Question: After seeing eToys Inc. fail so miserably during the tech boom, why buy a toy company?
Answer: I decided I wanted to be inside of a company again, and I had already been working in educational kids' products so I was already familiar with the toy world. I saw all these smaller toy companies that had been around since the Depression survived because they had very strong product lines with loyal followings.
Q: What did you see in Small World Kids when you led its buyout one year ago?
A: It was profitable and had been for some time. I wanted a company that was very strong in manufacturing and warehousing and overall operations with products in higher-end specialty stores. They had really high-quality educational products that were evergreen, not trend-driven. They're in infant and preschool products, not teen stuff, which is too volatile because of changing tastes.
Q: And what was the potential?
A: The owner of Small World before wasn't terribly interested in distributing internationally because it takes a lot of work in China, and you have to have a presence there, so he focused on the U.S. With the investors, we bought it to do rollups, to buy other children's products and companies. We could get into the mass market by buying a company that's already in it, without changing it and keeping its existing products.
Q: I understand you've twisted the manufacturers' traditional export model, by manufacturing items in China for the Chinese market.
A: Distributors in China started wanting our products. Everything there is growing so fast. You have this enormous population, and more and more people have a lot of disposable income. There are so many single-child families because of the population control, so parents really spoil their kids and invest everything in them.
Q: But aren't your toys aimed at the American market?
A: They want these educational products and they want American products, because there's this confidence in them. We have an office in China, where people oversee the work we do with the factories there, and the people at the factories help us make our products like "Neurosmith" (a goodie box with electronic, plush and other educational toys) and "IQ Baby" (a line of plush discovery toys such as puzzles) relevant to the culture there and translate the language.
Q: Any lessons for other companies trying to break into the China market?
A: It's important to work with someone who is over there, especially if you're manufacturing there, like a trading company, someone you can trust. You have to have a presence and direct relationships. It's good to ask other companies who they work with and what their experience has been. Or if your competition is very good, you can see who they use. For example, Mattel, Leapfrog and Hasbro use some of the same factories we use, so we knew they would be good quality.
Q: How did you get your start in the toy business?
A: I was recruited by Disney and they made me vice president of marketing for their brand new interactive group, basically interactive CD-ROMs based on Disney films and characters. Our home-video department was going, "Oh, my God, we're all going to lose our jobs because everything is going to be interactive, people are never just going to watch a movie anymore. And they'll watch them online!" That was in 1993. It was such a revelation, everyone was afraid for their job.
Q: Of course, that didn't happen.
A: I was a little more skeptical because I saw what it took for us to make one of those games, and how slow it was.
Q: But then you started your own CD-ROM company, Cloud Nine, in 1995. Why?
A: People were OK with their kids staring at a computer if it was educational. It was also at a time when there was one computer in a household, the penetration wasn't there, so it had to be very compelling. It was part of what the market wanted right at that time. We came up with our product line of educational CD-ROMs, "What Can I Be When I Grow Up?"
Q: When did you finally cash out?
A: Sega was an investor, and they wanted a softer image, so they offered us $35 million to purchase us. But we didn't think we were far enough along. I wish I had done it. That was in 1997. We ended up selling it to Simon & Schuster for about $3.5 million two years later. People weren't thinking CD-ROMs were the end-all anymore, interactive DVDs were being developed and interactive online stuff was growing.
Q: Any lessons learned there?
A: Sell on your way up. It's a mistake a lot of CEOs make, they stay a year too long because they think they're still going up. And they live to regret wanting to take that last penny off the table. You've got to sell while you've still got room to grow.
Q: What did your previous experience as an entrepreneur teach you about being a venture capitalist?
A: I wanted to help, I wanted to mentor, but it made me way more cynical. We were starting to get real skeptical. I would see a bright-eyed young CEO who clearly had no idea what they were in for. It made it so that I could call their (bluffs).
Q: Did the VC experience teach you about running your current company?
A: I have a greater appreciation and understanding of why investors would ask a company's management to do certain things they're looking out for their money and the other shareholders. I understand some of their frustrations if management doesn't share information with them. I feel like I have a much better relationship with my investors now.
Q: How is it being a female CEO?
A: It never bothered me being the only woman at corporate networking events. (But) I found the entertainment business had more women executives. I hadn't been here for a year when I started getting calls to be someone's CEO of the year, even though I wasn't remotely qualified to be awarded yet. Turned out I was the only woman on their list.
Q: I hear you have an interesting story about your marriage.
A: I hired Russell Fine as the chief technology officer when I was starting Cloud Nine. We started dating and after about six months, he asked me to marry him. I said, "Oh my gosh! I'm going to have to tell the venture capitalists," because they were supposed to fund us like two weeks later. I couldn't just take their money without them knowing that we were going to get married. I knew it would be a big problem. It matters ethically. A married couple running the company, they don't do that.
Q: Why not?
A: To VCs it's like an unwritten law. If you got divorced while running the company, and started a battle over the ownership of the company, it becomes a shareholder battle, so it comes into the boardroom. If you're already married and started the company together, they're easier about it, because they can take that into account before deciding to fund you.
Q: So what happened?
A: The VC said, "Fire him." Russell had just started his company, Youbet.com, and he really wanted to get moving on that. I said to Russell, "Good news and good news. You're fired and we're getting married." And he said, "Yes!" That was in 1995. He was cut loose, and Youbet.com was born.
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