Several years ago, I gave a talk at a game conference in Berlin about creating enterprise value and acquisition. I had a young studio CEO come up to me afterwards and thank me because he realized during my talk that he hadn’t been attuned to his primary duty as CEO. His studio had had some amazing successes with three #1 charting hits on the Appstore and no shortage of revenue. But he also recognized that he had not been building the enterprise value of his company by employing a differentiation strategy, hiring capable middle management, engaging in partnerships with companies that may buy them down the line or building an organization large enough to maximize the value of all the lucrative IP his studio had developed. You could see in his eyes that he was energized with revelation and alive with possibility. He was like a man with renewed purpose and focus. Experiences like this are why I love my job and I believe in my company’s mission to help studio CEOs increase value.
The video game industry is a difficult industry for a company to survive in and nearly impossible to thrive in. It is volatile and often appears unpredictable. We all know that the difference between winners and losers in our industry is stark. Almost all studios start as a commodity: an undifferentiated group of people with butts in seats making a game. If you are the CEO, your job is to employ strategy to take a studio from a commodity with little intrinsic value to a branded profit generating machine of great value.
The point I make in this article is that the time for a studio to engage in strategy is counterintuitively when you have money in the bank or when things are otherwise going well for your studio, not when things are on the brink. Oddly, this is also the time that I find CEOs and Founders are least likely to reach out to engage firms like ours about strategy or acquisition planning. Why? Because things appear to be going so well that they feel they do not need to do anything differently and they become complacent with their work or good fortune. But the best time to formally review a studio’s strategy is exactly when it is succeeding or when it has stability and money in the bank. This is because through their hard work and good fortune these Founders have earned the luxury of deliberately sharpening their studio’s strategy when so many other studios cannot afford it. And by employing strategy when things are going well, they can drive their enterprise value further upwards to the next level of achievement.
At our strategy and advisory firm, Strategic Alternatives, we get a lot of inbound inquiries from game development CEOs who unfortunately are undergoing an existential crisis. That is, they usually have just lost a paying project and have one or two months of runway left before they will have to let their employees go and declare bankruptcy. I guess it isn’t surprising that such an existential crisis leads CEOs and Founders to seek help wherever it may be available. When they reach out to us for help, it is for one of two things. 1) they hope to discuss a strategy to save themselves or 2) they hope to get acquired by someone.
But it is both sad and ironic that the point at which many game studio CEOs finally recognize their studio’s need for strategy is the point at which strategy can least be chosen or executed. They waited too long and took past success for granted. Let’s face it, when your company is about to stop being a going concern, the only thing you can do is hustle for any short-term gig to keep the lights on and make payroll. You must call in favors and make fifty phone calls and send a hundred emails hoping for a life preserver to get thrown to you. In such a situation, you don’t have the luxury of choice or options which are the basic building blocks of strategy.
It is a similar story with acquisition, it is sad to say. If one brings up the word “acquisition” when your future as a studio looks bleak, you will not be able to get what we call a “premium exit”. A premium exit implies that the seller is doing well as a going concern and does not need a buyer and that the acquisition is strategic to the buyer. No, when you are this close to bankruptcy, the only hope of an acquisition is what is known as an “acquihire”. Basically, the buyer takes over your company’s employment contracts and maybe tosses the company’s shareholders a pittance for the privilege. Make no mistake, there is no premium paid, there is no glory, there is no real upside enjoyed by shareholders who have risked and worked so hard to make a go of things. The buyer views the purchase as an opportunistic pick-up and usually has little to no tolerance for negotiation of terms. Therefore, such deals close very quickly – simplicity with little need for negotiation – the seller is basically dictated the terms by the buyer. It’s a fire sale.
The primary job of the CEO of a game studio is to grow the enterprise value of the studio for shareholders. Enterprise growth in many industries may be a smooth incline of incremental revenue growth but not in the game industry. In the game industry, enterprise growth is more like a staircase – it jumps up significantly with every successful game release or with stepwise improvement in the revenue and profitability of your live-service game(s). As the CEO, it is your primary job to set a strategy and execute it to differentiate your studio when you can afford to do so. Once you have differentiated your studio and grown your company’s enterprise value, you will know because legitimate buyers will approach you about acquiring you. And when you talk to them, expressing that you do not need someone to buy you, they will stay around to talk some more. They’ll seem even more interested in you when you aren’t for sale because they don’t want to buy you as an opportunistic pick-up; they don’t want to buy you for parts. No, they want to buy you because you are important to their own company’s strategy. They want the whole of you because of the capabilities you uniquely offer their company. They want to pay you and your shareholders a premium for that privilege. Congratulations, you are no longer a commodity studio. This is when you know that you are being courted for a premium exit. This outcome is what we work on with our clients – growing enterprise value over time and the eventual negotiation of premium exits for Founders and Shareholders. CEOs, please don’t wait till it’s too late to re-evaluate your strategy and take your company to the next level. When things are good in your business or at least there is enough revenue coming into your studio, that’s the time you can afford strategy and when you need strategy the most.