Business Stripped Bare (24 page)

Yes, Coca-Cola played hardball against us. But we had already lost. We still produce Virgin soft drinks, but in a much more targeted and niche way. And Virgin Cola is still the number-one cola drink – in Bangladesh!

I notice that Red Bull has launched its own cola. I know it will take them some time and a large tranche of money to win significant market share. But then, as a drinks company, this is their core business.

And perhaps the best thing to come out of our Virgin Cola escapade was a brilliant new company called Innocent Drinks, run by some entrepreneurial guys who were at Virgin Cola and saw a gap in the market for fresh fruit smoothies and have now built a business worth several hundred million dollars. While still with Virgin they set up a stall at the V festival to have revellers sample their products. They had two bins: a 'yes' bin and a 'no' bin. They asked people whether they should give up their full-time jobs to start the company. People tested the product and by the end of the day, the 'yes' bin was overflowing. Our loss, but even if it isn't a Virgin Company, I get a real surge of satisfaction to know that these guys cut their teeth in a Virgin business and made it work.

Back in 1971, when I was more gung-ho, I wrote in my notebook: '
We don't need lawyers
.' But over the years, stating our agreements in clear and unambiguous terms has proved, again and again, to have been vital for our success. Our contract with T-Mobile, in particular, turned out to be a vital document for us. Incurring unnecessary legal fees can ruin your start-up, but the answer, I now think, is not to ignore the lawyers, but to get the basics right from the very beginning. Any start-up business should sit down and take a long hard look at its legal agreements.

Our Virgin Mobile business was going exceptionally well in the UK. There was an incredible buzz – we were hitting the bullseye of the UK youth market with funky and irreverent adverts and great deals. Tom Alexander and the team were single-minded about the business and piling on thousands of new customers and there was a sense of fun. In the first three months of 2003 the turnover was exceeding £1 million a day.

Our television adverts were scooping awards for innovative marketing – and we were stealing market share from Orange, Vodaphone and even our network partner, T-Mobile. In the UK, we were able to use the American rap superstar Wyclef Jean for a cult advert. In it, he unwittingly signs a contract that leads him to being bound as a trailer park sex slave. In an attempt to escape he is subsequently imprisoned for 'breach of contract'. The underlying message of 'Be careful what you sign' demonstrated the benefits of switching to non-contract Virgin Mobile.

For all of us at Virgin Mobile, however, that advert had acquired a second, private meaning.

Our original deal had T-Mobile putting in the network, and Virgin arranging handset procurement, marketing and the Virgin Mobile brand. It all worked smoothly – until a new American executive, Harris Jones, arrived on the scene in Britain. He really set the cat among the pigeons.

He was smart. He looked at our original contract and saw we had a joint company worth £1 billion, of which Virgin owned 50 per cent: a fantastic success story in which both parties were doing well. Harris Jones – and ultimately his bosses – were desperate to obtain our shares and were willing to try a number of different tactics to get hold of them.

What was their problem?

They saw the Virgin Mobile deal as just another cost, because for every customer on Virgin Mobile, T-Mobile paid us a monthly marketing fee. This payment was a termination charge which T-Mobile collected from other networks to connect their callers to Virgin Mobile's customers. Virgin Mobile was entitled to this termination fee, even though we didn't own the network infrastructure. It was in black and white in the contract.

T-Mobile were saying that the terms of the contract were legally questionable. While we thought the agreement was crystal clear, going to court over this was frightening: T-Mobile was a substantial business and had pockets deep enough to fund an expensive litigation. Every day spent dealing with lawyers is not only costly, it's hugely time-consuming for key executives. Our relationship soon became very sour indeed, and our cherished flotation looked increasingly remote.

The case ended in the High Court in London – and T-Mobile lost. The judge, it was reported, said that T-Mobile's conduct was 'deserving of moral condemnation'.

The head of T-Mobile in Germany handled the fallout well. He was good enough to invite me over to Germany so that he could apologise to me in person – a decent gesture, and one we appreciated. After many months, we managed to secure an out-of-court settlement with Harris Jones's former bosses in Germany and with a new UK team led by his successor Brian McBride. Due to the court ruling they had to sell us their shares for £1 (Brian framed the coin in a presentation case!), and they offered Virgin Mobile a new airtime contract that it still operates with today. Thanks in large part to him, we managed to steer our way towards a stock-market flotation.

The lesson of all this is that you need to get your basic business contracts properly sorted out.
It's always worth getting the contract right in the first place
. And be prepared, on occasions, to go to court to defend the company. I'm afraid that when you draw up a contract for a joint venture, you have to take into account what might happen if there is a falling-out – or, worse still, when someone is trying to screw you. It would be lovely if all business could be done with a handshake – and I have done plenty of successful business this way in the past – but there are unscrupulous people out there, and you have to guard yourself and your business. We have never lost a major court case in forty years of doing business. In the GTech case (where I was awarded substantial libel damages), the British Airways case and the T-Mobile case, we have stood by our decision always to fight our corner.

Protect your reputation. Don't be afraid of making mistakes
.

These are the rules I live by. They ought not to contradict each other but many businesses wrongly assume that they do. Yet there is no denying the risk that mud sticks, and a damaged reputation in business can follow you around for years. You can deliver on every promise, keep your word, deal fairly, show forbearance – and the world can still throw you curveballs that mess up your reputation. And long after you have learned your lesson and moved on, others will still be harping on about this or that misfortune, this or that error. I've known plenty of talented and trustworthy business people who have carried the shadow of past errors around with them, and whose careers have suffered as a result.

There is no way to solve this problem, but there are ways to mitigate its effects. Certainly you should
never
keep your head down. That will do you no good at all – it'll simply confirm someone's lousy opinion of you.

I would say, first of all, that you should improve your communications. At Virgin, we take a great deal of care to keep the press up to date with what we're doing. Aside from maintaining a high profile, this helps decent journalists put any old, bad news in context. Our culture of openness also prevents bad news from building up a head of steam before it reaches the public. The public is actually pretty forgiving of most business errors except hypocrisy, and stalling almost always backfires.

We also practise what we preach. We look for people with exciting, dynamic CVs, not spotless ones. We're not pushovers, but we're happy to take chances with people, to move them around, to see how they tick and where they fit in. We don't pin the blame on people, or marginalise them when things go wrong. This culture pays dividends the longer we're in business, because eventually people realise that we're a company that knows how to deal with its problems, and is willing to take chances.

Over the years the Virgin brand has earned the reputation of being
bold
and
unafraid
. Isn't it extraordinary how few brands communicate fearlessness? Commercially, our reputation for fearlessness has been like gold dust. It turned our battle with Coca-Cola, which was commercially bad for us, into a story that, in brand terms, strengthened customer loyalty.

An error-strewn reputation is more damaging as rumour than it is in face-to-face dealings. Satirical magazines like
Private Eye
are always horrified to discover how many successful and famous friends stick by figures who are supposedly 'disgraced'. But that's not so surprising: individuals are better than groups at judging someone's character.

Your friends are your allies in the battle to improve your reputation after a knock-back. They will not only advocate for you; they will front for you. Their reputations will help yours recover. Distinguished people aren't stupid, and cultivating someone to take advantage of their reputation isn't going to wash. But they are, to a fault, generous and understanding. (They've been through the mill; they know what life's like.) So don't be afraid to ask the senior figures in your circle for advice and help.

I know what I'm talking about here because in 2004, when we were considering options for the flotation of Virgin Mobile on the London Stock Exchange, one of the perceived risk factors was
me
.

Investors usually have short memories. But the elder members of the City of London pinstripe-and-braces brigade recalled that I had taken the Virgin Group on to the stock market with huge fanfare and expectation in November 1986, and then, after the great market crash of October 1987, I offered to take it back into private hands again. I could feel the thick, red letters stamped on my forehead: 'Health Warning: This Man is Dangerous.'

The flotation of Virgin had attracted more applications from the public than any previous stock market debut, aside from the massive government privatisation of gas, electricity and telecoms. Nonetheless, my first experience of Virgin as a publicly listed company was one of the most miserable times of my business life. I became very disillusioned with the constant round of analysts' meetings and investor roadshows. I hated being accountable to institutional shareholders who didn't appear to understand our philosophy – and I know a lot of executives working in plcs have a certain sympathy for my viewpoint. But nobody was forced to 'take a bath' when we changed tack – and our investors got their original stake back plus a healthy dividend.

What happened was this. In 1985, our fledgling Virgin Atlantic airline found itself entrenched in a transatlantic price war, and our cash was being squeezed. My advisers at the time convinced me that we needed to expand the equity base of the group. Don Cruickshank took on the task of organising an initial public offering for Virgin's music, retail, and vision businesses, which were combined into the Virgin Group plc, a public corporation with 35 per cent of its equity listed on the London and NASDAQ stock markets.

Looking back, it was a funny sort of offering. Virgin Atlantic was considered far too risky an investment and was excluded from the share offering. So were our nightclubs, Virgin Holidays and Virgin Cargo. Yet Virgin Atlantic became Britain's second largest long-haul airline, Virgin Holidays the number-one long-haul holiday company, the clubs have made a fortune and Virgin Cargo grew to handle nearly 100,000 metric tonnes of cargo by 2000!

Early in 1986, Don and Trevor Abbott, who was brought in by Don as finance director, raised £25 million in a private placing of convertible preference shares from Morgan Grenfell. There was no legal commitment to convert this to equity in the event of a flotation, but it all seemed remarkably easy. In the public sale, the financial institutions would convert their preference shares into 15 per cent of the listed business, and we would create new shares for other investors, raising a further £30 million. This still gave me 55 per cent of the Virgin Group, while outside investors held 34 per cent. The business, which twelve months earlier Coutts Bank had nearly forced into insolvency, was valued at £240 million. Some of the cash raised was moved into Voyager, the company set up to invest in Virgin Atlantic.

During early 1987, we used money from the flotation to plot the takeover of EMI Music from Thorn EMI, by building up our shares, and to open an American music subsidiary, Virgin Records America. Naturally, both projects soaked up our capital. Then the stock-market crash in October 1987 hit us – and I made a mistake. I continued to buy shares in EMI as they were plummeting. Don Cruickshank and our non-executive directors raged at me: 'Richard, you cannot do this. You are throwing away good money after bad.' It was just the sort of thing we should have been doing if we'd had deeper pockets, but we didn't.

As the world recovered from the October shock, I expected the share price to jump back after we announced our results, more than doubling profits from £14 million to £32 million for the year ending July 1987. But the price of our shares had fallen along with everybody else's, from our flotation price of 140p to just over 70p. Double your profits, halve your share value: this was barmy logic. In July 1988 we told the market that we were conducting a management buyout – and at the original price of 140p per share. I didn't want to let down the army of smaller investors – including many close friends – who had put their savings and faith in our business. We took out a £300 million loan to do this, which meant that our gearing was very high. My dream of taking over EMI Music came to an end there and then. The City of London had misunderstood our business – we would now go off and become one of the largest groups of private companies in the world with several quoted investments to boot.