Made in Stone

16 February 2009

James Bird is CEO and founder of Stone Group, which supplies IT hardware and services to the UK public sector. Hailing from a sales background, he founded Stone in exasperation at the level of service and support being provided by the company he was then working for. The business – which manufactures and supports its own equipment to order from a facility in Stone, Staffordshire - was initially focused on the further education sector, but has since expanded using a pot of VC money earmarked for acquisitions. Stone’s latest deal was the purchase of Warwick-based Rock Group.

You had a roller coaster ride in the early years with explosive growth, then ran into difficulties. What happened?

The company’s early growth had been so phenomenal that I was able to fund it with no backing. But that was back in the days when you could negotiate a seven-day payment term with the finance department in a further education college. It was that sort of flexibility that was a contributing factor to our rapid growth. Another motivating factor driving us to make it a success was that we didn’t have the luxury of a major investor in the background pumping in millions.

With the massive peaks and troughs that existed in the public sector’s purchase patterns, an ongoing concern was how we could keep the factory output running more consistently. The answer to that was to chase business via the retail route. So we went out and secured a load of retail business – including the Byte Computer Stores contract – and we started building the Patriot brand. Unfortunately for us, SCC [Byte’s owner] sold it overnight to DSG, which was already building its own PCs. They came to see me and said we were too small.

This unfolding situation left me with quite a problem because we’d doubled the staff and expanded our manufacturing facilities. So we went from having a healthy balance sheet, to being insolvent.

How did you get through that crisis?

We put our cards on the table and played it straight with our bankers and all our creditors – we didn’t run from our responsibilities or put our heads in the sand. We sat down with them, explained why half the business had disappeared overnight, and outlined our strategy for restructuring and realigning costs. And that was the plan we stuck to.

After the initial surge of excitement, the entrepreneurial enjoyment often starts to fade for company founders. Was that why you subsequently left the business?

After this period of growth, there were a lot of challenges and issues to resolve. At times, it makes sound business sense to let somebody else make some of the decisions. But it is quite difficult to relinquish control when you’ve been used to playing with the train set whenever you want to.

Then in 2004, the business was making £2-3m a year. I’d got what I wanted, and it was probably time the management team were responsible for running it. So I did a deal with the team, and in February 2005, I sold it, retaining 20%.

With them now responsible for running the business, it didn’t really experience further phenomenal growth for a couple of years. So I thought I would go away and live abroad, planning to fly in every week for a couple of days, then fly back again.

But you were back at the helm by the end of the year. What happened?

The company was off-target. It was projected to make £5m, but it was making £2.5m, which isn’t very good from a bank or VC’s perspective. They want and expect you to deliver against the business plan they’ve invested in. The business then had classic problems. The plan had overambitious growth in it, so you’ve got a top line problem. To achieve the top line, you try to compete on price, and then you’ve got a profitability problem. To do all that, you need people to make it happen, so like most good plans, the overhead is fixed and that line is the only one that’s on track. The three things combined are like all the elements for the perfect storm.

Also, I was quite happy to come back and prove to certain people who’d been critical of what I’d done that I could put the business back on track. I’d retired at just less than 40, thinking I’d worked hard and had enough, and then I started thinking perhaps retirement’s not all it’s cracked up to be.

And did you have a different mentality after you’d taken 12 months out of a business you’d started?

I think that there’s a spoilt brat mentality that characterises many entrepreneurs. It’s back to the ‘it’s my train set, and I’ll do what I want’ attitude. That was my mindset when I exited, but when I came back, I came back as an adult with a much more rounded and mature outlook. With my fresh perspective, I realised there was a huge opportunity here. I could see that it was a business that we could drive potentially massive value out of. Sometimes you just can’t see that through your entrepreneurial eyes.

How did you set off down the acquisition path?

Well, I’d already integrated one company and bought another out of receivership during those years, so I had experience of successfully concluding deals worth hundreds of thousands of pounds. Then I had a strong lead from someone in the industry that one of our UK peer group competitors, Compusys, based in Aylesbury, was in trouble, judging by all the signals coming out of it. So I did the research and due diligence, and once satisfied that there was a strategic fit, we closed the deal. It was a big deal and we did an excellent job of it.

Following that success, I thought there’s got to be something in acquisition as a route to future growth.

On top of everything else, you’ve recently changed VC. How did that come about?

Our former VC fully understood our business and gave us the flexibility to act and respond to market opportunities. But it has since sold its portfolio to another VC, one that specialises in managing out portfolios. What this business needs is a VC that understands this company, and has the resources and vision to support relevant acquisition opportunities, to make this a £100m+ business.

So we went out to market, wrote a business plan and we changed VC. We also raised a load of acquisition money on the side, which is where I sit today – with a pre-approved figure with which I can go out and acquire strategic targets that enhance the business and drive the services into slightly different areas. It’s a non-diluted pot, which means when I spend it, the management’s share doesn’t get rolled back. This fund and this flexibility puts Stone in a strong position to make future acquisitions when the opportunity is right.

James Bird was talking to David Longworth