Hello, I’m Ronald Cohen, co-founder and past chairman of Apax Partners, and I’m going to be talking about entrepreneurship and private equity.

My first exposure to entrepreneurship/private equity was at business school, when I was in my early twenties, and I came back from the United States to establish Apax in Europe – it also had an operation in the United States – in 1972.

It’s hard to believe today but when you look back to 1972 these were times where Britain had 3 million unemployed, was viewed as the sick man of Europe, and trade union relations were at an all-time low with a three day week because of coal and electricity shortages.

It was already obvious in those days that large companies were going to go through a restructuring that would require them to lay off people. There was a threat that American large companies would overtake European ones, a book was written at the time by Jean-Jacques Servan-Schreibers called The American Challenge, which basically pointed to the threat that Europe would be dominated by America.

And yet when we look back today on those days, it is a completely different world that we live in. Big American companies do not dominate the world, and the big challenge of the last 35 years has really been with entrepreneurial companies and with innovation, where America has come out on top. And I’d like to talk a little bit about what’s happened in this intervening period of 30-odd years where I’ve been privileged to be involved in backing entrepreneurs and in helping to develop the private equity industry in Europe.

In 1972 in Britain there were precious few entrepreneurs. It was actually thought that entrepreneurship was an American phenomenon, and that Europeans were very ill-suited to entrepreneurial activity. It was tough to explain what an entrepreneur was, and the private equity industry was non-existent. In 1981, when we raised our first Apax fund in the UK, a £10 million fund – which compares with nearly £10 billion for the latest Apax fund – it was extremely difficult to raise the capital. Only £30 million was invested in entrepreneurial companies at that stage, by the whole of the British “venture capital industry”. The amount invested in 2006 was over £10 billion. And was has happened in the intervening years is that governments have come to the realisation that as large smoke stack industries went through restructurings and the companies that led these industries scaled down their activities and laid off people so enterprise was necessary if we were going to create jobs and get the economy to grow.

And enterprise could only thrive in an environment where there were substantial incentives for hard work, and for taking risks. It’s hard to believe, but in the early years of Apax the marginal rate of taxation in Britain was 98 per cent. Why should anybody take risks, or work hard, in order to earn 2 per cent after tax? The big challenge with entrepreneurship is that you need an environment around it that supports it. You need low rates of taxation, particularly Capital Gains Tax, but also income tax, and governments have to be prepared to support risk-taking, the liberalisation of industry, and generally to encourage the creation of new firms.

So what is entrepreneurship? Well, in my book The Second Bounce of the Ball, I chose a title that pinpointed the first and most important characteristic of entrepreneurship.

Entrepreneurship is about risk-taking. The problem is that the word risk has a negative connotation. It comes in fact from an Italian word that means ‘running into danger’, so it’s not surprising that people would feel unwilling to take risks. But risk masks the value of uncertainty, and uncertainty is the stuff of entrepreneurship, because you cannot make great gains out of situations that are certain. You can only make great gains out of situations where you have a particular insight that is not shared by the rest of the market.

And so the first essential aspect of entrepreneurship is an ability to seek uncertainty and to take advantage of it. And in a way, the private equity industry which is the professional sector – which is viewed as a very powerful economic sector today – the venture capital and private equity industry has specialised in seeking out areas of uncertainty, and backing entrepreneurs who can take advantage of them for their mutual profit.

Uncertainty is very much in the eye of the beholder. There are some people who come from backgrounds where dealing with uncertainty was extremely difficult. These backgrounds favoured security – safe jobs in big companies that appeared to have the prospect of a very long future. There are others who come from homes where risk-taking was always considered to be the thing to do, and where the fear of failure that goes with an approach that emphasises great security was not a particular hurdle. When you begin to work with entrepreneurs you realise that entrepreneurs come in all shapes and sizes, and there are some, who are more risk-seeking, and there are others who are more protective of the downside. But at the end of the day, it is very difficult to be an entrepreneur if you do not have an appetite for tackling something that seems impossible for others, but that you believe to be possible. In a sense, you might say that entrepreneurship is the art of the seemingly impossible.

The second aspect of entrepreneurship, apart from the desire to take advantage of uncertainty, is the ability to create an entrepreneurial team that is able to make decisions that are continually made with surrounding uncertainty, and the ability to collect a group of individuals whose collective judgement ends up being proved correct in a marketplace that is often evolving very quickly. And the essence of the entrepreneurial leader’s role is to create an effective organisation that can make the right decisions.

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