by Real Business - Thursday, 30th August 2007

Nigel Playford created a £700m company to rival BT. But within months of flotation, Ionica had been dubbed a "Telecom Turkey", derailed by a software problem that became a financial one.

Now Playford is back with a new venture. But, as he's discovering, people tend to remember the failure, not the original triumph.

Corporate collapses don't come more excruciating than Ionica's. The phone company whose ingenious new technology was going to sock it to British Telecom floated on the Stock Exchange in July 1997 with - it seemed to some, especially in retrospect - enough triumphalism to float a battleship. Never mind that it had only 22,000 customers. All eyes were on the one million who would soon be gagging to join them. Even the extraordinary 12-page health warning written into the prospectus by blue-chip investment bank, SBC Warburg, seemed to have a copper bottom. Risk means reward, it seemed to shout.

The mood was captured by the Mirror, not usually a devoted monitor of the new issues marketplace: "Phone Tycoon Plays a Bell-ter" it declared, recounting the front room to front page journey of Ionica and its founder, Nigel Playford. "Warn BT: Ionica Warchest is Full" was the Guardian's judgment, as it totted up the £300m bank loan and £160m of new equity funding now piled on top of the £215m that Ionica had raised only a few months earlier. By the end of day one, Ionica's equity and bank loans were worth more than £1bn. And although he wasn't free to spend it, of course no-one failed to overlook the £40m fortune now marked in against the name, Nigel Playford.

Before the year was out, these were memories. "Telecom Turkey" pronounced the Observer's Throg Street column in November, when Ionica said its software would need a rewrite to handle increasing volumes. "Many of Ionica's big investors claim they were sold an illusion," said the Sunday Times a month later, when the company gave a further update. To guffaws all round, Ionica said that in the previous three months, it had added 3,400 customers - about 90 per cent short of its target. The shares, which had been sold at 390p in the flotation, fell to 60p.

This rich dish of disillusionment turned out to be only the starter. At this stage, the general view was that Ionica was an over-hyped flotation getting its come-uppance. Sure enough, it had a software problem, but it had already solved hundreds in getting to where it was. And it was not short of money: was there not still a handsome part of £375m in the bank, and that further £300m facility waiting to be drawn down just as soon as necessary? Top City broker, Merrill Lynch, was not alone in thinking there was something to be redeemed: "Oversold" was its conclusion. In the short term, this proved correct.

In January 1998, Ionica said its bankers had told it that since it was behind its targets, it was no longer entitled to draw the loan, so even if it solved the software problem, it now faced a financial one. Playford relinquished his role as chief executive and his successor, Mike Biden, set out to renegotiate the loan, pointing out that after a few economies including 100 redundancies, there was enough cash in the bank to keep the show on the road for another year. But the bankers proved shy. By May, Biden had written them off and was looking for a strategic investor. In August, he felt compelled to advise that there was no assurance of finding one. In October, he called in the administrators. Within weeks, the company that had set out to pinch ten per cent of the UK residential telephony market comprised a large, empty building and a bottomless pit of speculation about what might have been.

"One minute you're a genius. In everything you do. The next, you're an idiot. In everything you have ever done," says Playford, summarising press coverage of Ionica's rise and fall. It's hard not to sympathise. As Ionica reeled, monstrous failings that no-one had spotted a year earlier were suddenly as plain as day. Here is one post-mortem in the quality press: "tale of mismanagement and hype... frittered away money... could have used off-the-shelf technology, they just did not want to... picked a mass market product and then did not know how to market it... in terms of a business, Ionica had nothing, absolutely diddly squat."

Playford: "You have to tell yourself that whatever they write, you got a lot of things right."

There are no two ways about it: Ionica was an amazing achievement, despite its ultimate failure. Back in 1991, when Playford decided to apply to become the UK's third national fixed-line telephone operator (after BT and Mercury), and only the second to handle the actual connection into the customer's home (what's known as the "local loop" - an aspect which Mercury always subcontracted to BT in the case of its residential customers), Ionica comprised four people and a few thousand pounds.

National telephone companies may seem ten-a-penny these days, but you'd be hard-pressed to find any who did not start off with a sugar daddy. Mercury had Cable & Wireless, Vodafone had Racal, Cellnet had BT, and Orange had Hong Kong conglomerate, Hutchison. All of them spent years draining cash before they started making it. Equally, all of them could draw on their parents for key managers, accommodation, and engineering expertise.

Ionica, on the other hand, was a blank sheet. "No money, no industrial partners, no people," says Playford. "He forgot to say that since they invented their technology, they had no proven system, either," adds a well-qualified telecoms observer who asked not to be named.

The technology used radio to make the local loop. Instead of digging up roads or hanging cables from poles, the customer was equipped with a dinner plate-sized aerial which relayed calls to Ionica's local base station, whence they were switched into the national network. The physical simplicity is what enabled Ionica to take on BT in the residential market: compared to the £500 to £600 cost of installing a cable, whether from BT or the cable television industry, Ionica could add new subscribers for just tens of pounds a time. And since it employed new digital technology, a host of customer-winning bells and whistles, such as multiple phone numbers on the same "line", could be taken for granted.

There was always some scepticism as to whether the technology would work in practice. The well-qualified telecoms observer says, "In effect, what they did was to go live with a beta version of the technology. Although the remaining problems were subsequently resolved, there was no knowing at the time what would be involved in getting to a solution."

The big challenges, though, were organisational. Receiving a national licence for nationwide coverage brought the most gargantuan to-do list. Between getting the government's provisional go-ahead in January 1992 and its flotation five years later, Ionica had to finalise its technology, find someone to manufacture it, build a prototype operation, follow up with a full-scale field trial, define a marketing strategy, launch the service in its home region and prepare the launch everywhere else. That involved hiring 1,000 employees - a vast organisational undertaking in itself, even before they were organised to carry out the task at hand. And it also involved raising the money, mountainous quantities of it: £50m by the end of 1993, another £200m by the end of 1996, before the final rounds of capital-raising in 1997 which brought in £375m plus that bank loan.

"Up to that stage, we did the whole lot. We nobbled every problem - organisational and technical," says Playford. "Even though we were spending half our time, always, raising the money. In the last 12 months, we had six separate capital-raising exercises. Yet we built a very credible organisation. All the investment banks who checked us over said so. It was a precondition for their being prepared to deal with us.

"Yes, we were terminated by a software problem, but it was really no different in scale from others we had resolved. You know, no-one ever reported this, but when we said in that November announcement that we had the capacity problem and would solve it by the following May, we met that target, and all the other ones we set down at the same time.

"I don't accept the charge that our flotation was hyped. The fact was, we were a £700m company by that stage. You can't float a £700m company on the quiet. On top of that, we were a David taking on a Goliath. It was a story that people identified with. We were bound to get a lot of coverage.

"Did we float too early? With hindsight, yes, obviously. We weren't pushed into it. We had come very close to floating earlier. We as a board decided the time was right.

"When did I recognise that it was terminal? Only at the last minute. We thought we had a rescue package. It was all signed up and ready to go. Obviously, the existing shareholders were going to take a big hit, but it would have preserved the technology. I can't go into why it didn't happen, although last autumn's global financial crisis didn't help. As we were trying to finalise the refinancing, share prices were crashing. Orange fell 40 per cent.

"Where did we go wrong? We took on too much - went for national coverage too quickly. To prepare for the rollout, our overheads were running at a high rate. If we had stayed regional and gone for a more organic rollout, we wouldn't have had the same mismatch between spending and resources. Obviously, in that case we would have had smaller resources, but we would have been burning them up less quickly. Why did we elect for the early rollout? Because cable television operators were snatching the marketplace. We had found we were an easy sell when we weren't up against cable. People were keen to get an alternative to BT, but weren't over-choosy between us and cable. If there were two alternatives, the key was to get in first.

"And when you do get into a rut, as a public company, you have to report chapter and verse every three months. Journalists arrive at conclusions which are expressed in black and white with no intervening shades of grey... What people read about you in newspapers - even your bankers and others closely associated with you who have superior information directly from the company - affects their perceptions of your situation.

"I don't say that had we stayed private, we wouldn't have had problems with the bank loan. But I do say that with fewer quickfire judgments being offered around and a more considered atmosphere for the people close to us to consider how to resolve the problems, we would have got to a better solution than no solution. We had had engineering problems and missed milestones before [the May 1996 full-scale introduction in East Anglia of Ionica's service was seven months behind schedule]. Difficulties and delays like these are inherent in the process of developing a new technology. We always surmounted them before. We always raised the money we needed."

Playford is an impressive character. You can see how, despite being a Lilliputian in Brobdingnag, he talked a licence out of the government and then all those millions out of investors. But you also get the rest of the package of ambition and boldness: you can see how he would prefer to take the short cut to the national service, rather than build out gradually from a regional one.

His ample supply of brain cells - as a student he picked up a first in engineering from Imperial College - haven't dissipated. Nor has the application. Last month he got an Italian A level, grade A. ("You have to have some diversions. Last year I did navigation.") And while he wasn't in night school, he was feeding and watering himself via his new venture, Albera Networks - a telecoms consultancy "specialising in radio local loops."

"It's an irony, but whereas the UK was the first to license an operator based on this technology, had a vast head-start and then saw Ionica collapse, now radio local loops are opening up everywhere. In the next year, 15 European governments are offering telecoms licences of one kind or another. Plenty of applicants are keen to use the technology we pioneered. It's well suited to emerging requirements such as high-speed Internet access. Albera is advising some of them, including several large US telcos, on how to go about things. We have unusual practical experience with the technology, how it relates to the market, and the rollout."

Albera counts 25 employees ("and maybe you could say we're hyper-keen to recruit?") and sales in the low millions. And how do clients treat the subject of Ionica? "They give me a good grilling when we first meet. I think it has sometimes been a problem, but obviously not a showstopper."

So is that it? Failed entrepreneur turns consultant. Makes a handsome living instead of a handsome fortune? No. Playford entertains the idea that Albera will prove a springboard. "Ultimately I hope we will find the opportunity to launch an operating business."

So how is he going to finance that, then, bearing in mind the £700m blemish on his CV? "We'll cross that bridge when we come to it. People have advised me that I should steer a wide course around the City - that it won't be interested because of the taint. I have detected some signs along those lines but nothing conclusive. In fact, I find it hard to believe that I will be unable to raise the money for the right idea with the right plan. But we'll take it as it goes."

Would they back him again?
Last year, before his own fall from grace, trade & industry secretary Peter Mandelson returned from a trip to the US arguing for more accommodating treatment in this country of business failures. This wasn't Mandelson the Kind. It was Mandelson the Practical. In the US, he pointed out, the entrepreneur who has failed is seen as a more investable proposition than the one who has not.

Says a venture capitalist who has tracked Playford's experiences closely after investing in Ionica at an early stage: "I agree with Mandelson. Prosperity requires entrepreneurs to take risks and investors to back them. Both parts of the equation are discouraged if failure automatically attracts a heavy stigma. Undoubtedly Nigel is going to face a few awkward questions next time he's looking for money. As it happens, I have a conflict of interest that would keep me out of anything being pursued by Nigel right now. But I have backed people with failures on their CVs and I think I am far from unique. He's a strong candidate and I would expect him to overcome the Ionica taint.

"But I don't think the problem lies chiefly with venture capitalists. As a society, we just seem to get too much pleasure from other people's failures. Schadenfreude rules. Look at journalists, friends, the bloke you meet at dinner. Almost to a man, they can be counted on to pillory any commercial failure as the disaster that was only waiting to happen. They put the honest nearly-made-its in virtually the same box as the crooks. And inevitably, that does condition the behaviour of venture capitalists. You have so much more explaining to do if you want to invest in someone with a big failure on his CV. A lot of VCs would say, why bother?

"You just don't get the same attitude in the States. And because people there don't expect to be annihilated for failure, they are more willing to have a go. As long as having a go works more than half the time, it's a winning formula."

If the government is keen to transplant these stateside attitudes, you might have expected it to latch onto Playford, who has to be the prime recent example of what Mandelson was talking about. So has anyone from the DTI been in touch? "No. Three people have contacted me to say they would like to learn from my experience. Two are telephone companies, now clients of Albera. The other was Peter Johnson."

Almost making it
Dr Peter Johnson, a business lecturer at Oxford University, prevailed upon Nigel Playford to give a seminar for MBA students: "The subject was Almost Making It."

Johnson agrees, in part, with the anonymous VC (see previous page). "In this country, we never say, 'it's nine-tenths full'. We say, 'it's one-tenth short'. Journalists, in particular, are unfair to people who fail in business. They are not interested in giving an objective account. Anyone who associates with a business failure is exposed to criticism, carping and ridicule. It's just not worth the hassle.

"And laid on top of all this is the UK's attitude to technology. We don't value it and we don't understand it - it's anorak territory. Venture capitalists don't understand investing in it. Here, our VCs are accountants, lawyers and generalists. They know how to cut a good deal. What they don't know about is technology. In the US, their opposite numbers will typically have engineering first degrees often followed by engineering second degrees. They will have been in technology marketing, say with Hewlett-Packard or Hughes Aerospace. That makes them familiar with the products they are investing in. When Ionica stalled, investors couldn't figure out whether it was an operational problem that was going to be sorted out in due course, or if subscribers simply didn't want the phones. If Ionica had been set up in the US, they would have got to the bottom of that. I feel sure additional parties would have come in to bankroll it, Russian debt crisis or not.

"Yet I also think they probably wouldn't have needed to. Ionica was floated too soon. Why? Because venture capitalists were itching to get their hands on the money. In the States, more effective VCs would have ensured it had a stronger management team. And/or stronger non-executives who would not have let the company bite off more than it could chew. Ionica built a financial and strategic straitjacket that ended up killing it. With better advice, the outcome would have been different."

Alistair Blair is the 1999 PPA business writer of the year. ablair@pobox.com

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