‘A V-shaped economic recovery? – the fundamentals are against you’: Business Leader talks to James Caan CBE

For its latest cover story interview, Business Leader Magazine spoke to entrepreneur James Caan CBE about his career, thoughts on the economy and how a ‘start your own business’ revolution could be growing.

Can you tell us about your business career?

I started out life as a young entrepreneur working in recruitment. I left school at sixteen and set the business up on my kitchen table, calling it Alexandra Mann.

Today, that business has grown to 7,500 employees and operates in 27 countries. It is ranked number one in the world and has revenues just shy of £1bn.

Following the success of Alexandra Mann, I then set up an executive search business which now has 147 offices across 30 countries. I eventually sold Alexandra Mann, and following this I took some out and reflected on my life. I decided to go back to school, and at the age of 40 I enrolled at Harvard Business School.

The key buzzword whilst I was studying at Harvard was private equity (PE), and I came back to the UK and set up a firm called Hamilton Bradshaw. Through this business I started investing in entrepreneurs who had passion and drive, but needed some help in scaling the company.

I have also founded the James Caan Foundation, which helps underprivileged children with their education. I also set up the UK Start Up Loans company in collaboration with government.

This was created to foster and encourage people to start their own businesses. I was tasked with identifying potential founders and helping then to start their own company.

In total we created 28,000 companies, which employ 86,000 people in total.

When you are investing in somebody – what are the traits you look for?

In business, it can be common for an entrepreneur to think that because they have a good idea, they will become a millionaire. The idea only counts for 5% of the opportunity though and sometimes people can think it is 95%. The real success in business is not an idea, but the ability to execute the idea.

We all have ideas every day, but they do not come to anything and success happens when you can turn an idea into reality; and I’m looking for somebody who does this.

I also look for somebody who demonstrates leadership skills. It is not about you in a business, but who you surround yourself with, and you need to have gravitas and charisma in order to attract good people.

Finally, I look for somebody that has a commercial mind. A big reason for a business failing is that it will run out of cash. I am not looking for an accountant but somebody that is commercially savvy.

You have exited two businesses – what is the process like?

To exit a business is much harder than people think. What helps the process is having a strong management team and board structure – the business cannot be too overdependent on the founder.

When I was going through the process I didn’t think about the money and what I would do with it, and when I sold the business, it wasn’t the excitement of having the money, but the fear of what I was going to do with the rest of my life.

You are in an unusual position because you do not need to work, so you question what you are going to do. You can only play golf and travel for so long before you realise it is a novelty, and you need to start the next phase of your career.

Can you tell us more about your experience of being on Dragons’ Den?

I had never imagined a TV career for myself and it happened by chance. I was sitting at my desk at my PE firm and an executive from BBC called me and said they were looking to add another Dragon to the show.

They already had a retailer in Theo Paphitis; Peter Jones who was involved in technology; Deborah Meaden who worked in the environment space and Duncan Bannatyne who had a leisure empire. The producers felt it would add a different dimension to the show, to have somebody from a PE background.

In total I made fourteen investments with £1.4m of my own cash and the best part was competing against four super smart businesspeople.

Moving on to another subject – how do you feel the pandemic has been handled by government in the UK?

I am very frustrated by how it has been handled, and the messaging has been very confusing. Everything was shut down and then we were told to go out and support the hospitality industry through financial incentives; and now it seems like the brakes are being applied again.

I have found the approach to the pandemic farcical, and I do not think the so-called ‘experts’ we rely on have done us justice when you compare the UK with other countries around the world.

If you look at Taiwan and Sweden for example, these are two countries whom I admire in how they have handled the pandemic and protected their economy.

How did Sweden better manage the crisis in your opinion?

Sweden took a strong position, which I do admire, as the role of government is to lead and to protect the economy. They took the opposite approach to the UK, and it is interesting to look at the net result of this. The number of infections in Sweden is 22 for every 1,000 people and in the UK it is 58 people for every 1,000.

The UK has twice the infection rate that Sweden has, and we have gone through the whole process of lockdown. I have found other governments more decisive too and France, for example, has been clear that there is no chance of a second lockdown.

To continue the analysis of the data when it comes to jobs, we have lost 700,000 in the last five months and we are set to lose another 700,000 jobs in the next three months. When you look at the question of ‘have we managed it well?’ all the data and statistics suggest that we have not. We have spent over £200bn and counting; and we are in a worse position than Sweden.

Government has also handed out unprecedented numbers of loans to save many businesses. Do you worry though that many will not be able to pay the loans back?

We are implying that the amount of money that has been put into the economy has saved businesses, but I am not sure that is true as the number of business closures is higher than it was pre-pandemic. So, are we saying it has worked – I am not so sure it has, and have we seen the worst? No, I think the worst is yet to come.

The major challenges are set to come in October or when the furlough scheme ends, and into 2021 when businesses need to pay back the loans they took out. The reality is that many businesses will go bust because their debts will be higher than their income.

I believe the furlough scheme has masked the problem and not solved it as we still have already lost over 700,000 jobs. We have also spent billions of pounds on supporting restaurants and bars, but did we get a value add?

Regarding the recovery – how do you see this being shaped?

I believe we are in this for the long haul, because we need to remember that the loans are just part of the problem. Many businesses in the UK have deferred their VAT too and they will need to pay this back in 2021. VAT is 20% of your turnover, so if you are running a £5m a year business that’s £1m you will need to pay back. If you’re a business owner, you’ll be looking at 2020 and saying it was a terrible year but 2021 looks even worse, as not only do you have to pay back the money you have borrowed, but you’ll need to pay your VAT bill and a huge chunk of your payroll cost.

There will be a huge amount of debt challenges that businesses face in 2021 and the fight for survival will be extreme. For the economy to recover, you will need consumers to start spending and businesses to invest – but where will consumers get the money to spend if they have been out of work and they are not earning? and how can companies spend on capital expenditure with so much debt?

When people are saying it will be a V-shaped recovery, what are you basing that on? Because the fundamentals are against you unless consumers and businesses start to spend.

With so many redundancies being made, do you expect to see a boom in people setting up their own businesses?

Historically, adversity creates opportunity and there will be thousands of people who may have wanted to set up their own business but had a secure job, so they did not take the risk. I expect to see an emergence of sole traders and entrepreneurs in 2021, and many businesses get started in a recession.

What advice would you give to somebody looking to set up a new business?

Typically, when you set up a new business you need to think about raising money, but one thing the last year has taught us is that with 10 million people working from home you may not need to look at raising substantial amounts of money.

I would also say that when you set up your own business, it doesn’t mean you’ll become a millionaire and the initial aim should be to earn more than you did when you were working for somebody else.

You do not need to take a huge risk and you do not need to build the biggest business in the world; being an entrepreneur is about baby steps and be clear on what your ambition is.

For example, it could be to have a small office; then to employ somebody and it can build and build. I would also say that technology has changed the way we work and made us realise that you do not need offices to set up a business anymore.

What would you say is a good formula for setting up your business?

For example, let’s say you’re a credit controller and your job is collecting receivables, but your employer has said that they can’t retain you as they don’t have enough work for you. The key word there is enough. The employer may not have enough work for the whole week, but you could ask them if they are happy to retain you for two days, for example.

If they say yes, then all you need to do is find three customers for the other days in the week and you will have a small business where you will be earning more than when you were employed.

To conclude, regarding private equity – what trends are you seeing?

What I am seeing is that valuations have not come down and there is a wall of cash that is waiting to be deployed. The reason why valuations have not come down is because many companies are masking their problems with government subsidies. We felt that as the crisis hit, businesses would review their operations but for some the crisis has not happened yet because they haven’t had to pay their VAT or PAYE and their staff have been on furlough.

The PE world has been taken aback and I think it will be 2021 when the loans need to be paid back where we will start to see some cracks in the system, and it could be a bumper year in regards to PE.

Ultimately, people may want to exit but it is not a good time to sell as I’m not sure you’ll get a good deal now. In my 30 years in private equity I’ve learnt that you buy when the market is lower and sell when the market is high; and in a low market is when it’s time to deploy capital. I would also say that many people are saying there could be a spike in sales due to changes in Capital Gains Tax but you shouldn’t let tax define your exit strategy.