Issue #17: Thursday, July 13, 2000 The daily Game Industry Index can be found here.
GA-Source is proud to present Investor Insight, a column dedicated to the game and hardware industries from the point of view of an investor.
The column is published every Sunday, and included an extensive analysis of the industry, interviews with the different related companies, and more. To submit your questions to be included in the column, please send them to bo@gagames.com.
Bo Andersson has been deeply involved in the game industry playing the part as managing director and co-owner of a European developer by the name of GRIN Inc. His professional merits in the investor community come from many years as both a trader and a member of a stockbroker association board. Following 4 years at a European business school, he is now pursuing an MBA in Strategic Management.
Raid, evade or trade?
This article is aimed to trigger some thoughts and provide tips for developers, publishers and any business angel or investor who is looking to lessen their risk when entering a deal with an early stage or medium developer.
So raid, evade or trade? That is the question a lot of the larger and publishers and even developers ask or should ask themselves in these times. The fierce fight over manpower, and that of the talented sort of course, has always plagued the high-tech industries. This fight has one devastating effect for the smaller companies, the infamous salary helix. Wages are pushed up as bidders start to grow in number and finally the small actor who isn’t secure in the mid term through financing by the stock market simply can’t hold the bigger sharks from raiding their company and buying the key personnel. Normally in an industry this kind of phenomenon has a set way of developing and we sure can see the pattern within our industry today.
At first this usually starts with simple consultancy and “dialogue” with other companies employees. At this stage companies don’t have the need or resources to totally transfer a certain person but only their special know-how at certain points in their own development.
In the old economy this took place at training events and big industry events, such as E3 and ECTS in our industry. But today we have a more efficient event, and you all know the answer to what that is - Internet.
Internet is a good thing; it opens up views, provides new resources, makes us more global and gives us opportunities to enter new markets with new customers and new ideas. But the Internet also tears down the protective barriers and opens a highway leading right into the less solid companies. Agents and competitors ride right in and raid for talent. This does not take months or years as in the old industrial world - no this happens instantly. Put your lead programmers e-mail on the web and you will have him fighting bidders right the same day as you release the beta or demo for your technically advanced game. Is Internet good for you as an employer? Depends on your protection, on your financial safety net.
And thus as a second stage we start to see engineers, as mentioned above, of magnitude being bought from one firm to another, despite NDAs and contacts protecting the host company this shift from one employer to another is fast and the transactions of know how happen just in the matter of months. As for the majority of developers who made it through their first struggling title, they face the threat of larger corporations noticing them, looking for their talent in terms of key persons such as programmers, designers and in a few cases artists.
Our industry is huge, but still we have a quite young workforce. When this workforce age a bit money becomes more and more important, and to stay with a half successful developer in favor of a larger publishers in-house developer or another famous developer is quite unlikely to most. Everyone has their price and that is why we see so few new developers that succeed with one title do this again without being bought or fail their second or third title - they get brain drained. Remember that in Silicon valley the average employee works with his company for 1,5 years and the time it takes to switch is often measured in hours not in months or weeks. I’ve seen a guy go through two jobs in one day by simply saying yes and bye in his cellular phone at lunch. Lets hope we won’t catch the IT tempo in our industry as well.
Third we see public figures being traded to boost a company’s profile, not only because these people are specially talented and good mangers but also because they have a reputation and the customers and the analysts put faith in them. In our industry this is used a great lot. Analysts know two things: the recent financial numbers of the company and the history of key personnel such as John Romero or Erin Roberts - everything else is often based on forecasts made from logic and pure intuition. So what is better than to invest in a few good public figures for your multimillion company? The galleon figure trade begins. This is often in the stage where IPOs are initiated or when the company delivering a terrible financial result and the figures need to be balanced. How do you think one single CEO can change a whole organization within half a year? He can lay down a good strategy that kicks in after a year but the financial effect often comes right after him entering the company or short after. It’s not the action that counts here it is the potential for action and thus the history of the key person.
We have all seen this about in the game industry as people trade positions for a funnier job and a pile more of dollars, which is they way it should work in the free market of course. And the trade and raid will intensify. As larger sums are put into development and the use of low risk in the eyes of the analysts has to be displayed, there will be a huge fight over track records and thus key persons. Innovation is sweet but good reliable performance through experienced people is better - as far as the stock market thinks of course.
And when the market decides the rules the players better get in line or suffer from investor drought, GT Interactive or Looking Glass Studios anyone? The smaller developers or less successful in terms of providing a good employee loyalty for that matter will be raided and they have to evade this somehow. The evasion is troublesome. On the one part you want everyone to know that you have talent in your company, on the other hand you don’t want your competitors to know who within your company has that talent right? To give you a good idea about the massive pressure from raiders and traders I can recall some events from E3 this year. Walking through the floors with one of Europe’s better game programmers, I saw him being offered jobs or rather “interview opportunities” at quite a few booths. And at the SONY party I saw more cards being traded than drinks served - and the drinks were free (thanks SONY).
If you are a business angle or a pre-IPO investor in a developer or if you are a publisher about to sign a multi-title contract with a developer, there are three things that you should have in mind and take a further look at:
The developers reliance on key personnel - should be minimized
Is this developer putting all the eggs in one basket, i.e. is the developer built upon the rumor of one single person or two? Do the key persons have great track records but totally new personnel under them and a vague organization? Often we see great programmers starting up new companies - now in charge for over 10 people and the financials. That is the right person in the wrong position at the right time, which isn’t sufficient for the investment to work out.
What happens is that the organization crashes and you will see either a focus on programming and financial mayhem or you will see good organization and no programming. Those who made it are the few and the proud - great men, but the rest are dead men so to speak. Look for a group with at least four key persons. Look at the company as a portfolio of stocks. You don’t put all your money on one stock do you? If you do then you are probably very much an inside trader, and to trade inside on individuals is as you know just not possible - if you aren’t married to them or their brother of course. Go for the group not for the lone wolf.
Diversity of the key persons
Another important factor when you look upon your group of key persons is the diversity of the people involved. These key persons should first of all be included in a group where they have a say about the direction of the product and the company as a whole. Not only do they need to feel that they can influence but they must also be somewhat diversified when it comes to background and skills. If you have group made up if only designers - then you will run into the hard concrete technological misinterpretation wall - head on. If you have a group with pure programmers, most developers do have these groups, then you will have a developer who isn’t ready to deal with the human resource problems that will occur, and neither will there be a good and fluent dialogue with the artists as they have no mandate to oppose or influence. The best and ideal group of key persons are heterogeneous, an artist, a programmer or two and a more senior person with sound business knowledge - not to old though, we don’t want to get alienated from the market we are selling our products in. Simply you would want varieties, a diverse group which isn’t afraid to challenge its own status quo - but with discipline.
Age and goals of the key persons
Age is important. And when talking raid and trade I must say that your safest bet here is that the older the person gets the more you have to fear. A 31 year old programmer don’t care much if he can be part of the new and cool game X, if he can make twice the money making game Y in another company. Younger talents often have less priority set on the money; they hunt the entertainment and thrill of developing and learning new things. Now young talent with experience is of course quite hard to find. If you see them tied them down with gold chains cause they will be worth it in a few years time.
Financial safety net
Speaking of chains. Chains of gold are a bit metaphorical of course. Make sure that these chains that are to prevent the raid are mad out of a smart financial web. One way is to put stock options or even stocks with loyalty demand tied to them into the hands of the key persons. This way a person loses his stock options or stocks and thus the possibility to earn great sums if the company does well in the future, by giving up his position with the company and leaving for another competitor.
As an investor on the business angel level or as a publisher, make sure to check these chains and that they really do exist. Otherwise you might find yourself left with one CEO and a few new employees running down the yellow brick road as Kansas is going bye bye. Make sure to tighten up the ropes and avoid the brain drain of a leaking organization. In our industry this is way too common with the newer developers - they get one hit title and then the talent lands with outside companies.
A popular way of protecting the company from brain drain to competitors has been to simply include in the work contract that the employee can’t work for a similar company within the next two years or so after ending the contract with the current company. This might be affective against drain of artists or designers, but programmers are not secured this way.
Today they will be recruited to the IT industry or the hardware industry and there is nothing the developer can do about that if there is not incentive to stay through some gold chains strapped on that talent. And so far most developers rely on technology in their games, thus IT is a huge threat and should be considered by the investor, the third party and the CEO of the developer.
Though we must remember that this is the economy of the mind. We produce entertainment to inspire and activate minds. Games are not built from pure technology or good licenses; they are built from minds who visualize our imagined worlds through games. If you think of game developers in terms of machines or previous titles, you will miss the point of this organization. It is therefore very important to keep the mind that created a certain product and even more important - keep the mix of minds who created it. The financial safety net is the key to this, as the minds or the people holding them grows older and look for more monetary incentives within their work. It is very easy for us who come from a rather individualistic culture to believe in one persons great ability to produce results, but in this business you cannot trust a single person, the days of David Braben (Elite) are over and you have to trust the team, group - the mix of minds to lead your company to success. Just imagine the financial safety net that Microsoft have, when Bill Gates himself says that if only twenty certain people would leave Microsoft it would risk bankruptcy within a relatively short time. Or in the words of Nintendo’s, Hiroshi Yamauchi “ An ordinary person can not develop a really good game, no matter how much he or she tries” it all boils down to the right mix of key persons.
So what do we make of all this. Look for the safety net, the wall, the gold chains or whatever you like to call it. Just make sure it is there cause the days of warm and friendly partnership developing is past. Business is war and if the threat isn’t primarily steaming from within the industry it sure comes from an industry close by a much more powerful one. Today we speak of the worries of key persons leaving for other ventures; still there is a far greater threat to concern us - the drain of manpower. What happens when the supply of ordinary programmers, artists and game developers simply is short and shrinking in an industry that is growing by double digits every year? We will first see the brain drain, but brains can’t work without hands and if the hands are bought buy another company your brain will surely move away to. And if your brain leaves your hands will follow so check your gold chains or weld new ones - you will need them.
