Loan Guarantees

Look Inside 38 Studios Disaster Shows Overconfident, Clueless Curt Schilling

|


Jason Schwartz and Boston Magazine provide a thorough autopsy of 38 Studios, the fledgling video game company started by former Red Sox star Curt Schilling that received $50 million of a $75 million guaranteed loan from the state of Rhode Island to produce a fantasy online role-playing game, only to burn through the money and collapse.

WOW non-killer

Schwartz managed to snag interviews with Schilling and several of his employees and paints a picture of a man who really had little idea about how to run a game development company. Schilling blew through millions of his own savings as well as public funds with a terrible plan that scared potential investors away:

By 2006, Curt Schilling had earned more than $90 million playing baseball, not including endorsements. But what he really aspired to was being "Bill Gates rich." He admired the global impact the Microsoft founder had made through his philanthropy, and wanted to do the same. Schilling, who has an autistic son, imagined providing $200 million to open the Shonda Schilling Center for Autism Research.

Creating a video game would be what catapulted him to that wealth. More specifically, he would build a massively multiplayer online game (or, blessedly abbreviated, an MMO) — the type that allows people from across the world to play with and against one another. As a kid, Schilling had been obsessed with computers (his first was an Apple II), and during his baseball career, rather than go out carousing, he spent his time playing MMOs. A favorite of his was the industry leader, World of Warcraft, a vast fantasy landscape filled with wizards, elves, and warriors that has more than 10 million paying subscribers.

Successful MMOs are incredibly lucrative, but they're also the hardest type of game to build. You're programming not just a game, explains Dan Scherlis, the first CEO of Turbine, a maker of MMOs, but a complex social system for thousands, if not millions, of users. A normal video game might require a couple of years to develop, but an MMO takes at least twice as long. Because of that, many gaming entrepreneurs start small, working their way up from something simple for a mobile device, or perhaps a single-player game for PlayStation or Xbox. But Schilling had grander ideas. He was going to challenge World of Warcraft. His fantasy world would be similar (you want elves and wizards, you've got elves and wizards), but he envisioned deeper plot lines and more-striking visuals. He persuaded R. A. Salvatore, the bestselling novelist from Leominster, to dream up the fictional universe, and the famed comic artist Todd McFarlane, a noted baseball fan, to conceive its artistic vision.

If Schilling's story were a Shakespearean tragedy, "He was going to challenge World of Warcraft," would be the line in which you realized the hero was doomed. World of Warcraft currently has more than 10 million subscribers. This is a drop in numbers over the last two years. According to figures from a site devoted to tracking MMO subscription numbers, no other game out there comes anywhere close. Even an MMO about Star Wars couldn't crack 2 million. This was a doomed plan from the start.

Schilling also had no real sense on how to run a start-up business, which became apparent long before he went begging Rhode Island for money. He launched the company with $5 million of his own and expected investors to come on board to pay the rest (he estimated the cost to produce an MMO as $40-50 million. World of Warcraft cost somewhere around twice that to build and maintain). He blew through tons of his own money in perks for employees.  He made many, many questionable decisions:

Schilling put his wife, Shonda, on the board of directors. Shonda's father received a job in IT (by all accounts, he performed admirably), and her mother was given the title "philanthropy and charity manager." Meanwhile, Shonda's uncle, William Thomas, became COO. Though a seasoned businessman, Thomas had no experience with video games, much less MMOs. Schilling took to calling him "Uncle Bill" around the office, and even in meetings with outsiders. According to the case study, Thomas told Schilling it was making them look bad and to stop. The nickname caught on with the staff, anyway.

Most troublesome of all was the unique profit-sharing plan Schilling devised for his first employees. Wasserman, Bussgang, and Gordon write that, since Schilling was bank-rolling the company by himself, he was hesitant to give up equity in it. So instead of luring early prospective hires with stock options, he promised to share all profits 50-50 with them. Upon arriving as CEO, Close recognized that "investors' heads would explode" when they saw the model, since they'd be bearing all the risk but reaping only half the reward. Close eventually convinced Schilling to scrap the policy and replace it with stock options.

But investors would have nothing to do with the extremely risky venture. Schwartz spoke with Todd Dagres of Spark Capital in Boston. He looked at what was going on at the company and decided against investment:

"He was very forthcoming to tell you how much of his own money he put in," Dagres recalls. Schilling tells me that he considered that kind of disclosure a selling point: "I assumed that they would look at it as, 'If he's this far in, it's not going to fail. He's not going to let this thing fail.'" Instead, Dagres was shocked that Schilling was plunging so much into such a risky venture. The VC left with his checkbook firmly closed.

Time and again, though, Schilling emerged from meetings like this one thinking he'd hit a home run. "There was never a single one that he didn't walk out of saying he absolutely killed it," says a former employee who attended a number of investor meetings. But over and over, there was no investment. Still, Schilling remained optimistic. "Curt sincerely believed that Copernicus was the best thing since sliced bread," the former employee says. He "could not imagine a scenario where other people would not see the same potential he did. His attitude is always, This is gonna happen, the deal is going to close.

It's quite remarkable how little Schilling grasped about the business side of his favorite hobby. Video game enthusiasts who don't have the millions to invest that Schilling did are more than capable of grasping why Schilling kept striking out. So, then, it probably shouldn't come as a surprise that Schilling didn't realize that turning to the government for a massive loan would turn Project Copernicus pretty much radioactive. Video games obviously and clearly do not need government support in order to succeed in the marketplace. The Rhode Island loan had to have been seen as a giant red flag to potential investors.

Schilling takes a lot of the blame for the company's failure, but still wants to point the finger at Rhode Island Gov. Lincoln Chafee for revealing confidential information about the company (such as that the company spending $4million a month).

But after reading the ridiculous way the company had been operating, Chafee comes out smelling like a hero. Rhode Island taxpayers have every right to be upset. This was an indefensible use of government funding.

More Reason on this subsidizing gaming disaster.