When high-profile experiences company Red Letter Days went under, its founder decided to explode the myth that business is all plain sailing. With the help of some leading entrepreneurs, Rachel Elnaugh tells Growing Business about the value of failure 

Most entrepreneurs hit a crisis at some point or another. Situations arise that can threaten the very existence of their companies, whether the result of strategic flaws or circumstances beyond their control. Sometimes the problems are overcome and the business moves on, but in certain instances the injuries prove fatal. However, regardless of the outcome, there is always something to be learned from a business nightmare.

When serial entrepreneur William Berry set up online venue-finding agency, ConferenceVenues.com, the start-up period was fraught with crises. Operating solely online relies on good data back-up, which is what Berry had. Or at least he would be forgiven for thinking he had, with a database server hosted by a third-party providing two mirrored hard drives (so if one fails, the other is there) and daily tape back-up.Nevertheless, in 2006, the scenario that most companies dread was played out.

“Our site simply disappeared and no attempt to get it back up would work,” recalls Berry. “The staff at the data centre explained that both hard drives had failed.” The following day it transpired that the tape back-up had failed too.

Facing bankruptcy, Berry threatened legal action, only to find that this would be unlikely to stand up due to the terms and conditions of the contract he had happily signed without reading. “In desperation I made a few calls and found a data expert that could recover failed drives,” he says. “The cost was £12,000 and there was no guarantee, but it was my only hope.

“After getting past security at the data centre – when they said I couldn’t have the drives, I pointed out that I was very close to the edge, and they relented – I took the drives to the data guru.”

Berry likens the following 24 hours to waiting for the results of a major operation. “I spent most of the time down the pub with my business partner,” he remembers. “Eventually, they found the data and we managed to get the site back online two days later. Now we have offsite backups as well to ensure it never happens again.”

Inspiration

It just goes to show that even some of the most seasoned entrepreneurs have faced near-terminal crises. But through sharing the experience of how they learned the hard way, it may well mean that others don’t have to. This was the inspiration behind the new book Business Nightmares, by Rachel Elnaugh, and it’s something that the former Dragon knows a thing or two about herself. The book outlines in frank, painful detail the collapse of her business, Red Letter Days, before sharing the stories of other high-profile entrepreneurs as a warning of the bear traps that lie in wait for business owners.

“I was inspired to write this book by the many entrepreneurs who confided in me about their own business problems after the meltdown of Red Letter Days in 2005,” says Elnaugh.

She was surprised by how many of the UK’s most successful entrepreneurs had faced their own business demons. “I decided to write this book to explode the myth that business is a breeze,” she says. “I asked some of the biggest names in business to share their experiences with me, and how they overcame the nightmares they encountered.”

The aim, she says, was to remind those who are currently going through hard times and experiencing those “sleepless, 3am ‘dark nights of the soul’ moments” that they are not alone. In fact, they are in the majority, and overcoming adversity is often what leads to feats of entrepreneurial genius.

In particular, she wants to change the way that business failure is perceived in the UK. “There is still a deep-seated dislike and even disgrace attached to failure,” she says, “and, unlike in the USA, where failure is ‘de rigueur’, people are still ashamed to talk about any mistakes they may have made on their business journey.”

However, she believes it is key that entrepreneurs talk about the problems, “if only to give hope and insight to
those entrepreneurs who are at the earlier stages of their business journey and find themselves struggling”.

So here are two examples of entrepreneurs that feature in Elnaugh’s book, along with her own story in her own words. Reading how some of enterprise’s leading figures ran aground, and managed to get back on course, might one day help some of you to see the light that’s flickering at the end of the tunnel.

Rachel Elnaugh: Red Letter Days

“In 2001, we achieved a profit of £1m on a £10m turnover. A deal with Boots led to other more lucrative projects, in particular with Debenhams. However, in reality, Red Letter Days was starting to buckle under the strain of so much business.

Our operating software was useless and we couldn’t even identify which customers had ordered more than once. I commissioned a full business review, and when the consultants suggested the time had come to put in a “proper CEO”, I stepped back into a non-executive chairman role. This was a fatal mistake, but at the time it seemed the right thing to do, particularly as I was having so much fun gladding it up at awards ceremonies and being courted by the BBC.

The business over-expanded and overspent. Our ‘right-brain’ entrepreneurial marketing people were replaced with an army of project managers, who were so busy writing project initiation documents and schedules they barely noticed the business had customers. Board management information was inadequate and inaccurate.

The business sustained a loss of £4.7m in the year to July 31 2003. I was seven months’ pregnant with my third child, but I rented a flat in London and worked around the clock to try to bring things back on track. By the end of 2003, it looked as if things were going to be OK.

However, we never fully recovered, and by July 2005, things again reached a crisis point. A deal we had been working on fell through at the 11th hour and I think I had lost my passion for Red Letter Days.

Despite trying to salvage the business over a ghastly three-year period, attempting re-financing after re- financing to bring things back into profitability, I knew the time had come to finally let go, and the company crashed into administration on August 1 2005.

When the end finally came, instead of the anticipated depression of ‘losing it all’, I actually felt a huge liberation; I was free of the struggle and at last didn’t have to go into battle every day. It’s surprising what we cling to in life for so long, when in fact we should be letting go.”

Doug Richard: Visual Software 

 Seeing that the supply of software held more promise than trading hardware, Richard sold his first business, ITAL computers, and set up Visual Software in 1991. Riding on the crest of the technology wave, pretty soon this business started to attract attention from the big players, who by this point were snapping up boutique IT companies.

One of those suitors was Micrografx, a huge public company. Its CEO persuaded Richard to do a paper-for-paper deal in 1996 on the promise of big returns under the umbrella of his healthy and profitable business. Of course, when you’re being courted by what seems like a successful, big, publicly floated company, it’s easy to omit doing your own reverse due diligence and miss the fact that there may already be trouble brewing at your new parent-to-be.

Just 85 days after the deal had gone through, the share price of Micrografx plummeted by 99%. Refusing to be beaten, and knowing the CEO who had been so persuasive was now in an very precarious position, Richard corralled the other shareholders and launched a hostile attack on the board, resulting in his own appointment as CEO. “I then took great pleasure in sacking every last one of the bastards who misled me,” he says. He focused on turning round the company’s fortunes and eventually sold it at the height of the dot-com boom to Corel in 2001.

It took five years of hard work, grit and determination, for Richard to recover his ‘lost’ fortune. All of which might have been avoided had he refused the paper deal and taken cash instead.

Donald Trump: The Trump Organization

When the US real estate market crashed in the early 1990s, Donald Trump owed a total of $900m to 99 different banks. He couldn’t even afford to service the interest on the loans, and was facing personal bankruptcy.

As Trump explains in his book, How To Get Rich, when faced with a problem of that size you have two choices: a fearful, defensive one, which is to give up; or the faithful, riskier one, which is to fight on. Trump was reminded by his secretary that he had been invited to a black-tie bankers’ convention at the Waldorf-Astoria. Attending was the last thing he wanted to do – Trump was probably the most hated man in New York at the time, he knew the room would be full of people he owed money to, he was tired and his energy was low. But he put on his tuxedo and, reluctant to be seen arriving in his chauffeured limo, walked 10 blocks to the hotel in the freezing rain. He arrived drenched, feeling at the lowest point in his life.

To make matters worse, he found himself sitting next to someone who refused to acknowledge his presence. He worked for a bank Trump owed $149m to, and had already forced 37 real estate people in New York into bankruptcy. But Trump saw the opportunity in the adversity and continued to make the effort to try to get to know his enemy. As the evening wore on and the conversation (and wine) started to flow, he found out the banker was in lots of trouble himself. It might have sounded all-powerful that he had already put 37 people into bankruptcy, but in the banking sector that is an awful lot of debt to write off, not to mention the legal fees involved. It also meant that the time spent on chasing ‘lost’ money was a distraction from new money-making deals. In short, this man was himself under acute pressure from his bosses. Losing another $149m would not help matters.

By the end of the evening, Trump had turned his enemy into an ally. The following Monday, Trump went to see the banker to renegotiate the terms of his borrowing in a new deal that would give him the time he needed to generate new revenue streams to service the interest, and for the property market to recover. In the same way, Trump worked his way through all 99 banks he owed money to, becoming personal friends with many of New York’s most influential financial people, who came up with even bigger loans to finance Trump’s later deals once his company had recovered.

Business Nightmares: When Entrepreneurs Hit Crisis Point is available through Crimson Publishing. Get your copy here.