After missing a $1.1 million payment May 1 and a personal plea from Schilling for more public assistance this week, 38 Studios has said it does not not have enough money to pay its employees. On Wednesday, the state economic development official who oversaw the loan guarantees resigned abruptly. In a bizarre twist, at one point Thursday, company representatives hand-delivered a check to the Rhode Island Economic Development Corporation, apparently to cover the late $1.1 million payment, but then later said the company had insufficient funds to cover it.
The precise cause of 38 Studios’ current trouble is unclear; its latest negotiations with the economic development agency are confidential. But what is clear is that Schilling steered the company through a feverish hiring spree and into a high pay-off - but high-risk - realm of the gaming industry that requires enormous start-up money.
“It’s a vibrant market, but it’s a fairly risky market,’’ said Barry Gilbert, vice president of Strategy Analytics, a Newton consulting firm that advised the Rhode Island agency during its negotiations with 38 Studios. “To be successful in the space requires superb timing, superb management, superb talent, and a good dose of luck.’’
The economic development agency’s board is scheduled to meet on Monday to discuss any action the state could take to protect its investment.
He had massive ambitions. The company promised each of its original 37 employees a bonus of $1 million if 38 Studios reached $1 billion in value, a huge stretch for a start-up. By comparison, Warner Bros. agreed to pay as much as $160 million for Turbine Inc., one of the Boston area’s largest established video game companies.
Schilling has long been interested in gaming. As a baseball player, he collaborated on “massively multiplayer online’’ games - called MMOs - with Sony Online Entertainment. His office in Maynard was filled with decorative swords, a sign of the fantasy world his new company planned to create. From its infancy, 38 Studios imagined it would elbow into a multibillion-dollar market filled with games such as Blizzard Entertainment’s World of Warcraft, which boasts millions of fans.
MMOs are hugely elaborate and expensive, with the potential to become either blockbusters or giant busts, analysts say.
Because the games are so expensive to produce, strong funding is critical. “It does take hugely deep pockets,’’ said Gilbert, the consultant. Schilling claimed he personally invested as much as $30 million in the venture. Schilling also personally guaranteed a $2.5 million line of credit that 38 Studios took out in 2010, which the company repaid with a portion of the proceeds it received from Rhode Island.
Schilling had originally hoped to launch the game’s first product in 2010. But he immediately hit trouble raising money. He shocked venture capitalists with an audacious pitch for $48 million - far more than gaming companies typically receive in an initial round of funding. In addition, Schilling was reportedly reluctant to give up much stock in exchange for funding. Flybridge Capital Partners and several other Boston area firms passed on 38 Studios.
“More than one VC who has met Schilling has come away with the impression that an investment would require quite a bit of ‘babysitting,’ ’’ noted a trade publication, Private Equity Week, at the time.
Schilling estimated he might need more than $100 million to complete the multiplayer game, code-named Copernicus.
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