He would do to it what venture capitalists do: they snap up struggling firms for a snip, plump them up, streamline, rationalise, asset strip and, oh yes, sack, before selling on for a very tidy profit a few months later.
There was no shortage of voices accusing venture capitalists of being unaccountable, invisible Svengalis, a jaundiced symptom of get-rich-quick spivvery – the very nemesis of good HR practice.
Venture capitalists – like their fellow deal-makers in mergers and acquisitions – are simply not seen as being very interested in people. “The financial, legal, and accountancy mafia concentrate on doing the deal – that is par for the course,” says Simon Barrow, chairman of management and recruitment consultancy People in Business.
“They do have to check how good the people are they are backing, therefore they ought to be interested in first-class HR planning and the ability to work in a team and so on.
“But the truth is that time pressure gets in the way of HR best practice, so I am not really sure how much they do. I don’t think they are terribly interested. You get paid for doing deals, the same as insurance.”
Oddly enough, the Rover crisis came at a time when the venture capital industry is going to great lengths to emphasise its positive influence on employment. After all, venture capital is responsible for Madame Tussaud’s, IPC magazines, Tetley Tea, Sock Shop, Dunlop Slazenger, National Express, William Hill, Odeon Cinemas, United Biscuits, Goldsmiths, Umbro and Hozelock.
Even the future has been mortgaged to VC: Dolly the Sheep creators PPL Therapeutics is owned by Apax Partners.
Some rather tendentious statistics produced by trade body the British Venture Capital Association make the point 50 per cent of venture capital finance is for expansion – £1bn was invested in high technology companies last year.
Between 1994 and 1998, venture-backed companies increased their staff levels three times faster than that of FTSE 100 companies. The average number of people employed in VC-backed companies rose by 24 per cent against a national growth rate of 1.3 per cent; sales rose by 40 per cent, profits by 24 per cent, exports by 44 per cent and investment by 34 per cent.
Altogether, Britain’s venture capital fraternity (the UK accounts for 49 per cent of the total European investment) invested some £7.8bn in 1,300 companies.
“Asset-stripping is really a phrase from the 1970s”, says David Thorp, chairman of the BVCA and managing director of Friends, Ivory and Syme Private Equity. “The ambitious fast-growth firms we have interests in do not really have assets to strip, apart from people, and that would be up to the company’s management, not to us.”
While venture capital situations vary widely (the VC firm may have a minority stake on a management buy-out or majority control) venture capitalists are rarely involved in turnaround expeditions, he says. “Rescues happen in the middle of a recession. About one in a hundred are about turnaround at the moment.”
So how detailed an interest do they take in people matters? According to Patrick Dunne, director at the largest venture capital house 3i, the composition of the board is the top priority. “The key thing for us is to get the right board in place. We spend a lot of time getting the right CEO. We do need to be convinced of the ability of the top team to be strong on the people issues. If they are not good at leading and motivating a team, that is crucial to the success of the venture.”
Dunne says it is rare for HR directors to be on the main board of the companies the venture capitalists are looking at – just below board level is common. But he maintains, “The relationship between the CEO and the HR director tends to be vital. When you look at how a business is doing, if a company is not managing its team well it is not long before you see problems in the marketplace.”
In assessing the pedigree of a board, Dunne says on-site visits are useful. “What you hear and see is more important than what you read.” Equally, he says VCs spend a lot of time getting different perspectives of a management team – in the case of 3i drawing on the expertise of some 600 independent directors, made up of former chief executives, chairmen and finance directors.
Alasdair Warren, managing director of nCoTec, a specialist communications enabling technology venture capital firm, formed by a team of former investment bankers from Saloman Smith Barney, goes even further. He says in new economy start-ups “you are basically investing in people”.
He adds, “There is a big difference in the old economy where you are realising the value of assets by efficiencies and so on. In start-ups, there is so much rapidly changing technology that you are investing in the people not the technology. It is the firms with the best people that win.”
Warren agrees that it is the senior positions that venture capitalists worry about, the CEO and CFO. “Typically, ideas are generated by people with a technological background whereas it is the commercialisation of the technology that is the crucial judgement.”
Because of the speed of movement, nCoTec has a strategic alliance with executive search firm, Skillcapital, which has a database of potential candidates already identified for new roles.
But on the staffing side of investing in start-ups, Warren says there are definite negative consequences attached to having a firm with more than 20 people. “If it [the venture] becomes dependent on people, you have to question their ability to recruit. People can push the business plan back six months and it becomes a concern.”
Aside from recruitment, at these senior levels, remuneration and incentives are the main HR area that venture capital companies have to deal with.
The bulk of the financial side is straight equity or options (thanks to changes in the last two budgets), but people who move into VC-backed jobs also typically insist on a base salary premium of 25 per cent in order to take on the risk of moving. “If we put a lot of effort into finding people, we do not want them to go,” says Dunne.
“The offer of options is an excellent way of aligning people to encourage growth in the value of the business. It is often logistically very difficult to put all-employee share ownership schemes in place, and that is where HR input can be crucial.”
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But yet, just as the venture capitalists claim to be oiling the wheels of the future economy, one of the interesting facts of the Rover crisis was that venture capital is investing in the old economy with new relish. Because of the fashionable obsession with high technology stocks, the current place to look for good deals is by trawling the chemical, engineering and retail sectors.
As Guy Hands, finance principal at Nomura, is on record as saying, “Without private equity and people like Jon Moulton focusing on old economy businesses, we are going to become a country full of unemployed people sitting at home playing computer games on the Internet.”
