
Rhode Island has made itself a player in an unusual, high-risk venture to create well-paying jobs and establish a video game development cluster in Providence, now that the R.I. Economic Development Corporation board of directors has approved a $75 million loan guarantee for Curt Schilling’s company, 38 Studios LLC.
Schilling, best known as a former pitcher for the Boston Red Sox and other teams, said after the EDC board’s 8-1 vote July 26 that he will work hard to protect the state’s interest. “I’ve invested a significant amount of my life’s earnings in 38 Studios,” he said, pledging “to protect the state’s interest as much as my own.”
But Schilling would not be able to save the state from a fiscal disaster if 38 Studios goes bankrupt and the state is left to pay back the loan.
“No venture capitalist would give that much money to a startup,” said Michael Gurau, a venture capitalist with Clear Innovation Partners in Portland, Maine. “I can’t think of a similar instance” where a state has taken such a risk, said Gurau, a frequent contributor to Providence Business News.
If the company goes under, he suggested, no money likely will be left to return to the state or pay any penalties the state may assess.
Schilling declined to say how much he has invested in the company he founded in 2006, now located in Maynard, Mass., and Baltimore. He revealed that he negotiated exclusively with the Ocean State, rather than pitting one state against another, and he maintained that he sees the final agreement as the start of a “partnership” with the state, “not just a business deal,” he said.
Pointing out that he knows what it is like to be part of a world championship team – referring to the four World Series in which he has pitched (1993, 2001, 2004 and 2007) – the Alaska native said he intends to put together “the best team in the world” to produce his video games. Already on board are best-selling fantasy author R.A. Salvatore and comic book artist Todd McFarlane.
The state in June unveiled a job-creation guaranty program, promising $125 million in loan guarantees to small businesses working in the knowledge and technology fields. The company will get 60 percent of that sum and is eligible to receive the state’s motion picture tax credit.
The terms of the agreement are unusual for the state because of various conditions placed on 38 Studios LLC.
For instance, 38 Studios will not receive the entire loan allotment at once, but on a staggered basis when certain milestones are reached. For example, the company will receive $15 million upon the loan closing, expected before Aug. 31; $10 million when a relocation date is announced, expected by Nov. 30; $5 million by Aug. 31, 2011, when 45 full-time jobs must be created; and $5 million by Nov. 30, 2011, when the company must have a satisfactory distribution agreement for its major product, a massively multiplayer online game code-named Copernicus now in production.
The loan agreement also: sets a penalty fee to the EDC of $7,500 per year for each of the 458 jobs that fails to materialize by the date set in the deal; designates all of 38 Studios’ assets as collateral, including intellectual property; and provides for annual direct payments from 38 Studios to the EDC, starting with $375,000 immediately and $1.5 million for each of the next three years.
The payments mean the business will “pay us for our loan,” said EDC Executive Director Keith W. Stokes.
Although the state and 38 Studios used an average salary of $72,000 for the new jobs coming to Rhode Island, that figure was whittled down to a more realistic $67,500 average per year, said J. Michael Saul, EDC deputy director.
Estimated income tax revenue from the new business is $3.5 million annually, Saul said. The state hopes to obtain an 8 percent interest rate on the 10-year term of the loan, with a 20-year amortization and a one-year debt service reserve.
The state is also owed additional payments for providing the guarantees to 38 Studios said Fred S. Hashway Jr., the director of government affairs and policy for the EDC.
Beginning in 2014, if 38 Studios exceeds its projected earnings for 2013, it will pay up to $5 million to the state. In 2015, 2016 and 2017, the company will make payments based on the same schedule. If by the end of 2017, 38 Studios has paid the state $15.25 million out of its “excess earnings,” it will have fulfilled that part of the agreement. The EDC for its part, will use those payments to invest in other technology businesses.
To keep track of the jobs created and the deadlines imposed, the EDC for the first time will develop and implement “a third-party monitoring, reporting and response process,” the agreement states, while 38 Studios will provide annual certifications to prove compliance.
With three members absent, EDC board member Karl Wadensten, president of VIBCO Vibrators in Richmond, was the sole dissenting vote.
“It is a lot of money” for one company, he said.
In response, Gov. Donald L. Carcieri replied, “No doubt there is risk. But this is a risk worth taking.” The state in recent years has spent $108 million in film tax credits and a total of $560 million in other tax credits, Carcieri added.
Gurau said he has seen venture capitalists stagger release of funds when large financing is requested for an unproven enterprise. However, “it’s very unusual for any state to do,” he said. He suggested that the state is betting heavily on Schilling’s fame and “star power” to make the deal successful.
Cary Collins, trustee professor of entrepreneurship in the finance department at Bryant University, sees only positives in the deal for the state.
“I honestly cannot find anything bad about it,” he said.
To those who worry about the state putting all its eggs in one basket, Collins suggested that there are no alternatives that offer this job-creation potential.
“We don’t have 10 firms waltzing through the EDC [with each] offering to create 45 jobs” to match what 38 Studios has proposed on its own, he said. •