The 'red flags' of 38 Studios' demise

The collapse of 38 Studios has put the state of Rhode Island in a precarious position. The government offered substantial loans to Curt Schilling's company. Following its bankruptcy, fingers were pointed: who's to blame?

A lengthy feature on The New York Times details the rise and fall of 38 Studios, and how both parties involved bit off more than they could chew. Schilling didn't properly anticipate the challenges of game development, let alone MMORPG creation. Rhode Island, eager to reinvigorate its economy with tech jobs, dove head-first into an investment that had "red flags" from the get-go.

Sean Esten, financial portfolio manager of the Economic Development Corporation which brokered the deal, warned that the worst-case projection for its business was still too optimistic. "I don't think I can support a $75 million guarantee to any single company in this industry due to the wide volatility in commercial success of game releases," Esten told his bosses in an e-mail. Apparently, 38 Studios was promising to release a successful game every two years--something the NYT correctly points out is "a track record that most gaming companies can only dream of."

According to the state, Mr. Esten's bosses "decided to bury his analysis."

Even government workers pointed out the dangers in investing such a large amount of money in an unproven company. Gina Raimodo, the current state treasurer who has previous experience working in venture capital, pointed out that the lack of VC funding for Schilling's company should have been a warning. "In general, I would proceed very carefully on this," she wrote to Keith Stokes, the corporation's executive director. The company "is in the Boston area where there are 200 venture capital firms, and it is in a very hot area of gaming so if it were in fact a compelling investment I would have to think it would be well funded already by venture capitalists; the fact that many have looked at it and passed is a red flag."

The collapse of 38 Studios ruined nearly everyone involved with it, from the taxpayers of Rhode Island, to those that were laid off, to even Schilling, who lost his baseball fortune.