Welcome to Scaled and Failed! My name’s Amil Naik and I’m an aspiring VC and founder at The University of Texas at Austin. I write about startups that scaled and startups that failed to draw insights about the patterns of startup failure and how to avoid them. Everything is clearer in hindsight, so it’s worth looking back.
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TLDR
Today’s Topic: Videogame Studios
Scaled: Jagex; Stuck to the roots of what made it successful while innovating, stays extremely transparent and consumer-oriented, invests heavily in the community and is communicative with customers, focused partnerships and channels for user acquisition, and has built incredible loyalty to its game.
Failed: Telltale Games; Poor work conditions, bad structuring to match growth, and subpar leadership led to deteriorating product quality and an inability to innovate, culminating in investors pulling out.
Lessons Learned: Stagnancy is a death sentence in gaming if competitors are all moving forward. Don’t let ego interfere with management, and don’t alienate your best talent chasing recognition; founders get the returns if the studio does well, so don’t sacrifice finances for fame. Develop your own intellectual property instead of building dependence on licensing from others, as it’s a high capital cost and can only take you so far in terms of customer loyalty. Growth will destroy a company without structural supports to handle it, so it’s better to go slow if you’re not equipped for massive growth rather than making risky bets.
Today’s Topic: Game Studios
Today’s topic is near and dear to my heart: videogames! If you’re anything like me, which I hope you aren’t, you had a childhood addiction and sunk literally thousands of hours into gaming, scorning reasonable sleeping hours and physical activity alike. Some of my best memories were made while rushing home and switching on a console, calling friends (via phone long ago and by Discord more recently), mashing buttons, and intently watching my brother until I was old enough to be given the second controller. I still remember the sucker punch I felt when I heard today’s failed company was shutting down. For better or for worse, gaming has played a large role in who I am today, so I absolutely had to talk about these two studios that were a large part of my childhood.
Taking a step back, gaming isn’t a poster child of VC investing and has seen fewer investment dollars in recent years, but there seems to be a bit of a turnaround beginning. Covid definitely pushed a lot more people into spending time playing games, as Verizon noted early in the quarantine period. This article from White Star Capital is a great landscape primer on gaming trends. Perhaps the most important of these trends is the deep connection gaming now has with popular content creators and the rise of Esports. Gaming is no longer just about playing games; it’s about what people watch on YouTube and Twitch, social media and communities, advertising spend and product placement, the teams people root for when watching tournaments, a lot of exciting new tech, and so much more. It’s a difficult space to be sure, as it’s harder to measure value for consumers in creative arts, but there’s plenty of potential to make a lot of money across the value chain, not just the games themselves. Dev tools, marketplaces, publishers, brand partners, studios, content creators, pro players, and even the consumers all play a very important role in shaping the industry, and there’s a lot of innovation happening in each of these spaces. For today, though, I’ll focus on the studios making the games since they remain the bread and butter of the industry.
Jagex is the company behind Runescape, the largest free-to-play MMORPG and one of the most popular MMOs overall. Telltale Games was the studio behind the narrative-driven, critically acclaimed The Walking Dead videogame that was done in a unique episodic, adventure style. Jagex has passed through many hands through the years, with US investors maintaining a controlling interest for some time, then acquisitions by different Chinese firms, and in 2020 being bought by Macarthur Fortune Holding for $530M. Since then, the firm has been purchased again for likely an even higher price tag. Telltale, meanwhile, fell apart and filed for bankruptcy in 2018 after raising around $54M over the years. LCG Entertainment has acquired many of its assets and put the studio back up under their company.
Scale: Jagex
Many younger Millennials probably have faint memories of chopping trees, catching fish, and killing cows back in simpler times. Runescape is one of the few “grindy” MMOs left involving repetitions of tasks over and over, and its return to popularity in recent years puzzles many. The story begins with the brothers Andrew and Paul Gower, who along with Constant Tedder as CEO launched Jagex in December 2001 to administer their recently released game, Runescape. That initial iteration of the game was known as “Runescape Classic,” and was still playable on certain servers into 2018. The game was wildly popular and a paid version was released, with much content locked behind the subscription. Part of the popularity was the ease of access; the game could be played in a browser and wasn’t extremely demanding, and the free version served as a nice trial of the game before paying. In 2004, an updated game engine with completely 3D graphics was released. This version is known as “Runescape 2” and became the primary Runescape. Jagex grew on the back of Runescape, and though it released some other games, none ever reached the same relevancy. More employees, more content, and for a long time Runescape was doing great. There were some bumps in the road that players like myself who were around in the later 2000s and early 2010s remember, but it was a time of prosperity that many call back to with nostalgia. The game received venture funding to fuel growth in 2005 from Insight Venture Partners and further funding in 2010 from The Raine Group, Spectrum Equity Investors, and Insight, which now had a controlling interest in the company.
Things started changing in 2012, with the introduction of microtransactions. Revenue growth was now being pushed at the expense of gameplay. People could essentially pay to gamble for in-game rewards of money, boosts to advancement, and numerous cosmetics. The core combat mechanics, gameplay, and graphical style were changed to be more “modern” and reflect numerous other MMOs in 2013. This version is known as “Runescape 3” and is considered the primary continuation of Runescape. Runescape 3 (RS3) has continued to bleed players over the years, though because of the “pay-to-win” model it likely is still a lucrative offering.
In 2013, prior to RS3’s release and its slow decline, Jagex polled and released a version of Runescape based on a 2007 backup, now known as Old School Runescape (OSRS) or 2007scape among many fans. When people call back nostalgia for Runescape or talk about how popular the game is, this is the version they mean. Over the years, it has become much more popular than RS3, recently hitting new all-time highs of concurrent players. It sees regular content updates, has a very strong community, and is an extremely consumer-oriented game. Any changes or updates to the game content are polled by the dev team and require a 75% agreement by the player base to pass. The team regularly has live streams discussing what’s on the agenda for development, verifies and allows helpful third-party clients that smooth gameplay and provide assistance within the scope of game rules, and tends to be accessible via Reddit and Twitter. The company has made serious pushes for player acquisition, releasing RS3 on Steam with OSRS to follow sometime soon, partnerships with Twitch, and forays into Esports (though this hasn’t gone very well). Jagex has had its share of issues, from staff involvement in the game’s black market to the dependence of many Venezuelans on gathering in-game currency, but none of this has stopped the game’s comeback. Nostalgia is a powerful force, and a profitable one too.
From a financial perspective, Jagex has done a nice job. The second most recent acquisition price was $530M, and it has changed hands many times, passing through several Chinese firms in prior years (though this acquisition might be the previous owner’s shell). Jagex was just acquired again by The Carlyle Group, a US private equity firm, for an unknown amount that is speculated to be higher than the previous price. Runescape has hit over $1B in lifetime revenue and $137.6M revenue in 2019. While most games had one-time costs, MMOs had an early advantage in recurring revenue models smoothing out the need for continuous releases. You just have to keep the cash cow healthy and keep milking it. Jagex has certainly done that well.
The saying “You don’t quit Runescape, you just take a break” captures the stickiness of the game and how Jagex has managed to stay relevant. They built something that captured people’s mind space very well and drags them back again and again. I ended a 7-year hiatus and started again on OSRS in 2020, and many others tell similar stories. There’s very little competition left in the niche space Runescape occupies as a grindy, simplistic game, and so it reigns supreme. You can do many things that require little attention so it maintains popularity as a side activity while most games demand your full attention. Additionally, the commitment to adding no microtransactions to OSRS and the receptiveness of the devs breeds continued loyalty to the game. Even though the game is old, the community is very passionate and constantly develops tools to assist gameplay, such as third-party clients that render graphics via GPU to beef up the game on higher-end computers or allow rebinding of keys.
With a solid profitable product to offer, loyal customers, and a community that eagerly draws others into the web, the push for growth via partnerships and accessibility is the right move to bring fresh blood to the game. The dated graphics and mechanics make it difficult for many without memories to adopt OSRS, but fan-made clients that modernize the graphics are coming and will likely push a hefty boost to the player count.
Fail: Telltale Games
Telltale is a much sadder story of mismanagement and problems within the gaming industry overall. If you like videogames but haven’t played the series of Walking Dead “seasons” (essentially sequential and separate games), I highly recommend it. There are few as well-written, emotional videogame stories in recent memory, and its style is different from most games out there. The critics agree, and sales on the first season reflect the acclaim. The quality of the game, uniqueness in the landscape, and popularity of The Walking Dead television show at the time synergized to deliver Telltale’s breakout success. They had several games before, but none that put them on the map even though they were met with moderate commercial success. Before this game, they had raised about $14M in funding, and a few years later in 2015, they raised $40M more. They used their initial win as a launchpad for serious growth. That growth, however, ended up being more than they could handle. Telltale proceeded to snap up many franchise IPs to develop games for: Game of Thrones, Minecraft, Batman, and many others that never came to fruition.
Telltale was created by three former LucasArts (big adventure games and Star Wars game developers) who departed after LucasArts shifted away from adventure games. This article does a great job of discussing Telltale’s rise and decline, explaining many of the issues within the studio that reflected the brutal nature of the industry as well as those specific to the company (I’ll pull a lot of the main points from here). The essence of it boils down to a few key issues: “crunch” time all the time, poor leadership, and a lack of innovation (though this is tied quite a bit to the first two). The first is a problem quite common in game studios but magnified in Telltale. “Crunch” is a well-known phenomenon for game developers and is a norm for most releases. 90 to 100 hour work weeks with far fewer perks and pay than an investment banker gets, and quite often throughout the year seems to be a common experience for game developers. Overtime pay would be nice but doesn’t seem to be given often. Although it’s a horrific expectation to set, at least it isn’t 24/7. Except at Telltale, it was. One section from The Verge article linked above describes the conditions at Telltale:
Some former employees reported working 14- to 18-hour days or coming in every day of the week for weeks on end. But where most developers go into “crunch mode” in the final months of a game leading up to its launch, they described it as constant. Because of the episodic nature of Telltale’s games, the studio’s development cycle was a constantly turning wheel. As soon as one episode wrapped, it was on to the next one, over and over with no end in sight. “Everything [was] always on fire,” one source with direct knowledge of the company says. “You never [got] a break.” This sentiment was echoed over and over to The Verge by four different people across several parts of Telltale.
It’s hard to imagine any sustainable success when you’re working your employees down to the bone to keep up with a hellish development schedule. On top of that, employees were underpaid while living in The Bay Area. Those two taken together led to losses of high-profile creative talent and regular staff alike, some joining other big studios and others launching their own companies. It was clear as more games were released and the studio kept growing, the quality had suffered significantly. Sales reflected the disappointment, with no game after the first season of The Walking Dead reaching anywhere near the commercial or critical success as their first homerun, though users who did play did seem to enjoy them. Releases suffered from a significant number of bugs and glitches at launch as well, further damaging the company’s brand and future revenue potential.
Compounding with the burnout and revolving door of talent was poor structure and management from the top. Telltale went from the typical “small indie studio” to a mid-sized company with hundreds of employees very quickly to meet its ambitions, falling straight into the “speed trap” pattern of failure. More staff were added but proper processes and documentation were never built, leading to severe disorganization internally. Combined with lots of the talent behind the studio’s success leaving, it’s evident there was nowhere near enough direction from the top to keep the ship sailing. That’s not a surprise when you hear about the complaints many former employees had about co-founder Kevin Bruner, who become the CEO in early 2015. Many employees said he was an overtly critical micromanager that stifled creativity, forced his views onto projects rather than letting the creators do what they do best, and not letting staff take due credit for their work on games. He contested many of these claims, saying his behavior and practices were best for the growth of the studio, but seeing how poorly Telltale handled scaling and how much the quality of output deteriorated, it’s doubtful he improved things at all. Another point in The Verge article describes what it was like to have Bruner watching you:
Numerous employees describe Bruner as cultivating a culture of fear, and a running joke at the company compared Bruner’s attention to the Eye of Sauron
I certainly wouldn’t want to work for someone like that. Though he was a great developer that built Telltale’s game engine and had some great ideas, he wasn’t the right person to steer the ship. He “stepped down” in 2017 and was soon replaced with a former Zynga executive. Restructuring took place and a quarter of staff members were cut to focus on making fewer and better games with a smaller team. It seemed like things were getting back on track, but it was too little, too late after years of damage.
The last issue that plagued Telltale was a result of losing a lot of great talent and poor management that further drove down quality and morale at the company. Creative and technical stagnancy in a creative field will drag down a company over the long term, and that’s what happened at Telltale. The game engine they used, the “Telltale Tool” aged with new consoles and was very limited in functionality. This made it difficult to develop games efficiently and because of the tight timelines and constant rewrites taking place at the behest of leadership, numerous gameplay bugs tended to end up in production. Though updates took place to the engine, they were often years behind. It wasn’t until 2018 they planned to switch to the Unity game engine, though they never got out a game built on it.
Additionally, they never moved past the formulaic nature that made the first season of The Walking Dead successful. Things are expected to change and improve as a studio makes more games, but it seems Telltale got risk-averse. This was a critical error, as the episodic nature and player choices in the narrative succeeded because it was so different at the time. As they made more games in the exact same format with different franchise skins, people got fatigued. Other more interactive, fulfilling games released over time with the same narrative depth and involvement of player choices in the story like The Witcher 3. In fact, after the novelty wore off people realized that player choices in Telltale games really made no difference and the story played out nearly the same no matter what you decided. There was only the illusion of choice for emotional impact, not gameplay differences.
Taken together, these issues destroyed the potential Telltale had. Though Pete Hawley seemed to be making progress at fixing things, a few months after The Verge article was written, Telltale shut down for good, ending any glimmer of hope for a return to success. Investors pulled out of a financing round last minute near the end of 2018. The studio let go of most of the staff and kept a skeleton crew to finish up a few obligations. Although LCG Entertainment snapped up the assets and licenses that hadn’t expired to continue making games under the Telltale title, most of the popular IPs they had rights to had reverted.
Lessons Learned
Telltale’s shut down and Jagex’s success have a few pretty obvious lessons for anyone to see. The most glaring one evident across both is that doing the same thing over and over in a creative medium doesn’t translate to customer loyalty and revenue. Jagex, which has successfully sustained a brand and game for over 20 years now, keeps the core experience and spirit the same but innovates with what they release. Content is fresh, interesting, adds to the gameplay, and most importantly is very in tune with what users want. Although their success is built on something old, it doesn’t rely on the same formula every time. Telltale, meanwhile, simply inserted characters from different licensed franchises into the same format. When the rest of the industry is moving forward, staying still means falling behind. You have to understand why the formula was successful at one point and when it’s time to change things up. At a core, this reflects poor management understanding of what made the company successful in the first place.
Whether that poor understanding at Telltale was because many of the people responsible for the first season of The Walking Dead had left or because they were being ignored in the first place, it resulted in lackluster products. In creative endeavors, let the creative talent do the work and be public about it. It’d be the same as any of the major film studios taking credit for the success of the film rather than the producers, writers, and all the others on the credits. Consumer-facing creative work isn’t a B2B software product and creatives like recognition for that work. Taking that away will rightfully disgruntle many. Jagex has its employees talk specifically about what they’re working on and who’s responsible for what content quite often, and it’s good for company morale and increases a team member’s personal investment in the end product. After all, founders will get their cut of profits, but the makers gain their reputation and future employability by being credited for good work. Take away that investment and attachment and you’re unlikely to get the best work you could. If you think you need to micromanage every aspect of every process, you’ve either hired terrible employees and aren’t fit to run a company, or you’re too possessive to let people do their jobs and still can’t run a company. Give credit where it’s due, be imposing when needed rather than all the time, don’t destroy your employee’s health, and stay hands-off particularly in creative products unless there needs to be serious intervention.
The most important lesson that isn’t so obvious is related to the core business model. Jagex has never had to deal with license acquisitions, rights reversions, and timeline issues that drove many of the problems Telltale had. Telltale bought IP for x number of years and had that long to crunch out a game and make money. They did that for most games and had very little original content. Seeing how pressed studios are for time, it’s very tough for relatively new game studios to put out continuous success built on the IP of others. This likely compounded their timeline issues and push to grow that eventually caused severe problems; they just bit off more than they could chew. Growth is great, but if you can’t do it without your company imploding, it’s worth slowing down and fixing what’s there. If you can maintain profitability, put out less but better content, and set up the infrastructure to scale, you don’t need to be 100% on the gas pedal. Jagex built its own world and lore over two decades and remains successful, but it took a while to get here. Had Telltale used lessons learned from its first success and applied it to some of its own intellectual property instead of cranking up its burn and betting on copycats, it may still be around. Chasing the hockey stick full speed with tunnel vision might keep you from ever getting there.
More Reads and Info
Thanks for reading! Tell me about some cool gaming startups and games you’re looking forward to this year in the comments! Also, if you happen to play Old School Runescape or I’ve convinced you to give it a try, leave your RSN in the comments or message me on LinkedIn and I’ll add you. If you found this interesting, consider sharing it with friends and subscribing if you haven’t already!
Cheers,
Amil