Using his Imagination

Today on Lunch with Entrepreneur Amanda Gome is talking to Imagination Entertainment’s co-founder Shane Yeend.

Yeend, who broke into the competitive games market with a hit board game Battle of the Sexes in around 1997, has focused on the US market which has since been walloped by the GFC. Amanda Gome talks to him about how he has survived and the great sales that fell through.
Shane, you were hoping to get revenue sales in 2007 of more than $80 million, how have you gone?

We backed off that a little bit. We’d actually signed an agreement to make a sale of the company to a large media group. We had a second offer from a big private equity group but we took the big media option.

Considering we’re really a big catalogue of brands and games in the interactive space and they’re not easy to come across, we were preparing to sell the company. But the deal didn’t go through as private equity had evaporated. From then on the majority of our earnings came out of the US, but then it started to back off a little bit and was just going soft.

And it was really strange because we’d been in the US market for 10-12 years. And since then I’ve been playing defence instead of a forward.

So how did you feel when that sale fell through?

Well we had an 80% cash deal – US dollars – the dollar was at 70 or 80 cents. But we plod on and today we’re probably worth half of that and it’s just the times. So entrepreneurs, you actually have to earn your money when times are tough.

That’s a good point. So did they contact you or did you find them? And is there a possibility that when things improve that the buyer might be back?

Yes they changed their strategy. There are a lot of things under the hood of Imagination that people don’t get to see and we’ve got some interesting technology platforms in place which may bring them back.

After the sale didn’t go through, we ended up entering into a couple of joint ventures with them. We started a radio network that’s now on 170 different stations across America. So we’ve got a lot of cross platform games slash ventures and we’ve got a couple with this company and they’re good partners. But we basically set a strategy for 2008 and then it was really go out and sell the strategy and come August we smacked into the worst retail conditions imaginable. The supply chain just stopped.

For a small, undercapitalised Australian exporter supplying 85,000 stores of the world’s biggest retailers in top three/four category position, the big guys started saying let’s get rid of $1 billion worth of stock and carry less. We’re in the middle of a supply chain between R&D, China and Walmart and when that stops, cashflow just dies.

Not again, because you had a problem when you first started.

We had the number one internet site in ‘97, ‘98 and ‘99 and when that died we had 20 days of cash left. We’ve been, as I’ve said, playing defence since last August pretty solidly.

So what did you do, how did you fund the business?

You find out who your friends are.

Are banks your friends?

We’ll leave that one. Yes it’s interesting because at least the UK Government stood up behind all the SMEs as trade finance evaporated which was the biggest thing. You think about it, I had a $40 million line of credit with QBE behind it which turned into a $12 million line of credit overnight. The same month the dollar goes so our facilities evaporated by 40% and then the banks come in behind that and say we want to take your facilities away from you as well.

Which bank was it? Name and shame.

Let’s not say, not yet.

How long had you been with this bank?

Since we were a $300,000 company.

Gee.

But it’s interesting, we’re still working through the issues.

So you’re still with them?

At the moment. The first sign of rough weather, you find out who your friends are.

It’s interesting because a lot of the companies have said to me: we will remember, we will remember how these banks treated us.

I look at my company and yes I’ve got a lot less employees, all we did was shut off our R&D capsule.

How many people did that employ?

About 140 and we basically sold off a couple of non-core companies, shut down an R&D module and then we basically went catalogue cash, cash up and basically had to bring the revenue down into quality customers. Because then all my customers started going broke. All the big retailers around the world. We dodged a fair few of the bullets but we copped a couple.

So your retailers start going broke and not paying you, the dollar changes by 40%, your facilities disappear, your credit insurance runs the business. Because you think about it, when we had a suitcase and went to America and get an order, you need 50 cents to buy that order to supply it for about 120 days and if you start at one box and then you start moving 10 million boxes, you basically just live on trade finance. But then EFIC (Export Finance and Insurance Corporation) gets sold off to trade finance to QBE and privatised it. They did that ages ago and then QBE went, oh well we’ll just back the good ones, and so basically today I can’t even get trade finance on Toys R Us or Kmart.

EFIC isn’t helping in any way?

You know what, I wrote to Mr Crean and got some four paragraph letter back.

Because we did a story yesterday saying they are planning to extend at last.

Fantastic, but that’s a year too late. I’ve got my business running extremely well now but a year later we’ve been living on no facilities and basically our growth was not held back through ideas and not held back through our retail partners, it wasn’t held back through our technology but it was always glued to how big our overdraft was in the R&D group 18 months before. And so the bigger that, the bigger the turnover. And as you cut that off, you bring the turnover down. But do you know what? We have good quality customers, the company is still travelling at under 1% bad debt, in a global market, that’s not so bad and we’re on track for 2010 year of about 25% EBITDA.

Well that’s good. So what will your revenue be?

We actually don’t know yet.

I actually do understand that now I run my own business.

It’s kind of tough to work out what we’re going to put through and what we’re not. But somewhere in the 40 to 50 range.

So how quickly do you think you can scale back up? What are the signs in America?

We’ve got live POS data coming out of all the major retailers and this year everything’s holding strong. We’ve got a couple of new products that are on fire. So it’s all good, it’s not dropping off the face of the earth. It’s actually kind of interesting because we’re in a market of family entertainment with products under $25 which are in recession times boom products.

The problem is, you actually just have to go through the fallout of retailers settling down, the ones going broke, the ones that stop buying. You’ve just got to make the transition quickly. We’ve been hands on the wheel for over a year and we have a daily cash update and it really is just about cash. And it hasn’t been about profitability. It’s been about, let’s make sure that this thing gets through. Because we’ve never gone out and done, even when we had 21 days of money left in 2001, we never went out and raised any money. Thta’s what we should have done now in hindsight. We had offers to take $60 million of debt on and the company’s valued at the $150 million or $180 million. And I’m so glad I didn’t do that. Like the company apart from one million or two is debt free and it’s a nice place to be. But I’m glad I didn’t take the private equity money. That came with debt. We should have sold the company but you know hey.