Welcome to the second series of Small Business Snippets, the podcast from SmallBusiness.co.uk.
Today’s episode features Rachel Elnaugh, businesswoman, author, speaker, mentor and one of the original Dragons. We talk about her time running Red Letter Days and what it means to be an evolutionary entrepreneur.
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Hello and welcome to Small Business Snippets, the podcast from SmallBusiness.co.uk. I’m your host, Anna Jordan.
Today we have Rachel Elnaugh, author, speaker, mentor, former Dragon and the creator of Red Letter Days.
She launched the experience day voucher company in 1989 when she was 24 years old. And after a precarious start, a print brochure campaign launched it to success. This led to multiple awards and a place as one of the original Dragons on Dragon’s Den. The company went into administration in 2005 due to over-expansion and the remaining assets were bought by fellow Dragons, Peter Jones and Theo Paphitis. They eventually sold the firm to Buyagift and it’s now owned by French firm, The Smartbox Group.
Taking the lessons of Red Letter Days with her, Elnaugh now mentors business owners and speaks at events in the hope that fellow entrepreneurs can learn from her experiences.
Anna: Hi Rachel.
Rachel: Hi Anna. Thank you for that intro.
Anna: Not at all. How are you doing?
Rachel: Yeah good, thank you.
Great. The first thing I’d like to ask you about is that you describe yourself as an ‘evolutionary entrepreneur’ – what do you mean by that, exactly?
Rachel: Well, I’ve been on my own journey of transformation and particularly being a business mentor, have got really interested in what makes one person successful and one another not. That’s kind of my holy grail – to really understand what makes the difference which has kind of taken me on this journey of discovery through mindset, through energy work and metaphysics and so I do think there’s a new era of consciousness opening.
I think I’m moving out of that old capitalist business paradigm into this new era, along with many other people, which is a very different way of doing business. It’s much more intuitive and much more about manifestation and effortless flow.
If your focus isn’t capitalism, what is it?
Rachel: Well, capitalism is fundamentally about scarcity and really about putting money ahead of all other considerations. As we move into this new era, we’re seeing that businesses that aren’t just about profit but are also very much about people and about the planet are really coming to the fore – those brands that embrace a much wider idea of success than just money. We’re seeing a massive change and we’re also starting to unravel some of the programmes of capitalism like scarcity.
For example, with renewable energy, the sun never stops shining, the waves and the wind never stop. There’s so much natural resource to tap into that I think this deep programme of scarcity is being unravelled and uninstalled.
Anna: Yeah, you can see in businesses now that a corporate social responsibility is non-negotiable. If the business doesn’t have an ethical basis then at least it’ll be embedded in their business plan.
Rachel: Yeah, and I think it goes way beyond the veneer of corporate social responsibility of wrapping a company with that. I think the companies that are really powerfully coming through are ones that have actually got ethics at the heart of them.
So, I think there’s a new breed of entrepreneur coming through which goes way beyond social enterprise, it’s people working from the heart, really passionate about their businesses and their brands. And wanting to do business but in a way that is very nourishing.
Definitely, I agree. I’d like to talk a bit about Red Letter Days as well. You made a loss of £4.7m at the time that you realised something was amiss. According to previous reports, there were various issues: management consultants taking on too many projects, a dud CEO, suppliers going unpaid, your financial director keeping information from you.
Rachel: I think that when a business goes wrong, a lot of waves hit the ship at the same time. Up until that point, we’d had a very successful company that was growing every year, that was profitable. In 2002, I started winning awards and getting on television. I think you can get the Midas touch and start to push too far and fast. Suddenly it’s driven by profit motives and ego rather than just wanting to create great products and experiences and services.
We brought in some management consultants who recommended that it was time for the business to grow up and to parachute in a new chief executive to take it to the next level – we really thought we could groom the business to float it. It was really that process of over-expansion, as you said in the intro, that was our undoing.
It was a very big lesson. I think if I had to share that lesson with other entrepreneurs I would say just grow organically and in a very steady way rather than trying to step change a business and leap to the next level. That was the mistake we made.
Anna: So, there’s a surge in confidence – then a real dip in confidence – on your part.
Rachel: Well, as I said, a lot of waves hit the ship at the same time, so we parachuted in a chief executive who was brilliant at spending money. He’d actually come in from Thomas Cook and he is the one who created the JMC brand which, literally the day before he joined, was closed down by Thomas Cook. That should have been a warning.
I also didn’t have a strong enough finance director and I think that’s really crucial in a business, I realise now. To have a very trusted, rock-solid finance director is key. So we over-expanded, overspent and then crucially, our credit card takings were bonded by our bank. When we were forced into administration, we had £3.3m cash at bank. That was another big lesson in that whoever controls the money has all the power. We had a huge amount of cash at bank but we just couldn’t touch it.
And the bank forced us into administration. When that bond was unbound over the next year, all of the vouchers had been redeemed, the actual cost of fulfilling them was only just over £1m. While the bond was appropriate, the level of it was way in excess of what was necessary. And it was that cash flow that strangled the business and forced us into administration.
There were a lot of factors involved and it was a very very dark, difficult learning process for me.
From your learnings, what kind of advice would you give entrepreneurs about finding the right bank, the right account, the right adviser for them?
Rachel: It was interesting because I remember having a discussion on the set of Dragon’s Den with Duncan Bannatyne, my fellow Dragon. I was telling him the problems at that time I was struggling with trying to get this bond lifted. And he just turned to me and said: ‘Rachel, the first rule of business: do not bank with Barclay’s’.
And the thing is, you don’t really understand how much power a bank has over you until you run into problems. And I think some banks are more ruthless than others. It was a big learning curve.
But I don’t want to sound like I’m blaming and in victim mode because in truth, we were undercapitalised. And it’s very difficult to re-finance yourself out of a cash flow issue like that. If I could’ve re-run the clock it would’ve been much better for us to have got some proper venture capital funding before embarking on the expansion plan rather than trying to fund it out of cash flow.
Tell me about the months after the company went into administration – what was it like for you?
Rachel: It was a bit of a double-edged thing because on one side of things, it was quite tragic for me because I’d spent 16 years building this company literally from nothing, it was literally like my baby. I’d poured my whole life into it. All of my passion and all of my money, I’d lost that.
On the other side of things, it was so stressful towards the end that when I finally signed the papers and put it into administration – and I really had no choice – it was a massive relief and a release. I’d just had my fourth son the week before so that was a great gift from God, you know. It was August, the sun was shining, I had a newborn baby and also, I’d just been on Dragon’s Den.
So, I had this new world opening up to me of being this TV celebrity entrepreneur. And even though I got annihilated by the press, I was given a book deal. I wrote a book called Business Nightmares about the fine line between success and failure. That came out in May 2008 and in September 2008, world economies crashed, and we had the banking crash.
And this repositioning of myself as a business survivor was actually perfect timing because it opened up a whole new world of speaking at business events, becoming a mentor and creating lots of products and ways of helping other people on their entrepreneurial journey.
It was synchronistic and beautiful even though at the time it felt like the worst possible thing that could ever happen to me.
Anna: I read that you found a note that you had written some time before about what you wanted for the future. It said something along the lines of ‘I will sell off Red Letter Days’.
Rachel: This was long before I understood the power of words and the law of attraction. A friend of mine was training to be a life coach and she needed guinea pig clients. I said, ‘I don’t need a life coach but I’ll be your guinea pig client’. She got me to write this life plan and I found it after the company had crashed. I had written this several years before, but I found the piece of paper.
On it I’d written: ‘By 2006, get rid of Red Letter Days so I can spend more time at home with my children, be creative and write.’ And so the universe had delivered that little cosmic order exactly to plan. You notice I didn’t write on there: ‘Sell Red Letter Days for £20m, be creative and write’, it said ‘get rid of’. And ‘get rid of’ is a very angry energy and so the universe got rid of it for me.
We have to be very careful about our spelling, spelling is very powerful. You have to be careful what you ask for because it’s delivered often exactly to the word.
What about planning what would happen within your business, including the staff. What was the process there?
Rachel: We didn’t want to go into administration and we were working on all sorts of ways to re-finance. I had a re-financing offer from HBOS and I was looking for match equity funding. What happened was one of our suppliers – and sometimes in these situations, suppliers can be their own worst enemy – took a winding up order against the company.
Could you briefly describe what a winding up order is for our listeners who don’t know?
Rachel: Basically, if a company owes you money and they don’t pay, you can enter into court a winding up order which is if they don’t pay, you’re going to wind up the company and get paid that way. It’s a bit like dropping a nuclear bomb on someone to get what you want.
Usually, in normal circumstances, if you get a winding up order from a creditor then you just pay them. But in our situation – it was a long time ago – but there was a legal reason why we couldn’t just pay them because we couldn’t create preferential creditors. When a winding up order has been put in, it basically opens you up to every other creditor.
What happened was the creditors started arriving at the company offices to try and take the assets. So the only way we could protect the staff was firstly to lock the doors. We were in London and we had staff in our head office in Muswell Hill on the phone saying, ‘There are people at the doors, what do we do?’ We had to say, ‘You just have to lock the doors.’ We were advised by the lawyers that the only way to protect the company and its assets from these creditors in their vans was to put the company into administration.
Through that winding up order we were forced into administration and as a result, no one got paid because I couldn’t complete the re-financing and it was game over.
It was a very fine line between success and failure. Had we not had that winding up order, I could potentially have maybe, and it’s always an if, completed on the HBOS deal, the bond would’ve been released because we would have re-financed. Then we could have traded through and floated the company which was the plan because it had growth and it had profitability and it had a great brand. But alas, alack, it was not to be.
How long would the re-financing process take?
Rachel: All of my time was spent in meetings with bank and financiers, so I had the deal agreed. It was just a case of finding match equity funding. I actually did go to Peter [Jones] and Theo [Paphitis] and said, ‘I’ve got this deal. Could you match-fund it?’
There was potential they could’ve done that, but they felt there was a bigger opportunity to push it through administration, although that proved not to be the case. It is a bit like going nuclear, pushing your company through administration. And certainly with that industry, they couldn’t wipe the deck by putting it through administration because no one would supply the business without getting paid. It was quite messy.
The experiences industry is huge now. If you could have started Red Letter Days at any time within the past 30 years, when would you have started it?
Rachel: We were the pioneers of the industry. And really, the 1980s were about how much you owned and the 1990s were about what you could experience, so the timing of creating the company was perfect because it captured the zeitgeist of the era. We weren’t the first company that did experiences, but we were the first company to truly embrace the concept of experiential giving.
Anna: I suppose – I’m not sure about our listeners – but for me it seems like a pretty recent shift towards less buying of stuff to more buying of experiences, but it’s interesting to find out that back then that it was emerging – it’s always great to get in on that emerging market.
Rachel: Yeah, for sure – we were creating that as we went. And a lot of people picked up on it, so we had lots of copycat companies and competitors. Then Virgin Experiences came in on it followed by all the retailers. And now it’s commonplace to see experiences as your prize or gift as opposed to a TV or a tangible piece of technology or kit.
You’ve said that part of the struggle of Red Letter Days initially was getting experience providers on board with something that was novel at the time – what would you say to entrepreneurs running a business based on a fairly new concept?
Rachel: In essence, Red Letter Days was a marketing portal. When we launched in 1989, everyone’s books were full, and business was booming. Then the first recession happened in the early 1990s and people’s revenues started dropping.
Even though a recession was opening, that was a great opportunity for us because people could see that their sales were dropping, and they wanted more promotion – especially free promotion – which is what we were offering. So I think in every era there’s always opportunity in adversity and I think you just have to tune into the market and be resourceful and just go with the flow and find out where people’s point of pain is and provide a solution to it.
Anna: Well, that’s it from me – is there anything you would like to add?
Rachel: No, that’s fine. Hopefully that’s been useful.
Anna: Yeah, it has been. Thank you so much.
You can find out more about Rachel at rachelelnaugh.com. You can also visit smallbusiness.co.uk for more guidance on mental wellbeing and expanding your company. Remember to like us on Facebook @SmallBusinessExperts and follow us on Twitter @smallbusinessuk, all lower case. Until next time, thank you for listening.