Our turn: Secrets of success in lands of opportunity

The driving force behind new businesses anywhere in the world is people. SIMON COLLINS examines what makes an entrepreneur.

Still in her 30s, Linda Jenkinson is already running her second "start-up" company in San Francisco. Jenkinson, from Palmerston North, floated a $US90 million ($216 million) courier business, Dispatch Management Services, on New York's Nasdaq stock exchange in 1998.

"At one point we were the darling of Wall St. I was on CNN every month," she says.

Then the Nasdaq dived. Jenkinson and her partners were forced to drop plans to raise a further $US50 million to buy up associated courier businesses around the world, and the value of her shares plunged from $US5 million to $US500,000.

Anywhere else in the world, she might have retreated from business to lick her wounds. And, indeed, she did take a short break in New Zealand.

But just a few months later, she was back with a new idea: a business called iSaySo that finds services for people on the internet and makes purchases or bookings for them. A venture capital firm agreed to put up $US5.5 million for it.

Jenkinson rented the top floor of a pokey warehouse in a somewhat seedy part of San Francisco, with a tiny attic which she has made into her own office.

She hired 35 staff, including a call-centre team in Boise, Idaho and found software engineers in India to write the company's programs on contract. iSaySo was under way.

It's a tough time in the Bay Area, where Cisco alone has laid off 8000 people since January - and Jenkinson is not the only one who is finding it hard going.

Vijay Kothari, a 29-year-old who arrived from Bombay two years ago, lost his job as a project manager at Selectron Corporation in March. But he is already planning a new business.

"When you are in a job, there are a lot of ideas you have and want to take to the market. You can't get to the market when you are in another business," he says. "I have a couple of ideas which I'm talking about right now with my friends."

He is cautious. He spoke to the Herald at the Santa Clara jobs fair, a regular event billed as the biggest fair of its kind in the world, where he hoped to find work to keep him going until he has tested his business idea with "a couple of influential people." But he is determined.

"Definitely we are looking towards having our own business pretty soon."

A short distance across the urban sprawl of Silicon Valley, Chris Sorensen was attending a class for would-be entrepreneurs led by venture capitalist Helen Ingerson at the San Jose Software Development Forum.

Sorensen describes himself as "a recent transplant from Chicago," where he was a business consultant. "I moved here because this is where the opportunity is," he says. "This is the crucible of creativity. Chicago is a desert. You can't do a start-up in Chicago."

Despite the market crash, there is a buzz in Silicon Valley and the broader San Francisco Bay area that is still palpable. Everyone with a dream feels it is possible to make it happen.

Around the world, there are some successful imitators.

Singapore - "Silicon Island" - has created its own venture capital industry, using government money in partnership with three local companies, including Lim Soon Hock's Plan-B Technologies.

In Taiwan, the Government helped to finance the first computer manufacturers, such as Acer, through state-subsidised banks. However, there are now 183 venture capital companies investing around $US400 million a year.

According to Upside magazine, Taiwan is now "the world's third most important high-tech center, after the US and Japan." It is the third biggest maker of notebook computers and silicon chips, and makes 91 per cent of the world's scanners.

In Israel - "Silicon Wadi" - more than 100 investment funds sank $US2 billion into new businesses last year, and more than 100 Israeli companies have listed on Nasdaq.

Martyn Levy, who works for Auckland's Krukziener Venture Capital, says that when he last visited Tel Aviv, a taxi driver asked him for a copy of his business plan to give it to the head of a big company the cabbie drives for.

"Venture capital has changed the mentality of the people - 15 years ago Israel was not like this," says his boss, Andrew Krukziener. "It's not that Israelis are different from New Zealanders. It's that people didn't realise it was possible."

So what are the factors that make it possible? Several have been identified as playing a part.

* Risk-taking: Entrepreneurial cultures see high risk - and frequent failure - as a sign of future success.

"One of the statistics is that most successful entrepreneurs have failed seven times before they cut it," says Sorensen. "Between 50 and 60 per cent have bankruptcies in their background."

Franklin "Pitch" Johnson, a veteran Californian venture capitalist who is a mentor to New Zealand venturer Jenny Morel, says his investors know that people learn from their mistakes. They know they are taking a risk when they invest their money.

"Here, if someone fails honestly and gave it a good shot, the society doesn't feel they have done something terribly wrong."

* Share ownership: In Silicon Valley, even the receptionist is often a part-owner of the company. Most high-tech businesses pay their workers partly in share options, allowing them to buy the company's shares at discounted prices. In the boom market before last year, this made many workers wealthy overnight.

Workers also hop frequently from company to company, making it clear that they are no one's servant.

The combination of share ownership and job-hopping means that workers feel more like free agents than they do elsewhere. They are highly motivated to work hard, pick up the skills and the capital they can earn from their current business, then move on to pursue their dreams.

* Strong sharemarkets: One of the major differences between the United States and other industrial centres in Europe and Japan is the extent to which growing US companies can raise money from shareholders, rather than banks. Johnson believes this has been crucial.

"The amount of permanent capital required to fund a technological business can vary from under 10 per cent of annual sales for a software company to well over 60 per cent of sales for some electronic manufacturing companies," he says.

"The greater the portion of this capital that is in the form of debt, the lower the earnings, because of interest, and the greater the likelihood of serious financial trouble in the inevitable event of a rough spot in the company's performance."

Johnson suggests that governments could encourage new companies to list on the sharemarket by simplifying securities law requirements and allowing pension funds to invest in public companies.

In Scandinavia, the stock exchanges have found another way to help by establishing a joint trading system, allowing investors to buy and sell on any of the Nordic exchanges through the same computerised system.

* Venture capital: Silicon Valley has institutionalised venture capitalism, with financiers contributing not just money but also hands-on management advice from the early stages of a business.

"I have been doing this since 1962 and I don't think I have ever gone a week without visiting several companies and getting out of the office," Johnson says.

"Our guys here are out of the office more than they are in it."

* Economic policies: You only have to watch the way the Federal Reserve Board has slashed US interest rates this year to see how committed US policymakers are to maintaining a favourable climate for investment.

As Jenkinson found, even the best planned businesses can fail in an economic downturn. In a more buoyant climate, entrepreneurs are more prepared to take risks, and more likely to succeed.

* Moderate tax rates: Johnson believes that starting a business anywhere in the US is easier than in Europe because the tax rates are lower.

Actually, the company tax rate is 35 per cent, about the same as New Zealand's 33 per cent, the top personal rate is 48 per cent, compared with New Zealand's 39 per cent, and unlike New Zealand, there is a capital gains tax.

But Johnson says tax rules allow most businesses to pay only 18 per cent capital gains tax, leaving 82 per cent of profits available to reinvest.

"The ability to make and keep money is one of the characteristics of an entrepreneurial climate."

Company tax rates are lower in Taiwan (25 per cent) and Singapore (22.5 per cent). However Israel, with company tax at 36 per cent and a top personal tax rate of 64 per cent, including social security taxes, suggests that entrepreneurship can flourish even with a high tax regime.

* Celebrating success: Entrepreneurs, like anyone else, want to be loved. They are more motivated if they feel appreciated.

In some ways this is an egalitarian instinct. Americans admire people who do well regardless of their social origins.

"Entrepreneurs have to be not only admired but, in my view, heroic figures, rather than figures who are thought to be doing something which is not quite nice," says Johnson.

"You want a mother to say as proudly, 'My daughter is an entrepreneur,' as she would say, 'My daughter is a doctor or a lawyer'."

* Networking: In Silicon Valley even more than in most places, who you know can make the difference between success and failure. That's why Linda Jenkinson diligently attends San Francisco's Forum of Women Entrepreneurs and weekly seminars on legal issues.

"Networking is a considerable part of my job," she says. "That's how you meet venture capitalists. You have a personal relationship with them, then they take your call. It's part of your job to have a public persona."

Jenkinson and her husband use their own connections to run another business "on the side," bringing New Zealand builders to California.

"New Zealanders are very reliable. They work six days a week, 10 hours a day, because they are making so much money."

Jenkinson believes it is "completely realistic" for New Zealand to become the next Silicon Valley-style success story. "The average New Zealander is more entrepreneurial in spirit than the average American," she says.

But we need international connections. "The Israelis are very good at developing that international network," she says.

"You need that business element to say, 'Is it [your plan] a viable business model?' So that if you have an idea in a certain industry segment, you can say, 'Let's go to the experts in this - how do we differentiate ourselves?'

"Who do you hook up with in the US to 'validate' you, to give you credibility here, to get your first client?

"It's a matter of attitude. You can always create it - if you have the view that you are part of the global economy."

Lessons

1. Business failures are inherent in risk-taking and entrepreneurs learn from them; they should not be a permanent black mark.

2. Entrepreneurs thrive where they can get access to venture capital, where economic policies and taxes are supportive, and where successful people are celebrated.

3. Success requires networking, and international success requires international networks which may include expatriate New Zealanders.

* On Monday: Focus on innovation.

Links

I Say So

SDForum

Upside Today

Morel & Co.

Our turn

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Simon Collins

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