Glitch might have profited $1 million per year and still been shut down
Here's an overlooked fact about the finances of Glitch. We don't know that Glitch wasn't profitable. We just know that it was considered a financial failure by its investors.
Let me explain. At the time it was working on Glitch, over $17.2 million was invested in Tiny Speck by outside investors, mostly by the venture capital firms Accel Partners and Andreessen Horowitz. (Source: http://www.crunchbase.com/organization/tiny-speck) Venture capitalists typically expect a very high return on their investment: 20% per year at the very minimum, but preferably 40% or more.
In 2011, Tiny Speck had 41 employees. Let's assume those employees were being paid $50,000 per year on average. That's just over $2 million in wages that Tiny Speck paid out every year. Let's assume they had $1 million in other costs, like office rent and servers. So, that's $3 million in expenses every year.
What, then, would have been the annual rate of return on that $17.2 million investment if Tiny Speck's revenue is $3 million per year? 0%. The company wouldn't have generated a profit for investors, but it would have been perfectly sustainable as a business had it not relied on venture capital in the first place. With that revenue, all the business's expenses could have been covered, and all the employees — including Stewart Butterfield and Tiny Speck's other three co-founders (Cal Henderson, Eric Costello, and Serguei Mourachov) — could have been paid a salary.
What if Tiny Speck's revenue was $4 million per year? That leaves a maximum profit of $1 million for investors (excluding the four co-founders' share), an abysmal 5.8% annual return on their investment. At that rate, it would have taken them 17.2 years just to make back their investment, which is unacceptable to most venture capitalists.
So, even if it had been bringing in $1 million every year in profits — let alone breaking even — Glitch still would have been considered a financial failure.
Tiny Speck would have needed to make a profit of at least $3.4 million per year ($6.4 million in annual revenue) for their investors to earn 20% per year on their investment (the minimum return that venture capitalists expect), and a profit of at least $6.9 million per year ($9.9 in annual revenue) for their investors to earn 40%.
We don't know exactly what Tiny Speck's revenues were, and we don't know exactly what it's expenses were. Tiny Speck might have been losing money on Glitch. It might have been breaking even, just making money for its employees in the form of salaries. Or it might have been profiting millions of dollars per year. Stewart Butterfield said he hoped Tiny Speck would earn $30-$40 million per year from Glitch, but it clearly fell short of that. (Source: http://allthingsd.com/20100823/flickr-co-founder-butterfield-talks-about-his-new-game-start-up-glitch/)
All we know for sure is that the fact that Glitch shut down doesn't indicate that it wasn't self-sustaining or profitable. It just wasn't making a profit of 20% of $17.2 million per year.
This should be encouraging to those of us who want to see Eleven succeed. It seems very likely to me that Eleven will be able to have a business model that — at the very least — brings in enough revenue to cover the cost of the servers, even if the game still has to be run on a volunteer basis. It also seems very possible that Eleven will bring in enough revenue to become a bonafide business with full-time employees, perhaps even including Tiny Speck alumni.
Let me explain. At the time it was working on Glitch, over $17.2 million was invested in Tiny Speck by outside investors, mostly by the venture capital firms Accel Partners and Andreessen Horowitz. (Source: http://www.crunchbase.com/organization/tiny-speck) Venture capitalists typically expect a very high return on their investment: 20% per year at the very minimum, but preferably 40% or more.
In 2011, Tiny Speck had 41 employees. Let's assume those employees were being paid $50,000 per year on average. That's just over $2 million in wages that Tiny Speck paid out every year. Let's assume they had $1 million in other costs, like office rent and servers. So, that's $3 million in expenses every year.
What, then, would have been the annual rate of return on that $17.2 million investment if Tiny Speck's revenue is $3 million per year? 0%. The company wouldn't have generated a profit for investors, but it would have been perfectly sustainable as a business had it not relied on venture capital in the first place. With that revenue, all the business's expenses could have been covered, and all the employees — including Stewart Butterfield and Tiny Speck's other three co-founders (Cal Henderson, Eric Costello, and Serguei Mourachov) — could have been paid a salary.
What if Tiny Speck's revenue was $4 million per year? That leaves a maximum profit of $1 million for investors (excluding the four co-founders' share), an abysmal 5.8% annual return on their investment. At that rate, it would have taken them 17.2 years just to make back their investment, which is unacceptable to most venture capitalists.
So, even if it had been bringing in $1 million every year in profits — let alone breaking even — Glitch still would have been considered a financial failure.
Tiny Speck would have needed to make a profit of at least $3.4 million per year ($6.4 million in annual revenue) for their investors to earn 20% per year on their investment (the minimum return that venture capitalists expect), and a profit of at least $6.9 million per year ($9.9 in annual revenue) for their investors to earn 40%.
We don't know exactly what Tiny Speck's revenues were, and we don't know exactly what it's expenses were. Tiny Speck might have been losing money on Glitch. It might have been breaking even, just making money for its employees in the form of salaries. Or it might have been profiting millions of dollars per year. Stewart Butterfield said he hoped Tiny Speck would earn $30-$40 million per year from Glitch, but it clearly fell short of that. (Source: http://allthingsd.com/20100823/flickr-co-founder-butterfield-talks-about-his-new-game-start-up-glitch/)
All we know for sure is that the fact that Glitch shut down doesn't indicate that it wasn't self-sustaining or profitable. It just wasn't making a profit of 20% of $17.2 million per year.
This should be encouraging to those of us who want to see Eleven succeed. It seems very likely to me that Eleven will be able to have a business model that — at the very least — brings in enough revenue to cover the cost of the servers, even if the game still has to be run on a volunteer basis. It also seems very possible that Eleven will bring in enough revenue to become a bonafide business with full-time employees, perhaps even including Tiny Speck alumni.
Comments
That means they may well have had PLENTY of money to give everyone refunds, give employees a nice severance package, and cover various other expenses... and still not had enough to keep running Glitch. Refunding a few thousand dollars to players wasn't going to make a difference in the millions they'd need each year--they probably could've manage to survive another few months, maybe another year, but they decided to cut things off when they still had that cushion, could still reward their staff and give players as many bonuses as they could insert into the game.
And no amount of friendly player offers to buy things or donate money was going to make a difference; they needed, from the bits of info I picked up, at least 10x the paying player-base--and they needed that immediately, and to increase it over the next several years. As was mentioned--many glitchen had already dragged every friend they could into the game; the gaming world as a whole wasn't going to jump into Glitch without some kind of marketing hook, and wasn't going to keep playing (and paying) without a change in its strategy and game-tone.
The game couldn't make the jump to grow that big, that fast; part of it was the limitations of flash as the gaming market moved to mobile devices, and part was Glitch's quirky nature and part was probably a swarm of other contributing factors.
That doesn't mean Eleven can't be sustainable or even profitable--it just couldn't, and probably can't in the future, sustain venture capital levels of income.
It's possible that they decided, "well, we *could* make as much money as they want us to... if we plastered the game with ads, removed half of the free items and made them premium credit items, and shut off half the skill tree to free players." They may have decided they'd rather shut the game down than become another "free to play; pay to get anywhere interesting" game.
I'm pretty sure if the amount they needed could've been raised by a shout-out to existing players, they would have. They saw the Indiegogo campaigns for the art book and music--they knew a one-shot k'start or i'gogo campaign could raise them tens of thousands of dollars right away--but that wouldn't be enough.
I think they needed to at least triple the number of paying players pretty much immediately, and to keep that number consistent and growing. And the game just couldn't handle 10x as many players, which is probably the minimum of what it'd take to greatly increase the number of paying ones. Platform was part of the issue--everyone was going mobile, and Glitch wouldn't port to iphones or android without a complete rewrite.
From what little thats been said it seems that is was investors and they wanted a huge return which they werent going to get, i think the game brought in money just not on the scale it needed to be to pay investors back. They needed to drastically increase thier playbase and the game did not appeal to most ppl. In most games and im sure this is the case with Glitch too, about 10% - 5% ( might be a bit off on the % ) of ppl that try a game stick with it. Some dont like the players, some the game interface, some the game itself, theres many reasons ppl dont stick with a game but the retention rate is always low. If its a very popular game the % is higher and ppl stick with games more if they already have freinds playing too, but in general retention rates are always low. Glitch had a few things that confused ppl , for one thing there was no combat, and also the game is weird, by design but things like egg trees, milking butterflies and talking rocks, bewildered ppl and when ppl left they seemed to say one or the other for leaving (weird or wanted combat) (if they said anything that is).
Platform wise yes Flash is on its way out, but they did have various offsite tools, websites or Apps that activated skills, or a wardrobe, & various market checkers or buyer tools, and the craftybot was meant to be controlled this way too but he wasnt finished, the route website offsite too, and that listed who had what on thier street or tower, which made it so you could do some things remotely without having to enter the game itself, which is a good compromise IMO, with Flash and needing a laptop or desktop to play becasue of screen size
That would make expenses at a minimum of $6 mil/year, or twice the amount quoted in the OP. Revenue of $4 mil would result in an annual $2 mil deficit.
Tiny Speck had an engineering team in San Francisco and a design team in Vancouver, so maybe the $500,000/month figure was the cost of running the whole San Francisco office, staff and servers included.