returned $6bn, so they can, on their own, write over 1,000 $5m cheques and still be ahead of the game! 

In the UK and Europe, VCs appear to be focussed on more established companies where they can financially engineer a return on their investment in the same way that Private Equity houses work. Apart from the ‘big four’ (Seqouia, Balderton, DFJEsprit and Accel), UK firms who prepared to back early stage or potentially explosive growth companies with development capital are difficult to find amongst all those who call themselves venture capitalists - maybe the UK's trade association, the BVCA, should look into who is and who is not a "venture capitalist"?

Groupon the next Enron?

OK so it probably isn't fair to "group" Groupon with Enron, Tyco, and Parmalat to name just three companies who have had accounting scandals in the last decade, but really, where do Directors and their advisors/auditors draw the line at creative accounting and potential misrepresentation of financial information.

Groupon Inc is looking towards an IPO and filed its Form S-1 on 2 June with the SEC. The form is the draft prospectus for the business with all sorts of legal, accounting and business information about the company, which is expected to be used by potential investors to determine whether they will invest or not.

Early on in the prospectus is a letter to potential stockholders from Andrew D Mason, one of the founder's of Groupon. Included in the letter is the following comment:

"We don't measure ourselves in conventional ways. There are three main financial metrics that we track closely. First, we track gross profit, which we believe is the best proxy for the value we're creating. Second, we measure free cash flow—there is no better metric for long-term financial stability. Finally, we use a third metric to measure our financial performance—Adjusted Consolidated Segment Operating Income, or Adjusted CSOI. This metric is our consolidated segment operating income before our new subscriber acquisition costs and certain non-cash charges; we think of it as our operating profitability before marketing costs incurred for long-term growth."

Lets take each performance measure in turn:

• Gross profit - fair enough, but it depends on how one creates it 
• Free cash flow - often used by unprofitable companies but that makes sense with their business model, subject to their caveat in risks "our operating cash flow and results of operations could be adversely impacted if we change our merchant payment terms or our revenue does not continue to grow", in other words, if they have to change terms they could hit a problem. TechCrunch highlighted this issue back in June pointing out that Google's payment terms of 80% in 4 days was more than twice as fast as Groupon's.
• Adjusted CSOI - and they hit us with the biggie - they measure profit before "new subscriber acquisition costs and certain non-cash charges"!

What, you measure profit before marketing costs and, for non-cash charges read, share based payments! Well, forgive me for being naive, but do you really expect people to ignore probably one of your biggest overheads - marketing costs?

If you run an internet business, you'll know that one of the biggest spends is the cost of acquisition of new clients, whether it is through pay per click channels, affiliates or even TV and Radio. To ignore these when describing your business performance is ludicrous. Try telling that to the bank manager, explaining you have made money as he forecloses on you because you have run out of cash from excessive marketing spending - after all that is pretty much what happened to Cobra Beer.

So, what does the "addjusted CSOI" mean in real numbers? 

Under the Groupon performance measure they made an adjusted CSOI of $60m for the year ended June 2010 and nearly $82m for Q1 2011. A fantastic improvement in performance for a business only 30 months old. But under normal (GAAP) accounting rules the results are a net loss of $420m and $117m respectively. In other words they wanted investors to ignore $480m of costs in 2009/10 and nearly $200m in the first quarter of this year.

I suppose Andrew D Mason's final comment before he signed off his letter says it all "Our path will include some moments of brilliance and others of sheer stupidity." Well for me, measuring your business performance by ignoring one of your largest costs has to be, by any measure, sheer stupidity!

Are UK Bank's really lending to SME's?

As the UK high street bank’s report their half year results, EMC Corporate Finance Ltd asked the question to bankers’, advisers and business leaders’ are UK bankers’ really lending to small and medium sized enterprises? The straw poll was run through LinkedIn and became one of the hot topics on the ICAEW’s group on LinkedIn.

The results were evenly split with 55% of respondents disagreeing with the statement and 45% agreeing with it.

Within the poll the comments reflect the very cautious nature that bank’s have to lending in modern times. One leading recruitment owner, who voted yes, stated that they are only lending with “significant levels of security and personal guarantees”. This supports a Surrey based IT chief executive commented “My view is that they are lending where the risks are known, understood, presented well and are of an acceptable level. They quite rightly got criticised for the old days when they would lend to anybody, almost without question about the risks”.

The CEO rightly reflects on the dilemma that the banks now face. The UK Government is placing considerable pressure on them to lend to businesses, with Vince Cable, the business minister criticising them for not lending enough. At the same time,  worldwide banking regulators, through Basel III, the FSA and the Bank of England have strengthened the rules governing the capital adequacy of the banks to reduce the likelihood of the 2007/08 banking crisis reoccurring. Put simply it means that regulators have said the banks must have stronger balance sheets, which means either getting in more equity or reducing the amount they lend.

Two leading solicitors reflect on this, with one looking at the differing places that lenders and borrowers are approaching from “One reason for the disparity in perceptions appears to be that the banks have been able to make the jump to `old fashioned banking' very easily, whereas the SMEs - for obvious reasons - have not. The tension will remain until an acceptable equilibrium is found.” Meanwhile  the other stated that “if the business is sound certain banks are in the market.”  

This brings about another area that we have seen firsthand in businesses that we are involved in, that businesses are not prepared to invest with so much uncertainty in the market.

However, whilst bank bashing continues to be all the rage in the House of Commons, press and pubs, others see the opportunities of a banking sector hamstrung by rules and regulations. Asset based lenders have seen a significant upturn in business. Sussex has three of the largest independent Invoice Discounting and Factoring companies in the UK. All of them have seen double digit growth in their businesses in each year of the recession, as businesses turn to a flexible lending solution that matches the demands of their working capital flows.

If you would like to comment or need assistance with financing your business, email michael.pay@emcltd.co.uk