Britain's New Generation Of Company Builders
If you doubt the role government can play in shaping an economic climate,you need look no further than Thatcher's Great Britain
After decades of economic decline, Great Britain seems to be turning around under Prime Minister Margaret Thatcher. In my two weeks there, I tried to get beyond the rosy numbers cited by her Tory government to find out if fundamental business conditions had really changed. -- J.F.* * *
Sophie Mirman never harbored "illusions of grandeur," she says. All she wanted was a handful of stores -- six of them, tops -- selling socks and pantyhose. The idea came to her one day as she searched London department stores for a pair of cream-colored woolen tights. She was astonished that such a basic item was so hard to find. Today, Mirman has all the socks she'll ever need, and her "grandeur" is no illusion.
Eight years ago, Mirman was employed by Marks & Spencer, the large British clothing chain. She had risen from the typing pool to management. Mirman then moved to Tie Rack, a small group of necktie boutiques, where she served as managing director. But with no equity in the business, she soon grew restless. In 1983, she left Tie Rack to start her own company.
Calling it simply Sock Shop, she set up in a kiosk in a London subway station. Business was so brisk on day one that Mirman knew she was on to something good. Six months later, she opened her second shop, and a few months later, a third.
Today, at 31, Sophie Mirman is chairman of Sock Shop International PLC, a fast-growing hosiery empire with 80 company-owned stores, 450 employees, and sales last year of $26 million. There are Sock Shops in New York City and all over the United Kingdom. Mirman envisions about 500 stores in Britain alone. This year she is advancing into France, and she speaks confidently of conquering the U.S. market.
Sipping tea in her London office, Mirman says her success would have been unlikely without the revolutionary changes set in motion by Prime Minister Margaret Thatcher, who since moving into 10 Downing Street in 1979 has turned Britain upside down.
Preparing to launch that first Sock Shop in 1983, for instance, Mirman approached various venture capitalists. In return for $85,000 she was prepared to relinquish 49% of the equity. "Luckily," she says now, "they thought the idea of a shop selling just socks and tights was crazy. They all turned us down." Instead, she turned to the Loan Guarantee Scheme started by the Thatcher government in 1981. Backed by a 75% government guarantee, Barclays Bank came up with the cash -- £45,000 (or roughly $68,400).
Just over a year ago, with the company's growth accelerating, Mirman needed another cash infusion. She decided to try the Unlisted Securities Market (USM). A junior stock exchange created by Thatcher in 1980, it was designed to enable small companies to go public without the restrictions of London's big board. Mirman floated 20% of Sock Shop equity. The shares opened at £1.25 (just over $2) each, were oversubscribed by 53 times, and finished by more than doubling in price on the first day.
Sophie Mirman has plenty of equity now. The stock that she holds, together with that of Richard Ross, her husband and partner, is worth about $95 million. Mirman's situation is not unique. By last June, the USM had enabled 641 companies to go public, creating in the process some 800 millionaires as well as thousands of jobs. They are only the leading edge, however, of an entrepreneurial groundswell that has transformed Thatcher's Great Britain in ways almost unimaginable a decade ago.
When Thatcher took office in 1979, the island nation that led the world into the industrial revolution had run out of steam, or so it seemed. The so-called "British disease," economic torpor, appeared to be terminal. The country was sinking into genteel poverty, and the signs of decline were everywhere.
Labor unions held the country in a stranglehold. Wages sprinted far ahead of productivity; the London Times estimated that "even efficient British firms are usually overmanned by between 50 and 100 percent." Inflation soared to 24% by 1975. A century after it reached the pinnacle as a world superpower, a demoralized Britain turned to the International Monetary Fund in order to pay its debts. But the harsh measures that the IMF imposed touched off more troubles. In the winter of 1978-79, labor strikes practically shut down the country.
None of this should have been surprising, given British fiscal policies. The top income-tax rate was 83%. The maximum rate on unearned personal income stood at 98%. Fiscal policy created a poor environment for capital formation; for example, only one venture capital fund was active in Britain when Thatcher assumed power (compared with more than 120 now).
The nationalization of uncompetitive industries had wrought further damage. William Manchester, in his biography of Winston Churchill, The Last Lion, relates an incident from the 1940s. Churchill's archrival in Parliament was Labour leader Clement Atlee. One day in the men's room, Churchill arrived to find Atlee standing at the urinal trough. He positioned himself as far away as possible. "Feeling standoffish today, are we, Winston?" Atlee asked. "That's right," Churchill snapped. "Every time you see something big, you want to nationalize it."
In time, the British nationalized virtually every industry of consequence: autos, mining, and railroads. With the government absorbing the red ink, competition was an alien concept.
The country's work ethic disintegrated in a system of cradle-to-grave welfare. In class-conscious England, the upper crust had long disdained industry anyway. The emphasis was on public service and respectability. Money and profit were regarded as crass and vulgar terms, unfit for polite conversation.
The children of upper-class families crowded into the professions -- banking, law, medicine, accounting, academia, and the military. Equally respectable were positions in the civil service and the diplomatic corps. And so when it came time for Britain's best and brightest to select an occupation, business was way down the line.
It wasn't always so, of course. In the eighteenth and nineteenth centuries, British businessmen were titans of trade and commerce. But around 1870, with imperial England at the zenith of its power, a profound shift took place. Manufacturing had made Britain wealthy, but the vast majority of people lived and worked under the most squalid conditions. As a career pursuit, business began to be regarded as "dirty."
"The public schools -- what Americans call prep schools -- became very popular and influential in the nineteenth century, and they put the emphasis on educating people as gentlemen," explains John Rae. A tall man with thick silver hair and patrician bearing, Rae spent 16 years as headmaster of Westminster School, situated in the shadow of London's Westminster Abbey. Like Eton, Harrow, and other elite academies, Westminster grooms the children of privilege and pedigree for Oxford and Cambridge.
Rae has seen the antibusiness bias of the English "squirarchy" at close range. Prep-school education, he says, "meant a little Greek and history and possibly a foreign language, although foreign languages were suspect as possibly being utilitarian. Even though the public schools educated a minute percentage of the population," he continues, "they set values right through society in the nineteenth century. The manufacturer in the north of England made his money in brass and sent his child to a public school to make him a gentleman, not a manufacturer. The curricula of those schools were totally against anything to do with science and technology -- against anything to do with money, really, unless you inherited it. The bias against technology and engineering and industry was still present in a school like Westminster even in the early 1980s."
If an educated Englishman did opt for a business career, it was sure to be with a large company. Salaries were secure, benefits and pensions were generous, and high rank brought with it such perks as chauffeur-driven Jaguars. The building of growth companies was almost unheard of in Britain. The cultural supports that entrepreneurs take for granted in the United States did not exist there.
The very word entrepreneur in 1970s Britain was pejorative. It conjured up someone sleazy, or "spivvy," as the Brits say, maybe a guy with a cheap toupee selling used cars. Even the few successful entrepreneurs back then were disparaged as a maverick bunch -- socially suspect, greedy, and downright un-British.
"There was only one thing worse than being an entrepreneurial failure," remarked Sir Clive Sinclair, of calculator and computer fame, "and that was to be an entrepreneurial success." New money was somehow unclean. If you had it, you certainly didn't flaunt it.
All told, the suffocating social and fiscal conditions in Great Britain led to nothing short of "the most devastating economic failure recorded in modern history." At least that's how author Sidney Pollard saw it in his 1981 book The Wasting of the British Economy.
Into this sorry situation stepped Margaret Thatcher, leader of the Conservative "Tory" Party.* * *
The Iron Lady came on as a headstrong puritan, preaching the virtues of self-reliance, moral rectitude, and hard work. The daughter of a grocer, she had made her way through Oxford University, taking a degree in chemistry.
If England was ready for radical change, Thatcher was only too happy to provide it. She has privatized state-owned companies at a feverish pace. She has busted unions. She has slashed subsidies to industry. After a painful but inevitable period of adjustment in the recessionary early 1980s, the country has come roaring back. And none too soon: in 1992, when all trade barriers within the Common Market are scheduled to fall, economic competition within Western Europe is certain to intensify.
To measure the dimensions of the Thatcher revolution, consider a few facts. Britain's economy grew by 4.4% this year, the highest growth rate in Europe -- roughly equal to growth in Japan. Inflation has been hammered down to 4.8% from 13.4% in 1979, and interest rates reduced from 17% at the end of '79 to 12% currently. Unemployment, though still high at 8.2%, has declined for 24 consecutive months; it stood at 5.2% when Thatcher took office, but leaped to 10.4% by the end of 1982 when a recession purged the nation of many of the unproductive jobs accumulated over generations.
Trimming the fat from British industry, painful though it was, brought tremendous productivity gains for the economy. Between 1980 and 1986, productivity increased 17% for the overall economy and 34% for manufacturing, compared with 11% and 26% for the United States. As was the case in the United States, most of the job loss in Britain took place in large companies, with smaller businesses growing rapidly enough to more than offset the loss. From 1982 to 1984, more than a million new jobs were created in Britain by companies with fewer than 20 employees. Net new businesses are forming at a rate of 865 per week. And self-employment has climbed from 1.9 million in mid-1979 to 2.7 million in June 1987, accounting now for 11% of the labor force, compared with 8.6% in the States.
In a bold dose of supply-side economics, Thatcher has cut taxes dramatically. The top income-tax rate has dropped in stages from 83% to 40%. Also, the surcharge on unearned income has been eliminated, and corporate taxes peak at 35%. At the same time, she has balanced the budget. It is Reaganomics -- without the red ink.
Unlike Reagan, Thatcher has not embarked on a costly military buildup. She has reduced the size of government, eliminating thousands of jobs. North Sea oil royalties, some $6.5 billion this year, have helped. And the sale of state-owned companies brought a revenue windfall of $29 billion; the public offering of British Telecom alone was worth more than $6 billion.
So profound has been Thatcher's success that the center of gravity has changed in British politics. Even leftists have stepped to the right, finding it hard to argue with the wisdom of enlarging the economic pie rather than squabbling over a shrinking one. Union membership is down by 25% in this decade. And the Labour Party now says that should it reclaim power, the top tax rate should not be substantially higher than 55% to 60%, the rate generally in effect in other European countries. That is a radical departure from Labour's soak-the-rich doctrine of the past.
Money, now that the tax code permits one to keep it, is back in style. "It was a most amazing change," notes Tom Lloyd, editor of Financial Weekly magazine. "All of a sudden, people were working 16 hours a day."
Signs of industrial recovery abound. The scaled-back steel industry is now among the most efficient in Europe and will likely be privatized soon. Textiles, too, are rebounding. In Scotland's Silicon Glen, a new computer industry is flourishing; electronics products rival Scotch whiskey as the area's top export.
The streets of London teem with luxury cars -- Rolls-Royces, Bentleys, Mercedeses, BMWs. London itself is being refurbished. The derelict dock areas of old South London, once reminiscent of Dickensian squalor, have sprouted shiny new buildings.
Bookstore business sections are crammed with new volumes on management, entrepreneurship, and investment. The percentage of the population owning stock has tripled since 1979, to 21%. Where before there was one television show about financial affairs, there are now several, with more being planned. And there's a new magazine on personal finance, Money & Family Wealth.
"It is unbelievable. Nobody used to talk about money; it was just not done," says Viscount David Linley, the 26-year-old son of Lord Snowdon and Princess Margaret. "It has changed from being a country that didn't feel much like working to a country where you can feel it as you walk down the street."
Time was when a man of Linley's lineage -- a titled aristocrat, a nephew of the queen, a future member of the House of Lords -- might have become a country squire. Instead, he has become an entrepreneur. His company, David Linley Co., manufactures fine furniture. Branching out, Linley recently opened a restaurant in Chelsea Harbor, a trendy new development on the Thames.
The successful entrepreneur has emerged as a cult figure in Britain. Sir Clive Sinclair, no longer seen as a misfit, was knighted by the queen. Richard Branson, the hippieish founder of upstart Virgin Atlantic Airways, calls at 10 Downing Street to deliver advice, and his face peers out from bookstore windows on the cover of Richard Branson: The Inside Story, a hot seller.
Such role models as Branson are inspiring the next generation. A recent survey found that teenage Brits, like their American counterparts, are rejecting rebellion and nonconformity. They want to be sufficiently well heeled to take advantage of the material benefits of Thatcherism. "Free love and communal poverty are out," reported the London Times, "while a strong work ethos, designer clothes and a status motor car are in."
Risk taking, furthermore, is not only acceptable but fashionable. "When you go to parties around Cambridge now, people find you far more interesting if you are an entrepreneur, if you are doing your own thing," observes Charlie Brown, a director of Cambridge Venture Management Ltd., which helps manage many young businesses around the old university town.
What Thatcher has done is to create the tools to stimulate growth. Consider the Unlisted Securities Market, the stock exchange that brought Sophie Mirman's Sock Shop public. The USM was established in November 1980, just 18 months after Thatcher took office. Since then, it has seen an average of two new offerings a week.
One man who keeps a close eye on this action is Ian Restall, editor of USM Magazine. He founded the publication last year to profile new listings, carving out a successful company of his own. Restall, a former stockbroker, operates from a converted butcher shop on the edge of the City, London's financial district. A huge window behind his desk affords a magnificent view of St. Paul's Cathedral, Sir Christopher Wren's masterpiece.
A company going public on the main London exchange has to have been in business for five years, he explains, and it must offer at least 25% of its equity. On the USM, the requirements are reduced -- a three-year history and a sale of as little as 10% of equity.
"This is not a funny market that is tucked away in a corner," Restall says. "These are stock-exchange companies with the full backing and investor protection of the exchange. Before 1980, there was nothing like this. Now, we have some of the sexiest companies you've ever seen."
Sophie Mirman's Sock Shop International, with 1988 profits forecast at $5.7 million, is one of them. Besides raising money, the USM experience helped the company grow in sophistication, since it motivated Mirman to put a solid management team in place. "Richard and I had been running the whole company -- the buying side, the financial side, merchandising," she says. "Now, I have a team of five buyers, all of whom are far more talented than I am. We have a personnel manager, a training manager, and a team of accountants. That has enabled us to take more of an overview and get on with planning."
The USM has done something else for business development. By enabling companies to raise large amounts of capital -- and by enabling early investors to cash out -- it has encouraged the growth of the British venture capital industry, now the strongest in Europe.
Venture Economics Ltd., a private group that tracks the industry, reports that more than $1.7 billion was invested in nearly 1,200 companies last year within the United Kingdom -- up 77% in dollar volume from 1986. And while some of the deals are huge, many are tuned to young companies. Small "seed corn" funds are springing up to finance new companies.
To help fuel the investment boom, the government took another extraordinary step, launching the Business Expansion Scheme (BES) in 1983. Under this plan, a private investor can claim a tax credit up to the top rate of tax, currently 40%, for funds invested in growing businesses. The investor must leave the money there for at least five years, after which capital gains can be taken tax free. Some 2,200 companies have received about $780 million under this arrangement.
In practice, much of the BES money is channeled through venture capitalists, people like Dennis Fredjohn. A Cambridge-educated veteran of the aluminum industry, the 63-year-old Fredjohn founded his company, Capital Ventures Ltd., in 1981. Since then he has gained a reputation as something of a buccaneer, willing to gamble where others won't. One of Fredjohn's many success stories is Sinclair International Ltd. (no relation to Sir Clive).
Sinclair operates from a two-story brick building in an industrial park in the East Anglia city of Norwich. The company manufactures and installs high-speed machines that label pieces of fruit as they roll along packing plant conveyer belts. It also makes the superthin labels for Sunkist, Chiquita, and many other brands.
Just four years old, Sinclair already has 1,000 machines in place around the world. It leases the machines to packers and makes its money on the sale of the labels. Revenues last year topped $6 million, all from overseas. The company employs 40 people. And according to Gervas Steele, an attorney who serves as chairman of the board, none of it would have been possible without the Basildon Fund of Dennis Fredjohn, fueled with BES capital. Sinclair got off the ground with about $1.3 million, sacrificing 56% of the equity.
"In the U.K., the BES has changed the atmosphere in business circles," says Steele. "Suddenly, everybody was keen to invest in start-up companies. In subsequent years, when we needed to raise additional capital and have fairly sophisticated banking facilities, we were talking to bankers in the right atmosphere. They were suddenly open to new ideas."
The Thatcher government has also launched the Enterprise Initiative, which provides government-subsidized consulting services in areas in which small companies often lack know-how -- marketing, design, quality control, and manufacturing technology. Budgeted at almost $100 million this year, the program pays half the cost of a 5- to 15-day consultancy, or two-thirds the cost in specially designated "assisted areas." Plans call for as many as 15,000 consultancies a year.
The underlying idea is to put some management muscle on Britain's burgeoning small-business sector to help it survive 1992. That's when the 12 nations of the European Community merge into one giant market, much like the United States. They will sweep away regulations, varying technical standards and other obstacles to unimpeded trade. The fear is that small, unsophisticated companies, no longer able to hide behind protectionist policies, will be eaten alive by the big boys.
At the same time, however, the new Common Market will present many opportunities. Sophie Mirman, for one, is looking forward to it. "It will make it so much easier to trade in Europe," she says. "There will be a lot less bureaucracy and paperwork involved."* * *
Many Britons are enthused about the Iron Lady's economic policies, but a strong undercurrent of dissatisfaction exists, too. New social conflicts are in evidence (see "The Dark Side of Thatcherism," page 6), and not even all businesspeople are happy about the direction of economic change. Each new policy direction affects small companies and large companies in different ways; and, as is the case in the United States, many policymakers don't understand the critical difference between traditional small businesses and those that grow quickly and create jobs.
"They talk about the enterprise culture, but I think what has not gotten through is the difference between small business and new ventures," says John Bates, founder and chairman of Datapaq Ltd., a three-year-old business in Cambridge that makes computerized control systems for industry. This year, Datapaq projects sales of $5 million. "Most politicians in this country still think of small business as corner newsstands, shopkeepers, and garages -- low-capital retail operations."
Recently, he points out, the government raised the capital-gains tax from 30% to 40%. "That's probably the worst thing you could hope to see from the standpoint of new ventures," he says. "The capital-gains rate is now the same as the top income-tax rate, so there is no advantage in working for capital gains. You might as well just rip it out in earnings. It's fine to treat capital gains on speculation as income, but not when you are trying to start businesses."
Bates located his company in Cambridge, which in many ways is a microcosm of the old and the new in Britain. The medieval spires of King's College Chapel rise over the narrow streets, filled with bicyclists and lined with bookstores and pubs. The Cam River, fringed with willows, curves around the town. Boating and cricket are popular pastimes. Cambridge denizens speak reverently of the school's distinguished alumni, including Sir Isaac Newtion, Oliver Cromwell, and, more recently, Prince Charles. It is the Britain of wealth and privilege -- and a centuries-old disdain for commerce.
On the other hand, more than 400 young technology companies call Cambridge home. And just a few miles out of town, the Cambridge Science Park hosts 70 more fast-growth businesses. These companies are engaged in frontier work in lasers, computers, and biotechnology. And since the university's Trinity College actually owns the park, it promotes intellectual links of all kinds. It gives the companies access, for instance, to the world-class brainpower at Cavendish Laboratory and its department of molecular biology, breeding grounds for Nobel laureates.
Robin J. Smith-Saville, himself a former physics professor, has worked at the Science Park since 1979. His company, Signal Processors Ltd., makes products used in satellite ground stations.
Though the company is only six years old, it has grown by an average of 40% annually and expects to reach about $4 million in sales this year. A third of its sales are exports. In some ways, the company is another product of Thatcher's enterprise culture. It started with a government-guaranteed bank loan, and Smith-Saville hopes to go public on the USM. But it would be wrong, he says, to assume that all of Thatcher's reforms have helped small companies.
He mentions the severe cutback of government-supported research and development. "In one way, it's fine," he says. "British industry should learn to rely on itself. However, in the telecommunications business, we go up against competitors -- Japan, for example -- that enjoy very large subsidies. They can help you eliminate a lot of risk at government expense. So come 1992, technology companies in the U.K. could be in for a tough time."
Smith-Saville criticizes Thatcher for another incentive she jettisoned. Before she took office, businesses received a 100% capital-investment credit against taxes. "If you were growing a company fast and buying a lot of equipment, you could offset that against your taxes," he says. "You could put your money into expanding the business."
Back in London, the brain trust at Advent Ltd. -- a sister corporation of Advent International Corp., based in Boston -- raises different concerns about the depth of the Thatcher revolution. Advent is one of the largest of Britain's venture capital firms. It has plenty of money -- more than $200 million. What it does not have are enough capable managers to run the companies it wants to finance.
Much of the U.K. intelligentia works in the City of London, Britain's Wall Street. Law and accounting firms skim off much of the rest. Business gets the leftovers, and most of them are ensconced in large companies, held in place by big salaries and pensions.
John Nash, an Oxford-educated lawyer, is managing director of Advent Ltd. and the new chairman of the British Venture Capital Association. He sees the shortage of entrepreneurial managers as a potential obstacle to the country's continued growth.
"The venture capital industry in the U.K. has grown faster than the U.S. industry has ever grown in relation to the economy," Nash says. "There are many proposals, but the strike rate of investing in deals is quite low, and the reason most often given for not investing is the lack of adequate management. So we have got to attract managers out of big companies and into small companies, but it is hard."
Advent has done that in many cases. "On day one, that small company is really overmanaged," Nash says. "But the principle is that if it grows quickly, it won't stay overmanaged for long. After a month, most of these chaps will tell you it was the most dreadful mistake they had ever made. The culture shock is extreme. But nine months later, they all say it was the best thing they've ever done. They wish they had done it years ago."
How Britons react to this culture shock may determine if Thatcherism will outlive the Iron Lady and make a lasting impact on Britain. "If you scratch most English people, they would like to have the manor house in the village with the pub around the corner," says John Bates. "So the longevity of this sudden business craze is very much in question. To sustain it means looking constantly at business, at cost positions, at marketing.
"You can't just get there and think it's all done, which is the English disease. It's this 'squirarchy' thing again -- that one day you will have made it and you can sit back and do nothing."
That there even exists a new role model to fuel this debate is a startling development for Britain. A decade -- Thatcher's tenure to date -- is not much time to bring about fundamental change in a country like Britain. But it's clear she has started.
THATCHER'S BRITAIN: BY THE NUMBERS
Inflation rate 13.4% 4.8%
Unemployment rate 5.2% 8.2%
Real GNP £20 bil. £93 bil.
Venture Capital (1981
data) £66.3 mil. £894 mil.
Net business formations 16,100 45,000
Interest rates 13.6% 12%
Output/person employed 104.1 146.5
Top income-tax rate 83% 40%* * *
THE DARK SIDE OF THATCHERISM
The new prosperity has deepened Britain's social divisions
Every revolution has its losers, and Margaret Thatcher's is no exception. Under her leadership, Britain has grown wealthier and more entrepreneurial. But the rising tide has not lifted all boats.
In Britain today, one hears repeatedly about the great divide between the prosperous south and the depressed north. The heyday of British manufacturing saw the flourishing of the big cities in the north -- Liverpool, Manchester, Glasgow, and others. But as heavy industry declined, these cities slid into decay. And saddled as they are with the decrepit infrastructures of a bygone era, they have not fared well in an economic resurgence built largely on a boom in the service, financial, and high-technology sectors.
"Those cities are depressing environments in which to launch a new business," says Robin J. Smith-Saville, who established his satellite-equipment company in the aesthetically pleasing Cambridge Science Park, in the south. "It's nice to get a fresh start."
While overall unemployment in the United Kingdom is 8.2%, it is more than 10% in Scotland and in the old northern industrial cities. While the government has spent heavily to rebuild the region, Thatcher still preaches self-help, thrift, and discipline. Addressing one Scottish group, the prime minister quoted St. Paul: "If a man will not work, he shall not eat."
It's not that Britain has resorted to Darwinian survivalism; social welfare programs still take a third of the national budget. But cutbacks such as those in housing and university scholarships have angered many Britons.
Many people are frozen out of the housing market in southeast England, where a surge in prices has brought valuations to the levels of such expensive U.S. cities as San Francisco or Boston. Even in London, the epicenter of the boom, there are signs of dismay. Prince Charles himself has decried the antiseptic coldness of the tinted-glass office buildings rising along the Thames River.
A change in spiritual values, a degradation of manners and dignity, also trouble people there. In a recent column in The New York Times, writer Bernard Nossiter concluded that it is "impossible to write any longer of civility as a distinguishing British characteristic."
Social commentator John Rae, former headmaster of Westminster School, says Thatcher "has enabled the English to realize that they are not a very nice people. You musn't have the impression that England is full of gentlemanly people -- it's not. They are a greedy, acquisitive lot. That part of the English ch