A Gathering of Entrepreneurs
How Chris Whittle has used an innovative approach to partnership to build one of the hottest media companies around
Though you may not recognize the name, you undoubtedly know who Chris Whittle is. He's the man who created an uproar this spring with his idea for Channel One, a television program for high-school students that will carry news -- and commercials -- into classrooms across America. Or you may have seen a copy of Special Reports, a glossy Whittle magazine that is distributed free to doctors for their waiting rooms, so long as they limit the number of periodicals they display. Or perhaps you've heard about the new line of business books his company has commissioned -- the ones that will carry advertising.
Whittle has been stirring up controversy, and raising journalists' hackles, ever since 1979, when he and Phillip Moffitt, his partner at the time, breezed into New York City from Knoxville, Tenn., to perform the business equivalent of open-heart surgery on Esquire magazine. To some people, it was like turning over your beloved grandmother to a couple of kids with rusty penknives. Whatever implements they used, the kids did the job, saving the doyen of general-interest magazines and earning the grudging respect of their publishing peers.
Then in 1986 the partners parted. Moffitt got Esquire, which he later sold to the Hearst Group. Whittle wound up with 13-30 Corp., the Knoxville-based publishing company the pair had cofounded with three other college buddies in 1970. The word on the street was that Moffitt got the better deal. Since then, however, it's Whittle Communications, the successor to 13-30, that has emerged as a force to be reckoned with, growing from $70 million in sales in 1986 to an expected $185 million this year. Meanwhile, Whittle himself has continued to make news with his controversial media projects and bold deals. Last year he sold 50% of his company to Time Inc. for $185 million. This year he started testing Channel One.
Lost in the controversy has been another story -- the story not of a publisher, but of a company builder, one of the most innovative we know. Like others who've appeared in these pages, he seems to challenge his industry's most sacred rules and conventions. What we find most interesting, however, is his strikingly original concept of partnership, a concept that lies at the core of his approach to business. For Whittle, partnership is an attitude, a philosophy, and a code of behavior. It governs his relationships with fellow executives, investors, joint-venture partners, even customers. It is through partnerships that Whittle, 42, aims to build what he unabashedly says will be "one of the largest media companies in America in the coming decades."
He talked about partnership and other matters with Inc.'s editor-in-chief, George Gendron, and senior writer Paul B. Brown.
INC.: We are constantly running across companies that have done pretty well with one or two products, but damned if they can come up with another. You don't seem to have that problem.
WHITTLE: Actually, we have the opposite problem. We have vaults of ideas. We have ideas stacked up around here in holding patterns, and I'm talking about major concepts. Our problem is finding the people to execute the concepts we have.
INC.: Are you saying that you can't find enough good managers?
WHITTLE: No, a company like ours doesn't need managers; we really need entrepreneurs -- a word that has been beaten to death in America, as you know better than I. I'm talking about people who can take a concept from a standing start and make it live and breathe. We have an incredible appetite for people with those skills and talents, and they're very hard to identify. Once we've identified them, they're rather easy to attract, because we have wonderful things to offer here, but identifying them is the number-one challenge in our business.
INC.: What makes those people so hard to find? Why can't you develop them internally?
WHITTLE: Because we're looking for a particular characteristic that someone may or may not have. We've noticed there's no rheostat on success in our company. If we send people out on a mission, they either come back victorious or they don't return at all. No one comes back wounded. Now that's not what you'd expect. Theory says you should have a bell curve of results, but it doesn't happen that way. If there are 20 units to be sold, we've found that a certain group of people will go out and sell 18, 19, 20. Another group will sell nothing. There's not much in between. We've been through this over and over again in the past 20 years. The variable is this entrepreneurial skill. Either people have it or they don't, although they may have it in different ways.
INC.: I have to say I get nervous when I hear people talking about entrepreneurial skill as if it's something you're born with.
WHITTLE: I don't know if people are born with it, but I know it's real. Let me tell you a story. We launched Special Reports last year. This is a magazine we distribute only in waiting rooms, which gives us something like 50 readers per copy, as opposed to, say, 7 or 8 for a conventional magazine. Among other things, that changes the whole way we approach advertising. We decided we would sell 30 different advertising units for $1.25 million per unit. Alan Greenberg, the vice-chairman here, was in charge of Special Reports. In the beginning, he was the only salesperson. He sold all the units alone in six weeks -- almost $40 million in revenues. To put that in perspective, the most successful conventional magazine ever launched was People, which did $8 million in its first year of business. So Special Reports was five times the largest magazine launch in the history of publishing, and the sales were all made by one person. A standard magazine has 20 people working for years to sell $40 million worth of space. If we had taken people from a conventional industry background and sent them on this mission, not only wouldn't they have come back with 30 units, 9 out of 10 would have come back with zip.
INC.: So when you talk about needing entrepreneurs to execute concepts, you mean high-level people in your company.
WHITTLE: Absolutely. We need high-level people who are willing to roll up their sleeves and engage customers and go right out on the point. Alan is the vice-chairman of a company with 1,000 people, and he was right out there making it happen. That's the way we function around here. The highest players in the company are the first ones out of the trenches. That includes me.
INC.: Do you do a lot of selling?
WHITTLE: Three days a week I'm out talking with our customers, and I don't mean, "Hey, let's go have lunch." I mean, "Hey, let's do a deal." I don't schmooze. I sell. And maybe that's what it really gets down to -- finding high-level, experienced players who are still willing to do what makes business work in the world: sell.
INC.: Isn't there a built-in problem here? Suppose you do find the people you're looking for, people who are capable of going out and doing multimillion-dollar deals on their own. Why would they choose to work for you? Why wouldn't they go into business for themselves?
WHITTLE: That's a good question, and one we've spent a lot of time thinking about. This gets into the area of our internal financial structure -- how we distribute equity. We've worked very hard on that. We've asked ourselves, "What kind of financial reward does it take to attract and keep entrepreneurial talent?" Because we do view our company as a kind of gathering of entrepreneurs, and our success is directly related to our ability to attract and keep them. So we've developed what we call entrepreneurial reward levels.
INC.: Wait a minute. I don't understand what you mean when you say your company is a gathering of entrepreneurs. You have 1,000 employees.
WHITTLE: In this context, I'm really talking about 15 or 20 people. These are high-level people who could leave and start their own businesses tomorrow and be successful at it -- and, by the way, have probably thought about it at one time or another, either before they joined us or since. We need a relationship that produces the kind of results we want for the company and the kind of results these entrepreneurial people want for themselves. And what do entrepreneurs want? For one thing, they want to take a relatively small amount of capital and turn it into a fortune of some sort. So we've structured both our compensation system and our equity system to let them do that.
INC.: I'm not sure I understand what you mean.
WHITTLE: Let's say an entrepreneur has $50,000 that he can beg, borrow, or steal. If you say, "OK, entrepreneur, we're going to increase that fivefold to $250,000 over the next 10 years," any good entrepreneur will laugh at you. They'll say, "So what? That's not a whole lot better than I can do in a bank. It's certainly not meaningful relative to what I want and think I can achieve."
INC.: I don't know. That sounds like a pretty good growth rate to me.
WHITTLE: From one point of view, it is. Once a company gets to a certain size, it really can't grow much faster than that. A fivefold increase in 10 years? I'll bet that's about a 20% compounded annual growth rate, which isn't bad. If you could put in a million a year, it would produce an absolute dollar return that would be OK. But entrepreneurs don't have that kind of capital to invest. So if you want to attract and keep those people, you have to figure out a way to dramatically increase the rate of return. You have to offer them a potential payoff comparable to what they'd get if they were starting their own company from scratch.
INC.: How can you do that without screwing up your capital structure?
WHITTLE: To begin with, you create two classes of equity. You have entrepreneurial equity and investor equity.
INC.: Do you mean two classes of stock?
WHITTLE: Not stock, equity. We're a partnership, not a corporation. We couldn't find a way to do this within the corporate form, so we switched to a partnership form three years ago.
INC.: You'd better explain how this works.
WHITTLE: Let's say this is day one of the plan, and the business is worth $100 million. You have your original equity holders, and you let your entrepreneur partners put up, say, $1 million. Suppose the business is worth $300 million five years later. Its value has grown $200 million. You split that. Half the increase goes to the original investors, so they make $100 million on their original $100 million -- they've doubled their money. The other half of the increase goes to the entrepreneurs, who started out with almost nothing. They're looking at returns of 100 times their original investment.
INC.: Are you exaggerating?
WHITTLE: No, not at all. That's just a hypothetical example, but it's almost exactly what we've done. We've set up systems whereby $10,000 to $20,000 investments by the entrepreneurs can yield $500,000 to $1 million returns over five to seven years.
INC.: Let me get this straight. The entrepreneurs are investing in Whittle Communications -- not just in their particular businesses, say, Special Reports or Channel One.
WHITTLE: That's right. Now we also have a compensation system that's tied to the performance of the particular business units. The heads of the business units get a base salary and a straight cut of the unit revenues with no caps. We have five business units, and each has a group of products. There are also the generalists and nonbusinesspeople who provide services to these groups, and they get a cut of the corporate profits. But this equity system is separate from that.
INC.: And the entrepreneurs have to buy into it. . . .
WHITTLE: Right. We don't ever give equity away. We think it's an important part of our culture that you always have to buy your equity. It's an investment. You're investing in the future growth of the company. In effect, we're splitting the growth between the original investors and the entrepreneurs. The original investors keep the base.
INC.: You're creating a new base, aren't you? You're saying, "OK, the old game is over. Now, we're going back to zero and starting a new game."
WHITTLE: That's exactly right. And we keep recalibrating it from time to time.
INC.: Do you require the entrepreneur partners to buy back in?
WHITTLE: No, we just readjust the systems so that the new entrants can have situations similar to the old entrants. That's really where the large companies have failed. I think it's one of the key reasons they've lost entrepreneurial talent. With the equity systems they have, there is no way for new people to get the big percentage returns. We recruit heavily out of those companies, so I know their equity deals don't work. We have a very low attrition rate, so I know ours does.
INC.: But how does it work for the outside investors? After all, they're not getting the big percentage returns.
WHITTLE: They have to look at their returns relative to what they could get by investing their money elsewhere. And remember, we can negotiate the way we split the growth. Our first deal, three years ago, was a limited partnership with a British company. We agreed that 45% of everything above the base would go to the entrepreneurs and 55% to the original investors. But we could have made it 70-30, or whatever. That's the beauty of the limited partnership form. With stock, there's a whole body of law chasing you around. Here, you just sit down and go, "How do we want to do this?"
INC.: There's something I don't get here. You're a privately owned company. What happens if one of your entrepreneurs wants to cash out?
WHITTLE: That's an important point, because there are a lot of equity plans with bad exit systems. They are really golden handcuffs in disguise. The partner can only cash out if the leader sells the company, which is screwy because that kind of deal just creates discontent and forces sales. Here we have a vesting system and an exit plan. Now suppose you decide it's time for you to take your sail around the world. Once you're vested -- after six or seven years -- you can bring your shares to the company cashier and put them in at market rates. We actually have an index that simulates how our company would be valued in the stock market. With most equity plans, you get book value, which generally doesn't approach market value, particularly for a company like ours.
INC.: What do you mean, put them in at market rates? Can people cash in their equity whenever they want?
WHITTLE: In most cases, yes. There may be rare circumstances under which they have to wait for their cash. But even then they can lock in a selling price if they're vested.
INC.: How do you provide liquidity?
WHITTLE: To be honest, we don't really think about it a lot. We do it when the opportunity arises -- which seems to happen every three to five years. In fact, that was a big part of why the reason we went into the arrangement with Time.
INC.: You're losing me. I thought that deal was a corporate partnership.
WHITTLE: Yes, but in the beginning I wasn't even thinking about that. I was talking to Shearson Lehman about some longer-term issues, and they said, "Do you know what your company's worth?" I said, "Sure, around $200 million." They said, "Wrong. It's worth around $400 million." I said, "Really? I didn't know that." And I really didn't. I hadn't focused on it. I said, "If that's true, I ought to sell half of it." They said, "Yeah, you might want to give it some thought." The discussion was almost as casual as that.
INC.: So was that your main reason for selling half your company to Time?
WHITTLE: There were two objectives driving the deal. First, it was a very good financial transaction for all of the partners, the executives, at Whittle. It brought $185 million of liquidity to our group, and I'm not above a good financial transaction. I would have to say that was the primary consideration. The other thing was that we wanted an association with a value-added partner. That was a secon-dary part of the transaction, but it was crucial in choosing who we did it with.
INC.: Tell us how you went about selecting a corporate partner.
WHITTLE: It was very straightforward. We sat down with a list of 30 companies we considered possible partners and quickly narrowed that group to 8. Then we spoke with 7 of the 8 and presented them with the concept we had in mind. We had a very specific idea about how we wanted the transaction to work. Most important was that we wanted it to be a partnership, because we're a partnership. As I said, we have found that to be a much more flexible and creative form than the corporate form, primarily in the ways it allows us to provide equity to our executives. We think it's a superior type of organization, and we definitely wanted to maintain that structure. Second, it was crucial that we keep control of the business. So those were absolute requirements of the transaction.
INC.: How did you present all this to the companies you met with?
WHITTLE: We walked in and said, "Here's who we are. Here's what we do. Here's the kind of transaction we're looking for." Very directed, focused, to-the-point meetings. We made it clear what our price range was and that it was not negotiable. In the end, three of the seven were serious contenders.
INC.: What attracted you to Time? What was its value added?
WHITTLE: The most important consideration had to do with the people -- how we related to the key players there. First, they were gentlemen, which matters a lot to us. They were people we felt we could trust. They had a certaincasualness that we liked. There was also a no-bullshit approach, meaning that the deal was done quickly and right and without a lot of nitpick haggling.
INC.: What about Time as a company?
WHITTLE: It was important that Time was involved in a range of technologies -- magazines, books, television. We knew we would be in all those areas. Alan Greenberg made a big point of what he called the wild card factor. He said, "You have to look at all the things Time is involved in. There's something in there we don't know about that could make a real difference to our business over time." There were more wild cards at play in a relationship with Time than there would be with another company, and that was a big consideration.
INC.: Anything else?
WHITTLE: Looking further down the road, we also thought the Time deal enhanced the career possibilities for everybody in the company. We've got an enormous amount of talent here, and we could imagine circumstances under which that talent might become part of Time.
INC.: What were your anxieties about the deal?
WHITTLE: There weren't many. Remember, we have a lot of experience with partnerships. In 1977 we sold 50% of our company to the Bonnier Magazine Group, which is Scandinavia's largest publisher. Then in 1979 we repurchased that 50% and sold it to the Associated Newspaper Group in London. They still own 33% of the company. I have 11%, our key executives have 6%, and Time has the rest. So this is the third time we've sold 50% of the company. In retrospect, we undersold. If I were doing it today, a year later, I would change the number.
INC.: How much do you think you should have asked?
WHITTLE: Well, $185 million for 50% of the company came out to about 50 times the prior year's earnings. Now, I'd say the price should have been 20% to 25% higher.
INC.: That sounds pretty steep.
WHITTLE: Yes, but I have to say we have always underestimated our potential from day one. As a result, we've sold significantly below what we should have in at least three cases. Then again, our investors have done well, and that is one of the real joys of entrepreneuring -- winning for investors. I take a great deal of pleasure in knowing that every investor in Whittle over the past 20 years has made lots of money.
INC.: Did you have outside investors in the early days of the company?
WHITTLE: Yeah. We were in college then, and we scurried around and raised money from everyone we could. There were about 15 of our friends who put in $10,000 each -- all about our own age, between 22 and 24, just out of school. Most of them borrowed the money from their parents. In 1986 we bought out all the original investors. That $10,000 in 1971 returned about $990,000 over a 15-year period. Almost all of the original people were still around, too.
INC.: Let's go back to your corporate partnerships. You seem very relaxed about doing deals with much larger companies. Don't you worry that the partnership may go bad?
WHITTLE: If it goes bad, you change it. A lot of people view every deal in life as the final deal. I don't think there are any final deals. That doesn't mean I'm cavalier about a transaction, but I know that every relationship must adapt to new circumstances. To view equity transactions as static is just incorrect. If circumstances change and a deal stops working, you fix it. You have to have faith in your own company's strengths, in what you yourself bring to the party.
INC.: And what exactly do you consider your strengths when it comes to renegotiating a deal?
WHITTLE: In my view, there is only one major strength in business, and that is the ability to produce. Some people would say, wait; there are other strengths, such as ownership -- legal ownership is a strength. That's true, but I've always thought that the ability to produce is the most powerful factor. As long as you have that, you have as much control over your destiny as you need. If you can grow something, you can control your destiny. You can certainly alter a transaction that isn't working out -- alter it in ways that work for everybody. We've operated like that for 20 years, and it's always worked out.
INC.: That's a very unusual attitude. Most owners we know go into deals like this with the sense that it's irrevocable, that they're selling a part of themselves.
WHITTLE: Not only owners, but key people in the company. Employees are very anxious, too. They wonder, "What does all this mean to me? What's happening?"
INC.: But don't you ever worry about losing control of a situation?
WHITTLE: Maybe I'm naïve in this regard, but I believe that, ultimately, performance controls. A lot of people put their faith in legal documents, which can't be ignored. But I tend to put my faith in what we do and in what I do. As long as someone can do the job, everything else is secondary. And I believe that intelligent people will understand that the most important asset is the ability to deliver. That asset prevails over any technical language in a contract. I'm not at all paranoid about what goes into a legal document. In fact, I didn't even read the final Time contract. I trusted someone in the company to read it and tell me it was OK to sign.
INC.: I wonder if that attitude doesn't also affect your feelings about equity. To many people, sharing equity with anybody under any circumstances is a huge hurdle -- a legal, managerial, and emotional hurdle. For you, it seems not to have been much of a hurdle at all.
WHITTLE: No, it wasn't. Of course, you have to remember that we had 20 or so shareholders from the very early days of the company. The original 5 guys all had equity, and then there were the 15 outside investors. So we were kind of used to the idea of sharing equity. We also knew the importance of having a group. I don't think there's any question that we would have failed as an enterprise without that group of 5 people.
INC.: Why would you have failed?
WHITTLE: Because our original idea didn't work. We did a magazine, Knoxville in a Nutshell, that was designed to orient new students to the University of Tennessee. We were all student leaders there, and a couple of us were involved in student orientation. So one of the group, Phillip Moffitt, came up with this idea. Nutshell made money the first year, and it lost money thereafter. Maybe in the sixth or seventh year it made a little money, but not much, and it lost lots of money in the first five years.
INC.: How did the group save you?
WHITTLE: First of all, it gave us five times the borrowing power, meaning that all the families got hit up as hard as they could be. And it also gave us five times as many friends to borrow from.
INC.: I guess that's nothing to sneeze at.
WHITTLE: Not in our condition, it wasn't. But, seriously, the group was most important because it allowed us to divide the labor. One person took distribution, one took finance, one took editorial, one took sales.
INC.: You were all still undergraduates in college at the time, weren't you?
WHITTLE: Two were undergraduates; three were graduate students. I was a senior, and I left when I graduated. I sold my equity for $2,500 and went to Columbia Law School, where I lasted a couple of weeks. After that, I worked in a political campaign and traveled for a year. I was on my way to teach history at a private school when the other four guys took me out to dinner and said, "We really need you to come back." They probably just needed my borrowing power. But they were my best friends, and I liked the idea of doing this venture with them. We thought we'd work for three or four years, make it a success, retire at the age of 26, and go on to the rest of our lives. So I bought back in at a much lower level and became the number-five partner. Three or four years later I was up to my eyeballs in debt, and I couldn't afford to leave.
INC.: What went wrong?
WHITTLE: We tried to do Nutshell in 20 cities, and itdidn't work. We had losses of something like $60,000 the second year. By the fifth year we had losses of $500,000.
INC.: That doesn't sound like much fun.
WHITTLE: In the first three years I would say it was a lot of fun. In the fourth and fifth years we had real serious problems, and it wasn't fun at all. A kind of battle fatigue set in. Then we discovered something called national advertising.
INC.: Are you saying that you'd been going after the wrong market?
WHITTLE: Yeah, we were trying to do it with local advertising, and we finally realized it wasn't working. We were losing money on every sale. So we decided to focus and train our guys to sell national accounts. And over a couple of years we built them up and got to break-even. That was a turning point. Then there was a second key event. One of our advertisers, Nissan, came to us and asked whether we could figure out a way to showcase them more than in a typical magazine, where they are just one of many advertisers. We said, "Well, maybe we could develop a magazine in which you are the only advertiser." We did it, and it worked. We quickly went, "Ah, there must be other ideas like this." So those two events really did it for us -- coming on line with national advertising and starting the single-advertiser magazines. We finally broke out into the clear.
INC.: How long had you been in business when this happened?
WHITTLE: Six or seven years. The business really began to work in 1977. We were a $5-million company, with $1 million in profits. We paid our debts, and a couple of the original people split. We went from five partners to three.
INC.: What happened to the other two?
WHITTLE: One of them spun off part of the business, a computer operation. The other retired.
WHITTLE: Yeah, he was the chairman, sort of the financial man -- the adult of the group. He was four years older than me. He retired at 30, and he hasn't worked in business since then. We're still friends.
INC.: What does he do now?
WHITTLE: He's kind of a philosopher.
INC.: Makes for an interesting business card. So where did the company stand at this point, and where were you heading?
WHITTLE: Well, there was Moffitt and me and Ed Smith, with maybe 50 or 60 employees and five or six properties, all in the youth publishing business. The name of the company was 13-30, which was our target age group. We had some ideas about other publications we could do, but I don't think we had a real good sense of where we were going. We were late bloomers in terms of vision, which helps explain why we bought Esquire. It was totally off strategy, not that we realized it at the time.
INC.: How was it off strategy?
WHITTLE: Our magazines used unconventional distribution channels and weren't cluttered up with advertising. Esquire used conventional distribution and was a cluttered vehicle. I should add that, financially, buying it was one of the worst things we ever did.
INC.: So why did you buy it?
WHITTLE: We did it mainly because we were tired of hearing, "They don't do real magazines." Finally, we said, "OK, we'll show them. Let's play in the big leagues. We'll go do one of theirs." But it didn't make much sense in terms of the company, as we eventually grew to understand.
INC.: Well, you aren't the first to make that mistake. We see it happen over and over -- companies getting sidetracked by a need for respectability.
WHITTLE: It's an issue I've tried to deal with in this company. I mean, there are no industry awards for the businesses we're in, so how do you get peer approval or applause? I've said to people here, "Look, you're going to have to get your prestige in a different way. One part of being a pioneer is that you don't get immediate applause. You have to accept that. You have to delay gratification. One day people will applaud you as pioneers, but that will only happen after it's clear we've succeeded." I think it's important to talk to people about that, show them a light at the end of the tunnel. Otherwise, they'll find another way to get prestige, and one would be to turn us into a conventional operation, which would be a disaster for the business.
INC.: Was Esquire a disaster for 13-30?
WHITTLE: It came very, very close.
INC.: In what sense?
WHITTLE: In the literal sense. When we bought Esquire, it was losing $5 million to $6 million a year and -- unbeknownst to us -- trending downward. We had $3 million in the bank, our total resources as a company. We were making maybe $1.4 million a year. We said, "Hey, we've been through tougher times than this. We can get this thing in the black in a year." That was May 1979. Well, the $3 million was gone in a matter of months. Poof! By the end of October it was clear that Esquire's losses were accelerating, not declining. We could see we'd be completely broke by Christmas. Basically, we had three options. One, we could shut the magazine down, because nobody wanted to buy it. Two, we could go bankrupt, which was not a very interesting prospect. Three, we could arrange some other kind of financial situation that would allow us to dig ourselves out.
INC.: Hadn't you realized yet that you'd walked away from your core strategy?
WHITTLE: No. Anyway, we knew we'd be the laughingstock of the industry if we closed, and that wasn't something we were interested in. So we went to our British partners, Associated Newspapers, who were the previous owners. Under the terms