Enter Pembridge Partners. Described as a “business accelerator for creative services firms”, Pembridge is made up of five partners and 20 regional associates which provide financial advice for creative companies across the UK. The group’s core business is as an investment vehicle, which puts cash exclusively into the creative industry. It has raised over £10million and is involved with more than 50 companies at present.
“We help companies discover where they sit in the great realm of things,” says Hugh Mason, a consultant with Pembridge Partners. “We aim, in 20 minutes, to try and help show companies how they compare to their peers.
“We generate a mass of intimate data about the company. We look at bands of turnover from creative companies. We work from bands of £10,000 to £30,000 upwards. What’s interesting is that as you progress up, you see a bulge of firms that are stuck between £100,000 and about £2million. This is something quite unique to the creative industries.”
Mason believes that although there is a fall-off in the business, there is a glut of agencies that have grown to a certain size and gone no further. “It makes me think, ‘What is holding them back? Do they want to be there? Do they want to grow? Does it feel comfortable being that size?’”
The growth of the creative sector is of paramount importance, Mason believes, as the UK economy is going through a strange period of financial maturation. “We don’t build ships any more, and we don’t build cars, so from the government’s point of view, they have to look at sectors which are growing. And the creative industries is one such sector. This is why the government hires us to supply our advice to people and subsidises our cost.”
Mason believes that running a creative company is like moving up a wine glass (take a look at Figure 2 over the page for a better idea of what he’s talking about). “While there are lots of businesses at the bottom level, there are actually very few who have made extraordinary riches up at the top. And there’s a really uncomfortable thin part in the middle that companies have to grow through if they’re going to get to that critical mass.
“We have looked at the different companies we work with to see how they grow over the time. Say a group of individuals come together to start a company, each with their own talents – some are good with clients, some are good at doing the creative. Over time, they get a raft of clients and the projects come and go. What you learn to care about is those projects and the clients because that’s where the money comes from.
“Most people don’t really think about the company very much. When they do, it’s normally when something goes wrong, or at the end of the year when they have to fire a couple of the accounts. There is an awareness, when you grow a company, that the company itself – separate from the people who founded it, separate from the client list – could have value. When I talk about value in a company, it’s that value I’m talking about – what someone will actually pay to buy your business tomorrow.
“When you start a business, at the very early stages, it’s extremely hard to say that the company is worth anything at all over the first couple of years. You don’t know if the manager of your team wants to be in business, you don’t know whether they have a proposition that matches the market anyway. It’s very hard to set a value.”
Some companies, Mason believes, are able to get through the two-year growth period that start-ups need, but others fall into a ‘lifestyle business’ trap. “That’s where they run the agency to service a kind of lifestyle,” he says. “I say that they’re stuck in a trap without criticism. There are some world-class, award-winning creative businesses which work in that space, but structurally there are some real issues if those companies want to grow.”
Pembridge’s interests lie in those agencies which suddenly decide they want to grow, those where there is a genuine motivation among partners to grow the business, to take the risks and to take the necessary action.
“In the creative industries, the venture capital aspect is virtually irrelevant,” says Mason. “There are not many services businesses that will ever do what MDs want them to do, probably because if you want to double the revenue, you have to do twice as much work. Revenue scales with the number of jobs you get.”
But if it’s the intention of the MD to move out of that plateau and grow, then Mason insists the comparison between company and personal life has to be made. “Companies are a vehicle to get you, your ambitions, your clients, your projects, your staff, everything that is your company from one place to another. If you think about real life, you have different vehicles for different purposes. Often when people start up businesses, they find it very difficult to separate the business from themselves, and they imagine that while there are all these things they would like to do, they have to do them through this one vehicle. I currently run two businesses and I also set up a charity – and those are all part of who I am.
“It is very easy to think, ‘I set up this agency 10 years ago, and now that I’m driving it, it’s giving me some of the things I want.’ It’s such a big wrench to say, ‘That vehicle is never going to give me what I want.’ But the moment you can start separating yourself from the vehicle, then you, as the director of the business, can start making this business available for investment or available to sell to its employees in a management buy-out or to whoever wants it.”
Mason blames the emotional attachment involved in the creative industries on the fact that it is a people business. “It’s a psychological trick,” he says. “It’s so hard for creative businesses to make the separation between the people who founded the business and the business itself because it’s so hard to see what the business is.
“If you run a chip shop, you have a chip shop – there is fish, there’s the fryer and there’s you. It’s very obvious. But if you walk into a creative agency, it’s quite hard to see what the business is. It’s not tangible.
“We shouldn’t beat ourselves up for having that challenge of separating ourselves from our businesses. But we need to separate ourselves if we’re going to think about the business independently.
“Another example would be if it becomes appropriate in your ‘business’ life to take out debt to finance growth. That’s fine, but you might not be keen on debt in your personal life. It may not always be the right thing to apply the same personal values that you have in your home life to your business. A business has its own destiny, and as soon as you can give it its own wings and let it fly, the better.”
WHEN DO YOU GET RICH AND RETIRE?
The big question asked of Pembridge is: “When do the millions start rolling in?” Mason believes there are five clear transitional periods that companies go through. Start-up, lifestyle business, high growth, venture capital and PLC. What tends to happen, he says, is that two years after a company has floated, all the creatives get pissed off and set up a smaller business.
“It’s a circle,” he says. “To move up the ladder, you need to focus on what you’re trying to achieve and pace yourself in a sensible way to achieve your goal.”
Few company owners expect to walk away with millions. “When you build a small business, the human factor really dominates everything,” Mason says. “The first thing we do when working with a small company is to take the directors away and blitz through the process of strategic planning with them. The starting point is always the same – we ask them, ‘What do you want to achieve? Not for the business.’
“The kind of thing we’d like to hear about is, ‘I would like to send my kids to university and not worry about the fees in 10 years.’ Or, ‘I’d like to take time off and write the book I’ve always wanted to write, and know I’ll have enough money to do it.’ Or, ‘I’d like to go sailing round the world.’ With some people, it is about money, but surprisingly few will say, ‘I want to make £10m.’
“Often people find it quite hard to define those personal goals. Often these goals are a surprise, because they are radically different now from what they were when the business was set up six years ago.”
PLAN FOR THE FUTURE?
“There are day-to-day tasks we all do, like working out what the cashflow is going to be,” says Mason. “There’s a lot of housekeeping that small companies don’t do because it’s very hard to do yourself, to see outside and find the truth.
“You can start working out what the value of the company is, and where you are going to exit from, and how that’s going to happen. There are some reasonable goals to set and, if you’re going to build value, how do you go about it? If you’re going to build value by hiring more people then what’s the process?
“Look in cold, hard terms at the business itself and say, ‘If you ignore the personal goals, what is this business actually?’ It may well have started off as a PR firm. We might say we’re an integrated agency, but what really is the business model? Where is the revenue turning point? Where are we going to sit in the marketplace? We take a cold hard look, not at where the business would like to be, but what is actually is now.”
Businesses need to envision different scenarios for the future of the business, such as closing down, selling up or opening in another country. Mason gets the directors to think about what it would be like to actually live through one of the scenarios. “Such as, ‘If I were to open an office in Dubai, that means I can’t drink for six months of the year.’ That might be an issue. You have to think in terms of your personal life and measure up those possible scenarios to see which is most likely to give us what we want.”
Often, however, the best possible scenario (which pleases the majority of the partners’ desires) can rub others up the wrong way. “Maybe, when you get to this point, that can be an uncomfortable home truth,” says Mason. “But you’re far better off learning how to deal with it, otherwise you’ll end up having disagreements down the line.”
It is then important to create a horizon where the partners can identify turnover for the next three to five years, estimate when it needs a chief executive and factor in logistics such as moving premises.
“Companies write up an incredibly succinct one-page summary of what the business is and what it’s trying to achieve,” says Mason. “We get that plan as quickly as possible, take it to the director and say, ‘This is what you said you wanted to do. Do you really want to do it? Either commit 100 per cent to it or don’t commit at all. But for goodness’ sake, don’t do half of it. Make the decision and stick with it.’”
WHAT KIND OF BUSINESS ARE YOU?
“On the bottom row are those who understand how to do what they do well,” says Mason. “They might do design well, they might do PR, they might do advertising, but in terms of strategically growing value in business they don’t know what they’re doing. They are low on a commercial, streetwise maturity. Those in the middle are learning, while those at the top know their stuff.
“There is a kind of company, which I would call a ‘hobbyist’ company, where the work is far more important than actually being paid. Those kinds of businesses don’t really scale above four or five people – they sometimes go bust because they forget to invoice clients, but that’s not untypical of most start-up creative companies.
“There’s another category of start-up: ‘clubs’. These have around five to 20 people, and the company will be the kind of place that is like a family, where everyone will remember everyone’s birthday, you would remember everyone’s second name as well as their first name and you all go out for dinner a few times a year.
“Those kinds of shops can be the most fulfiling creative place to work. It can be a fantastic place to nurture new talent, but it usually lacks any kind of process and structure that it needs to grow. You can’t take that kind of structure and double it in size – it just doesn’t work. In fact you can’t even make it one and a half times bigger than it is.”
That’s not to say running small companies that way is wrong. “It is a valid way to run a business,” says Mason. “You can run an award-winning shop that way and have extremely happy staff. If your motivation is to build the kind of business that you always wanted to work in, then that might be exactly what you offer. But if you want to scale a business, you have to change gears completely, and change the culture of the company.”
But what about the old complaint that once the structure has changed, the magic has gone? “It’s a valid question,” admits Mason. “Once you start becoming a mature business and asserting yourself, doing the stuff grown-up businesses do, the culture does change.
“I remember working for a PR firm that went from 25 people to 65. One day a little book appeared next to the fax machine where you were to write down which client you sent faxes to so they could be billed back to the client. That was the example of process starting to appear.
“I also remember when it was impossible to remember people’s second names. That’s what happens when you take a company into that bracket. You might lose something in terms of culture, but you gain something in terms of scalability.
“Our job at Pembridge is to help people jump between those brackets. The analogy I give to people is that when we help the company make that transition, it’s like when you sign up to the gym. A lot of people say, ‘I want to be thin,’ but most people who go to the gym don’t follow the fitness plan through. The same thing seems to apply to company fitness. It’s fine for us to help a company set itself some goals, but they need to be your goals, not ours.”