24-07-2012 00:29
End Game
Curt Schilling set out to build the greatest video-game company the world had ever seen, and to get rich ÔÇö Bill Gates rich ÔÇö doing it. Instead, the whole thing exploded in his face. Drawing on exclusive interviews with the Red Sox legend and his former employees, Jason Schwartz takes us inside the chaos, arrogance, and mistakes that led to the destruction of 38 Studios and the loss of $75 million in taxpayer money.
By Jason Schwartz | Boston Magazine, August 2012
The sun is beating down hard on the Dracut High School softball field, where Curt Schilling sits atop a bucket of balls beside the dugout. HeÔÇÖs helping coach his daughterÔÇÖs team, the Drifters, in a tournament, and theyÔÇÖre on the verge of their second win of the day. Schilling could use the uplift: ItÔÇÖs been a month since the extraordinary implosion of 38 Studios, the video-game company he founded and lost $50 million investing in. And though his face is not quite the ghastly shade of white it was at the height of his companyÔÇÖs crisis, he doesnÔÇÖt exactly look good. Dressed in shorts and a standard-issue blue and orange coachÔÇÖs polo, his facial hair is scraggly and heÔÇÖs got heavy bags beneath his eyes.
ÔÇ£Come on! LetÔÇÖs close it out!ÔÇØ shouts the former Red Sox star, noted during his career for his precision arm and considerably wilder mouth. Moments later, thereÔÇÖs a game-ending grounder to second. Drifters win, 9ÔÇô0.
Despite keeping an uncharacteristically low media profile of late, Schilling has agreed to meet with me. So while the players wait for their next game of the tournament, the former pitcher takes a seat in a lawn chair and performs what winds up being an emotional, two-hour-long autopsy of 38 Studios. The companyÔÇÖs death was grisly: Before going under, it defaulted on the $75 million guaranteed loan that the state of Rhode Island had used in 2010 to lure it to Providence. As the money ran out, the company encouraged┬á its 379 employees to continue coming into work, even though it knew it could not pay them. Staffers realized theyÔÇÖd been stiffed only when they noticed the money missing from their bank accounts. A pregnant woman had to find out from her doctor that her healthcare benefits had been cut off.
Add it all up, including interest, and already-cash-strapped Rhode Island could be out as much as $110 million on the loans. As Schilling sits beside the softball diamond, his company, with nearly $151 million in debt and just $22 million in assets, is being liquidated through Chapter 7 bankruptcy.
Asked about 38 StudiosÔÇÖ failure, Schilling says his management team suffered from ÔÇ£significant dysfunctionÔÇØ and that his video-game developers worked too slowly. Those problems, he allows, are his fault. ÔÇ£As the chairman and founder,ÔÇØ he says, ÔÇ£whoÔÇÖs above me?ÔÇØ
But he also shovels much of the blame onto Rhode Island Governor Lincoln Chafee, whom he believes had a political agenda when it came to 38 Studios. The day before, Schilling alerted his former employees through a private Facebook message board that he planned to go on WEEI sports radio to talk about ChafeeÔÇÖs role and ÔÇ£tell the untold side of this nightmare.ÔÇØ
Many former 38 Studios employees, including the CEO, responded to that Facebook post with fierce attacks against Schilling himself. As the assaults mounted, SchillingÔÇÖs wife, Shonda, rose to her husbandÔÇÖs defense. ÔÇ£50 million its [sic] not a fucking joke. ItÔÇÖs gone,ÔÇØ she wrote, adding that, ÔÇ£You have no idea what that last two weeks were like. Hope and hell. We hung on every telephone call. My husband couldnÔÇÖt function. My kids saw their father cry more in that month then [sic] any child should see.ÔÇØ
SchillingÔÇÖs harshest critic in the online exchange was Bill Mrochek, the vice president of online services, whose wife required a bone marrow transplant at the time their healthcare disappeared. ÔÇ£Are you going to admit that your stupid hubris, pride, and arrogance would not allow you to accept that we failed ÔÇö and help shut it down with dignity?ÔÇØ he asked Schilling.
Mrochek was talking only about 38 StudiosÔÇÖ dramatic final weeks, but as interviews with Schilling, members of his former staff, and others associated with the company show, he might as well have been describing 38 Studios from the moment that Schilling ÔÇö lacking any business experience, but full of the same confidence, bravado, and determination that made him a baseball legend ÔÇö decided he could build a billion-dollar video-game company.
By 2006, Curt Schilling had earned more than $90 million playing baseball, not including endorsements. But what he really aspired to was being ÔÇ£Bill Gates rich.ÔÇØ He admired the global impact the Microsoft founder had made through his philanthropy, and wanted to do the same. Schilling, who has an autistic son, imagined providing $200 million to open the Shonda Schilling Center for Autism Research.
Creating a video game would be what catapulted him to that wealth. More specifically, he would build a massively multiplayer online game (or, blessedly abbreviated, an MMO) ÔÇö the type that allows people from across the world to play with and against one another. As a kid, Schilling had been obsessed with computers (his first was an Apple II), and during his baseball career, rather than go out carousing, he spent his time playing MMOs. A favorite of his was the industry leader, World of Warcraft, a vast fantasy landscape filled with wizards, elves, and warriors that has more than 10 million paying subscribers.
Successful MMOs are incredibly lucrative, but theyÔÇÖre also the hardest type of game to build. YouÔÇÖre programming not just a game, explains Dan Scherlis, the first CEO of Turbine, a maker of MMOs, but a complex social system for thousands, if not millions, of users. A normal video game might require a couple of years to develop, but an MMO takes at least twice as long. Because of that, many gaming entrepreneurs start small, working their way up from something simple for a mobile device, or perhaps a single-player game for PlayStation or Xbox. But Schilling had grander ideas. He was going to challenge World of Warcraft. His fantasy world would be similar (you want elves and wizards, youÔÇÖve got elves and wizards), but he envisioned deeper plot lines and more-striking visuals. He persuaded R. A. Salvatore, the bestselling novelist from Leominster, to dream up the fictional universe, and the famed comic artist Todd McFarlane, a noted baseball fan, to conceive its artistic vision.
Industry experts often compare making video games to filming movies, given their similarly long production cycles and hit-or-miss nature. In movie terms, then, Schilling was attempting to start a studio from scratch, but instead of beginning with a low-budget indie flick, he was going straight for the summer blockbuster. His first time behind the camera, he was going to make Avatar.
ÔÇ£If it wasnÔÇÖt an MMO, I wouldnÔÇÖt have done it,ÔÇØ Schilling tells me. ÔÇ£If you look at the game space now, if you want to build something thatÔÇÖs a billion-dollar company, the only game to do that with is an MMO.ÔÇØ
Schilling founded his company, originally called Green Monster Games, in August 2006, and set up shop in Maynard. (The name was changed a few months later on account of some other guys already owning the trademark on ÔÇ£Green Monster.ÔÇØ) He code-named his game Project Copernicus, and set out to make it richer, more beautiful, and, in sum, more lovingly created than any before it. CopernicusÔÇÖs world would be deep enough to support a network of related products: toys, books, and other video games and media. Schilling calculated that it would cost $40 to $50 million to produce the MMO, of which heÔÇÖd front about 10 percent. ÔÇ£I told my wife I was going to take $5 million and try it out,ÔÇØ he says. The rest of the money would come from investors. He projected that Copernicus would debut by 2010, or in four years ÔÇö an aggressive timeline for even an established video-game studio.
To industry observers, SchillingÔÇÖs quest seemed overwhelmingly difficult. To Schilling, it was just another opportunity to prove the naysayers wrong. ÔÇ£I had to beat the Yankees three times in nine days,ÔÇØ he tells me, referring to when he led Arizona to the 2001 World Series title. ÔÇ£I never doubted I was going to do it. My whole life was spent doing things that people didnÔÇÖt believe were possible, because God blessed me with the ability to throw a baseball. And I carried that same mentality into everything I did here.ÔÇØ
Schilling knew heÔÇÖd been treated well during his baseball career, and wanted his staff at 38 Studios to feel the same. That meant gold-plated healthcare, for which employees had no paycheck deductions, and top-notch 401(k)s, with the company matching to the legal limit. As 38 Studios grew from 20 employees in 2006 to 42 in 2007 to 65 in 2008, there were plenty of other goodies along the way: free gym memberships, two homes the company rented to temporarily house new out-of-state hires (though that perk was short-lived), and, one year at Christmas, new laptop computers for every employee. Gifts like the computers came out of SchillingÔÇÖs pocket ÔÇö he says he spent as much as $2.5 million on that sort of largesse over the years.
With midday Ultimate Frisbee games and a staff that got along remarkably well, the Maynard office appeared downright idyllic. Once, after an IT guys rottweiler died, Schilling presented him with a brand-new pup during an all-staff meeting. There was much applause. Former employees say Schilling was an unparalleled cheerleader. He hadnt originally intended to be in the office full time, but when he got hurt in 2008 and subsequently retired from baseball, he became a permanent fixture. Jesse Smith, a designer, says that at monthly meetings, Schilling would usually give his thoughts after employees presented their work. There were a couple times that you could tell he was getting choked up, Smith says. This was something that was just an idea and a dream to him, and now its coming to reality. It was just powerful.
Everything at 38 Studios was not, however, perfect. It quickly became apparent that Schilling was new not just to video-game development, but to the basic concept of working in an office. In December 2009 ÔÇö months before Rhode Island signed on to the $75 million deal ÔÇö Harvard Business School published a case study about the company titled ÔÇ£Curt SchillingÔÇÖs Next Pitch.ÔÇØ
Brett Close, who joined 38 Studios as president in 2007 and soon after became its first CEO, put SchillingÔÇÖs inexperience into perspective for the studyÔÇÖs authors, Noam Wasserman, Jeffrey Bussgang, and Rachel Gordon. ÔÇ£He really needed Company 101,ÔÇØ Close told them. ÔÇ£For example, the whole concept of vacation was foreign to Curt. He actually said, ÔÇÿPeople get weekends off, right?ÔÇÖÔÇØ Schilling at one point suggested that people work 14 straight days and then take five days off. It jibed with his baseball experience.
That idea was never instituted, but other questionable ones were. Schilling put his wife, Shonda, on the board of directors. ShondaÔÇÖs father received a job in IT (by all accounts, he performed admirably), and her mother was given the title ÔÇ£philanthropy and charity manager.ÔÇØ Meanwhile, ShondaÔÇÖs uncle, William Thomas, became COO. Though a seasoned businessman, Thomas had no experience with video games, much less MMOs. Schilling took to calling him ÔÇ£Uncle BillÔÇØ around the office, and even in meetings with outsiders. According to the case study, Thomas told Schilling it was making them look bad and to stop. The nickname caught on with the staff, anyway.
Most troublesome of all was the unique profit-sharing plan Schilling devised for his first employees. Wasserman, Bussgang, and Gordon write that, since Schilling was bank-rolling the company by himself, he was hesitant to give up equity in it. So instead of luring early prospective hires with stock options, he promised to share all profits 50-50 with them. Upon arriving as CEO, Close recognized that ÔÇ£investorsÔÇÖ heads would explodeÔÇØ when they saw the model, since theyÔÇÖd be bearing all the risk but reaping only half the reward. Close eventually convinced Schilling to scrap the policy and replace it with stock options.
The CEO also tried to rein in SchillingÔÇÖs spending, doing away with ideas for company cars and cell phones. But Schilling was adamant about the rest of the perks. According to the case study, between fiscal years 2007 and 2008, the company spent more than $705,000 on ÔÇ£travel and entertainment,ÔÇØ a sum Scherlis, the former Turbine CEO, calls ÔÇ£wildly high.ÔÇØ
It never had the culture of a startup, says one former employee. The message was being sentthat there was plenty of money.
As SchillingÔÇÖs personal investment shot past $5 million, he knew he would need outside financing. Since the Red Sox hero was able to get meetings with just about anyone within the broadcast range of NESN, he and his executives met with potential investors practically every week for the companyÔÇÖs first three or four years.
Todd Dagres, a founder and general partner at BostonÔÇÖs Spark Capital, one of the top tech venture capital firms in the country, trekked out to Maynard for a meeting. He says he was looking to invest in games, but admits that he was also excited to meet the bloody-sock hero.
Schilling gave him an office tour, clicked through PowerPoint slides, and delivered a passionate pitch. But Dagres says Schilling came off as overconfident, as though he didnÔÇÖt understand what a huge bet heÔÇÖd made with 38 Studios. Project Copernicus was going to require tons of cash, and if the game flopped, the company would go down with it. 38 Studios didnÔÇÖt have ÔÇ£the ÔÇÿAÔÇÖ team that I thought youÔÇÖd want to see developing such a difficult game,ÔÇØ Dagres says. It lacked MMO development experience at the top. ÔÇ£Curt was not the CEO,ÔÇØ Dagres says, ÔÇ£but you could see he was quite involved and had a lot of control. I was a little nervous.ÔÇØ He also took note that the COO was SchillingÔÇÖs relative.
Then there was the issue of equity. Dagres says that Spark Capital likes to get 20 percent of a company it invests in, but that SchillingÔÇÖs offer was far too small. Schilling denies that he hoarded equity, but multiple sources say that, because he was funding the whole enterprise, he guarded it jealously.
ÔÇ£He was very forthcoming to tell you how much of his own money he put in,ÔÇØ Dagres recalls. Schilling tells me that he considered that kind of disclosure a selling point: ÔÇ£I assumed that they would look at it as, ÔÇÿIf heÔÇÖs this far in, itÔÇÖs not going to fail. HeÔÇÖs not going to let this thing fail.ÔÇÖÔÇØ Instead, Dagres was shocked that Schilling was plunging so much into such a risky venture. The VC left with his checkbook firmly closed.
Time and again, though, Schilling emerged from meetings like this one thinking heÔÇÖd hit a home run. ÔÇ£There was never a single one that he didnÔÇÖt walk out of saying he absolutely killed it,ÔÇØ says a former employee who attended a number of investor meetings. But over and over, there was no investment. Still, Schilling remained optimistic. ÔÇ£Curt sincerely believed that Copernicus was the best thing since sliced bread,ÔÇØ the former employee says. He ÔÇ£could not imagine a scenario where other people would not see the same potential he did. His attitude is always, This is gonna happen, the deal is going to close.ÔÇØ
ÔÇ£Absolutely,ÔÇØ Schilling tells me when I run that quote by him. ÔÇ£And thatÔÇÖs the way IÔÇÖm built. I think itÔÇÖs one of the reasons I was able to do what I did playing baseball. And itÔÇÖs not fake. IÔÇÖve been around situations where you can make people believe something they donÔÇÖt believe.ÔÇØ
Perhaps, but no investors seemed to be believing ÔÇö and as they continued to pass, sources say, Schilling and Close, the CEO, began clashing over the equity issue. Meanwhile, Jen MacLean, the VP of business development, was pushing 38 Studios to buy a Maryland video-game outfit called Big Huge Games, which was available for cheap. The deal closed in May 2009, giving 38 Studios 70 new employees. Three months later, Schilling fired Close and appointed MacLean CEO.
Hanging over everything, though, was the fact that there was no new money coming in. As the calendar raced toward 2010 ÔÇö SchillingÔÇÖs original deadline ÔÇö Project Copernicus remained years away from completion. If Schilling wasnÔÇÖt able to track down money soon, the studio would be doomed. He needed a savior, and was convinced that if he worked hard enough, heÔÇÖd find one.
On March 6, 2010, Schilling hosted a fundraising event at his Medfield home. Then-Rhode Island Governor Donald Carcieri attended, and the two men got to talking business. Schilling needed money. Carcieri was looking to beef up his stateÔÇÖs high-tech sector.
The talks continued for months, with the outline of a deal to move 38 Studios to Rhode Island gradually taking shape. At one point, Schilling approached Governor Deval Patrick and asked for tax incentives to keep the company here, but Patrick politely passed. Given the warning signs flashing around 38 Studios, it remains difficult to understand why Rhode Island so freely handed over $75 million. But for Schilling, despite being a longtime proponent of small government, the guaranteed loan was a godsend. HeÔÇÖd get the cash without having to give up even the tiniest slice of ownership. And if everything went bust, it would be Rhode Island that was responsible for the money.
There were a few catches, though. The loan deal stipulated that 38 Studios had to hit certain hiring benchmarks to access some of the funds. The company would unlock $17.2 million for creating 80 new jobs in the state by spring 2011, another $4.2 million for adding 45 more by fall, and $3.1 million on top of that for 125 additional jobs by winter.
So as the company moved south in April 2011, it embarked on a hiring binge. In its midst, Schilling seemed to be handing out important titles to anybody who asked nicely for one. ÔÇ£It became a joke,ÔÇØ one employee says. ÔÇ£Oh, you are a VP of lunch? Oh yeah, IÔÇÖm a VP of doughnuts.ÔÇØ Infighting inevitably resulted, with execs often giving conflicting directives to staffers. ÔÇ£They didnÔÇÖt work well together,ÔÇØ Schilling says of his bloated management team. ÔÇ£I was amazed at the turf-building and protecting that went on.ÔÇØ
The people working under Schilling had their own complaints about him. One says that heÔÇÖd undermine managers by randomly dipping in to give direct orders to employees: ÔÇ£His requests added significant work, and were often contrary to the direction given by other people.ÔÇØ Former staff members also charge that Schilling was stubborn and ignored people when he didnÔÇÖt like what they were saying. For instance, sources say Schilling froze out his vice president of business development by excluding her from meetings. ÔÇ£Once Curt turned on somebody,ÔÇØ a former employee says, ÔÇ£you went from being a superstar to he doesnÔÇÖt want to talk to you, overnight.ÔÇØ
Schilling disputes much of this, but 38 Studios churned through a litany of executives during its existence. One former employee says Schilling appreciated that there was a lot he didnÔÇÖt know about video-game development, and ÔÇ£tried to hire some of the best people in the industry to shore up those gaps. The problem is if you donÔÇÖt listen to those people.ÔÇØ
Whatever the dysfunction at the executive level, most employees at 38 Studios were unaware of it, and remained happy at the beginning of 2012. There was great excitement in February when the company released Kingdoms of Amalur: Reckoning, a single-player title produced by Big Huge Games. It did well, selling 1.3 million copies.
Schilling, meanwhile, kept up his free-spending ways. This past Christmas, he personally bought every staffer a computer tote bag with the 38 Studios logo. Add in the companyÔÇÖs high staffing levels, frequent gratis lunches and dinners, and big travel budget, and it was easy to forget the whole thing was a startup. ÔÇ£We never had that sense of urgency or panic,ÔÇØ Schilling tells me. ÔÇ£I think there was a sense of invulnerability ÔÇö I donÔÇÖt want to say invulnerability, but I think we were comfortable.ÔÇØ
Deadlines were frequently missed, something for which staffers say Schilling rarely held anyone accountable. The ex-pitcher had a bigger concern. ÔÇ£The game wasnÔÇÖt fun,ÔÇØ he says, unprompted, beside the softball field. ÔÇ£It was my biggest gripe for probably the past eight to 12 months.ÔÇØ Visually, Copernicus was stunning, but the actual things you could do in the game werenÔÇÖt engaging enough. The combat aspects especially lagged. Schilling ÔÇö who never wavered in his belief that the game would be great ÔÇö says the MMO was improving, but after six years, it still wasnÔÇÖt there. When Schilling walked around during lunch hour, he says, nobody was playing CopernicusÔÇÖs internal demos. They were all on some other game.
By mid-March, a year and a half after moving to Rhode Island, 38 Studios had received $50 million from the state and had burned through nearly all of it. Because of the way the deal was structured, that would be all they ever got. So Schilling put up $5 million worth of gold coins as collateral for another loan, this one from Bank Rhode Island. Despite the money crunch, however, he brought in two new executives in March, one of whom moved from Texas. That same month, 38 Studios stopped paying vendors like Blue Cross Blue Shield. It had already been ignoring bills from Atlas Van Lines for some time.
Adding to MarchÔÇÖs chaos, CEO Jen MacLean, whoÔÇÖd been feuding with Schilling, suddenly went on leave. Her colleagues ÔÇö and the press ÔÇö were led to believe it was because of her pregnancy (she was roughly six months in), but according to a company source, MacLeanÔÇÖs departure was not for medical reasons.
38 Studios was at its most desperate juncture yet. On May 1, a $1.125 million fee payment on the loan from Rhode Island was set to come due. And both the company and Schilling were all but tapped.
Hopeless as things seemed, Schilling remained confident that yet another lifesaving deal was imminent. He still owned 82.9 percent of the company, and says he was willing to part with a healthy chunk of it to save the studio. In April, 38 Studios sent eight employees to China to meet with a potential partner. Then there was a South Korean video-game concern called Nexon, whose executives had recently visited the Providence office and appeared interested in a deal. And finally, Schilling felt that 38 Studios was close to a pact with the company Take-Two Interactive to publish a sequel to Kingdoms of Amalur: Reckoning.
But when May 1 arrived, 38 Studios was unable to make its loan payment. That put it into default and set off a series of private meetings with Governor Lincoln ChafeeÔÇÖs office. Still, most staffers had no idea the company was in trouble until two weeks later, when, on May 14, Chafee told the Rhode Island media that he was working to keep 38 Studios solvent.
Schilling says the deal with Take-Two was ready for ÔÇ£final sign-offÔÇØ the next day, May 15, but fell apart when the publisher got spooked by ChafeeÔÇÖs comments. Take-Two seems to have had a different impression, however. ÔÇ£I am not aware that there were any negotiations,ÔÇØ spokesman Alan Lewis says. ÔÇ£We do not comment on rumors and speculation.ÔÇØ YouÔÇÖd need a microscope to read between the lines of that statement, but it seems clear that nothing was imminent. Both the Chinese investor and Nexon disappeared, too. (Nexon declined comment.) Meanwhile, according to the Associated Press, 38 StudiosÔÇÖ board of directors voted to authorize the company to go into bankruptcy, in case it became necessary.
May 15 brought more unwelcome news: 38 Studios missed payroll. Company officials assured employees that the salary issue would get resolved. Workers were told that they had the option to stay home, but that the office would remain open. Most everybody kept coming in.
MacLean, on leave since March, officially resigned as CEO on May 17. That same day, 38 Studios tried to make the $1.125 million payment to Rhode Island, but the company had insufficient funds to keep its check from bouncing. The day after that, Schilling tried again, sending the state a second check ÔÇö a good one this time ÔÇö to cover the missed payment. It was part of a complicated plan under which Schilling hoped that Chafee would deliver $6.5 million in additional tax credits ÔÇö which 38 Studios would then sell to a broker for immediate cash. But Chafee declined. He told the press at a news conference that he didnÔÇÖt want to throw good money after bad. Barring another investor ÔÇö the very type that 38 Studios had been unsuccessfully chasing for six years ÔÇö those tax credits would have only kept the company going for a few more weeks, anyway.
At the news conference, Chafee also revealed two pieces of information that to that point had been confidential: the anticipated release date of Copernicus ÔÇö June 2013 ÔÇö and that 38 Studios was spending about $4 million a month. Schilling was outraged, believing that the info would help 38 StudiosÔÇÖ competitors plan against the game. Schilling insists that Chafee, who opposed the 38 Studios loan guarantee when he ran for governor, was pursuing a vendetta against him. ÔÇ£There was a concerted effort to make this not succeed,ÔÇØ Schilling tells me.
Meanwhile, as the media swarmed outside the 38 Studios office, employees inside began to realize that the company could be done for. Wanting the world to see their work, a few grabbed an old Copernicus trailer and began to brush it up. As they worked, colleagues crammed into a small set of cubicles, packing in 50 to 60 deep. When the video was ready, someone hit play and ÔÇ£Project CopernicusÔÇØ came up in gold lettering on the screen, followed by a shot of a foreign-looking world. With haunting music in the background, the camera zoomed in, whooshing through a series of distinct, beautifully rendered landscapes ÔÇö a forest of trees decorated with ornate hanging lamps; a castle with a base of finely detailed sculptures; a palace topped with golden griffin statues. When the two-minute trailer ended, people lost it. ÔÇ£WeÔÇÖre all leaning on each other,ÔÇØ says Jesse Smith, the designer. ÔÇ£A lot of us were crying, a lot of us were happy. And after it happened, there was just an uproar of applause.ÔÇØ
The trailer was played several times, with new groups of employees cramming in to watch. It was posted online and then played again for the full staff later in the day on a big projection screen. There was a standing ovation.
As the days marched on, most employees continued to come into work. Some figured it was their best chance at getting paid. Others did it out of loyalty. Thom Ang, the companyÔÇÖs art director, says Schilling had always taken care of his employees, so he trusted that he would now. ÔÇ£Any time he was presented with options with how to set up the company, how to treat the employees, he always chose the best,ÔÇØ Ang says.
On May 24, the entire 38 Studios staff was laid off via e-mail. They hadnÔÇÖt been paid since the end of the previous month, but their problems were just beginning. In short order, their healthcare disappeared and their 401(k)s were frozen. Then, MoveTrek Mobility ÔÇö a company 38 Studios hired during the relocation to Providence to buy and resell employeesÔÇÖ Massachusetts homes ÔÇö notified seven people that, because it had not yet sold their houses, they were potentially responsible for their old mortgages. And Atlas Van Lines alerted some individuals that they were on the hook for bills that management hadnÔÇÖt paid.
Thom Ang is one of those people suddenly stuck with his old mortgage. With two young kids, no salary, rent due on his Rhode Island home, and now a mortgage in Massachusetts to pay, heÔÇÖs afraid his credit is about to be ruined. ÔÇ£I wasnÔÇÖt even aware that this could or would happen,ÔÇØ he says, ÔÇ£and then having it affect where I could possibly live and where I could possibly work?ÔÇØ
At the last minute, Schilling believed heÔÇÖd found a white-knight investor to inject $15 million into the company. But that deal, too, was dependent on additional tax credits from the state, and fell apart. On June 7, 38 Studios filed for bankruptcy.
One of the companyÔÇÖs final acts ÔÇö between June 4 and June 6 ÔÇö was to pay COO William ÔÇ£Uncle BillÔÇØ Thomas just over $12,000 for his work shutting down 38 Studios, according to bankruptcy documents. Nearly every other employee had not been paid for more than a month. Many local industry veterans and tech investors tell me theyÔÇÖre outraged by how Schilling failed to responsibly unwind the company and transparently communicate the dire situation to his employees long before May.
One former staff member vented his frustrations on Facebook, writing, Id like to honestly know why I was hired in the first place on January 16th, 2012when members of the company knew they were behind on bills and not doing well economically? I moved my pregnant wife, sold my house for a loss of 18k, relocated away from all my family and friends for a company I thought was honest and forthright to their employees. What did I get in return? An unpaid [$10,500] relocation package months after it should have been paid, a pregnant wife who found out our insurance had lapsed from our doctor, a ton of bounced checks and payments to bills when we found out our paychecks had not been paid through the media and a large debt to my unemployed father to help us survive.
Surprisingly, though, during and after the companyÔÇÖs demise, many former employees continued to stand up for Schilling. When I attended a June 13 mini reunion at a bar in Waltham, one ex-staffer told me, ÔÇ£IÔÇÖd still take a bullet for him.ÔÇØ On the phone, even Thom Ang ÔÇö stuck with his old mortgage ÔÇö said, ÔÇ£I love the man,ÔÇØ adding that Schilling could not have been responsible for how he and his coworkers were misled and mistreated. ÔÇ£How the business was run? ThatÔÇÖs not Curt,ÔÇØ Ang says.
But it was. Schilling acknowledges as much. In the private Facebook postings, executives like MacLean and Mrochek claim they tried to stop Schilling and he wouldnÔÇÖt listen. MacLean wrote that executives ÔÇ£brought their issues up many times and were largely ignored.ÔÇØ
ÔÇ£You knew we had not been paying all the bills for months,ÔÇØ Mrochek wrote to Schilling. ÔÇ£You bet our lives on the roulette wheel of Rhode Island state politics.ÔÇØ
Schilling disputes that his lieutenants warned him. He says he pushed 38 Studios to the edge because, as ever, he was confident a deal would come through. ÔÇ£I believed with every ounce of my being that everything was going to work itself out,ÔÇØ he says. ÔÇ£IÔÇÖm $50 million in at this point, so IÔÇÖm not going to walk away,ÔÇØ he adds. ÔÇ£You could make an argument that that was blinding me, but there was the tenor and the velocity and the content of the conversations with the investors.ÔÇØ
Back at the softball field in Dracut, Schilling is still having trouble fathoming what happened. ÔÇ£IÔÇÖll find myself in the middle of the day, just aching,ÔÇØ he says. He concedes that heÔÇÖd promised his employees 60 daysÔÇÖ warning if the money ever looked like it was going to run out, but argues that the situation was moving too fast for him to keep sending updates. ÔÇ£It wasnÔÇÖt that I didnÔÇÖt want to tell anyone,ÔÇØ he says, ÔÇ£itÔÇÖs I didnÔÇÖt know what to say.ÔÇØ
His company is now under federal and state investigation. Schilling denies any legal wrongdoing, and while Roger Williams Law School professor Michael Yelnosky says itÔÇÖs unlikely that Schilling will be held personally accountable for the unpaid salaries under Rhode Island law, there is federal precedent that could force him to pay the wages back, plus damages. Schilling says he would have paid his employees the roughly┬á $1.5 million theyÔÇÖre owed out of his pocket, but he doesnÔÇÖt have the money. That doesnÔÇÖt bode well for a lawsuit Citizens Bank filed against him, which seeks to recover $2.4 million in loans to 38 Studios that heÔÇÖd personally guaranteed. Presumably, either the suit or having to repay lost wages could push him into personal bankruptcy.
As a baseball player, Schilling refused to ever consider the notion of defeat until the final out, even down three games to none to the Yankees. By his own admission, he carried that same attitude into business. One former employee describes it as ÔÇ£rampant and destructive optimism.ÔÇØ
Asked if thatÔÇÖs truly what undid him, Schilling says, ÔÇ£No,ÔÇØ then stutters and pauses. ÔÇ£I donÔÇÖt know any other way to be,ÔÇØ he says finally, his voice dropping to just above a whisper and his eyes welling up. ÔÇ£I donÔÇÖt know any other way to be.ÔÇØ
Curt Schilling set out to build the greatest video-game company the world had ever seen, and to get rich ÔÇö Bill Gates rich ÔÇö doing it. Instead, the whole thing exploded in his face. Drawing on exclusive interviews with the Red Sox legend and his former employees, Jason Schwartz takes us inside the chaos, arrogance, and mistakes that led to the destruction of 38 Studios and the loss of $75 million in taxpayer money.
By Jason Schwartz | Boston Magazine, August 2012
The sun is beating down hard on the Dracut High School softball field, where Curt Schilling sits atop a bucket of balls beside the dugout. HeÔÇÖs helping coach his daughterÔÇÖs team, the Drifters, in a tournament, and theyÔÇÖre on the verge of their second win of the day. Schilling could use the uplift: ItÔÇÖs been a month since the extraordinary implosion of 38 Studios, the video-game company he founded and lost $50 million investing in. And though his face is not quite the ghastly shade of white it was at the height of his companyÔÇÖs crisis, he doesnÔÇÖt exactly look good. Dressed in shorts and a standard-issue blue and orange coachÔÇÖs polo, his facial hair is scraggly and heÔÇÖs got heavy bags beneath his eyes.
ÔÇ£Come on! LetÔÇÖs close it out!ÔÇØ shouts the former Red Sox star, noted during his career for his precision arm and considerably wilder mouth. Moments later, thereÔÇÖs a game-ending grounder to second. Drifters win, 9ÔÇô0.
Despite keeping an uncharacteristically low media profile of late, Schilling has agreed to meet with me. So while the players wait for their next game of the tournament, the former pitcher takes a seat in a lawn chair and performs what winds up being an emotional, two-hour-long autopsy of 38 Studios. The companyÔÇÖs death was grisly: Before going under, it defaulted on the $75 million guaranteed loan that the state of Rhode Island had used in 2010 to lure it to Providence. As the money ran out, the company encouraged┬á its 379 employees to continue coming into work, even though it knew it could not pay them. Staffers realized theyÔÇÖd been stiffed only when they noticed the money missing from their bank accounts. A pregnant woman had to find out from her doctor that her healthcare benefits had been cut off.
Add it all up, including interest, and already-cash-strapped Rhode Island could be out as much as $110 million on the loans. As Schilling sits beside the softball diamond, his company, with nearly $151 million in debt and just $22 million in assets, is being liquidated through Chapter 7 bankruptcy.
Asked about 38 StudiosÔÇÖ failure, Schilling says his management team suffered from ÔÇ£significant dysfunctionÔÇØ and that his video-game developers worked too slowly. Those problems, he allows, are his fault. ÔÇ£As the chairman and founder,ÔÇØ he says, ÔÇ£whoÔÇÖs above me?ÔÇØ
But he also shovels much of the blame onto Rhode Island Governor Lincoln Chafee, whom he believes had a political agenda when it came to 38 Studios. The day before, Schilling alerted his former employees through a private Facebook message board that he planned to go on WEEI sports radio to talk about ChafeeÔÇÖs role and ÔÇ£tell the untold side of this nightmare.ÔÇØ
Many former 38 Studios employees, including the CEO, responded to that Facebook post with fierce attacks against Schilling himself. As the assaults mounted, SchillingÔÇÖs wife, Shonda, rose to her husbandÔÇÖs defense. ÔÇ£50 million its [sic] not a fucking joke. ItÔÇÖs gone,ÔÇØ she wrote, adding that, ÔÇ£You have no idea what that last two weeks were like. Hope and hell. We hung on every telephone call. My husband couldnÔÇÖt function. My kids saw their father cry more in that month then [sic] any child should see.ÔÇØ
SchillingÔÇÖs harshest critic in the online exchange was Bill Mrochek, the vice president of online services, whose wife required a bone marrow transplant at the time their healthcare disappeared. ÔÇ£Are you going to admit that your stupid hubris, pride, and arrogance would not allow you to accept that we failed ÔÇö and help shut it down with dignity?ÔÇØ he asked Schilling.
Mrochek was talking only about 38 StudiosÔÇÖ dramatic final weeks, but as interviews with Schilling, members of his former staff, and others associated with the company show, he might as well have been describing 38 Studios from the moment that Schilling ÔÇö lacking any business experience, but full of the same confidence, bravado, and determination that made him a baseball legend ÔÇö decided he could build a billion-dollar video-game company.
By 2006, Curt Schilling had earned more than $90 million playing baseball, not including endorsements. But what he really aspired to was being ÔÇ£Bill Gates rich.ÔÇØ He admired the global impact the Microsoft founder had made through his philanthropy, and wanted to do the same. Schilling, who has an autistic son, imagined providing $200 million to open the Shonda Schilling Center for Autism Research.
Creating a video game would be what catapulted him to that wealth. More specifically, he would build a massively multiplayer online game (or, blessedly abbreviated, an MMO) ÔÇö the type that allows people from across the world to play with and against one another. As a kid, Schilling had been obsessed with computers (his first was an Apple II), and during his baseball career, rather than go out carousing, he spent his time playing MMOs. A favorite of his was the industry leader, World of Warcraft, a vast fantasy landscape filled with wizards, elves, and warriors that has more than 10 million paying subscribers.
Successful MMOs are incredibly lucrative, but theyÔÇÖre also the hardest type of game to build. YouÔÇÖre programming not just a game, explains Dan Scherlis, the first CEO of Turbine, a maker of MMOs, but a complex social system for thousands, if not millions, of users. A normal video game might require a couple of years to develop, but an MMO takes at least twice as long. Because of that, many gaming entrepreneurs start small, working their way up from something simple for a mobile device, or perhaps a single-player game for PlayStation or Xbox. But Schilling had grander ideas. He was going to challenge World of Warcraft. His fantasy world would be similar (you want elves and wizards, youÔÇÖve got elves and wizards), but he envisioned deeper plot lines and more-striking visuals. He persuaded R. A. Salvatore, the bestselling novelist from Leominster, to dream up the fictional universe, and the famed comic artist Todd McFarlane, a noted baseball fan, to conceive its artistic vision.
Industry experts often compare making video games to filming movies, given their similarly long production cycles and hit-or-miss nature. In movie terms, then, Schilling was attempting to start a studio from scratch, but instead of beginning with a low-budget indie flick, he was going straight for the summer blockbuster. His first time behind the camera, he was going to make Avatar.
ÔÇ£If it wasnÔÇÖt an MMO, I wouldnÔÇÖt have done it,ÔÇØ Schilling tells me. ÔÇ£If you look at the game space now, if you want to build something thatÔÇÖs a billion-dollar company, the only game to do that with is an MMO.ÔÇØ
Schilling founded his company, originally called Green Monster Games, in August 2006, and set up shop in Maynard. (The name was changed a few months later on account of some other guys already owning the trademark on ÔÇ£Green Monster.ÔÇØ) He code-named his game Project Copernicus, and set out to make it richer, more beautiful, and, in sum, more lovingly created than any before it. CopernicusÔÇÖs world would be deep enough to support a network of related products: toys, books, and other video games and media. Schilling calculated that it would cost $40 to $50 million to produce the MMO, of which heÔÇÖd front about 10 percent. ÔÇ£I told my wife I was going to take $5 million and try it out,ÔÇØ he says. The rest of the money would come from investors. He projected that Copernicus would debut by 2010, or in four years ÔÇö an aggressive timeline for even an established video-game studio.
To industry observers, SchillingÔÇÖs quest seemed overwhelmingly difficult. To Schilling, it was just another opportunity to prove the naysayers wrong. ÔÇ£I had to beat the Yankees three times in nine days,ÔÇØ he tells me, referring to when he led Arizona to the 2001 World Series title. ÔÇ£I never doubted I was going to do it. My whole life was spent doing things that people didnÔÇÖt believe were possible, because God blessed me with the ability to throw a baseball. And I carried that same mentality into everything I did here.ÔÇØ
Schilling knew heÔÇÖd been treated well during his baseball career, and wanted his staff at 38 Studios to feel the same. That meant gold-plated healthcare, for which employees had no paycheck deductions, and top-notch 401(k)s, with the company matching to the legal limit. As 38 Studios grew from 20 employees in 2006 to 42 in 2007 to 65 in 2008, there were plenty of other goodies along the way: free gym memberships, two homes the company rented to temporarily house new out-of-state hires (though that perk was short-lived), and, one year at Christmas, new laptop computers for every employee. Gifts like the computers came out of SchillingÔÇÖs pocket ÔÇö he says he spent as much as $2.5 million on that sort of largesse over the years.
With midday Ultimate Frisbee games and a staff that got along remarkably well, the Maynard office appeared downright idyllic. Once, after an IT guys rottweiler died, Schilling presented him with a brand-new pup during an all-staff meeting. There was much applause. Former employees say Schilling was an unparalleled cheerleader. He hadnt originally intended to be in the office full time, but when he got hurt in 2008 and subsequently retired from baseball, he became a permanent fixture. Jesse Smith, a designer, says that at monthly meetings, Schilling would usually give his thoughts after employees presented their work. There were a couple times that you could tell he was getting choked up, Smith says. This was something that was just an idea and a dream to him, and now its coming to reality. It was just powerful.
Everything at 38 Studios was not, however, perfect. It quickly became apparent that Schilling was new not just to video-game development, but to the basic concept of working in an office. In December 2009 ÔÇö months before Rhode Island signed on to the $75 million deal ÔÇö Harvard Business School published a case study about the company titled ÔÇ£Curt SchillingÔÇÖs Next Pitch.ÔÇØ
Brett Close, who joined 38 Studios as president in 2007 and soon after became its first CEO, put SchillingÔÇÖs inexperience into perspective for the studyÔÇÖs authors, Noam Wasserman, Jeffrey Bussgang, and Rachel Gordon. ÔÇ£He really needed Company 101,ÔÇØ Close told them. ÔÇ£For example, the whole concept of vacation was foreign to Curt. He actually said, ÔÇÿPeople get weekends off, right?ÔÇÖÔÇØ Schilling at one point suggested that people work 14 straight days and then take five days off. It jibed with his baseball experience.
That idea was never instituted, but other questionable ones were. Schilling put his wife, Shonda, on the board of directors. ShondaÔÇÖs father received a job in IT (by all accounts, he performed admirably), and her mother was given the title ÔÇ£philanthropy and charity manager.ÔÇØ Meanwhile, ShondaÔÇÖs uncle, William Thomas, became COO. Though a seasoned businessman, Thomas had no experience with video games, much less MMOs. Schilling took to calling him ÔÇ£Uncle BillÔÇØ around the office, and even in meetings with outsiders. According to the case study, Thomas told Schilling it was making them look bad and to stop. The nickname caught on with the staff, anyway.
Most troublesome of all was the unique profit-sharing plan Schilling devised for his first employees. Wasserman, Bussgang, and Gordon write that, since Schilling was bank-rolling the company by himself, he was hesitant to give up equity in it. So instead of luring early prospective hires with stock options, he promised to share all profits 50-50 with them. Upon arriving as CEO, Close recognized that ÔÇ£investorsÔÇÖ heads would explodeÔÇØ when they saw the model, since theyÔÇÖd be bearing all the risk but reaping only half the reward. Close eventually convinced Schilling to scrap the policy and replace it with stock options.
The CEO also tried to rein in SchillingÔÇÖs spending, doing away with ideas for company cars and cell phones. But Schilling was adamant about the rest of the perks. According to the case study, between fiscal years 2007 and 2008, the company spent more than $705,000 on ÔÇ£travel and entertainment,ÔÇØ a sum Scherlis, the former Turbine CEO, calls ÔÇ£wildly high.ÔÇØ
It never had the culture of a startup, says one former employee. The message was being sentthat there was plenty of money.
As SchillingÔÇÖs personal investment shot past $5 million, he knew he would need outside financing. Since the Red Sox hero was able to get meetings with just about anyone within the broadcast range of NESN, he and his executives met with potential investors practically every week for the companyÔÇÖs first three or four years.
Todd Dagres, a founder and general partner at BostonÔÇÖs Spark Capital, one of the top tech venture capital firms in the country, trekked out to Maynard for a meeting. He says he was looking to invest in games, but admits that he was also excited to meet the bloody-sock hero.
Schilling gave him an office tour, clicked through PowerPoint slides, and delivered a passionate pitch. But Dagres says Schilling came off as overconfident, as though he didnÔÇÖt understand what a huge bet heÔÇÖd made with 38 Studios. Project Copernicus was going to require tons of cash, and if the game flopped, the company would go down with it. 38 Studios didnÔÇÖt have ÔÇ£the ÔÇÿAÔÇÖ team that I thought youÔÇÖd want to see developing such a difficult game,ÔÇØ Dagres says. It lacked MMO development experience at the top. ÔÇ£Curt was not the CEO,ÔÇØ Dagres says, ÔÇ£but you could see he was quite involved and had a lot of control. I was a little nervous.ÔÇØ He also took note that the COO was SchillingÔÇÖs relative.
Then there was the issue of equity. Dagres says that Spark Capital likes to get 20 percent of a company it invests in, but that SchillingÔÇÖs offer was far too small. Schilling denies that he hoarded equity, but multiple sources say that, because he was funding the whole enterprise, he guarded it jealously.
ÔÇ£He was very forthcoming to tell you how much of his own money he put in,ÔÇØ Dagres recalls. Schilling tells me that he considered that kind of disclosure a selling point: ÔÇ£I assumed that they would look at it as, ÔÇÿIf heÔÇÖs this far in, itÔÇÖs not going to fail. HeÔÇÖs not going to let this thing fail.ÔÇÖÔÇØ Instead, Dagres was shocked that Schilling was plunging so much into such a risky venture. The VC left with his checkbook firmly closed.
Time and again, though, Schilling emerged from meetings like this one thinking heÔÇÖd hit a home run. ÔÇ£There was never a single one that he didnÔÇÖt walk out of saying he absolutely killed it,ÔÇØ says a former employee who attended a number of investor meetings. But over and over, there was no investment. Still, Schilling remained optimistic. ÔÇ£Curt sincerely believed that Copernicus was the best thing since sliced bread,ÔÇØ the former employee says. He ÔÇ£could not imagine a scenario where other people would not see the same potential he did. His attitude is always, This is gonna happen, the deal is going to close.ÔÇØ
ÔÇ£Absolutely,ÔÇØ Schilling tells me when I run that quote by him. ÔÇ£And thatÔÇÖs the way IÔÇÖm built. I think itÔÇÖs one of the reasons I was able to do what I did playing baseball. And itÔÇÖs not fake. IÔÇÖve been around situations where you can make people believe something they donÔÇÖt believe.ÔÇØ
Perhaps, but no investors seemed to be believing ÔÇö and as they continued to pass, sources say, Schilling and Close, the CEO, began clashing over the equity issue. Meanwhile, Jen MacLean, the VP of business development, was pushing 38 Studios to buy a Maryland video-game outfit called Big Huge Games, which was available for cheap. The deal closed in May 2009, giving 38 Studios 70 new employees. Three months later, Schilling fired Close and appointed MacLean CEO.
Hanging over everything, though, was the fact that there was no new money coming in. As the calendar raced toward 2010 ÔÇö SchillingÔÇÖs original deadline ÔÇö Project Copernicus remained years away from completion. If Schilling wasnÔÇÖt able to track down money soon, the studio would be doomed. He needed a savior, and was convinced that if he worked hard enough, heÔÇÖd find one.
On March 6, 2010, Schilling hosted a fundraising event at his Medfield home. Then-Rhode Island Governor Donald Carcieri attended, and the two men got to talking business. Schilling needed money. Carcieri was looking to beef up his stateÔÇÖs high-tech sector.
The talks continued for months, with the outline of a deal to move 38 Studios to Rhode Island gradually taking shape. At one point, Schilling approached Governor Deval Patrick and asked for tax incentives to keep the company here, but Patrick politely passed. Given the warning signs flashing around 38 Studios, it remains difficult to understand why Rhode Island so freely handed over $75 million. But for Schilling, despite being a longtime proponent of small government, the guaranteed loan was a godsend. HeÔÇÖd get the cash without having to give up even the tiniest slice of ownership. And if everything went bust, it would be Rhode Island that was responsible for the money.
There were a few catches, though. The loan deal stipulated that 38 Studios had to hit certain hiring benchmarks to access some of the funds. The company would unlock $17.2 million for creating 80 new jobs in the state by spring 2011, another $4.2 million for adding 45 more by fall, and $3.1 million on top of that for 125 additional jobs by winter.
So as the company moved south in April 2011, it embarked on a hiring binge. In its midst, Schilling seemed to be handing out important titles to anybody who asked nicely for one. ÔÇ£It became a joke,ÔÇØ one employee says. ÔÇ£Oh, you are a VP of lunch? Oh yeah, IÔÇÖm a VP of doughnuts.ÔÇØ Infighting inevitably resulted, with execs often giving conflicting directives to staffers. ÔÇ£They didnÔÇÖt work well together,ÔÇØ Schilling says of his bloated management team. ÔÇ£I was amazed at the turf-building and protecting that went on.ÔÇØ
The people working under Schilling had their own complaints about him. One says that heÔÇÖd undermine managers by randomly dipping in to give direct orders to employees: ÔÇ£His requests added significant work, and were often contrary to the direction given by other people.ÔÇØ Former staff members also charge that Schilling was stubborn and ignored people when he didnÔÇÖt like what they were saying. For instance, sources say Schilling froze out his vice president of business development by excluding her from meetings. ÔÇ£Once Curt turned on somebody,ÔÇØ a former employee says, ÔÇ£you went from being a superstar to he doesnÔÇÖt want to talk to you, overnight.ÔÇØ
Schilling disputes much of this, but 38 Studios churned through a litany of executives during its existence. One former employee says Schilling appreciated that there was a lot he didnÔÇÖt know about video-game development, and ÔÇ£tried to hire some of the best people in the industry to shore up those gaps. The problem is if you donÔÇÖt listen to those people.ÔÇØ
Whatever the dysfunction at the executive level, most employees at 38 Studios were unaware of it, and remained happy at the beginning of 2012. There was great excitement in February when the company released Kingdoms of Amalur: Reckoning, a single-player title produced by Big Huge Games. It did well, selling 1.3 million copies.
Schilling, meanwhile, kept up his free-spending ways. This past Christmas, he personally bought every staffer a computer tote bag with the 38 Studios logo. Add in the companyÔÇÖs high staffing levels, frequent gratis lunches and dinners, and big travel budget, and it was easy to forget the whole thing was a startup. ÔÇ£We never had that sense of urgency or panic,ÔÇØ Schilling tells me. ÔÇ£I think there was a sense of invulnerability ÔÇö I donÔÇÖt want to say invulnerability, but I think we were comfortable.ÔÇØ
Deadlines were frequently missed, something for which staffers say Schilling rarely held anyone accountable. The ex-pitcher had a bigger concern. ÔÇ£The game wasnÔÇÖt fun,ÔÇØ he says, unprompted, beside the softball field. ÔÇ£It was my biggest gripe for probably the past eight to 12 months.ÔÇØ Visually, Copernicus was stunning, but the actual things you could do in the game werenÔÇÖt engaging enough. The combat aspects especially lagged. Schilling ÔÇö who never wavered in his belief that the game would be great ÔÇö says the MMO was improving, but after six years, it still wasnÔÇÖt there. When Schilling walked around during lunch hour, he says, nobody was playing CopernicusÔÇÖs internal demos. They were all on some other game.
By mid-March, a year and a half after moving to Rhode Island, 38 Studios had received $50 million from the state and had burned through nearly all of it. Because of the way the deal was structured, that would be all they ever got. So Schilling put up $5 million worth of gold coins as collateral for another loan, this one from Bank Rhode Island. Despite the money crunch, however, he brought in two new executives in March, one of whom moved from Texas. That same month, 38 Studios stopped paying vendors like Blue Cross Blue Shield. It had already been ignoring bills from Atlas Van Lines for some time.
Adding to MarchÔÇÖs chaos, CEO Jen MacLean, whoÔÇÖd been feuding with Schilling, suddenly went on leave. Her colleagues ÔÇö and the press ÔÇö were led to believe it was because of her pregnancy (she was roughly six months in), but according to a company source, MacLeanÔÇÖs departure was not for medical reasons.
38 Studios was at its most desperate juncture yet. On May 1, a $1.125 million fee payment on the loan from Rhode Island was set to come due. And both the company and Schilling were all but tapped.
Hopeless as things seemed, Schilling remained confident that yet another lifesaving deal was imminent. He still owned 82.9 percent of the company, and says he was willing to part with a healthy chunk of it to save the studio. In April, 38 Studios sent eight employees to China to meet with a potential partner. Then there was a South Korean video-game concern called Nexon, whose executives had recently visited the Providence office and appeared interested in a deal. And finally, Schilling felt that 38 Studios was close to a pact with the company Take-Two Interactive to publish a sequel to Kingdoms of Amalur: Reckoning.
But when May 1 arrived, 38 Studios was unable to make its loan payment. That put it into default and set off a series of private meetings with Governor Lincoln ChafeeÔÇÖs office. Still, most staffers had no idea the company was in trouble until two weeks later, when, on May 14, Chafee told the Rhode Island media that he was working to keep 38 Studios solvent.
Schilling says the deal with Take-Two was ready for ÔÇ£final sign-offÔÇØ the next day, May 15, but fell apart when the publisher got spooked by ChafeeÔÇÖs comments. Take-Two seems to have had a different impression, however. ÔÇ£I am not aware that there were any negotiations,ÔÇØ spokesman Alan Lewis says. ÔÇ£We do not comment on rumors and speculation.ÔÇØ YouÔÇÖd need a microscope to read between the lines of that statement, but it seems clear that nothing was imminent. Both the Chinese investor and Nexon disappeared, too. (Nexon declined comment.) Meanwhile, according to the Associated Press, 38 StudiosÔÇÖ board of directors voted to authorize the company to go into bankruptcy, in case it became necessary.
May 15 brought more unwelcome news: 38 Studios missed payroll. Company officials assured employees that the salary issue would get resolved. Workers were told that they had the option to stay home, but that the office would remain open. Most everybody kept coming in.
MacLean, on leave since March, officially resigned as CEO on May 17. That same day, 38 Studios tried to make the $1.125 million payment to Rhode Island, but the company had insufficient funds to keep its check from bouncing. The day after that, Schilling tried again, sending the state a second check ÔÇö a good one this time ÔÇö to cover the missed payment. It was part of a complicated plan under which Schilling hoped that Chafee would deliver $6.5 million in additional tax credits ÔÇö which 38 Studios would then sell to a broker for immediate cash. But Chafee declined. He told the press at a news conference that he didnÔÇÖt want to throw good money after bad. Barring another investor ÔÇö the very type that 38 Studios had been unsuccessfully chasing for six years ÔÇö those tax credits would have only kept the company going for a few more weeks, anyway.
At the news conference, Chafee also revealed two pieces of information that to that point had been confidential: the anticipated release date of Copernicus ÔÇö June 2013 ÔÇö and that 38 Studios was spending about $4 million a month. Schilling was outraged, believing that the info would help 38 StudiosÔÇÖ competitors plan against the game. Schilling insists that Chafee, who opposed the 38 Studios loan guarantee when he ran for governor, was pursuing a vendetta against him. ÔÇ£There was a concerted effort to make this not succeed,ÔÇØ Schilling tells me.
Meanwhile, as the media swarmed outside the 38 Studios office, employees inside began to realize that the company could be done for. Wanting the world to see their work, a few grabbed an old Copernicus trailer and began to brush it up. As they worked, colleagues crammed into a small set of cubicles, packing in 50 to 60 deep. When the video was ready, someone hit play and ÔÇ£Project CopernicusÔÇØ came up in gold lettering on the screen, followed by a shot of a foreign-looking world. With haunting music in the background, the camera zoomed in, whooshing through a series of distinct, beautifully rendered landscapes ÔÇö a forest of trees decorated with ornate hanging lamps; a castle with a base of finely detailed sculptures; a palace topped with golden griffin statues. When the two-minute trailer ended, people lost it. ÔÇ£WeÔÇÖre all leaning on each other,ÔÇØ says Jesse Smith, the designer. ÔÇ£A lot of us were crying, a lot of us were happy. And after it happened, there was just an uproar of applause.ÔÇØ
The trailer was played several times, with new groups of employees cramming in to watch. It was posted online and then played again for the full staff later in the day on a big projection screen. There was a standing ovation.
As the days marched on, most employees continued to come into work. Some figured it was their best chance at getting paid. Others did it out of loyalty. Thom Ang, the companyÔÇÖs art director, says Schilling had always taken care of his employees, so he trusted that he would now. ÔÇ£Any time he was presented with options with how to set up the company, how to treat the employees, he always chose the best,ÔÇØ Ang says.
On May 24, the entire 38 Studios staff was laid off via e-mail. They hadnÔÇÖt been paid since the end of the previous month, but their problems were just beginning. In short order, their healthcare disappeared and their 401(k)s were frozen. Then, MoveTrek Mobility ÔÇö a company 38 Studios hired during the relocation to Providence to buy and resell employeesÔÇÖ Massachusetts homes ÔÇö notified seven people that, because it had not yet sold their houses, they were potentially responsible for their old mortgages. And Atlas Van Lines alerted some individuals that they were on the hook for bills that management hadnÔÇÖt paid.
Thom Ang is one of those people suddenly stuck with his old mortgage. With two young kids, no salary, rent due on his Rhode Island home, and now a mortgage in Massachusetts to pay, heÔÇÖs afraid his credit is about to be ruined. ÔÇ£I wasnÔÇÖt even aware that this could or would happen,ÔÇØ he says, ÔÇ£and then having it affect where I could possibly live and where I could possibly work?ÔÇØ
At the last minute, Schilling believed heÔÇÖd found a white-knight investor to inject $15 million into the company. But that deal, too, was dependent on additional tax credits from the state, and fell apart. On June 7, 38 Studios filed for bankruptcy.
One of the companyÔÇÖs final acts ÔÇö between June 4 and June 6 ÔÇö was to pay COO William ÔÇ£Uncle BillÔÇØ Thomas just over $12,000 for his work shutting down 38 Studios, according to bankruptcy documents. Nearly every other employee had not been paid for more than a month. Many local industry veterans and tech investors tell me theyÔÇÖre outraged by how Schilling failed to responsibly unwind the company and transparently communicate the dire situation to his employees long before May.
One former staff member vented his frustrations on Facebook, writing, Id like to honestly know why I was hired in the first place on January 16th, 2012when members of the company knew they were behind on bills and not doing well economically? I moved my pregnant wife, sold my house for a loss of 18k, relocated away from all my family and friends for a company I thought was honest and forthright to their employees. What did I get in return? An unpaid [$10,500] relocation package months after it should have been paid, a pregnant wife who found out our insurance had lapsed from our doctor, a ton of bounced checks and payments to bills when we found out our paychecks had not been paid through the media and a large debt to my unemployed father to help us survive.
Surprisingly, though, during and after the companyÔÇÖs demise, many former employees continued to stand up for Schilling. When I attended a June 13 mini reunion at a bar in Waltham, one ex-staffer told me, ÔÇ£IÔÇÖd still take a bullet for him.ÔÇØ On the phone, even Thom Ang ÔÇö stuck with his old mortgage ÔÇö said, ÔÇ£I love the man,ÔÇØ adding that Schilling could not have been responsible for how he and his coworkers were misled and mistreated. ÔÇ£How the business was run? ThatÔÇÖs not Curt,ÔÇØ Ang says.
But it was. Schilling acknowledges as much. In the private Facebook postings, executives like MacLean and Mrochek claim they tried to stop Schilling and he wouldnÔÇÖt listen. MacLean wrote that executives ÔÇ£brought their issues up many times and were largely ignored.ÔÇØ
ÔÇ£You knew we had not been paying all the bills for months,ÔÇØ Mrochek wrote to Schilling. ÔÇ£You bet our lives on the roulette wheel of Rhode Island state politics.ÔÇØ
Schilling disputes that his lieutenants warned him. He says he pushed 38 Studios to the edge because, as ever, he was confident a deal would come through. ÔÇ£I believed with every ounce of my being that everything was going to work itself out,ÔÇØ he says. ÔÇ£IÔÇÖm $50 million in at this point, so IÔÇÖm not going to walk away,ÔÇØ he adds. ÔÇ£You could make an argument that that was blinding me, but there was the tenor and the velocity and the content of the conversations with the investors.ÔÇØ
Back at the softball field in Dracut, Schilling is still having trouble fathoming what happened. ÔÇ£IÔÇÖll find myself in the middle of the day, just aching,ÔÇØ he says. He concedes that heÔÇÖd promised his employees 60 daysÔÇÖ warning if the money ever looked like it was going to run out, but argues that the situation was moving too fast for him to keep sending updates. ÔÇ£It wasnÔÇÖt that I didnÔÇÖt want to tell anyone,ÔÇØ he says, ÔÇ£itÔÇÖs I didnÔÇÖt know what to say.ÔÇØ
His company is now under federal and state investigation. Schilling denies any legal wrongdoing, and while Roger Williams Law School professor Michael Yelnosky says itÔÇÖs unlikely that Schilling will be held personally accountable for the unpaid salaries under Rhode Island law, there is federal precedent that could force him to pay the wages back, plus damages. Schilling says he would have paid his employees the roughly┬á $1.5 million theyÔÇÖre owed out of his pocket, but he doesnÔÇÖt have the money. That doesnÔÇÖt bode well for a lawsuit Citizens Bank filed against him, which seeks to recover $2.4 million in loans to 38 Studios that heÔÇÖd personally guaranteed. Presumably, either the suit or having to repay lost wages could push him into personal bankruptcy.
As a baseball player, Schilling refused to ever consider the notion of defeat until the final out, even down three games to none to the Yankees. By his own admission, he carried that same attitude into business. One former employee describes it as ÔÇ£rampant and destructive optimism.ÔÇØ
Asked if thatÔÇÖs truly what undid him, Schilling says, ÔÇ£No,ÔÇØ then stutters and pauses. ÔÇ£I donÔÇÖt know any other way to be,ÔÇØ he says finally, his voice dropping to just above a whisper and his eyes welling up. ÔÇ£I donÔÇÖt know any other way to be.ÔÇØ