[2014] MISFORTUNE IN THE 1980s

0261 Setting Up Computerland

As I slowly worked out the months remaining at IBM, I also worked out what I was going to do next.  I really wanted to move on to more personally rewarding things, such as moving into academia.  On the other hand this seemed very unlikely, as matters then stood.  Accordingly, I was determined to find myself cash cow which would fund my entrance into such fields.

The obvious route was through a PC dealership.  These were then licences to print money; or at least they had been.  By then competition was becoming rife, and price cutting was the main means of obtaining business.  However, from my time in corporate strategy, I knew that IBM was about to clamp down on these price cutters -- and regularise the whole industry.  IBM had almost always been successful in manipulating the industry in this way, so I had no reason to expect otherwise.  Regrettably, as events turned out, for one of the few times in its history IBM failed in its planned strategy.  It's PC dealer managers, driven by a typical IBM sales plan, went after the biggest sales -- and these came from price cutters.  Thus, if anything, IBM encouraged the price war in practice.  This of course was a disaster for my plans!

In the first instance, though, I was convinced that the route to success was to provide the best possible support.  This in itself was expensive.  On the other hand, to become an accredited dealer to IBM -- which was the only route to success in those days -- you had to have 'glass on the street'.  What this meant was that you had to have good location, with an excellent showroom open to the public.  This was originally designed to keep the smaller dealers out.  Typically it meant an investment of something over £100,000.  In our case, which was designed to push this approach to the limit, it actually meant the investment of well over a quarter of a million.

I couldn't do it alone, so I persuaded Ian Donaldson -- who had come back from Saudi Arabia and was finding it difficult to get a reasonable job -- to join me.  It was not difficult selling the idea to Ian, since he really didn't have much of an alternative; as neither did I!  Accordingly, between us we were able to raise something like £160,000 (£80,000 each) without putting our houses on the line. We needed, for our business plan, something like another £240,000, to take it up to £400,000.

That's when I started my hunt for an extra quarter million pounds.  I started out with the banks, and even the merchant banks. The one sticking point with all of them was presented by Ian.  He positively refused to put his house on the line to back up funding. In the event this was the best decision he ever made -- and I was eventually eternally grateful to him that he stuck to his guns.  However, at the time, it made it very difficult to pull together funding.  All the banks wanted was that you put everything you owned, especially your house, up as guarantees for the money they were lending. Basically they wanted to take no risk whatsoever.

Ultimately we found ourselves at 3I (Investors In Industry) who, to my surprise, were willing to put up £200,000; and didn't want our houses as guarantees.  We had some very exciting meetings with the 3I people. They were very bright indeed, and were soon as enthusiastic as us about the whole project.

This still left, though, £50,000 to find. The government then had a scheme which partially guaranteed investment in new business, as long as the bank invested £50,000. We eventually went to the Royal Bank of Scotland, and they agreed to put up the last part of the money.  Having said that, perhaps wisely, they then withdrew the money.  I was able to persuade them to put it back in, by pointing out that if we went bankrupt, which I was willing to do, their agreement meant that they would still be locked in and would lose far more money; since they then would also lose the government guarantee.  Very grudgingly they put up £50,000.

I guess this was the best selling campaign that I ever undertook.  I more or less walked on water, raising over £400,000 with no guarantees.  Unfortunately, it took all my effort, and all my concentration, for the best part of a year. During this time I didn't notice that the market was changing against us.

The position was not helped by the fact that our financial model was based on one given to us by Computerland.  We later found that that, in order to bring us in, the management in the UK had falsified the figures.  In particular, they had literally doubled the net profit level we were to expect. The figures they quoted, as the average in the UK, were indeed twice as big as they really were.

When I went across to Luxembourg - where the European office was - to work through the plans with the people there, I got the impression that they were a little bit surprised at the figures; but even they didn't raise the alarm.  They too were very keen to get us in when the rest of business was lagging behind target.

Accordingly we went ahead with our business plan and did everything that was required.  It was just four months later, when we were examining the first set of reliable financial figures on our trading position, that we realised we were in desperate trouble.  It was also at this time that we were discreetly made aware that the Computerland figures were wrong; and the manager responsible wisely disappeared off to another job

I am litigious, and have taken other people to the cleaners in court, but this was the one-time I couldn’t. I genuinely lost a large amount of money due to falsification by the other party.  However I couldn't recover it. Partly this was because the whole business was run under the laws of Luxembourg, not the United Kingdom, and this would have made it incredibly expensive, and difficult, to challenge the deal. More important however, Ian Donaldson still thought Computerland management were wonderful -- and I was rubbish -- and would never have backed me in court.  My task then was to get out with the minimum loss.  In the event I managed to get some of the money back and went out of the door with a loss of £65,000.  By then the company was illiquid, illegally so, and the banks eventually lost something like half a million.

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