The Atlanta Business Chronicle is reporting this morning that former dot-com pioneer and CEO of iXL Bert Ellis (my old boss) is embarking on a new venture called Brash Entertainment. The headline reads “Game Startup Raising $150M,” and the article goes on to discuss their model of building video games around popular movie releases.
The headline was accompanied by a publicity image for the blockbuster movie “300.” However, there is more to this story, I think, than meets the eye.
In addition to being a technology/startup guy, I’m also a video game fanatic. So it’s no surprise that this article struck an exciting nerve for me. But the more I read, the more my excitement waned.
Here are a few snippets from the article, and my thought process as I read through it.
Thomas Tull, executive producer of the new blockbuster movie “300,” and dot-com pioneer Bert Ellis are near closing a mega $150 million round of private equity in a video game startup with ties to Atlanta and Hollywood.
Brash has announced their intent to product 60-100 titles over the next 5 years, all from popular movie brands. It is important to point out (as the article does as well) that a popular video game hit can take an investment of $20-25M. That would mean an investment of $1.2B to $2.5B in development costs. Not unachievable, but essentially, if Brash is looking at a $150M raise, they have enough capital to sustain the development of their first 5-7 properties. Obviously, they need one of those to hit big in order to stay in business. But I digress.
Brash Entertainment has Ellis on its board and Atlanta Jim Altenbach, an attorney with Greenberg Traurig LLP, as an officer. In addition Brash Music CEO Mike McQuary, a former EarthLink, Inc. executive, is an investor in the company. Executive leadership, meanwhile, is in New York and Los Angeles.
Brash is outsourcing video game development around the world. The possibility exists, Ellis says, to outsource some work to Atlanta.
If you know anything about the video game industry, you’ll know that there is a HUGE offshore video game development industry in Europe and the former Soviet republics. Some of the more successful games of the past 5 or 6 years were developed by overseas game development studios and simply licensed or sold to American game publishers. From a business standpoint, it is a VERY cost-advantageous model. So if you were getting starry-eyed about being a technology professional and working for a world-class Atlanta-based video game shop, dry your eyes and move on.
Ellis is particularly excited about the possibility of a “300” video game, which is still being negotiated. Brash Entertainment has already closed on a $6M round from Ellis, Tull, and others. Brash Entertainment has a term sheet for the $150 million round from a major media technology investor and others, Ellis said, and the deal should be complete – if all goes well – by the first week of April.
In the old days a term sheet was the result of due diligence on the part of investors. They liked your concept, dug into your plan, and then got into the nuts and bolts of it all before making an investment decision. These days, however, in the private equity world, a term-sheet can often be the precursor to due diligence. In other words, the investor has taken a serious look, but it doesn’t necessarily mean they are close to investing. They are presenting their broad terms to the founders, and if those terms aren’t in the “ballpark,” there is little to be gained by spending lots of time digging in too deep. I’m not saying this is the case here, but it could be.
Finally, it is possible that the founders were not terribly excited about their 1st term sheet, and so they’re trying to drum up some others. By leaking the story to the press (and getting it on the front page of the Chronicle), they could be trying to create some semblance of a term sheet auction to garner more attention. It could work – but it could also backfire. If done unbeknownst to the term sheet writers, it could undermine their trust in the principals of the company. The investors could become less inclined to go forward and give them $150M for what is effectively a greenfield startup.
Not only is the local impact of this transaction likely to be minimal due to offshoring, the transaction itself could conceivably be a lot farther from consummation than appears at first glance. Time will tell, I guess. Nothing would make my day more than seeing something like this come to life in Atlanta.
The story makes for a good headline, and probably moves a few papers, but from what I can tell, I don’t see this deal doing much in the way of enhancing Atlanta’s startup culture, or adding to the economics of Atlanta or the southeast. I do look forward to seeing the games, though. :)
Of course, if this deal gets done, you will have anti-pundits out there quietly incorporating this $150M number into the latest startup statistics. I can see it now: “What’s the problem? Atlanta is a hot bed for startups. We did $151M in startup deals last quarter!” Nine figure private equity deals should never factor into such reports, especially when they are going to create very little regional economic growth.