The Second Bounce of the Ball
by Ronald Cohen

This was the second business book to seriously influence me. If Felix Dennis's How To Get Rich lit the fire, TSBOTB chanelled that energy into a serious, meaningful plan of action. The two books could not be more different in style, conception, approach and character. No doubt they reflect their authors. While I am not confident that Cohen and Dennis would have tolerated each others' company for more than five minutes, the two books together formed my foundation.

You realise within a few pages that Cohen is extremely intelligent and extremely driven. I had that uncomfortable feeling you get introduced to someone junior to you, yet much more brilliant; sooner or later you'll be reporting to them. On holiday in Corfu, I decided out of respect for the book to see if I could write a complete precis in ten pages and a summary.

2-minute summary

If you are equipped to be an entrepreneur, calibrate the opportunity and pick your timing. Go for the largest opportunity in the largest market. Recruit the best team in the industry. Do not be afraid to recruit people who are better than you at their jobs. Draft a rugged business plan that can cope with unexpected problems and test it hard. Do the necessary due diligence and then do some more. Get an accurate measure of the length of runway you will need to take off. At stage one, raise enough money to get to stage three. At stage two, raise enough money to get to stage four. Raise the money from the most experienced, most reputable source you can find. Begin to plan your exit even as you make your entrance. Listen to your intellect and intuition and control your ego. Make it your business to be a good student of your sector and the economy as a whole. Make your own luck by persevering, building a network, learning from your business, being adaptable, staying focussed, and most of all by turning every setback to your advantage. Adhere to the highest ethical standards and create a sense of obligation in your team to do the same. Make an orderly exit, like a relay runner passing the baton to his team-mate as he accelerates away, giving him the best chance to win the race. Above all, anticipate the next bounce.

There, in a single paragraph, is how to turn risk into opportunity.

Chapter 1: Climbing the North Face

  • What Oxford taught me was the importance of underlying principles. What Harvard Business School taught me was the additional importance of studying the small print, of reading the footnotes. HBS students were hugely motivated, competitive and ambitious and they focused on every detail.
  • MMG origins in a HBS project written in 1970 by Maurice Tchenio (later partner). MMG = Multinational Management Group.
  • Tchenio introduced RC to Maurice Schlogel, “one of the top figures in European finance in the 2nd half of the C20”. He became MMG’s first chairman. (Author's note: just like that, eh Ronald?!)
  • They started a private equity firm (PE = transactions to take control of a company and transform its performance via transactions involving unlisted shares, buy-outs (take private), buy-ins, venture capital (early stage), expansion capital. They were a decade too early.
  • 2 partners quit in 1975. Tchenio also said wanted to operate independently but sharing the same brand in different territories. RC stuck with it.
  • Your business will grow to match the scale of your ambitions. RC decided very early on he wanted to build a global firm.
  • Understand the environment around you.
  • Perseverance – it might take years.

Summary: The higher you aim, the higher you go.

Chapter 2: Fear of failure

  • People’s attitudes towards risk is different. Anecdote of person who said “I cannot leave what [salary] I already have for anything less [to join your firm].” (Page 47)
  • “I asked him if he valued security more than the rewards of success. He was taken aback. He had never thought of himself in those terms.”
  • Risk is an emotive word that masks the value of uncertainty.
  • “I am conscious of what might go wrong, but it does not inhibit my confidence or my ambition. I certainly have to stretch to achieve my objectives. If there are setbacks, I am always trying to turn them to my advantage. In any event, I avoid the emotional roller coaster”.
  • You have to inspire confidence in order to motivate: you cannot do so in a state of high anxiety. Leaders stay calm.
  • Attributes of successful entrepreneurs
    • Good leaders with inspiring vision, able to attract and manage talented people.
    • Driven to succeed and are obsessive about their business. They persevere and are capable of extraordinary effort to achieve their goals.
    • They are self-confident, optimistic and competitive.
    • They have an unusual talent for their chosen field / opportunity and are deeply fascinated by it. As a result, they develop a very deep understanding of the market and their business.
    • They have an appetite for uncertainty, kept in check by an inclination to take calculated risks.
  • Most people do not realise that enterprise is a profession. If you have the fundamental personal attributes, the rest can be learned (purpose of the book).
  • You do not need to have been to university or business school, but business school will save you time.
  • Those who attribute all success to luck are mistaken: they would do better to attach themselves to someone who compensated for their areas of weakness.
  • There is no disgrace in not being the leader, in being a member of an entrepreneurial team.
  • You cannot learn to swim by exercising on the beach.
  • Dyson story, page 60. They [banks etc] didn’t back him, misjudged his personal ability to overcome.
  • The principal task of the entrepreneur is to seek out uncertainty and take advantage of it.

Summary: stop worrying about failure and put that energy into winning the race.

Chapter 3: Calibrating opportunities

  • Some business plans are solutions in search of problems, some are the reverse.
  • Key criteria for calibrating opportunities:
    • size of the opportunity
    • your personal aptitude in the chosen market
    • your ability to recruit suitable managerial, technical and creative talent
    • the attractiveness of the business model
    • capital intensity
    • the barriers to competition that you can establish
  • Interesting: I have met entrepreneurs in small markets who connected with their opportunity through happenstance and felt lucky [us?]. After several years though, when they knew the market and saw the limits of its size, they began to think differently. They realised that, far from being lucky, they were boxed into a small opportunity. They had opened the door to a cupboard rather than a ballroom.
  • Case study: Frank Lowy, Westfield: started with one small food outlet in Aus, then resi, then shopping centres, then USA. Took 10 years to figure it out. Page 72.
  • Great effort will bring small reward if you don’t have the right business model.
  • Use decision trees with probabilities assigned to each branch to assess situations: a robust analytical method for weighing choices. Also good for explaining to colleagues.
  • Summary: If you pick a provincial line, you arrive at a provincial destination.

    Chapter 4: Timing is everything

    • Summary: a second bounce usually follows a change in the trend or a change in the cycle.
    • Many entrepreneurs do not see the context in which they are operating. You need to know where you are in relation to trends and cycles – and not confuse one with the other.
    • Schogel: encouraged us to try to predict the second bounce of the ball.
    • Computacenter case study: page 97. From B2B PC sales to support to full outsourcing.
    • RC started MMG / Apax 8 years too early BUT it didn’t cost much to be open for business and there was a huge strategic advantage in being first.

    Summary: The first bounce of the ball everyone can see. To anticipate the second bounce you need a really deep understanding of the market.

    Chapter 5: Leading a winning team

    • Great entrepreneurs make mistakes – most common one being they underestimate the importance of creating a winning team.
    • Many are threatened by the thought of recruiting someone as good or better than they are.
    • Good is the enemy of great – if you start off, or tolerate good, great people will not join the team.
    • Computacenter case study: Phil Hulme and Peter Ogden. Peter outward-facing, Phil ran the operation.
    • Waterstones case study: Tim Waterstone gifted strategist but less interested in day-to-day management.
    • PPL case study (Dolly the Sheep): Ron James failure. Page 128.
    • 3 aspects to your offer.
      • First – vision. It is the scope of the vision that dictates the need for people of a certain calibre and it is the scope of the vision that attracts people. Needs to be inspiring but realistic.
      • Secondly: leadership. Star candidate is assessing you just as you are assessing them. Can they go further with you than they can on their own? Plus trust, and enjoyment of working together.
      • Thirdly, type of organisation you are building. Most entrepreneurial business start out with a wheel structure, with the entrepreneur(s) in the middle and everyone reporting in. That only works up to about 40 staff and will limit the quality of people you can attract and retain.
    • At a certain point in the development of the firm, the entrepreneur must adapt from being the decision-maker to being the leader of a team of decision-makers. You have to realise that the day-to-day business has to be run by people who are better at their jobs than you would be.
    • The founder must adapt to the needs of the firm, not the other way around.
    • Early years of Apax, I characterised myself as driving alone in a sports car. I recruited the first employee and he sat next to me. I recruited more and they sat in the back. Soon I had a car full of people. I began to feel as if I was out of the car, pushing it uphill with my team inside.
    • Rhys Williams, CEO of GEC-Marconi, a very large business changed my ideas on team management. Introduced Monday-morning meetings, sector teams with leaders – I ceased to be the hub and became the leader, moving from the centre to the front of an organisation that could make decisions without me.
    • My role was to provide leadership in the sense of motivation and direction and management of the leadership team. This was necessary to make a step-change in size while maintaining performance.
    • The moment you put the right person in a senior position, you feel it – the load on you is significantly reduced.
    • As you grow, there are other adjustments that need to be made in the way you manage the business (in early years the finance director does administration, personnel and compliance). As you grow you have to pick new people and sometimes separate yourselves from those with whom you started out.
    • Every recruitment decision is an investment decision: it has a cost, a level of risk and if it works, a great reward.
    • You must exercise careful judgement in picking people from larger firms. Sometimes you can aim too high. You might think you need a finance director from a large company because he already knows the road you want to travel. But he might not want to get his hands dirty (need to be objective-driven rather than process-driven).
    • You need to empower people: that means you have to let them get on with it. You trust in their sense of responsibility, so that they say, when they are unsure or in difficulty, ‘I need input over here’. You can build in checks and balances but basically it is a question of trust.
    • Incentives are a delicate matter. When striking a match, you need sulphur, oxygen, and friction. Power and value go to the rarer element.
    • Sometimes people ignore this fact. Because they are necessary to an enterprise, they think they are equally valuable to it. They are not. It is a crucial distinction.
    • If you have a star – and you should be looking to recruit stars – you have to pay them handsomely. You have to be sure that they get a good share of the value created by their performance.
    • My own starting point was The Dirty Dozen – recommended for any budding entrepreneur.
    • Some people are good at protecting the downside, others good at identifying and capturing the upside.
    • To me a building is more than just a space. It is a marketing message about your brand. You get to the stage in a growing business where, instead of going out to make a sale, business starts to come to you. That is the point at which marketing becomes more important than selling. That is the beginnings of building a brand. (4th key factor to attract best recruits).
    • 1993 was when Apax started to systematically build the brand.
    • I have never lost anyone to the competition whom I wanted to keep (lost some to start own firms, very successfully). I believe in stability as the basis for growth.
    • Principle of leapfrogging: when someone leaves, use it as an opportunity to get someone better.
    • 5th factor is success. Great people want to work for the best.
    • Summary: You attract the best talent by offering vision and leadership, by delegating to and trusting your colleagues, by creating a culture of empowerment within the firm and a sense of obligation to it, by providing appropriate incentives to maintain the continuity of your team, by building a great brand and by being successful.

      Chapter 6: Smart money

      • Don’t just raise cash, raise your probability of success.
      • Good entrepreneurs develop a kind of x-ray vision. They can see through all the operational issues – the products, the markets, the clients and the staff – down to the hard, underlying financial structure of their business. It is like seeing the skeleton under the flesh. As an entrepreneur, you will concern yourself with that skeleton as it becomes visible through the profit and loss account, the cash flow statement and the balance sheet.
      • There is a temptation to understate the amount of funding required for your new venture. This can be the worst mistake to make.
      • You don’t want to discover you need more runway just when you are picking up speed.
      • When people meet you they are assessing you on an intellectual level and on an intuitive level. They are listening to you but they are also observing you.
      • You cannot pretend to be someone you are not. You will be found out. If you are a thinker, and the situation demands an implementer, make sure you get someone on your side of the table who is an implementer.
      • One of the key criteria is the degree of determination of the individual.
      • From time to time you come across individuals who are very able, even though the opportunity they have identified is limited. You feel that they will either transform the opportunity or they will connect with a larger opportunity at some point. You therefore back them.
      • There are certain industry standards. It is rare for a supermarket concept to achieve more than 5% profit, or for its gross margin to be more than 30-35% of sales. Manufacturing business needs gross margin of 45%+. The return on equity in a plc is about 15%.
      • Important what the source of money is: you want a great investor, expertise and contacts not just the investment itself.

      We would rather back jockeys than horses. Ideas abound, the rare skill is effective execution.

      Chapter 7: Ego, intellect and ambition

      • Deep down, most entrepreneurs are driven by the need to make a mark. This driver is all about ego. As well as being powerful, ego can be destructive, especially if you allow it to set your course.
      • Ego should provide power, not direction.
      • Harnessing the ego and channelling its energy is an essential discipline for success, but this discipline is not always maintained (Clive Sinclair case study, page 192).
      • In early stages the entrepreneur is the business; as the business grows it has its own needs and these will eventually conflict with the entrepreneur.
      • The best entrepreneurs are aware of the role they play relative to the needs of the business; they sublimate their egos to achieve greater success.
      • How do we know if ego is in the driving seat? Ego is clamorous and articulate, impatient and intolerant. Hasty, doesn’t do due diligence.
      • To harness ego, we must give priority to intellect and intuition.
      • Intellect is about calm, rational analysis of the evidence before arriving at a conclusion, bringing due diligence to bear on every decision, placing long-term interests of the business above short-term personal considerations.
      • Intuition = humans' ability to process many factors faster than reason can follow. Do not ignore your intuition.
      • Entrepreneur’s job is to listen to scale of opinions and then come down on one side or the other (not a democratic vote).
      • At Apax we never voted on any decision. Voting crystallises the contention between egos.
      • At some point the entrepreneur may have to harness his or her ego and decide that he is no longer the best person to manage the company from day to day.
      • The founder might be the best at making difficult judgements but he might not be the best at leading their implementation.
      • The time comes to appoint a CEO (or COO if the founder keeps the title CEO). Many entrepreneurs fear such a step.
      • It is important for you to have a concept of the evolution of the firm and your role within it. Once you reach a certain size, you will have to attract talented, experienced people and delegate large parts of the operation to them.
      • As the co grows, there are usually half a dozen key opinion formers who are consulted on every major decision. By the time the firm is 100 or so, this is usually formally constituted as the executive committee.
      • The founding team (exec committee) cannot expect to guide the company forever. Do not expand the exec ctte to satisfy everyone’s ego.
      • Use variable geometry to solve the problem of moving people off – see detailed explanation on page 200. Give them something else important to lead.
      • Exec committee should not be bigger than 5 or 6 – ever. You can expand the size of the senior group but they are not all members of the exec ctte.
      • When the business makes the transition to being a public company, it will need a board of directors run by a chairman, an an exec ctte run by the CEO.
      • If your gratification comes from being the clear leader making all the decisions, from the confirmation you are in charge, you will find this transition difficult. You may not enjoy yourself as much as you did in the early days when it was just you, a few colleagues and your dreams.
      • If you let your ego get in the way of that process, your firm will suffer. The extent of your success will be limited by the extent of your personal reach.

      Harness your ego, apply your intellect and develop your intuition, and lead your colleagues to do the same.

      Chapter 8: Chance, perseverance and luck

      • In the long run luck – in the sense of pure chance – is not a deciding factor in your success.
      • Nice anecdote (page 207) about the 2 partners who left and the paper RC wrote on the relationship between perseverance and luck.
      • As the actor who played Tarzan said, “the most important thing is not to let go of the rope”.
      • Was I lucky? Yes. Was my luck the result of chance? No. It was immediate proof of my proposition that perseverance is the key to being lucky.
      • The first rule of luck is that you should persevere in doing the right thing. Opportunities will come your way if they do.
      • Perseverance is only the first element in the luck equation. The second is networking.
      • Luck is directly proportional to the size and quality of your network.
      • For many years RC went out several evenings a week with contacts, clients and colleagues.
      • My friends could never understand why I would get on a plane to go to LA for one interesting meeting.
      • For me it was obvious: if you meet interesting people, something will come out of it. Not today, maybe not tomorrow, but one day.
      • You need a critical mass of such people. It puts you in the position to spot opportunities, spot good people and spot new ways of doing things.
      • It may take you years to get your product right and achieve meaningful scale. You will become more visible in the meantime.
      • As you become more visible, people start to network with you. Your network grows without you having to make all the running. It becomes easier to be lucky.
      • Learning from your experience is the 3rd element of luck. You need to live and breathe the strategy of your business, pushing it forward in a direction that will give you the ultimate prize of leader of your sector.
      • What element of flexibility is built into your plan? To what extent should you expect to revise the plan within a short time-frame?
      • You are working for the short-term and the long-term at the same time: this is an important concept.
      • Flexibility, improvising as you go along, perhaps having to change direction: this is what it takes to win.
      • 5th element might seem contradictory: the need for focus. Define the main chance and focus on it. Develop an alternative in case the main chance does not come through. Eliminate all other possibilities.
      • Psychologically, closing down a line of research or product development can be difficult. It is like chopping off a limb. But it has to be done.
      • 6th and final factor (and most important): the ability to turn setbacks into advantages.
      • Suppose a good person leaves: you need to rise to the challenge every time that happens. Use it as an opportunity to get someone better, or with a different skill set.
      • Setbacks enable you to make changes that you might have shied away from making.
      • Fundamental for turning an apparent setback to your advantage is the exercise of will. People can get dejected by what they see as a setback. The will to view it as an opportunity and to get the team to view it as an opportunity is essential if you are to hold the team together.

      The secret of lucky entrepreneurs is the ability to turn every setback to your advantage.

      Chapter 9: Doing it right

      • It takes wisdom to build a great company. Wisdom leads eventually to fulfilment, which is a healthy balance between what you do for yourself and what you do for others.
      • Apax could only grow to the size it did because we had an agreed set of values: personal and corporate integrity, meritocracy, maintaining long-term relationships based on trust, internally and externally, leadership and stewardship of the firm by each generation in turn.
      • The bigger you get, the more important it is to articulate and apply your values, such that anyone who doesn’t observe and share them should leave the firm.
      • Enron / Arthur Andersen case study (page 237). AA executives shredded Enron documents rather than hand them over to investigators. When they did that, they shredded the firm’s reputation. 85,000 jobs were lost worldwide overnight.
      • Cheats never thrive in the long run. Why? It is harder to operate a web of deceit than do things properly and above board.
      • My approach at Apax was always to be a hundred miles from the border of acceptability.
      • Doing it right at Apax meant adherence to 5 precepts:
        • My word is my bond.
        • Honour the spirit as well as the letter of the agreement.
        • Full disclosure.
        • Act fairly (thinking about both sides, esp. if power imbalance eg firm vs employee)
        • Act responsibly. With power comes responsibility.
      • People increasingly feel that there is something wrong with successful, entrepreneurial society. The market does not take care of all its consequences.
      • Great story about being done over on a deal, page 242, $15m compensation.
      • Always, without fail, act in the best long-term interests of the business.
      • Same rule applies to the founding entrepreneur(s). Some people hang onto leadership long after it has ceased to be in the interests of the firm. And they know it. But they say, ‘So what? This is my business and I do not care if someone else could do it better. I am going to continue until it suits me to leave.’
      • When you think in that way you are making a wrong business decision.
      • When dealing with issues it’s vital that values are communicated in advance of a conflict situation. Being a good communicator really helps. Some have it, some do not.
      • Any entrepreneurial organisation ends up running on trust. You need a strong culture of responsibility and doing the right thing for the firm.
      • From time to time there will be people in the company who cannot keep up with the business. That is just how it is. It’s crucially important that the person is dealt with fairly, so that others who might be in the same position one day will see that the firm will be fair.
      • The organisation will then judge that this is something that needed to happen and the firm has been fair, and the person has been treated with respect and generosity.
      • In your business career, you can do good deals and bad deals, you can make money and lose money, but you only have one reputation and you must take every opportunity to consolidate it.
      • This creates a sense of dependability; then, as is inevitable, when people criticise the leadership for their unhappiness, people will confront them and say ‘the organisation would not do that’.
      • The only problem with doing the right thing is that there is usually a cost in the short term. However there is always a pay-off in the long term. When you cut corners, it’s the other way around.

      Principles, whatever their cost, are a bargain in the long run. People should feel that the organisation and its leadership have the highest integrity.

      Chapter 10: Entrances and exits

      • Every company has an exit scenario. We work towards that exit from day 1.
      • At Apax, we say ‘well done’ to our people when they make an investment. We reserve ‘congratulations’ for when they made a successful exit.
      • If your aim is to build a lifestyle business, do not approach PE. Raise money from family and friends instead.
      • There was never a resting-place, there was always a higher level of success that attracted me.
      • Apax became the global leader, $35bn under mgmt, achieved 30% return pa for 15 years.
      • I decided in my fifties to leave Apax on my 60th birthday. The question was how best to prepare my departure so that the firm would thrive.
      • If you have got great people, you have to give them a timely chance to run the business.
      • If they are 10y younger than you and they know that they will have chance to run the business you will keep and attract great people and move forward fast. If you want to keep people and attract excellent recruits, you have to give them a chance of reaching the top.
      • At what point does an entrepreneur decide to let go? This is not an academic question.
      • Too often entrepreneurial firms are identified with the founder and cannot survive without him or her.
      • Succession is a process, not an event.
      • All too often it is viewed as a process, not an event – to be well handled, it has to be a staged process. Succession begins on the day it is announced, not the day it is completed. If your successor is worth his salt, he will do as much as possible in the transition period and you will have to fight your instinct to interfere.
      • How successor is chosen is important. Apax was a partnership; instituted a constitution in 1998, leader of the partners chosen by secret ballot after making a presentation.
      • Since leaving, I have not given colleagues advice unless they asked for it.
      • Entrepreneurs come in all shapes and sizes. Some do only one thing well, some thrive on business or management and become serial entrepreneurs.
      • Social entrepreneurship: looking at poverty today, and the shrinking state sector, it is clear that an increasing social sector / ‘third way’ is required.
      • Philanthropy and govt incentives can alleviate suffering but philanthropy can only go so far and govt intervention tends to create dependency not independence.
      • Apax co-founded Bridge Ventures in 2002 – invests in the poorest areas of Britain; social investment run on commercial lines. Generates a financial return and a social return.
      • RC founded the Portland Trust in 2003. Helps develop and support economic initiatives to improve the standard of living of Palestinians and poor Israelis. Focusses on the use of economics in peace-making.
      • Projects include financing businesses, creating a private-sector pension scheme and registration of land and property rights.
      • Social investment is going to be a new asset class. I am sure of it. I can see that asset class – I can touch it. It is inevitable. Unless the private and voluntary sector can remedy poverty, the system will blow up.
      • Why are prominent entrepreneurs picking up issues that governments used to address and applying private sector business practices to them (eg Bill Gates). Because he has the confidence he can do it. Gates and Buffet know that it is not money that counts – governments have plenty of money. What counts is the entrepreneurial mindset and skill.
      • There are few entrepreneurs who cash in and retire to a beach house. It is in the nature of entrepreneurs to do rather than to be.
      • Just like the PE investor, the entrepreneur has to think about the exit from the beginning.