The 2012 bankruptcy of Rhode Island-based video-game developer 38 Studios isn't just a sad tale of a start-up tech company falling victim to the vagaries of a rough economy. It is a completely predictable story of crony capitalism, featuring star-struck legislators and the hubris of a larger-than-life athlete completely unprepared to compete in business.
Former Boston Red Sox pitcher Curt Schilling, an iconic figure in New England after anchoring a historic playoff comeback which ended a legendary 86-year title drought, founded 38 Studios near the end of his baseball career in the hopes of becoming a big shot in the intensely competitive multi-player gaming world.
Since 2006, Schilling invested millions of his own fortune into 38 Studios, and with the self-assured bravado he exhibited as a major league baseball player, set out to find investors to infuse his company with the roughly $50 million needed to complete 38 Studios' first game. Although Schilling is the kind of local legend who could get a meeting with every venture capitalist in New England, Massachussets VCs passed on 38 Studios. WPRI-TV's Ted Nesi reported that one such potential investor said "it would have taken a lot of babysitting to do a deal with Schilling because he was inexperienced and the management was inexperienced."
Finding no success raising financing in the private sector, Schilling turned to Gov. Deval Patrick (D-Mass.), but the Patrick administration declined to get involved when "they couldn't make the numbers work for us."
Enter Gov. Donald Carcieri (R-R.I.), term-limited and searching for a legacy after presiding over one of the worst state economies in the U.S., featuring long spells of double-digit unemployment and frequent last-place finishes in rankings of business friendliness. In a classic spasm of "do something, anything" government desperation, Carcieri made it his mission to lure 38 Studios from its headquarters in Maynard, Massachusetts to Rhode Island.
Using his bully pulpit as both governor and chairman of the Rhode Island Economic Devlopment Corporation (RIEDC), a quasi-public agency whose mission is to promote business in the state, Carcieri pushed hard for 38 Studios to receive a $75 million taxpayer-guaranteed loan.
Each loan guarantee must be approved by the Rhode Island legislature, and when the votes were cast in 2010, only one lawmaker voted against it. Rep. Bob Watson (R-Greenwich) noted "a lot of red flags" in a "very risky" deal that was "too fast, too loose, and frankly, a scandal waiting to happen." Watson added "more often than not, politicians are very poor when it comes to making business decisions."
Watson is clearly on to something, at least in the Ocean State. Some legislators later admitted that they did not realize that the loan guarantee meant to stimulate Rhode Island business, was in fact, only going to stimulate one business, 38 Studios.
In 2011, 38 Studios moved from Massachusetts. After little more than a year in Rhode Island, with monthly expenses approaching $5 million and their big game release more than a year away, 38 Studios began to unravel with stunning swiftness. In May 2012, 38 Studios defaulted on a $1.1 million loan payment to the RIEDC, then tried to deliver a bad check. Unable to meet payroll, the company laid off its employees in a mass email, with one employee learning of his new unemployment only after his pregnant wife was told at a doctor's visit that their health insurance had been terminated.
Schilling has been an outspoken "small government Republican" activist, who campaigned with President George W. Bush in 2004, but with his business in dire straits, he once again turned to the state for a bailout.
Unfortunately for him, Donald Carcieri had been succeeded as governor by Lincoln Chaffee, a Republican-turned- Independent and vocal opponent of the 38 Studios loan from its inception. Gov. Chafee sharply declined to to use any more taxpayer dollars on the foundering company, which Schilling described as a politically motivated "$100 million I-told-you-so."
After the company filed for bankruptcy, Gov. Chafee appointed the non-partisan Rhode Island Public Expenditure Council (RIPEC) to produce a study that included an analysis of the collapse of 38 Studios and why the state's development agency, completely failed to monitor the taxpayer's investment. RIPEC's Executive Director John Simmons told Reason TV that the RIEDC lacked any meaningful "guidelines and principles" to effectively monitor the progress of the loan and report to the governor and the RIEDC's board.
Schilling, who claims to have invested $50 million of his own fortune in the company, now says that he is broke, and may have to sell some of the prized memorabelia from his baseball career, including the famed "bloody sock" from the 2004 American League Championship Series. 38 Studios' assests are being liquidated and the already economically depressed state of Rhode Island, thanks to the interest on the 38 Studios loan, is now on the hook for more than $100 million.
In November 2012, Rhode Island filed suit against Schilling and several former EDC board members alleging fraud, racketeering, and conspiracy. The lawsuit claims that Schilling and former EDC Executive Chairman Keith Stokes (who now works for the legislative lobbyist firm The Mayforth Group) knew the company would run out of money by 2012, but concealed that from the EDC before the loan guarantee was finalized.
Former Gov. Carcieri hoped 38 Studios would be the cornerstone of a new video game tech hub in Rhode Island. Instead, the fallout from the collapse and squandered taxpayer dollars will make the state unlikely to cut any more of what WPRI's Ted Nesi describes as "special, one-off deals with individual companies...picked by a certain group of people in state government."