Derek's Blog on Games, Home Theater and Programming

In my previous blog posts, I outlined the beginning of why I believe game development is not cheap.  In this post, I'm going to reinforce that point by outlining the remaining costs associated with starting a game development studio.  It's worth repeating that with this exercise I am not building just a game, I'm building a company.

When we last left off, we were at $436K in costs over nine months.  All of our employees were in an office, sitting at their desks and working towards the production of our awesome game.  Before we can truly get started, we need to recognize that we left out some major components to the process.

Establishing a company is not free.  There's filing fees with federal, state and local governments.  There's a bank account and the associated accounting software required to run the company.  Employees tend to get disgruntled when the promised paychecks don't arrive. :) Figure $200 for QuickBooks, $500 in filing fees, checks and other essentials.  You'll need to protect your company's ideas so you better get some legal help to draw up the non-compete and employment agreements.  Assuming you don't raise funding from an outside source, legal fees will run you around $2K to produce.  We can roughly figure somewhere around $3K to set the business up.

Our project needs an answer to the build or buy decision when it comes to the 3D engine that we're going to use.  A 3D engine can cost a significant amount of money.  Gamebryo is $50K per title per platform with a $25K yearly support fee.  In addition to that you'll spend money on training so that your developers and artists can get up to speed quickly.  Emergent charges $8K for artist training and $4K for programmer training.  Conversely, you can use something like Unity 3D and save some money.  Each license of Unity is $1200 and they offer paid support.  We'll budget the same for training and average out the costs of the licenses between these two solutions for our fictional company.  That brings us to $29K and $12K training.  Remembering our personnel burn rate of $42K per month from the first article means that if we cannot build the same 3D engine functionality in one month with our team then buying is the right decision.  In this case, buying is easily the right decision and this doesn’t take into account the logistical effects of building your own engine. (Artists sitting idle waiting for tools to come online.)  Side note.  The Gamebryo license will include source whereas the Unity code will not which is something else to consider.  Unity will be more in line with Gamebryo for a source code license.

The last part of the equation we've not addressed is the game’s sound.  We need to budget for a sound engineer so that our game can have music and sounds.  Sound engineers make approximately $70K a year so we'll figure a $60 per hour contract rate for two months or $19K.  If your game concept is heavy on story then you’ll need additional hours for that.  If you need motion capture or voice actors then there’s additional expense.  For our fictional company, we’re not getting that sophisticated so we’re only going to look at adding audio to the game. 

Lastly, there’s the publisher relationship.  This model assumes a publisher for the final three months of sustainability.  I’m assuming that the publisher will bring a QA team and marketing for your game and that those expenses are the reason why your first payment will be delayed a few months.  Obviously, this can vary considerably so your financial model has to consider the added costs of dealing with a given publisher.

Employees: $380K, check.
Office & Tools: $58.5K, check.
Game Development Environment: $42K, check.
Incorporation & Legal: $3K, check.
Contract Labor: $19K, check.

Grand Total: $502.5K

That's a startup studio for approximately $500K.  I'm sure there are a whole host of ways to creatively reduce that number.  Keep in mind, that every time you pull a resource or don't purchase something, something will have to give.  Don't want to pay that many people?  Scale your game design down so that it can be completed by the remaining employees.  Does it still have a chance in the marketplace or do you need to find a new marketplace?  A final consideration has to do with raising capital.  If you decide to raise the capital instead of paying these salaries out of your own pocket then there are additional costs.  You'll have networking expenses, travel expenses, presentation expenses and additional legal expenses.  Most VC/angel sites will tell you that you can figure legal expenses to be $20K - $30K depending upon the amount of negotiation over the terms and contracts.  There may even be a finder's fee that needs to be paid to the referring party that introduces you to the people with money.  These can range from 1% - 5% of the total deal value so if you're going to raise $500K for our fictional company, you should plan to raise between $530K and $580K so you can pay the fees associated with raising capital.  As soon as you go down the VC/angel path, your game design needs to change accordingly so that you have a shot at selling the requisite number of copies for the much larger expected returns.

Building a game development company from scratch is not cheap.  I hope I've done a bit of a service to those that believe all that gaming goodness comes for free or nearly free.  Looking back at Flight Control, their web site indicates that they have hit 2 million sales on the iPhone.  That's a remarkable number but if it took a team anywhere near what I've described here then they are barely breaking even on the game.  They've had to add staff to handle the community’s response to the game.  They've been in business for more than nine months and if they’re paying their employees, it’s been with a burn rate north of $50K per month.  Given our fictional company's financials and the fact that they've grossed a grand total of $1.4M from iPhone application sales we can deduce that they’re doing well.  Their game’s sales easily meet the cash flow needs of sustaining a game development business but it's not the runaway success that the news would have you believe despite the great sales numbers. 

It’s not cheap.  That’s my point.  I'll talk about the development constraints and the sales projections in the next installment.

In my previous blog post, I outlined the beginning of why I believe game development is not cheap.  In this post, I'm going to reinforce that point by outlining the next set of costs associated with starting a game development studio.  It's worth repeating that with this exercise I am not building just a game, I'm building a company.

Let's start with the baseline costs established in the last post.  $380K is the number we figured for personnel costs.  I'm trying hard to stay under $500K.  We'll see if it can be done given a team size of six.

The first costs you'll need to deal with will have to do with office space.  How much space do you need?  Each employee takes up about 65 square feet for their desk so 400 sq feet is required simply for desk space.  Add in closets, bathrooms, common areas, walkways and a small meeting room and you can get by with about 1000 square feet.  In Louisville, you're looking at $15 per square foot per year on average with a one year commitment.  That would be $15K more cost.  We need to add furniture.  In my searching for furniture, I found that you can get furniture real cheap or it can get real expensive.  At this point, I allotted an amount for each desk based on some of the averages I found on the web.  $700 includes a desk, a chair and some basic supplies.  That's another $4200.  Add in another $800 for common area furniture/supplies and we're off and running for $5K.

So now we have a place to sit; we need to turn on the lights and give these people tools to build our fantastic game.  Let's start with a couple of basic toolsets.  Developers need Visual Studio at the minimum.  We can get this through MSDN licenses @ 2x $1200.  Artists need a 3D package and Photoshop at a minimum.  A bit of research on Maya 2010 leads me to a $3,500; 3DS is similarly priced.  Photoshop is $700 so we'll take two licenses because they're small.  I'll assume that CVS is used for source control or that a similar free source control application is purchased. 

Let's summarize up to this point.
$15K for office space.
$5K for furniture.
$11K for software.

Software doesn't work without computers and computers need power and an Internet connection. We'll assume that all six employees get the same computer.  It makes management easier and it makes our financial model simpler.  Because the next nine months will be spent behind these computers, this is one area where I wouldn't skimp.  Buy a nice computer for each employee.  $2,500 each will get them a nice development machine that they'll be happy to sit behind for those 16 hour days come crunch time.  Nothing makes working long hours worse than fighting with your equipment while you do it.  As for the Internet connection, Insight Communications has business broadband for $140 per month with a 2 year commitment.  We'll even assume that everyone will have a cell phone for making phone calls so that we don't need voice services.  If we need voice, we can always add Vonage or some other VOIP solution on the cheap but it's very possible to get away with no voice or fax services these days; at least in the beginning it is.  Utility bills in Louisville run somewhere around $150 a month for a 1000 sq ft office.  We'll need one server, one consumer class router and one network printer running us $4K, $100 and $500 respectively.  We can pickup Office and Windows 7 with an Action Pack subscription for $300 per year which will get us all the licenses we need for the server and the desktops.

This brings our software, hardware and utilities costs to:
$15K for six PCs.
$3,500 for Internet connectivity.
$1,500 for utilities.
$5K for remaining hardware and software.

All of this added expense creates stuff that needs to be maintained.  We'll add a 10% fudge factor into the budget so that we can handle hardware failures and general maintenance without having to wonder where the money comes from.  My view is that anytime you have to make due with a broken tool, you're not running as productively as you could be.  This leaves our total outlay for nine months of development at: $438.5K

But wait, we're not done.  We still have other considerations which I will cover in the next installment.

Far too often, I read about indie games being done on the cheap and succeeding beyond the developer’s wildest dreams.  Flight Control for the iPhone is a great example.  Fantastic game; apparently made for very little money and then launched to commercial success.  We see these articles in the headlines every so often because, well, they make great headlines.  What we don’t see are the games that took months to develop that end up selling 400 copies.  What we don’t ever see is the true cost of a team of 4 – 6 people working on a project in a budding game development company.

Many indie developers have the one man shop mentality and as long as they build games where one person can do everything that the game needs they'll succeed.  They'll rarely achieve any sort of free standing business simply because their business relies on them being there to do the work but with a bit of luck they'll get a good career out of it and they'll be able to fund their own personal expenses from their efforts.  That's not the kind of game development company I was thinking would get excited about what the guys at Indie Fund are up to.  I immediately thought of the small 4 - 6 man team working six months on a game. Personally, I was secretly hoping they would be a full blown VC for the games industry.  How nice it would be to have a VC for AAA game development that understood the risks and rewards of the industry without having to be educated on what a video game is and why all video games aren't Facebook games but I digress.

I wanted to take a look at the financial model for a fictional company to shed light on just how expensive it is to execute the startup of a game development studio.  Let me start with a couple of assumptions:

1. The game != the company.  The game is merely the first revenue generator for a fledgling development studio.  The plan is to not only create a profitable game in the first go but to create a company that can sustain the development of future games.  I’m building a company, not a game.
   
2. I take the responsibility of hiring employees seriously.  I can only be one person on the team of six and that means that at least five other people are depending upon me to provide them a means to make a living. 
   
3.  I'm building a company, not a game.  If you don't get that see points 1 and 2.

Now for the specifics.  Let’s black box the game concept entirely.  Assume it is a fantastic idea.  Assume there's a market large enough to support it.  We'll even back into the sales projections once we figure out expenses.  I'm assuming an aggressive schedule of 9 months to revenue.  That's six months development and three months to the first revenue check.  If that check doesn't arrive in 9 months, then there's a serious chance that you'll be disbanding the team and shutting down the company without some other form of revenue.  Call it our drop dead point.

For our fictional company, we need 2 programmers, 2 artists (sharing 2D/3D/Animation duties), 1 level designer/game designer and 1 producer/manager.  As the CEO of the company I've got to fill one role so naturally, the management of the company falls to me leaving five more positions to fill.  So far so good.  Using Gamasutra.com Salary Survey averages (April 2009) we can calculate the requirements to pay for this staff.  You're specific salaries will depend upon a whole host of factors including location, local taxes, company options in lieu of salary, etc., etc. (round everything to nearest $5K for easier math later on.)

Producer: $85K pre year.
Programmers: 2x $85K per year.
Artists: 2x $70K per year.
Level Designer/Game Designer $70K per year.

Add all that up, divide by 12 multiply by 9 and you need: $350K just to pay payroll salaries for the 9 months that you plan to stay alive.  Wait a sec; we're not done. Federal Unemployment Taxes are 6.2% of the first $7K earned for every employee.  In the first two months you'll pay out $2600 in FUTA taxes above and beyond salaries.  Then the company has to pay 6.2% to Federal Social Security taxes and 1.45% to Medicare taxes for all wages so let's include that number: ~ $27K in company paid payroll taxes.  Rounding up the two values and adding to the original gives us a grand total of $380K to fund our company for 9 months. Additional months beyond the first 9 will eat $42K per month just to keep the team together.

We're still under a half million dollars so we're doing pretty good.  Not so fast.  In the next update we'll add in the cost of a small office, computers, development software, utilities and supplies.  Keep in mind that our human resources plan covers the basic necessities.  There's no dental coverage, no optical, no life insurance and no health insurance.  The current political climate aside, each of these adds to the cost of keeping the company running and in the case of health insurance, the amount can either be a significant cost to the company or a significant reduction in the employee's salary.  The rest of your personnel plan will affect your entire hiring strategy when you're looking for employees to fill these positions.

It's expensive already and we're not even close to done.  More is explained in the next installment.

In November of 2009, I pitched our video game, Ages of Athiria, to the Louisville Venture Club at the venture club’s monthly meeting.  What follows in this post is a transcript of an email conversation that seemed to come from a legitimate person willing to invest into our company.  Needless to say, when the second email arrived, I realized it was a scam and decided to follow it up to the decision point so that I could document this scam to help others avoid it.

It started with a rather innocuous email that looked legitimate enough to pass my internal scam alarms.  Here’s the email in question along with the message’s headers.

   1: Received: from mail-bw0-f219.google.com (209.85.218.219) by

   2:   (xxx.xxx.xxx.xxx) with Microsoft SMTP Server id

   3:  8.1.393.1; Tue, 23 Feb 2010 19:30:55 +0000

   4: Received: by bwz19 with SMTP id 19so3328668bwz.6        for

   5:  <derek (at)elysianonline (dot) com>; Tue, 23 Feb 2010 11:22:03 -0800 (PST)

   6: DKIM-Signature: v=1; a=rsa-sha256; c=relaxed/relaxed;

   7:         d=googlemail.com; s=gamma;

   8:         h=domainkey-signature:mime-version:received:date:message-id:subject

   9:          :from:to:content-type;

  10:         bh=NM9J9CizaA+V+BYQl9t00vrFCo+ZNiveVkh8fkpxGLs=;

  11:         b=l3TTPK0IAqTvyKyr7ZnnbO7OTTHlbZsiby5Pa3FTObWrCxK/xxpXRCVTkDMv1mNi9K

  12:          N+oE7cNbCta1ewXrzzuHSz1jRlRfZpBF/Lz8xk+VQcJEChzMbXG1PYMU90fLg6tHuoYh

  13:          iaB9mwXF3mtVOhFQR+a8qd4N9Tn05lZb6jHSw=

  14: DomainKey-Signature: a=rsa-sha1; c=nofws;

  15:         d=googlemail.com; s=gamma;

  16:         h=mime-version:date:message-id:subject:from:to:content-type;

  17:         b=lkEVdg6LRBIsQWfJxTbHvyMdq1y/Z03dRpMrr1vUl3XGuUjjOaJudMNpACt2AnbD7l

  18:          RC4LPgvNz92ce7Liwfbc39Qb5twViqKVjguL78e5Pfyfvv7mA6s0PMLgt5HrHJsseGac

  19:          F5+E5Y3ETHMciFJa7jUeEHz7bT4m9vR4UJNOc=

  20: MIME-Version: 1.0

  21: Received: by 10.204.39.200 with SMTP id h8mr3284089bke.97.1266952917893; Tue,

  22:      23 Feb 2010 11:21:57 -0800 (PST)

  23: Date: Tue, 23 Feb 2010 19:21:57 +0000

  24: Message-ID: <4ec0a4da1002231121p588e6588i5cf2895782603692@mail.gmail.com>

  25: Subject: Elysian Productions Inc. funding

  26: From: Lesley Newland <newlandlj@googlemail.com>

  27: To: derek@elysianonline.com

Aside from the grammar errors, it seemed possible to me that this could be an older couple or individual that decided to get into the angel market.  They found my name through the Louisville Venture Club’s web site.  I do have a post on that site outlining my pitch.  The email comes from googlemail.com which I verified to be the same as gmail.com.  This is readily seen in the headers above, complete with DomainKey entry and all.  All in all, it seemed legit so I responded.  Sans the reference to Louisville Venture Club, I probably would not have responded.

Even I can make grammar mistakes.  *shrug*  The next day I received the following response.  This response set off all sorts of alarms and is what prompted me to post this blog post.

The first sentence is written like a Nigerian money scam email.  They have not seen my executive summary.  They responded to their own email and not the response that I sent them. (not shown)  How could their investment portfolio manager give them consent to move forward with anything?  Grammar declines considerably in this email.  You would think that these guys make enough money to hire English speaking authors but for whatever reason they do not.  In this email, they’re telling me how their internal portfolio is performing poorly.  That makes me feel real confident.  What angel would tell you that they are not knowledgeable enough in sophisticated investments?  Anyway, I was a bit skeptical with the first email but not enough to not respond.  Enough looked right with the first email.  This one, however, screams scam.  That said, I responded.  I’m a glutton for punishment but figured I would see how far this rabbit hole goes before publishing it to save other Venture Club members a lot of pain.

As an entrepreneur, I’m optimistic to a fault.  I believe everything will just work out.  Back against a wall, check.  In need of large sums of money, check.  Recently announced publicly that he is looking for money, check.  Eager to find a solution to these money woes, check.  Easy prey is what we’re sometimes called and even the scam artists are beginning to understand this.  The thing about this is just how badly executed it was.  They at the very least had me strung along for the ride using the first email.  The first email used a reputable referral source, sounded legit, had decent grammar and managed to not raise huge scam flags.  For the second one to be so bad either points to the first one being a feeder for a default scam or the emails coming from different people.  I’ll never know but now you know and knowing is half the battle.

Kentucky Enterprise Fund (KEF) declined to invest in our project.  I’ve known this for just over a week now and I was hoping to be able to post an update here with additional information from our other sources of funding.  Unfortunately, it seems as if mother nature got in the way of communications over the past week.  With all the school closings, days off and snow (Snow that Louisville is not prepared to handle), I’m left waiting on updates from the private equity investors that I’ve spoken to over the past couple of weeks.  I’m expecting answers soon.

It’s been difficult to convince an investor that they need to drop $15M - $18M into our company and the reasons for this have mostly been external to the project or the team.  For instance, Kentucky Enterprise Fund had 55+ applicants for a grand total of $1M in funding dollars.  We were asking for $250K from them to build our technical demo.  KEF would receive a return no earlier than three years from now and there were/are serious questions pertaining to where we would raise the next round of funding.  As a matter of fact, the “next round of funding” seems to be a major road block towards getting a green light for our project.  Most angels in the Louisville market do not believe Louisville VC has the resources to fund a $15 - $18M deal or the contacts to enable that level of institutional investing.  I don’t believe it.  I think it is small market thinking but hey, I’m not the one with the money.  I do know that Greater Louisville, Inc keeps track of regional investment dollars and that the total investment in Louisville was just over $20M in 2009 with one company receiving $5M while the rest of the companies received less than $1M so there may be truth to the notion that the Louisville market can’t do our deal.  In any case, the feedback we received from KEF was that there were too many other companies with applications that lead to revenue faster for fewer dollars invested.  The companies they invested in didn’t need additional rounds of funding to get to revenue.  Our project, vision, team and plan checked out but we didn’t make the cut because there were faster paths to a return for KEF.  They left an open door to come back when we were further along which we may or may not take advantage of.

Hope still springs eternal though.  The KEF fund application forced us to answer the second round of funding question sooner than I would have thought and we’ve begun to make headway into other VC markets in the country.  The idea is to secure $500K in funding to build a technical prototype of our concept and then to shop that concept to institutional investors that we’ve already lined up prior to securing the initial $500K.  The whole thing makes me wonder how multi-round funding deals are done though that thought may simply be a product of the current economic conditions.  Updates will follow as soon as I have more information.