Enterprising approach to entrepreneurship

Posted by Linda Anderson on Nov 6 15:51.

By Davide Sola

The roads of education and enterprise have traditionally met in business schools. This is something the UK government should have considered before targeting teenagers with its National Enterprise Academy initiative.

In a country such as the UK, where enterprise forms the backbone of the economy and is regarded as something of a national institution, investment that supports entrepreneurship is to be expected, indeed welcomed. But is trying to capture enterprise in a qualification for teenagers the answer?

I believe the solution is for business schools to change their approach to entrepreneurship radically.

Many business schools in recent years have rushed to establish courses and incubating facilities to promote entrepreneurship. The prevailing view has been that entrepreneurship, or enterprise, means start-ups: companies based on a breakthrough innovation such as a new product, service or technological advance.

Acquiring a new business may be enterprising, but it is not considered “enterprise” in the traditional sense and is not the focus of business schools’ incubating support and activities.

Consequently, the results of this approach, with a few exceptions, have been poor, with most business school-trained wannabe entrepreneurs returning to industry – albeit with valuable experience – after their start-up folded. Many reasons for this failure can be named but in my view, too often business schools still train people to run, rather than create, companies.

There is, however, another route to entrepreneurship, one that is suited to the profile of the typical MBA: the search fund, a model designed and developed in the US in the 1980s, but still relatively unknown. It consists of investors putting money up before they know what the idea or company is, so in effect they are funding a person, not a business, at the outset.

Unlike traditional models, the object of the entrepreneur’s search is a healthy company ripe for growth or expansion. Search funds enable the entrepreneur to complete a leveraged buy-in of an already profitable business (typically with sales of £5m to £15m), which they then manage on a full-time basis and look to grow, exiting five to seven years later. For investors, search funds offer the opportunity for attractive returns compared with other similar asset classes, such as venture capital or private equity.

Given the knowledge, skills and competences MBAs acquire during their programme – plus their characteristic aspiration and drive – they are ideal search fund entrepreneurs, on their way to being equity-owning chief executives of SMEs that they’ve – if not founded, then – certainly remade. The search fund model is based on the acquisition of a profitable but under- performing business, due to perhaps the existing owner’s lack of motivation, imminent retirement, or complacent attitude to innovation. Whatever the causes, MBAs can bring up-to-date management competences and techniques that can really make a difference.

The potential for the search fund model in the UK and the rest of Europe is huge. The real barrier to this model taking off in the UK and the rest of Europe is not a lack of investors but of incentives and policies to facilitate transfer of ownership.

At a basic level, high capital gains tax and red tape hamper the search fund model in the UK and the rest of Europe and this requires a simplification of laws. Governments, business schools and other institutions must recognise that entrepreneurship can be fostered via the acquisition and rejuvenation of existing businesses, not only the creation of new ones.

In an environment that embraces and encourages the notion of enterprise in its widest sense, a new breed of entrepreneur can take under-performing businesses to a new level by bringing innovation to their processes and product development.

As the youngsters at the National Enterprise Academy begin their studies, I hope that by the time they reach business school, the environment for all forms of enterprise is truly ripe for innovation.

Prof Davide Sola is UK director of ESCP Europe.