Ideas man

When things are really tough there’s comfort to be had from old adages that hint of better times ahead. A stalwart of the genre is the economist Joseph Schumpeter, who believed that ‘creative destruction’ is the lifeblood of new enterprise. ‘I often wonder,’ he wrote in his diary, ‘whether there is anything that ever happened that could not be turned into a business opportunity.’ More recently, President Obama’s chief of staff Rahm Emanuel made much the same point when stressing his determination not to let ‘a serious crisis go to waste’.

It turns out that Jonathan Kestenbaum takes his inspiration from an earlier American thinker. ‘I love the phrase attributed to Benjamin Franklin who said that “nothing concentrates the mind more than a hanging”,’ he says. Bracing stuff. But as chief executive of Nesta – the National Endowment for Science, Technology and the Arts – Kestenbaum is better placed than most to gauge the severity of the recession: both at the innovative grassroots level (Nesta backs 48 start-up companies) and in the wider economy.

On the latter point, it is safe to say he is not exactly sanguine. Although we meet some time before the Chancellor revealed the eye-popping extent of the UK’s public borrowing in the Budget, he is already painting pictures of the disasters that might lie ahead. ‘Just imagine this as an apocalyptic scenario: public borrowing getting to a point where its levels start to affect Britain’s credit rating. Forget the international humiliation of it. Once you get to that point, when it becomes expensive or impossible to borrow, I mean that starts to get really dangerous.’

Meanwhile, he suggests, UK companies continue to be stifled. Despite reports that credit conditions are easing, the banks still aren’t lending – and government lifebelts offer little respite either. ‘I’ll give you a great story. I sit on the board of a digital media company and the finance director called me up and said he had some amazing news. “I’ve discovered the company qualifies for one of these emergency finance packages,” he said. Now I’ve never yet met anyone in the country who qualifies, so what’s the story?’

It transpires that ‘you have to demonstrate that you’re profitable, that you’ve been profitable for the last five years, that you have independent directors’ guarantees, that you’ve got an order book going forward... In other words, if you can demonstrate that you don’t need the money, you get the cash’.

Creative in a crisis

Nonetheless, all the chat at the moment – at least among those of a glass-half-full disposition – is that this epic crisis could (and should) stimulate a renaissance in Britain, comparable to the breakthroughs that took place in the 1930s. Images of the Great Depression have been filling the news media, but it is often forgotten that this was an extraordinarily creative decade, spawning crucial inventions: from nylon and plastic to such unsung innovations as the ballpoint pen, the electric typewriter and Campbell’s condensed soups. In fact, there seems to be a pronounced link between tough times and innovation. You might cite the turbulent mid-1970s that saw the birth of the personal computer industry, or the extraordinary creative flourish that accompanied Japan’s recent decade in the doldrums. 

In companies, too, the evidence would suggest that fortune favours the brave. When McKinsey, the management consulting group, investigated the fates of 1,000 companies over a 17-year period (1982-1999), it found that the most successful in the long term were the ones that had taken advantage of downturns ‘to reshape their industries in ways that benefited them most’. They did this either through imaginative mergers and acquisitions or by upping the spend on R&D to come up with more innovative products.  

Kestenbaum agrees: ‘There is something about recessionary times...’ he muses, though he’s inclined to put it down to Benjamin Franklin’s point about focus. ‘During benign economic times, when leaders have a decision to make – should we do this, or should we do that – you very often fudge it and say “Let’s do both”. Then you end doing neither particularly well.

‘But one thing that’s beginning to happen is that agile and forward-thinking leaders in many companies in Britain today are saying, “Let’s do one thing really well. Let’s focus our resources, let’s focus our energy.” And the best of them are thinking, right now, RIGHT NOW, about how do we invest, where do we invest – so that when recovery comes we’re well positioned for it. That’s strong leadership at its very best.’

You might gather from the above that one of Kestenbaum’s many talents (he is a polymath of some scope) is a gift for oratory. ‘You don’t want speeches, right? Is it all right if we just chat?’ he says at the start of the interview. Absolutely, I say. Even so, he can’t resist going off on a few set pieces. Which in many ways is great: most of what he has to say about Nesta’s approach to innovation (of which more later) is fascinating. But I’m itching to learn more about his equally intriguing history. How he came to work for the Chief Rabbi Sir Jonathan Sacks, for instance; or what he learnt from studying the interesting combination of economics and anthropology at Cambridge; or whether he misses the excitement of running a large family commodity business and the buzz of trading on the London Metal Exchange. 

But Kestenbaum has the politician’s knack of turning every question into a vehicle to get his message across and the interview sometimes feels like a hustings campaign. In some ways, it probably is. Kestenbaum has rightly identified a sizeable hole in the national recovery strategy. ‘The asset class we once called venture capital has pretty much disappeared,’ he says, certainly in terms of financing start-ups in the very early ‘pre-revenue’ stage. The final blow came when 3i – founded after the Second World War to nurture new industries from the rubble – closed its early-stage business in order to focus on the more immediately lucrative big private-equity buyout scene.

‘We need a big new financial vehicle like that,’ he says, ‘a source of public capital that would drive new businesses and sit alongside private capital. It’s a classic model and it’s worked well.’ Nesta, which has a similarly hybrid public/private model, but much less financial firepower (£50m, compared with the billions that private equity funds can draw upon) may well be the vehicle he has in mind for beefing up. It is already the largest source of pre-revenue finance for early-stage companies in Britain.

‘What I really want to stress is that the potential consequences [of this lack of seed cash] for the next generation of entrepreneurs in this country are dramatic,’ he says. ‘We have never seen such a fantastic pipeline of interesting investment opportunities coming out of this new generation of science and technology entrepreneurs. We’re looking at about 500 proposals a year.’

Generation enterprise

In some ways, then, the situation is encouraging. ‘It tells a story of a Britain that has a very strong science base and some potentially powerful technologies.’ And this is especially true in the environmental, biotech and IT areas. ‘Most interestingly of all, though, it shows that a generation of people are going into the workforce for whom the idea of entrepreneurship and building businesses is appealing – in a way it wasn’t for a previous generation. When I entered the world of work, there was very, very little talk of building businesses. So that’s good news. But unless you can grow these businesses to a genuine global scale, they won’t have the type of impact on the economy that we need them to have.’

Kestenbaum’s own background is as hybrid as the financing model he advocates. Born in Japan in 1961, of American parents, he spent his childhood shuttling between the two countries before moving to Britain when he was 11. After taking degrees at the London
School of Economics and Cambridge, he did an MBA at Cass Business School, dabbled with the idea of a career in education, and eventually wound up in the family metal trading business, which he successfully expanded internationally. In 1993, the company was sold in a management buyout, which – as a previous interviewer noted – put him ’on a very solid financial footing’. 

He got his first experience of ‘a deeply mission-driven culture’ when he became chief executive at the Office of the Chief Rabbi Sir Jonathan Sacks: together they worked on several publications, including a series of BBC Reith Lectures, The Persistence of Faith. But the man he cites as his real mentor (in business terms at least) is Sir Ronald Cohen, the founder of Apax, credited by many as the father of the modern UK private equity industry. During his time at Apax, Kestenbaum became chief executive of Cohen’s particular hobbyhorse, the Portland Trust, a not-for-profit foundation committed to promoting peace and stability between Palestinians and Israelis through economic development. 

American dream

‘Mobility, opportunity and an international approach define my career,’ says Kestenbaum.
But his early influences live on. ‘I feel British – my wife and children are British and I am passionately committed to doing whatever I can to make a contribution to the economic prospects of this country. But I can’t deny the influence of that sense of American vision and purpose.’

Strong leadership, he reckons, is a crucial ingredient to fostering innovation: whether in companies or on a national scale. A key moment in US history for him was when John F Kennedy stood up in Congress in 1961 and said America would put a man on the moon in 10 years. ‘In fact, they did it in eight. But much more important was that it unleashed a great wave of technological entrepreneurship across the country, particularly on the coasts, in Massachusetts and California.’

Another favourite example is Finland, which went from Soviet supply state (rubber, paper, logs) to hi-tech marvel (Nokia et al) in ten years flat after Communism fell in 1990. He says this is mainly because of its ‘relentless focus on what the future economy might look like’ and the ‘extremely strong coalition of political and business leadership that drove the changes. It was the prime minister of the time, Esko Aho, a young 38-year-old man, who galvanised that vision’.

Kestenbaum considers this kind of vision – and raw determination to achieve it – to be the critical determinant of success or failure in any innovative venture. Even today, when he’s sorting through applications for Nesta funds, it’s the key attribute he hunts down. ‘People often ask what we’re looking for. Well, of course we’re looking for the technology… and a degree of financial savvy. But if you would push me on one thing it would be the scale and scope of the ambition of the founder-entrepreneurs. It’s that which drives the company. It’s the main differentiator between the companies that push on to generate the capital and build the customer base, and those that don’t.’
He thinks that in this department, frankly, the UK could do better. ‘Maybe it’s to do with national psyche, maybe something the education system is lacking, but one wonders at the degree to which young people are infused with that sense of ambition and purpose.
You know the apocryphal story about the American and British teenagers walking down the street? The British teenager sees a Maserati, gets his key out and scrapes it along the side. Why should he have a Maserati and I don’t? Whereas the American teenager sees the Maserati and thinks: one day I’m going to have car like that. Now I know it’s cute, but...’

The spice of life

There is change afoot. For one thing, Britain (and its companies) is becoming more diverse – another crucial signpost on the way towards a more innovative culture, says Kestenbaum. ‘If you look at where pockets of real innovation have taken place in the last ten years, it’s been in Britain’s big cities: London, Manchester, Birmingham, Glasgow. These are cities that are utterly unrecognisable from the cities we grew up in. What we see over and over again is that it is diversity of opinion, diversity of discipline, diversity of input that creates new ways of doing things – and the breakthrough ideas.’

Nesta is also doing its bit to mix it up, combining old strengths with new ones. The UK has a history of strong creative industries: in design, film, art and fashion. Kestenbaum is running a new programme to fuse these talents with more scientific and commercial disciplines. ‘Essentially, we’re backing the brightest and best people coming out of the Royal College of Art, Imperial College’s School of Engineering and Tanaka Business School. Most classical incubators are a fusion of technology and business schools: this goes one step further. It’s quite unlike any other incubator.’

That says it all really. You want to foster innovation? Here’s Kestenbaum’s advice in a nutshell. Get your vision and leadership in place – and then get out your battered copy of E M Forster’s Howards End. The mantra? ‘Only connect.’