Wednesday, May 25, 2016
A Perspective on Architects of War
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".
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)
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.
I think there are some key learnings that one can take from this experience
(1) NEVER LET YOUR HOBBY BECOME YOUR BUSINESS
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.
(2) ACCESS TO CAPITAL IS THE KEY TO SUCCESS
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.
(3) KNOW BOTH WHAT YOU'RE GOOD AT AND WHAT YOU'RE NOT
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.
(4) BE PREPARED TO FAIL
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.
(5) KICKSTARTER IS A LIMITED PURPOSE TOOL
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.
(6) SOCIAL MEDIA IS A REQUIRED SKILL
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.
(7) ALWAYS COMMUNICATE WITH CUSTOMERS
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.
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.