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38 Studios: Speaking Ill of the Dead

If you look at the varied coverage of 38 Studios’ incredible meltdown, two pictures emerge.

In one, we have a company that would’ve pulled itself out of the fire if only the government hadn’t sabotaged them.Gamasutra has an article where anonymous former employees absolve Schilling of any real responsibility, faulting only his “naive optimism.”  It cites “outraged sources” blaming politics for the demise of the studio, and claims no financial wrongdoing on the part of 38.  The Providence Journal cites Schilling’s claim that “state economic-development officials reneged on a deal to approve film tax credits to which 38 Studios was legally entitled.”  There’s also the repeated claim that Governor Chafee’s statements regarding 38′s solvency ruined deals in the making.

Overall, we have a founder well-loved by his employees, who was misled by the government and whose venture might have attracted more investment had the state not scared them away.

There’s a number of things wrong with that picture.  Here’s another one that starts with some questions:

Why was the company in trouble to begin with?  Why were we at a point where it needed yet more angel investors and payment deferrals from the government in order to stay afloat? Scott Jennings at Broken Toys notes that it’s a bit questionable when you’ve been as rabidly anti-government and anti-stimulus as Schilling has, but are okay with them when you can get some – when you’re on Fox News talking about how you’re tired of people blaming others for their own lack of success – to then try to sell the story that your own failure is the Gummint’s fault.

So 38 Studios managed to kill its cash flow, then sought outside help to fix it.  There’s some evidence that these tax credits Schilling complains about weren’t really handled well.  Specifically, they may have been depending on income from selling tax credits they hadn’t been issued yet.  When you create a chain where you sell something you haven’t gotten yet, using future sales to pay off prior purchases, that’s called a Ponzi Scheme.

Even the ex-employees cited in that Gamasutra article don’t seem to understand this.  They innocently reveal that Schilling’s MO was to chase after funding to avoid 11th-hour shortfalls:

Employees never had warning when the company was going to miss its payroll because apparently Schilling had been all but certain another investor was coming through, up to the last minute. Employees say they later learned that on two occasions the threat of being unable to make payroll had been alleviated by savior investors, so on that third occasion, Schilling had just been counting on something to manifest — and that didn’t happen in time.

There are just so many things wrong with all this.  His grand plan was “just counting on something to manifest?”  This is not the business model of the fiscally responsible.  For someone who considers himself a conservative, it’s just odd.

It gets even odder when you take a look at a Gamasutra article about the initial loan.  This was two years ago, in June 2010:

State Treasurer Frank T. Caprio, who is also the Democratic candidate for governor, also challenged the loan independently of Chafee by sending a letter to the EDC board requesting that the state be allowed to attend 38 Studios board meetings and hold equity in the company. He also prepared a list of recommendations for the deal that includes a penalty if the company eliminates jobs too rapidly.

Democratic general treasurer candidate Gina M. Raimondo also voiced strong feelings against the loan and the high risks involved, specifically because 38 Studios have yet to release a title. She also noted that there are a large number of venture capital firms in the area and that she felt it was worth noting that Schilling’s project did not attract backing from any of them.

So… we had two state officials involved with finance who were really not into this idea AT ALL.  Raimondo’s final comment is interesting as well, and worth considering further, I think.

And the current Governor, Lincoln Chafee? The guy Schilling wants to blame for his current failures?  He had something to say in 2010 as well, when he was just recently a senator:

The Providence Business Journal reports that Chafee had made a request to the Rhode Island Economic Development Corporation to reconsider and suspend their support of Schilling’s project until the board has properly investigated public proposals from other companies in the area, citing “high risk” as one of his key reasons for the appeal.

(Chafee was elected as an Independent, in case you were hoping for a partisan angle.)

All of these concerns were overridden, apparently.

Then there are the “former employee sources,” who want to paint Schilling as an innocent victim here.

Firstly, there’s a simple matter of professionalism.  There are a few things about publicly bad-mouthing a former employer in a tight-knight industry.  One, it’s bad form.  Two, it’s potential suicide.  Three, it may negatively impact any future legal action.

Oh hey look over here!  We have some potential legal action:

Workers said the company, which laid off its employees on May 24, stopped issuing paychecks after April 30. The firm had more than 400 full-time employees and contractors in Rhode Island and Maryland.

Laura Hart, spokeswoman for the Rhode Island Department of Labor and Training, said Wednesday that the agency was conducting “an active investigation” into the wage situation at 38 Studios. “If there are unpaid-wage complaints, we are going to pursue them,” she said.

See, here’s the thing.  The story about employees continuing to work after not getting paid?  Sounds very heart-warming, and it seems to me like it was certainly spun that way.  But step back a moment and consider the reality.

One thing no one disputes is that employees were kept in the dark right up until the layoffs.  If your job is having financial issues, but no one gives you any indication of how bad things really are, do you just quit and go home?  Leave what you still think is going to be gainful employment?

Apart from that, this paints a far less-rosy picture of the environment at 38:

Some employees felt they had to continue working without pay for fear they would be fired and not qualify for unemployment benefits, said the former manager, who asked not to be named.

“Fear” is not usually associated with an environment where you feel like the boss has your back.  It’s also, um, kind of illegal to just not pay your employees.  A more common (and legal) tactic is an across-the-board pay cut; it sucks, but it’s meant to show investors and creditors that you’re serious about tightening up your financials, as well as save on payroll.  However, just not paying people anything, without warning, is not legal.  An upcoming audit may reveal where all the money went.

I’d like to take a similar step back from the idea that Schilling had investors lined up who were “scared off” by the Governor’s public statements.  This is just face-palmingly ridiculous.  Investors do not read blogs to research potential companies to send money to.  There’s this thing called Due Diligence where they conduct a thorough investigation of the company’s financial state, management, business plan… you don’t just throw away a multi-million dollar deal because the guv’nor said some unkind things.

Lastly we have a bit of Stockholm Syndrome; those who want to believe that Schilling is above all blame.

Schilling was the boss.  The big cheese, the guy on top.  There is no higher position of responsibility in the company.  If the upper management he hired wasn’t performing, it was his task to correct or replace them.  If you claim the position of highest authority and privilege, you’re where the buck stops.  This really should be self-evident.

I’m sorry for the hardships being endured now by some talented folks who thought they’d be starting a new voice in the industry.  I hope they can move forward without nostalgia and do what needs to be done to protect themselves.

In the meantime, I am extremely disinclined to lend any weight to Curt Schilling’s proclamation of victimhood.

UPDATE: It looks like at least some of the developers from 38 Studios will have a home at Epic Games.

  • http://twitter.com/UnSubject UnknownSubject

    The only disagreement I’ve got with your article above is the focus on Schilling. He’s the well-known face of the company, but there is a management team behind him that deserves a lot of attention as well. 

    Schilling wasn’t the CEO, CFO or anything like that. He may have been bankrolling 38 Studios and had a lot of say, but there were others around him who should have been pulling him into line and to have known better.

    • spacefiddle

      Certainly true, and I got easily caught up in digging around old articles without clarifying that more.  What I really want to emphasize, though, is: if you have a lot of say, and are drumming up funding on your word and assurances, then those assurances need to mean something.  If you vouch for your business plan and your management team, you’d better make sure you have a reason to.  You can’t spread your hands amidst the smouldering wreckage and say “it was those guys!”

      Maybe this is what the Gamasutra-cited employees meant by his naivete, but there’s something a little obscene about constantly being in the press complaining about poor millionaire you who didn’t stay on the ball, while your employees haven’t been paid and lost health benefits mid-pregnancy and mid-chemo treatments, you know?