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Founding a startup and prepping a game for launch is not for the faint of heart. Here you can read up on some of the challenges we've been facing, including a few surprises.

Kris Morness, Blogger

November 3, 2010

14 Min Read

Notice how most mortems are based on either success stories or failures, well after the fact? Our story is about a startup that is well underway and we're only a few months away from releasing/monetizing our game.

About Us

We're made up of seasoned veterans. We consist of 3 founders with a combined industry experience exceeding 50 years of experience, and we've each shipped a large number of AAA PC and console titles. A tech director, art director, and me as creative lead. We've also had contributors from around the world and that has been rather hit or miss, mostly miss.

We're making a browser-based MMO game utilizing CoreX3D engine technology. With full 3D graphics, and action based multiplayer gameplay, we feel we are doing something much more advanced than the current free-to-play web-based game offerings.

We're also embracing the free-to-play model for reasons I'll detail after this summary.

Virtual Studio

As this industry ages and many of us become seasoned industry veterans with families, the desire to have better work-life balances and flexibility is increasingly important. Not to mention that a virtual studio is effectively a free option, and quite necessary for a decentralized team such as us (British Columbia, California, and Texas).

Good: Low Operating Costs

We're currently paying ~$150/month to operate. The software to effectively manage a startup has never been cheaper, for good quality software. Atlassian has a number of professional tools, and they have a very effective "startup hook" -- 10 user full licenses for $10 each. We don't have 10 people, so done deal. We're using the following software:

  • JIRA ($10): Web-based task and bug tracking.

  • Greenhopper ($10): JIRA addon providing agile project management workflows and tools.

  • Confluence ($10): My all-time favorite Wiki solution for collaboration and stashing design documents, development guides, research articles and competitive/financial analysis.

  • Joomla (free): Website which connects us to our customers.

  • Kunena (free): Forum add on for Joomla

  • Subversion SVN (free): Source control which is ideal for virtual studio setups.

  • Linux Servers (2): We rent one in Germany, one in the US and pay a combined $150 a month. Servers are cheaper in Germany for higher end machines.

At first we started with only one server hosting our game, forums, and all our dev suite software. We quickly discovered it lacked the power to manage everything. In particular the Atlassian products (JIRA/Confluence) were resource hogs, relatively speaking. We decided to add a new server so we could avoid the massive caching delays when someone tried to access it.

Not So Good: Recruitment

One of our early assumptions turned out to be a major clusterfluff. Given the current economic conditions with so many studios getting shut down or teams getting laid off (2 of us fit that boat), we greatly believed that we could put together a working version, then allowing us to easily find other unemployed or available veterans eager to join our startup for sweat equity.

The strange twist here is we found a wealth of people that genuinely seemed interested and eager to join us. Given the virtual studio setup, it was extremely easy to set these people up to develop. But given the time it takes to get them recruited, up to speed, tasked out and actively developing, the majority of the time, they would just fade away and most of them contributed exactly nothing. Really, actually quite a downer!

We've come to the realization that there are two causes:

  1. Virtual studios have limited visibility and a lot of freedom and potential personal life distractions. We've realized that it takes a special breed of individual to flourish in such an environment. And by our math, we calculate that at about 10%.

  2. Money ultimately talks. Because we're not paying anyone yet other than offering profit sharing and equity based on relative contribution, it becomes very difficult to get people commited and productive. To make matters work, when you aren't paying someone to work for you, you can't exactly drill down on them when they don't deliver, so you need to take a "bonus" approach with them. If they do it, great! If they don't, we'll have to do it ourselves.

We really believed with so many people unemployed, some of the more entrepreneurial ones would be very eager to do something productive with us. Couldn't be more wrong and perhaps it was ill luck in our case.

Basically, the time investment hasn't been worth the results we've received except for a couple rare cases, with most of the most capable people having a tendency to prefer salaried positions at big game developers and struck out approaching several key people that we have worked with in the past. And don't even bother trying to get anyone to moonlight. People in the game industry have a tough enough time with one full-paying job, to come home and neglect their family to work part time for a startup like ours.

Business Model

Everything we are doing currently is based on our interpretation of market direction and extensive research we have done so far. So far the great news is that we haven't needed to pivot our business model based on changing conditions. We seem to be on track for success, but only time will tell.

As you all know, the packaged goods market has been hit rather hard lately. If you pay attention to the news you hear of many layoffs in developers of these markets and the reactive migration to social, casual, and mobile gaming. Virtually all the new startups are in these areas, including ours. The way we see it, we are entering a rare gold-rush era. The industry isn't shrinking at all! It's just migrating to new business models that don't need big publishers. Perfect storm, I say!

But we are differing from the more common startups. We are doing a rather ambitious MMO project in a webbrowser based on 3D action oriented game play. And when we say MMO, we mean it properly with interactive multiplayer, guilds, live chat, leaderboards, avatars, etc. A lot of Facebook games are claiming to be MMOs, but you never actually see another player being controlled by a player nor do many of them have live chat. Live chat does not turn a game into a MMO!

Free-to-Play /w Microtransactions Model

We believe strongly that gaming will continue to migrate to the free-to-play with microtransaction model at the cost of packaged goods and purchased digital distributed games. If you take a look at Asian markets, especially China and Korea, you'll find that the FTP model is the defacto standard and has been for many years.

The reason we love this model is because it generates recurring revenue. With a low overhead, we don't need to make a lot of money to succeed initially. Instead, we look at our product as a growing seedling. Once we monetize our game and people are paying for it, we get valuable metrics and trends. With that information we can determine how we can grow the game and ramp up staff (with money!) and improve things like player retention, player growth, providing new monetization opportunities, and more content.

And another key element about the free-to-play model that people tend to not consider is accessibility. Having a free game is risk free from the user perspective. Way more people are willing to play a game in a browser for free, then to have to download and install a client or purchase a game upfront. Thus, you maximize your change for getting players hooked. And you need hooked players to pay, and free players to provide that critical mass for monetization.

There is nothing you can do to further break down the barriers to entry as releasing a free-to-play game. Additionally, people browse on PCs which far outnumbers all consoles combined. Last I checked there were 1.7 billion PCs, with a small subset of those being "gamers". This is why several browser games can achieve well over 10 million players, even 100 million is possible, though 2 million seems to be the number you need to achieve critical mass success where word-of-mouth explosion takes your game to the next level of growth.


Another aspect that is yet to be determined is whether or not to tie into existing portals like Bigpoint. You gain access to their established player base, but comes at a cost of roughly 30% of your revenues. So we want to try to do this on our own first, and move to a platform like this if we feel the need. We do have the technical experience to do this entirely on our own, but we will not underestimate the power of portals.

Lack of Tangible Market Data

This is a tough one to swallow. We spent a lot of time digging up insights from other places. There are many public companies that follow these business models that provide useful data. Check out some of the Chinese publishers like Giant Interactive, Perfect World, Tencent, Net-Ease. Most if not all of those are publicly traded in America. But domestic data is vague and open to interpretation. But the direction is clear, and even the crappy thinly veiled click games on Facebook are generating tons of a revenue. Imagine what a real game could do in a similar situation?

The holy grail is guestimating your ARPU (average revenue per user). Most games tend to claim rates at around $1-$2 but some go as high as $5 -- and typically fail to mention whether this is before or after transaction fees (you know 30%?). What you get depends on which countries make up your player bases and the quality of your game design and monetization strategy. Then try combining that with guestimating your number of players and growth rates. There is simply no real way to know, but we generated some awesome profit projections!

But go ahead and do some math -- like 10,000 players with an ARPU of $1. That's $10,000/month, every month -- not enough to pay the bills for 3 people, but probably enough promise to grow it bigger over a couple months. Oh but what if it is 200,000 players with an ARPU of $2. Now we're making $400,000 a month, every month. Say we make it really big and get 10,000,000 players at $2 ARPU. Now we're pulling in a ridiculous $20,000,000 per month shared by 3-4 people + contractors/employees and making more money per month than I could for the rest of my natural salaried life. The joys of business planning...

We've done comparitive analysis by comparing our type of game to other similar games with data and extrapolating growth rates (try out compete.com which only contains US data) and going somewhere in the middle.

Venture Capital?

We have flirted with venture capital with curiousity and the fact that we chose not to pursue it keeps coming back to haunt us. Sometimes it would be so much easier to have money so we can outsource a lot of the content we so desperately need. But on the other side, we don't want to have to give up too much equity. It's always a good plan to take your startup as far as possible before lining up capital -- and so that is what we are doing.

We were kind of surprised at how negatively a virtual studio setup with a small team was perceived by the VCs we talked to, even given our experience and quality of our online version. It seems the traditional business model is the order of the day, with physical studios consisting of 20 or more team members. We considered that, but it doesn't quite jive with our values at this time. But given our less than perfect experience with virtual studios thus far, it's not out of the question if someone wants to throw a few million our way.

Business Development

We're all developers that are good at making games and that's what we want to do. But there are just so many things that need to happen behind the scenes, even with a small startup like ours. Of course we expected an amount of required business development, but it's been crazier than we've ever imagined. It's enough for a full time person, if you want to do it correctly. Here are some of things we need to tackle:

  • Incorporation and foreign qualification

  • International tax planning

  • Venture capital

  • Business strategy (long term growth, exit strategy)

  • Shareholder agreements / vested equity / etc.

  • Lawyers / Contracts

  • Middleware Relations / Licensing

  • Bank Accounts & Vendors (PayPal, SSL, etc.)

  • Accounting

  • Filing Taxes

  • Compliance (labor, taxes, cross-border issues)

  • Copyrighting and IP protection

  • Customer Development

When you consider each one independently, it becomes rather daunting doesn't it? We've concluded we need a real CEO, someone with the background and experience to tackle most of these projects.

Lean Startup Principles

I've covered a lot of obvious topics, but this relatively obscure one is probably the most important one. Lean startup isn't so much what you do, but rather it's a philosophy. I give all credit for this new line of thinking to a guy named Eric Reis whom always frequently speaks about Lean Startups. As a serial entrepreneur, he took a deep look at his failures and figured out a lot of stuff.

For example, the common joke about a dot.com startup is what happens after getting that round of funding. The money gets spent on swanky digs, Aeron chairs, and hiring up a lot of staff. In this typical scenario, the amount of funding you get dictates the 10x profit you need to achieve, therefore startups commonly work backwards and say "Okay, with $1 million, how do I make $10 million+". So that money is budgeted out over a period of time and people are hired. Your burn rate quickly becomes high. But hey if you are making progress and run low on money, you go out and secure a 2nd round of bigger funding. Then you have to readjust your projections and expand accordingly if you get it. But in many cases, the product launches and fails to meet the market projections and can't keep up with the burn rate. BOOM!

A lean startup essentially works backwards and tries to get a minimum viable product out to market as quickly as possible -- like a first playable with proxy assets and "coming soon" features. It's all about customer development and getting into the hands of your players and not shipping a perfectly polished bug free game. You assume all your assumptions are wrong and use this relationship to validate your predictions. It's way beyond the scope of this long post, but I urge you to read the book he recommends, Four Steps to the Epiphany by Steven Gary Blank. Ironically I found the first 30 pages a very enlightening summary of the problems and solutions, with the rest of the book going deep into specific details.

Furthermore, lean startups don't expand prematurely and keeps the burn rate as low as possible. Once you are generating revenues, you use that revenue to hire more talent. Money comes before the hiring and expansions into swanky new offices rather than the other way around. And that method of thinking combines rather well for these types of startups with this kind of business model.

Last Words

As we approach our first release launch, we currently struggle primarily with content creation and biz-dev issues. We feel very good about the quality of our technology infrastructure, game design concept, and business model. Each of us are able to afford to be "unemployed" for several more months and are commited to see this through to the end. We are in the middle of some extraordinary times, and we're very excited about the future.

If you are in the middle of a startup or looking to start one up, try to get the right diversity of skillsets and like minded people that you have shipped product with before. This is a typical scenario when a studio has layoffs. Most of those people will go off to find other jobs, but if you find a few guys and can get excited about a direction, then go for it, but it is a long and difficult path. Risk vs. reward, baby! Would you rather work the rest of your conventional salaried life for someone else's profit, or work really hard to create your own early retirement situation? In our experience, the answer is yes to about 10% of you out there, when about 50% think it's yes. The trick is figuring out the difference before it's too late.

I just felt the need to share, in hopes our insights might help other startups-in-progress out there.



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