Wednesday, May 25, 2016

A Perspective on Architects of War

Yesterday, I received an "Order of Discharge" notice related to the Architects of War (AofW) bankruptcy process.  It reminded me that a number of people have asked me for my thoughts on AofW (AKA Alien Dungeon / Robot Peanut Studios) and it's bankruptcy.  Why ask me?  I was an investor in the business and may have a better understanding than most of what went on and how the business came to unravel.

Side note: The notice I received related to the Baker's personal bankruptcy, the dissolution of the business is still ongoing.

One point to make upfront is that, as an investor, I lost money when AofW went under.  My losses came from two sources - a direct equity investment and a partial guarantee on a bank loan to the company.  Losses in business investments are nothing new to me as my "real world" job involves being a partner in a Venture Capital firm that invests in tech and financial services companies.  Sometimes they work, sometimes they don't - it comes with the territory.  While disappointed in the outcome, especially the personal toll it took on the Bakers, their trade partners in the miniatures industry and AofW's customers, I'm not mad and, more importantly, I wasn't cheated.  As the man says in investing "You pays your money and you take your chances".

Out of respect for Barb and Ernie's privacy I will refrain from specific numbers but my losses were not insignificant but they are also not material to my financial well being.

Lastly, while I have tried to be as even-handed as possible these thoughts are my personal opinions and may not be universally shared nor agreed with -  in other words, "your milage may vary".  

The Bankruptcy:
Both the company and it's owners filed for bankruptcy in the 1Q' of 2016.  Bankruptcy is not something to be taken lightly - it's public and exacting in it's toll.  During a Bankruptcy process, the remaining assets of a business are given over to a court appointed trustee whose job it is to sell those assets (liquidation) and recover as much value as possible.  The proceeds of the liquidation are then parceled out to the creditors based on their preferential order.  Not all creditors are treated the same as some have "secured" rights.  In AofW's case there is a bank loan that has a significant amount outstanding that has to be settled first before any proceeds go to other creditors.  The general order of preference is:

- Court and Legal Fees (lawyers always get paid first - they're rather adamant about that!)
- Secured creditors (there's only one - the bank loan)
- Trade debts (obligations to suppliers / customers / employees)
   -- There is a fairly large amount owed to suppliers/vendors (mostly related to All Quiet) very little to customers (again mostly related to unfilled pledges for the All Quiet Kickstarter)
- Investors

I'm doubtful the net proceeds from the liquidation will fully pay back the bank loan but we shall see.

What Went Wrong?
One of the core issues faced by AofW (and just about any other small business) was a of a lack of growth capital.  In addition to the funding levels there were some challenges that were unique to the business itself including (1) a lack of experience with technology/social media and how to use it to  drive direct retail (online) sales and (2) a under estimation of the operational and logistical challenges of bringing the "All Quiet on the Martian Front" product line to market.

When it first opened it's doors, AofW was a specialized miniatures dealer that had it's own line of resin terrain pieces and sold historical miniatures from other manufacturers (namely Perry Miniatures and Gripping Beast).  The terrain pieces were top notch but expensive due to the cost to manufacture and ship (resin is heavy).  All the products were designed by Ernie and cast by a local Maryland vendor.  The historical lines were great for a gamer like me but the margins involved in selling other companies miniatures are less than 10% - they generate lots of top line volume but no profit.  AofW carved out a nice niche in the historical market but never generated a profit as a historical vendor.   What the company didn't expect was the impact that cheap laser cut terrain would have on it's resin product line.  The advent of 4ground and other laser cut manufacturers really cut into the product demand for the higher priced resin products.

Ernie correctly believed that the way to drive both growth and profit was to create his own game IP and expand into the much larger fantasy/SciFi market.  He went about learning how to do so by first writing and publishing the ACW skirmish ruleset "Uncivil Wars" and then doing his first Kickstarter for a fantasy skirmish game "Fanticide".  Both games were moderately successful but never "caught fire" a sales perspective.  One of the things that limited their potential was not really understanding how to use social media to drive both attention and a following.  Social media is a business skill that needs to be learned and understood by any miniatures manufacturer.

Based on what the company learned with it's previous game design projects it embarked on the "All Quiet on the Martian Front" game.  As a design idea, I thought is was brilliant - great concept, interesting period and quasi historical.  AofW went about the creating the game with a recipe that couldn't loose - get name brand game designers to write the rules, check!.  Take a well know work a fiction and make a game out of it - check!  Put a great deal of thought into the product design - check! Run an apparently successful Kickstarter to fund the thing, check!  How could it go wrong?

Despite raising a little under 305K for the project from 1,003 people the project failed -why?

A series of inter-related missteps.

(1) Kickstarter Discount Was too High:
During the course of the kickstarter, the offer was sweetened to appease several vocal individuals who wanted a "better deal"  There was one particular individual who kept whining that the kickstarter was priced for the 1% and, therefore, unfair to people like him.  He was as rude as he was min-informed of basic economics.  It was decided to throw more freebies in to "sweeten the pot".  Making these midcourse changes proved to be catastrophic as they significantly decreased profitability and increased the complexity of the project fulfillment.

(2) Production Delays:
AofW relied on sub-contractors for all its manufacturing including metal / resin casting, the plastic molds/casting down to the printing/binding of the hardcover rule books.  All of these activities were overseen by a very small team with deep product design skills but limited production management experience.  The design and production of the plastic components went well but the initial costs were under-estimated.  The contractors for the metal and resin proved to have over-stated their abilities and under-costed their bids - delays crept in as new subcontractors needed to be found.  The delays from these missteps built upon one another and delays cost money as staff still needs to be paid.  Remember while there historical line was still in operation it never generated excess cash so there was no financial support from there.

I do share some blame here as when Ernie asked my advice on when to set the initial delivery date for the kick starter, (which ended on June 3, 2013) I suggested December of the same year.  It was theoretically feasible but didn't build in any cushion for delays.  Dumb advice from me.

(3) Shipping Costs:
The impact of the production delays forced the company to decide break the shipping up into several "waves" which proved to be a material financial hit as the shipping costs more than tripled.  It was a decision that was based on trying to get the product both in customers hands and out to market at the same time.

(4) Direct Sales Never Took Off:
The overall marketing strategy for the product outside of the Kickstarter significantly relied on developing trade sales through brick and mortar game stores.  This tactic proved to be costly to implement from a manpower allocation and not very fruitful as game stores are very stressed from a business viewpoint and can't afford to take chances.  Too little was focused on building online buzz and community about the game.  In the end, both direct and "trade sales" never really took off.

(5) Poor Customer Communications:
In late 2014 a decision was made to limit communication to the kick starter backers to just "official announcements" from exhaustion and frustration.  I can understand the frustration one can get from dealing with gamers as anyone who looks at TMP or some of the comments on the All Quiet kickstarter page will understand.  Sadly, that's something a small business person can't afford - if you don't communicate all that's left is the small minority who want to vent.  I tell the CEO's of businesses I invest in that bad gossip sells better than good gossip and you don't have the luxury of ignoring it and not communicating as something worse always fills the void.  More importantly for every ranter there are many more customers with legitimate issues and grievances that need to be acknowledged.  Any communication from a customer is a chance to improve and shouldn't be passed up.

Don't get me wrong - ALL businesses make mistakes as they bring a concept to market.  If it was easy, everyone would do it, but it's not.  The core issue for AofW was that it didn't have a big enough capital cushion to weather any misstep, let alone multiple ones.  As the mistakes piled up the company tried to stay afloat by taking successively risky steps - from selling kickstarter product early before the backers got it first, selling the existing historical inventory at ever steeper discounts, delaying payments to suppliers, moving to PA to a much lower cost environment and to be closer to a potential manufacturing partner and ultimately changing the payment terms and disclosures to take money upfront even when out of stock.  It was a death spiral.

Some of those decisions were bad judgement but none were done will ill intent or from a desire to defraud.   Others, like taking money upfront for out-of-stock items should never had been enacted.  I think you'd understand how this type of thinking can occur if you either owned or were involved in a business that had deal with a dire situation - tunnel vision and a desire to succeed can outweigh more reasoned judgement.

So What?
I think there are some key learnings that one can take from this experience

Perhaps more a personal observation from me, but a hobby is a stress reliever and a business is a stress creator.  I think it's very difficult for a hobbyist to make the transformation to a business runner especially with something as esoteric as miniature gaming.

Starting a business is not for the faint of heart nor the short of funds - having access to enough capital is the single biggest lever one has to be successful.  Capital can come from savings, friends or investors.  Starting a business under the assumption of "if I build it, investors will come" is really risky.  If you're afraid to ask people to fund your dream, then keep it a dream and move on.

There are a lot of strong opinions about Ernie and I'm not going to editorialize here.  I will say Ernie is a superb product designer with the gift of imagination.  As an operator he had to learn lot on the fly and was too willing to believe his subcontractors initial promises.  Perhaps another way to put it is  that a small business owner needs to have the same scrutiny bar for good news as they do for bad.

All business endeavors make mistakes and start ups make even more as they are pushing into new frontiers.  Accept that fact and embrace these mistakes as the critical teaching tools there are.  If you don't accept the mistakes as yours then you really can't learn.  More importantly,  incorporate some cushion into both your production and financial plans to reflect there will be unanticipated setbacks.  See point number 2 above.

Kickstarter are neither good nor bad.  They can be used as a sales finance tool but should never be used to fund pre-production products.  As a financing tool a Kickstarter can be used very effectively to fund inventory build for a product's introduction and to gauge market receptivity.  The key to using Kickstarter wisely is understanding your production costs and timelines so you can both accurately gauge the discount to offer and know the time to delivery.  Neither of those were known for All Quiet and were the cause of it's downfall.

Brick and mortar retail outlets for historical miniatures are dead - some may be hanging on right now but their prognosis is terminal.  If your coming out with a new product for the miniatures market you need to really understand how to drive sales through online channels.  If you don't, get someone who does or find something else to do with your time.

Do so even if you've just got bad news.  As stated earlier the void is filled by some who are practicing "recreational outrage" and others who have legitimate concerns.  All shape your brand and need to be attended to.

The Post-Kickstarter noise:

The is still a lot of angst from the Kickstarter community about fraud / suing / talking to states attorney generals, etc.  All I can say is to remember that failure isn't fraud and the the company exerted a more than legally sufficient effort to fulfill on its obligation and completed 80% or so of the project.  Given that the retail price discount was 40% it's hard to see any net harm.  Don't get me wrong, I'm disappointed that I will not get all my stuff (the Goliath was a really cool design) but I don't think I was cheated.

More importantly read the damn user agreement with kickstarter - you don't get the huge discount without taking some form of risk and one of those risks is that the project fails and you don't get your toys.  If you can't accept that risk, don't play the game.  Whining, stomping your feet and posting about the unfairness of the world really doesn't get you much.

Closing Thoughts:
At the end of the day, I'm heart broken for the Bakers who literally lost everything in an attempt to build a business.  I can only wish them the best in their future endeavors whatever they may be.      Ernie has his personality challenges (which is not all that rare in our little tribe, is it?) and some of his decisions while running AofW burned bridges with other industry players who are justifiably angry at how things turned out.  For those of you who wished the Bakers ill from this adventure - congrats you got your wish in the form of extreme personal stress, public failure and financial ruin.  That is a very steep price to pay for attempting to bring a dream to life.

I think our hobby is lessened without the presence of AofW and I, for one, will miss them.


PMMDJ said...

great read, very in-depth. Thanks for taking the time to write this up!

Edwin King said...

Interesting reading and some sensible advice for those of us who are trading. A lot of food for thought - thank you!

Paul Robinson said...

A very interesting read and well argued

Martin Cooke said...

Very interesting. Always a shame when good intentions back fire.

Lasgunpacker said...

Thanks for posting this, more analysis and thought on this sort of subject is always beneficial.

john de terre neuve said...

I have to admit that many times I considered emailing you to get your sense of what happened. I bought a lot of figures and terrain from Architects of War and their service was first rate. I was not involved in AQMF project, not really a fantasy gamer but I have to admit being tempted as it was such a great idea.

Your analysis is very interesting on many levels, thanks for posting it.

I do feel sorry for the Bakers, I always felt confident that there was no malice.


Dai said...

A very educational write up. You certainly sound like you know your stuff.


Pastor Burt said...

Well written and very fair. It's good to see your insight, Miles! Praying that the Bakers find some solace and peace as all the dust settles.

In other news, it looks like AQMF will continue. It seems that new company "Ironclad Games" out of St. Louis, MO, is purchasing the game rights, molds, and all remaining inventory. The dream lives on.

Stuart Spindlow said...

You have describe all the points very carefully. Thanks.
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AHunt said...

Thank you Miles. It's good to have your opinion put out there, especially with the line of work you're in.

Peter Douglas said...

Well said Miles and excellent post mortem. I wish your friends well. The biggest lesson is same for starting a small business and investing in a Kickstarter. It's a risk and you shouldn't invest what you aren't prepared to lose. I have yet to invest in a KS, but I'd treat my investment the same way I treat the money in my wallet when I walk into a pub!

Cheers, Peter

Eric Farrington said...

As a small business owner I will never forget this bit of wisdom:

When starting a business be prepared to lose three things; your money, your friends, and your family. If it is still worth it then go for it!

Very few businesses survive the first 5 years so no one should be surprised when one fails, but we always are!

This is the best article I have read on this topic. Thanks for writing it!

366_Zoh6 said...
This comment has been removed by the author.
Der Alte Fritz said...

A very well written and comprehensive study of what went wrong. One little nit to pick is the purpose of Kickstarter:

Funding pre-development and start up costs is precisely why a company or individual uses or needs KS. They have an idea but need funds to develop the idea and turn it into a product. I don't view KS as an inventory funding mechanism, although it can be used in that manner.

What kills failed KS projects is under estimating costs ( free shipping is insane) and under pricing the product ( the "add ons").

John said...

Excellent post Miles. Regarding the failure to use social media and online promotion: was that something the Bakers knew was a weakness of theirs going into this project, or only in hindsight?

David Jackson said...

Well, this was such a well written, basically objective piece, but with just the right amount of praise, emotion and friendship. I know exactly the problems they encountered as I did in my own miniatures venture. I "failed" because I was too successful and didn't have the funding/access to take the next step. Luckily I was able to sell it and recoup a lot.

jmilesr said...

Wow - lots of great comments - I'll try to address some of the points here:

Der Alte Fritz - We may be more similar than different - a kickstarter is great when you know your costs of production and have confidence you understand and control the production process - the larger the scope of a project, the more complexity and risk that your estimates are off so for a project of the complexity of AQMF it was the wrong call. For something more limited - like casting some tanks for the Trenchworx kickstarter it works great.

Social Media - it wasn't that the Bakers didn't know about it's importance they just didn't have a professional grasp of how to use it. Ernie used to be CEO of GW - USA and had a very good grasp of the trade sales and that became the primary thrust because it was the only area with traction. Business social media is a skill which needs to be learned. Having a Facebook account doesn't make anyone a professional user. This is not a knock on Ernie - I would suck at it too, but more a "learning" for other small business vendors to really study the tools.

Unknown said...

I am not upset about the kickstarter. I know that Barb and Ernie made some mistakes and misjudgments. The problem I have is with the theft that occurred and just seems to be dismissed by Mr. Miller. (They took payments for items that they did not have.) Here is what happened in my case. About a year ago, I e-mailed them about whether I should get an item from them or should I get it straight from England. I was told that they would be sure to get it, so I should go ahead and order from them. When I next saw them, they told me face to face that they had my product in hand and I handed them the money: however they had left it back at the house. But I was promised that it would ship the next day. I found out a month later (after numerous unanswered e-mails and phone calls) that they had never even ordered the product from their supplier. So I was lied to my face and money was handed to them in good faith. According to PA law that is theft by deception ( I could quote Article and Section of the law but that is unimportant at this moment.) Kickstarter going bad is understandable, outright lies and theft are inexcusable.

Robert Wiltrout said...

Don't know why it came out as Unknown. That was not intended to be anonymous.

J Wiltrout

brigadegames said...

I wish the long comment I made actually posted. I will try again:

As DerAltFritz said, Kickstarter is exactly for preproduction funding. Unless one is dreaming of doing something, one has to have a good grasp of all costs , especially of production, for a KS to be successful in the fulfillment section. Let's be honest. That is the most important part.

As one of the larger historical vendors in the US marketspace and a long time vendor at HMGS East events, I never got a chance to really know Ernie. From the beginning he was aloof, always seemed pissed off at something and event though I would say hi unloading my trailer, I never got the same back. I understand alot of things were said by him about other longtime vendors and how AoW would be taking them down and capture the market as we didn't know what we were doing. As you can understand, this didn't sit well with any of us. I had one interaction with Ernie during his lead up to Fantacide. He inquired twice. I responded and never got responses back. From a businss perspective I dont think he respected most of us in any way as he was the gaming expert from GW.

Imports. I can say that your calculation on many imported brands is very close to the mark. However, I have been importing from Australia and the UK for over 15 years so there is definitely a way to generate some profit. However, this requires mfrs that you are importing to work with their overseas outlets and not look at it as lost income. This means they must support you with a decent discount and not have absurdly low shipping rates which do not allow overseas vendors to succeed. I never understood Ernies pricing model, as in some cases even early on, he was selling items at a rate that I bet cost him money. How could one with his business pedigree make those mistakes? Then a few years ago he started to go after some of my long terms brands with the same pricing mentality. I never understood it. In the end, I was more than correct. Unfortunately, Ernie leaving some UK vendors with unpaid bills only makes it more difficult for others to pick up those ranges as all Americans will be painted with a similar brush. Look at it this way, for most, he was someone with serious business creds and they were still screwed.

The last say 6-8 months of AoW, you could tell there were issues. Constant sales and crazy promotions. Stories of retailers getting KS items before backers. And as Jeff said above, there sounded like there were a bunch of people in that same boat. Tough to say but those examples are fraud, plain and simple. Totally unacceptable.

As you also said, lack of communication can really hurt a company with customers. This is key these days.

One thing I never understand from day one of any new small business is the need to hire a bunch of people. Crikey, get your plan worked out and fine tuned and operating well before committing to hiring help. The hardest thing to do it let someone go because you miscalculated and your business is failing. Starting and running any business is not easy, no matter what anyone tells you. It takes hard work with very long hours. As you said above, it also takes capital. It also takes capital you can risk losing. So it you are not willing to put in the long hours needed to make it successful, losing weekends, sleep and investing lots of money, don't even attempt to open any business.


jmilesr said...

A few more responses

J Witrout:
I chose not to dwell to much on the taking cash before placing an order because it really wasn't a cause of the business failure. The decision to do so was wrong and really not defendable but came through an act of desperation which was doomed to fail. I didn't intend to sweep it under the rug but it wasn't a driving force of the business failing

Great response and yes Ernie definitely has his personality challenges and I learned after investing doesn't really "play well with others" which is an unacceptable character trait in such a small industry. The business didn't really hire a bunch of people except for the shows where they had a lot of temporary help

I think Ernie is another example of the difficulty of making the jump from a large corporate role into a small business.

I do hope you'll be at Historicon - I bought a bunch of Frostgrave stuff from you at Cold Wars this year and my sone wants a good bit more!

brigadegames said...

Yes, we will be at Historicon. One last time in the hopes sales actually are good.

And yes, we will have frostgrave. The new Gnickstarter preorder just started today BTW.

Link is on my home page



joel said...

There is one thing that I believe Miles could add to his post, and it something that I heard Ernie say over and over again when he was talking about his AQ kickstarter. Basically, when the kickstarter ended, most of Ernie's suppliers, those in the miniatures industry, stated they had miscalculated their cost and had to raised their prices.

Basically, when your Kickstarter is over and your available funds are known to all, and you have not secured your quotes on prices from subcontractors, you are bond to be paying more than you expected. There is a great difference between "I believe it can be done for this much" and "This is what it is going to cost to get this done!" Yes, there are times that materials and products go up between the bids and the actual time of production, but when someone actually knows or perceives how much you have to spend, they will want a larger piece of the pie unless there is something to bind them to original agreement.

I have seen kickstarters were the person who received the funding had to delay production while looking for new subcontractors due the original ones inflating prices, and that issue was understood by the backers.

Martin said...

What a shame. despite not being interested in the AQOMF game I really liked the idea of the game and the fluff being a logical continuation of the war of worlds novella.

I bought a few things from Architects of War and was completely delighted with their good customer service. I hope this is not the end for Ernie and Barb on the wargaming business

Dave Wolford said...

Well written Miles, good insight into the juggling act that is the table top games industry. KS users (both sides of the equation) do need to think long and hard before pushing off, I dont think it is going to happen any time soon but at least they have your thoughts to thunk over.

John Stiening said...

Thank you for taking the time to write this. It think this might end up a good business primer for the war-games community as a whole. I know it would intersect with your day job, but I would be interesting in reading your thoughts on how companies can succeed in this environment.

Hope to see you at historian this year.

-john (from bolt action tournaments)

Andy said...

Well I am sorry to hear what happened. I never had any problem with them and had only good experiences. Hate to see this happen.