85. John Whelan: Being charged with fraud forced me to build a business

0:00Welcome to The Difference Engine, the show for tech founders, investors and innovators.

0:11Those of us who have been living in the UK, we've just acquired a new Prime Minister. And around that Prime Minister has been much discussion about a phenomenon called Manchesterism. Now, there's a big difference in life between slogans and slog. The slogans of politicians and the slog of entrepreneurs. Joining us today is John Whelan. John Whelan is a classic example of a British entrepreneur originating from Manchester that has delivered major success in the IT industry. However, John's path to success has not been a smooth one, and there are many, many lessons about the realities of entrepreneurship and category creation that we can learn from John.

0:54So, John Whelan, welcome to The Difference Engine.

1:02John Whelan:John Whelan entrepreneur fellow Mancunian and passionate Brit welcome to the difference engine thank you Paul yeah I um I don't really like the word entrepreneur prefer entrepreneured um I think entrepreneurship happens to you by accident not by design but it's great to be here great wonderful well let's go through a little bit of that journey we sort of refer to uh to you as a a Mancunian, but actually that's not strictly true, is it? Because I think you were born and brought up in Reddish, which my memory serves me right, is actually part of Stockport, which is in Cheshire, isn't it? So tell us a little about, you know, your growing up years.

1:38Yeah, Reddish, well, I suppose like all of us, you're a product of your first seven years, and your parents have a huge influence, and of course, massive responsibility. They pass on to you all things good and bad about their own prejudices um religion being one that um that springs to mind immediately being from a an irish catholic household a story told many times that what you get is you get a work ethic whether you like it or not you get um discipline probably on the aggressive side of average um but you get a steal i think that um that stands you in good stead for what life brings later Life, I think, took you, like so many of our generation, who were relatively bright, but had relatively humble beginnings, to a grammar school, which also, given our common experience, promptly changed into a comprehensive.

2:38So it talks about how you got along at senior school, and was it the headmaster ritual, as the Smiths would have said? In fact, I was the first year of comprehensive education, thanks or no thanks to Barbara Castle. I think it was her initiative. So I actually did not do the 11 plus and went to what used to be a high school. And therefore the teachers were probably lower grade than they were at grammar school. And that with the benefit of hindsight, you see these things in context. But of course, at the time, the bullying didn't really categorise itself as bullying in my mind. It was just a harsh environment.

3:21To quote the Smith song, The Headmaster's Ritual, belligerent ghouls run Manchester schools, spineless wines, tormented minds. I absolutely resonated with me because it was a very tough time. In fact, I ended up having to leave school before I did my GCSEs and only ended up with six GCSEs, which for a man of my intellect, not to sound conceited, is an appalling reflection on the education system in the UK in 1982.

3:51John Whelan:There's nothing to be ashamed of there, John. Let's look at the entrepreneurship tick boxes here, right? Immigrant background. So many of the US folks we hear about got immigrant backgrounds. College dropout. And a bit of a rebel. So I think we've ticked a few boxes here already. So there you are. You've left school. You're sort of underachieved. You've got your 6.0 levels under your belt. What happens there? Well, I was lucky enough then to stumble into doing 4A levels, just about had the required criteria. And I went to a Catholic college called Severian in Manchester. There, I was much more comfortable.

4:31You know, you get treated a bit more like an adult. you're left to do your own study and my ill of results um were then good enough to get into university and um i was i was lucky and you know you say oh did you escape reddish or did you escape um you know a difficult environment the interesting thing is when you're growing up you don't know whether you're rich or poor because everybody around you is is exactly the same and what I did have was an ambition I wasn't really aware of it at the time but an ambition impugned in me by my parents to better yourself and not going to university was never an option and I was the first to go to university in my family but I never had anything else in my mind other than I was going to go to university and it wasn't anything that had worked out But it was simply to fulfil what my mother had, particularly my mother, had driven into me from the time I was about four.

5:34And she taught me to read before I went to school.

5:36John Whelan:But I'm very disappointed, John. I mean, chartered accountancy. Now, you and I have spoken about this. You describe chartered accountancy as sexy. I'm struggling. Help me. Well, I hate the phrase accountant with personality. but I don't know if you remember Mad Mike Hoare, who led the rebellion in the Seychelles in the 80s. He was a chartered accountant. Michael Heseltine, who famously swung the mace around his head, was also a chartered accountant. But sexy, come on. What was sexy about it? Michael Heseltine was sexy. What attracted me to it, though, was in the 80s, if you remember, I was leaving university in 1987, and the plan was to follow in Simon Le Bon's footsteps, who actually dropped out of Birmingham University in the second year because Duran Duran went to the top 10 with Planet Earth.

6:27That was actually the real reason I chose Birmingham. So in 1987, I'm graduating with a degree thinking, hang on, this isn't how it was meant to happen. And through what was commonly known as the milk round, the big eight, as they were accountancy firms then, were very sexy and sexiest of all was Pricewaterhouse. Some of jobs inevitably I'd done digging the roads and the sewers with my dad's Irish friends. That was just the rite of passage. You got paid£60 a week in cash and you thought you were king of the dung heap, which in many ways you were. But the idea of becoming an accountant and being able to read a set of financial statements is the thing that has set me apart from most people in my life.

7:20Most people will be holding a balance sheet and wouldn't know whether they were holding it upside down or not. Within 20 minutes, not bragging because it's something that was trained into me, within 20 minutes, I can make a pretty good judgment of a company as long as you give me the balance sheet, cash flow, and profit and loss. Those three things put together can really tell you the story of any business. I actually would be conceited enough to say, if you are not an accountant, you probably should not be running a company. Wow, love that. Well, I'm going to take issue with that. But I get the point.

7:56Basic financial literacy, at least in business, is really, really important. So how long did you last in audit, presumably? because you trained as a CA, which usually meant going around the country in a small team doing lots and lots of audits.

8:10John Whelan:Well, I was going to say, isn't that part of the sexiness of accountants? It's like, say what you will about it, but at least you travel. Well, you know, I don't remember it particularly fondly. And, you know, the reason that the exams are really bloody tough. And despite the fact that I mentioned that my O-levels weren't the greatest, I generally found academic work relatively easy. I was always sort of in, you know, in the top deck aisle of the class without having to do much work. I got to PricewaterhouseCoopers and they're arranged like school years. So you go in with your cohort of 22, 23 other people.

8:48And I found myself near the bottom of the class because these people were, you know, very, very gifted. And like you say, you travel around and you do audits and it teaches you the basics of accounting principles. and they're things that never leave you. And I've tried to instill it in my son, who has actually become an investment banker in London. And he joined straight from university two years ago. And when I talked to him about getting an accountancy qualification, he still calls me daddy rather charmingly. He says, daddy, he said, you sound like one of those parents in the 1960s who wouldn't let the kids sign a professional football contract before they got a qualification in plumbing or carpentry.

9:32So he's put me well in my place. So maybe I am a little bit of a dinosaur, but I would always encourage anyone, go and get a basic accounting qualification. There's lots available online and then pick up a set of accounts and you'll have the key to understanding what a company's true financial standing is. Not the bullshit that the CEO will give you. Tell us about what happened in chartered accounts and why you left. Yes. I mean, you know, to be frank, it takes you three years to qualify. So, and I couldn't wait to get out the door, but I developed some good relationships with the consultancy side of Pricewaterhouse and with some of the more senior guys got on with them well and ended up on the consultancy side.

10:17You know, and when you look at it, you've never run a business and you're there giving advice to people who are running businesses. It's, you know, you're probably a bit of a fraud. I mean, it's not inherently evil consultancy, but you never own anything. And there's a lot of grifters in consultancy. I mean, I spent seven years there. So, and what did I learn there? I learned presentational skills. I learned communication skills. But I was keen to own something. I was keen to spend a few years somewhere where you could see the impact of your actions on the profit and loss. I mean, I'm retrofitting here, Jonathan and Paul, because you don't, other people's lives might be, I had a vision and I executed it in my career.

11:05I don't think that that can be true because there's so many sliding doors moments in anyone's life. If you can make a picture out of joining the dots with the benefit of hindsight, you're probably contriving to join the dots and you invent a vision with the benefit of hindsight. I don't think there's many people who have a career vision and spend their life executing it. So many different things, doors open, slam in your face, you end up by default on a particular road. And that indeed is what happened to me. I left consultancy in 1997. I actually joined a client. And this must happen with a lot of consultants.

11:44You're there working for a client. PwC are charging three times your salary to the client. and eventually once you've been there for a while it's a lot it makes economic sense for them to offer you a job directly and indeed that's what happened to me and it was a company that makes airline meals in factories near airports something everybody listening to the podcast will have tasted no doubt complained about but you try making a gourmet meal out of$1.25 which is which is what the budget was and and the outcome is it's pretty remarkable what can be delivered So I was running factories. I was learning lean manufacturing principles.

12:22I ran the Manchester factory for a year, 97 to 98. Then I got moved to Gatwick. I earned my spurs there. And then I was lucky enough to be offered a job running the Detroit factory, completely different scale. Gatwick probably had a thousand employees. Detroit had two and a half thousand. And I thought, I must be so gifted because the mothership wants to take me all the way over to America to run one of their flagship factories in Detroit. And to be frank, I couldn't wait to escape Gatwick. It was a tough, tough job. What I hadn't realised, being pulling the straw out of my hair stick, still a bit, still a reddish lad, is the only reason they'd offered me the job in Detroit factories is because no other American had taken the job.

13:07And I didn't know the difference between Seattle, San Francisco, Texas. Arrived in Detroit, and I realised on the first day how tough it was going to be because my secretary said, the question that I need to know is which drawer are you going to keep your gunning? And I looked at it and said, well, I've never held a gun, so I'm more likely to kill myself than anyone else. So the first thing to go is the gun. Making a long story very short, it meant that the relationship between me and the workers in that Detroit factory, because the English accent is like syrup on the ears of Americans in my experience.

13:43And it stood me in great stead, really stood me in great stead. So there you were, you know, you're in Detroit, a town which was beginning its long and rather catastrophic decline, home, of course, of MC5 and the Stooges. um but as you say a slightly different approach went a long way there and you ran that operation very successfully uh so much so um that they decided to to really accelerate you and you found yourself on the other side of the continent i went to the west coast to south to san francisco is where i live because i was running the west coast 15 factories on the west coast triangle from Alaska to Hawaii down to Los Angeles sounds very glamorous um but actually the the factory in Manchester looks exactly like the factory in Hawaii except the people look different same structures same principles um but what um what what I what I did learn from that was that you can't do everything.

14:51You have to organize and get good people in. And that, the higher up the management chain you become, your job becomes more of a HR job. And by the time you're CEO, your job is just organizational, generally speaking. And that was what my job was there on the West Coast. So there must have been a point where you thought, I've possibly had enough of this, or I may not be able to go any further. And listeners may start to think, hang on a minute, this is a podcast about IT and category. Maybe something to do with John being on the West Coast may have been something to do with him ending up in IT.

15:32I mean, talk us through this. So, of course, I'm living in Silicon Valley, basically. One of my factories was in San Jose, which is the heart of Silicon Valley. And I live just a bit further north. So I was very aware of the emerging technology companies in that part of America. And I was aware of them. But of course, my world was factories and putting meat pies on planes. So occasionally now, because I've now reinvented myself, I'm no longer an accountant. I'm a tech guru. um so as an introduction i use i often say well i worked from from the year 2000 to 2003 i worked in silicon valley and then very quickly move on what i don't tell them was it was pies and mushy peas i was putting on planes and but there's no doubt when you lived in that environment you couldn't help but but see this taking shape around you of course with the benefit of hindsight bloody hell maybe they stayed there got into that industry but that's not what happened yeah and if

16:36John Whelan:If you'd have done that, John, we would have missed out on a British entrepreneur. So we're sort of glad that something siren called you back. Because at this point, you've gone a long way from accountancy. You've done the finance function. You've done the ops function, let's say, or the managing of the ops function. And you mentioned CEOs become a bit like an HR function. Something was calling you back to finance, I feel. You know, when I look back at that time, gosh, what I was always doing was putting myself outside my comfort zone. It doesn't matter that you're not an expert. And do you know what, Paul?

17:08I don't want to sound conceited. Most people are not like that. Most people like the comfort zone. I'd taken my young family over there, you know, basically didn't have any savings or anything. And I really admire that young man. I mean, I hardly recognize him, but yeah, deeply proud of taking that risk. Then what happened is 9-11 happened. And the cash in the airline industry flowed out like a tide. And I realized that I was being, you know, instead of making meals for$1.20, I was having to make them for 60 cents. You know, and you just couldn't do it. And you had to, it was an impossible task.

17:53And what you learn from that is it doesn't matter how well you do a job, you can be, you can have everything in place. You can be executing your plan. Something external happens and you get bowled over like Skittles. But Lady Fate maybe was smiling on me because I got a call from somebody who I used to work with who was working in a technology company called iSoft. And if you look it up, you'll see very quickly that iSoft was an interesting story. Manchester Company, the guy who was FD was becoming chief exec, and I'd worked with him at Pricewaterhouse. and his boss who was exiting said um he was actually moving to chair said go and find the best accountant you ever worked with and make him your fd so sounds sounds conceited to uh to say that now um but it was a great seduction method that the guy used you know he'd he knew me he'd done his research you use a line like that to somebody and you think straight away blimey All it needs is the right financial package, and I know I'm onto a winner.

19:01So iSoft itself was a healthcare software provider. But young chartered accountants like John Whelan need help because, in essence, what iSoft was doing is it was recognising revenue aggressively. And there's not necessarily anything obvious about that to the outside world. and indeed inside companies it's not obvious because you get institutionalized right about

19:29John Whelan:this time there's a change in software wasn't there because it went from being something you paid you sort of capex you spent you spent a lot of money in a nice presentation from larry's lads or whoever signed a massive check and you went away and got very little for a year and they came back the next year or five years down the line but things were changing in software to become more pay as you go drink by the glass not the bottle and i don't know if that was part of the issue all that's to say this rev recognition thing is an issue became an issue out of seemingly nowhere you know in this in this era yeah well revenue recognition um for software companies is is still an issue today you know if you look at you need to look at balance sheet and look at what's happening with the debtors and the earned income in a company to really see how healthy it is what what is its cash generation um that's the that's the clue to aggressive revenue recognition the debtors continue to grow of course i i hadn't been i'd come back from i hadn't been an accountant since um since i moved into consultancy in 1990 so remember this is now 2003 and i've come back and you know you it's a bit like riding a bike you do pick it up but you you know you can't go race Chris Hoy, but there I was, FD of a FTSE 250 company.

20:45IFRS 15, which accountants will just have a look at it, it is ambiguous about how you recognise revenue. In fact, for example, you can recognise revenue without a contract. And if you fast forward to today, you just need to tick to sign terms and conditions. But back in the day, the contract signature wasn't such a big thing. It was about delivery. Those listeners who are not sexy accountants, what was the impact of this technical accounting, when this technical accounting convention comes into conflict with business ambition? Yeah. So not to make this an accounting lesson, but accounting is all about debits and credits.

21:33Every time you have a debit, you have a credit. And if you want to know what side they go on, post the debits to the left-hand side, right? So, and the credits go to the right. Now, essentially, when you recognize revenue aggressively, you go credit revenue in the P &L, increases your profit, debit debtors, which is money that's owed to you. Those debtors have to turn into cash quickly. And if they don't, the consequences of revenue recognition are that the company will collapse because it won't collect its profit into cash. And therefore, companies that are ostensibly profitable can go bankrupt.

22:10And essentially, I left ISOF and it was in rude health. It was only two years later where there was a profits warning. And then what is now the FCA came knocking on my door to ask me questions. But I left in 2004 after a difficult year and a half. It was a tough, tough job, as you can imagine. And you don't go in and think, ah, that's wrong, because everybody around you has been living with this for 15 years, and the issue is with you. And this is what people don't tell young chartered accountants. It's not as simple as it looks in the textbooks. you know you've got lots of sphengali characters charismatic particularly founder owners generally speaking um tend to be narcissistic sociopaths um which you have to be in a startup but when you get into a scale up those characteristics can start to cause problems um and indeed that's what i've got indeed my analogy and it's easy for me to say here jonathan i'm sure if the fca were on the call or some of my previous colleagues that have a different story.

23:24But my analogy is I got to the party and it was already midnight. I was late to the party and the host was face down in the punch bowl. I left the party at midnight 20 minutes later, but then, you know, a murder's committed and you still get interviewed by the police. So that's the analogy I'd use. So you joined iSoft, worked very hard for a period of time, decided to move on. um what did you move on to do before the regulator came calling this is the first time in my life that um i hadn't had a job but i was actually um reasonably comfortably off financially because i've been well paid so i didn't have to rush into the next job so with looking back on it it's the first time i was able to sit back and think right what do i actually want to do um and private equity at that time was in the ascendancy.

24:23I decided that this was an industry I wanted to get involved in, but I didn't want to go on the investor side. I didn't want to work for a private equity company. I wanted to work for a company that had taken private equity cash, follow the business plan, deliver the gains to the private equity. And of course they have this thing called sweet equity. And very, very simply, if you pay£100 million for a company, private equity ladens it with£100 million of debt. And then if they subsequently sell it for anything more than £100 million, you get a small sliver of those shares. And I looked at a couple of different option.

25:02One was a glass recycler. And then I stumbled into this model, which is in the temporary labor market which is they're called umbrella payroll companies no reason why anybody on this on here will have heard of them uh but a great model because it's working capital in reverse you collect the cash before you need it because if you're trying to pay a contractor uh two thousand pounds the recruitment agency will pay you two thousand pounds you'll deduct the v you'll collect the vat as well deduct the pay and you end up collecting two thousand but only paying the contracts are a thousand and the cash balance just builds up and up even if your profit is zero so it was the opposite to iSoft in many ways and i could not wait to be part of this investment it was a company called paystream um who is still the biggest provider in the umbrella payroll market this was 2005.

25:53John Whelan:About two years in thinking everything's fine then it's the old knock on knock on the door most people listening to the podcast will probably have never never been uh in court other than for a speeding fine or maybe you've been involved in a an altercation in city centre manchester or birmingham and you end up on the wrong side of the law um but when you end up in something like this this is slow motion it's it's horrible when i look back at it it's like it happened to somebody else um what you actually get is a letter okay you get a letter from uh from the authorities. The FCA are basically the police for financial crime in the UK.

26:35And the SFO sit between them and the police. The SFO are for the real sort of gangsters who tend to use violence. So the SFO for listeners, serious fraud office. And FCA is financial conduct authority. The SFO deal with the thugs. The FCA deal with the smart Alex.

26:54John Whelan:So who was knocking on your door? So it was the FCA. And what happens is you lose everything. You're not sort of aware of it, but because people don't say, I don't want to talk to you anymore. They just sort of drift away and you are very, very alone. It's not just the reputational damage. You lose your livelihood and your ability to generate income for your family. And as the pressure ratcheted up, In the end, the private equity firm said, look, you are about to be charged. We've got to part ways. Now, I'd invested a quarter of a million. I had£150 ,000 a year salary, and I don't have any bitterness towards private equity at all.

27:43There are the individuals because they just carried out the instruction manual. And in the articles, when you take investment from a private equity company, there's something called good lever, bad lever provisions. And if you're a director with sweet equity, just go and have a look at your articles. It could be in the shareholder agreement as well. And just look at the good lever, bad lever clauses.