Heroes of the Pacific was a huge gamble for IR Gurus, and the big risk brought a big reward. By MIKE PRESTON.
By Mike Preston
When Melbourne-based computer game developers IR Gurus were bought by the NASDAQ-listed US game publisher Red Mile Entertainment last month, it was the ultimate pay-off for a high-risk gamble chief executive Mike Fegan (right) led the company into four years ago.
In 2003 IR Gurus had just 20 staff and a turnover closer to $1.5 million. Today the company is a fast growing and profitable company with well over $10 million in annual revenue and 110 employees.
The company had achieved success with high-profile game titles based on the AFL and Saddle Club brand licences, but in 2003 IR Gurus was just one of the many development guns for hire in the fledgling Australian games industry – its fortunes rose and fell with each new contract won or lost from big international game publishers.
Then chief executive Fegan saw an opportunity to put the business on a more independent footing. His developers had come up with a strong concept for a game called Heroes of the Pacific, incorporating some innovative game play features that the company could sell directly to investors, bypassing the big game houses.
Armed with a game demo and a background in game publishing, Fegan and his management team found investors’ doors opening to them. Investment bank Grant Samuel backed them with $3 million, which provided a springboard for a publishing contract for the game in the huge US market.
Then disaster struck. The company that was to publish the game in the US was bought out and terminated its contract with IR Gurus, leaving the $5 million project – even the business itself – hanging in the balance.
“It was a feeling of pure terror,” Fegan says. “It dawned on us that we owed millions, didn’t have a publisher, we had the bank, financiers and completions bonders on our back – not to mention that your wife hates you because you haven’t been home for months, so it was incredibly hard.”
Fortunately for IR Gurus, their investor didn’t withdraw immediately, which gave Fegan and his team time to find a new publisher in the US. They signed with Codemasters within three months. Then, to publish in Europe, they signed with the US-based Red Mile Entertainment, which subsequently bought the business.
“It was one of those things that can make or break you. If we had failed I think the company would have gone back to 12 people in a room making niche titles and small budgets, effectively a hobby business instead of a serious business,” Fegan says.
In the end, the Heroes of the Pacific game sold more than 600,000 units internationally, and although it didn’t make a lot of money, it established IR Gurus’ international reputation and made them the owner of some valuable intellectual property.
Both of these factors were crucial in motivating Red Mile Entertainment’s purchase of IR Gurus this year. Although Fegan won’t reveal how much Red Mile paid for the business, he will say the deal involved a 75% cash/25% share split for each of IR Gurus’ six owners – which includes the three original founders of the business and Fegan himself – and that they were all “very happy” with the deal.
IR Gurus is the first developer to join the Red Mile stable, which Fegan says is essentially a start-up backed by very experienced and well-connected figures in the global games industry. Their established relationship meant IR Gurus was a logical first acquisition for Red Mile, while getting in on the ground floor of an international business that is already pursuing further acquisitions was an attraction for IR Gurus’ owners, Fegan says.
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However, the key motivation for the deal from IR Gurus perspective was the access to capital markets that the NASDAQ-listed Red Mile affords.
Far from being ready to take the money and run, Fegan and the key IR Gurus management team – all of whom have signed two-year work-out clauses as part of the sale process – have big expansion plans for the business. But big growth takes big money, and there is precious little of that in Australia.
The deal means IR Gurus can realistically aim to become one of the top 20 developers in the world within 20 years, Fegan says, although getting there means continuing the business’s hectic growth pace and keeping in the good books with the new owners.
“There is more pressure now: we have to make sure we don’t screw up. The way it stands at the moment they’re reliant on us to come up with more original content, but if we don’t’ deliver that there will be a push for changes.”
In the short term, however, IR Gurus faces another huge challenge common to many Australian businesses in the ICT sector: finding skilled staff.
Last year it imported 60 workers from Europe, but still has room for another 20 to meet the current production schedule. Fegan says the real challenge will come next year, when IR Gurus will look to double staff numbers to more than 200.
“The talent pool in Australia is so small, there is just no chance of finding the people we need in Australia,” Fegan says. “We have four recruitment companies on retainer and do 90% of our recruitment offshore, and that could increase next year.”
But while IR Gurus will be sourcing its employees from as far countries as diverse as China and Egypt, Fegan says he will be focused on keeping the Australian character of the business.
“It can be tough working in a global industry from Australia, we tend to be a bit out of sight, out of mind – but you can’t find that great ‘can-do’ attitude that we have anywhere else. When our backs are against the wall we perform, and that’s really something you can build a business on.”