Recap

Last week, we looked into software complexity and the SDLC in relation to crowdfunded software development along with a diversion to look at the concept of diminishing returns in software. Part III can be found here.

Part II looked at complexity in relation to crowdfunded software development as well as introduced the SDLC and can be found here.

Part I introduced the concept of complexity in general and can be found here.

In part IV, we’ll look at budgets and what they mean in software development.

Budget

Budget is important. Without money, little to nothing happens. People need to eat and pay their bills. Without money, something is a hobby and progress is slow. With money, it becomes a job and people can devote more time to doing whatever “it” is. This of course is important because most things which get made as part of a business are looking for an ROI (Return On Investment). Somebody invested some money and if they did so in a commercial endeavour, they expect to earn some money from their investment.

The thing is, crowdfunding is not investing in the traditional sense. Nobody expects a percentage return on their cash. What they do expect is a return on their hopes in terms of enjoyment or utility of whatever they’re crowdfunding, games are an entertainment product so people are likely looking for some degree of enjoyment from the game if and when it gets funded and made.

But how do you budget for something that has no fixed budget? Well, you project. You try to figure out how much money you can reliably count upon and then scale your development to try to match that amount while leaving yourself some wiggle room in the event that something doesn’t go to plan. So when people start saying that a company is screwed because it only has $x left, they’re trying to panic the public and affect that company in doing so.

The simplest type of company to budget for is a one product company. This is for a few reasons:

1. You generally have a reasonable idea of your cost centres for production of your product and can relatively easily translate that into how much of it is needed to cover existing development, support, sale, management departments etc.
2. Your incoming revenue stream is fairly simple. It’s made up of the revenue associated with your one product! Granted, there may be sales revenue, sponsorship revenue, VC revenue, but even with these separated out, it’s not too difficult to budget for compared to huge companies which have multiple product lines, some interrelated with each other which means that revenue from product x is contingent on the development of product y.

Budgeting for a company is as you would imagine, like doing your household budget but scaled up. Let’s compare it to a house:

Most people live somewhere! This somewhere may be a house or apartment that you own, rent, or have a mortgage on so are in the process of paying to one day own. The costs of living in this place are equated to your rent on office space (most companies don’t own their office space).

Next, you have a lot of smaller outgoings. These may include:

1. Food/drink this is what you need to allow you to keep living. Think of this as the engine room of your company. Spending money on something which allows you to keep generating money
2. Maybe you have a monthly car payment. This in itself may or may not be required to allow you to earn money but you have figured out that for you, it’s worth it.
3. You’ve got all your utility bills, gas, electricity, water.
4. You’ve got your ongoing costs like a mobile phone, broadband connection, maybe a tv service like Sky or Netflix, amazon prime, petrol, paying for your kids school trips/fees, etc etc.

Now, I’m obviously simplifying it somewhat, but hopefully to pay for all your expenses you incur in everyday life, you’ve got a job of some sort. Maybe you live with someone and they have a job and contribute too. You see, running a household budget is a lot like running a small company, you have your incomings and your outgoings and you need to offset one against the other. Some people are good at budgeting and end up with a surplus (profit), some people struggle and have a negative number at the end of the month after all is said and done.

The bottom line is, (relevance in the next section, point 2!). If somebody said to you “Hey, over the past 4 years of you working and earning all this money, where has it all gone?!?!?!” If you’re in the UK or US, the average income over that period is about 100,000 of your chosen currency. Would you expect to have most of that available in the form of savings after 4 years? Of course not, and this is no different from a company. Companies earn money and spend money so that they can continue to earn more money and keep making their product(s). This is important to keep in mind for crowdfunded game development.

Relevance to crowdfunded development

So once again looking at Star Citizen as my source material, simply because it’s the most relevant and potentially controversial of subjects these days. I contributed to an article Jeff wrote a while ago on the site talking about CIG and Star Citizen. I feel it’s relevant here so I’ll reproduce:

“It’s a double edged sword. CIG has been successful beyond what anybody imagined would be possible, that success has also brought a lot of dissatisfaction as they can’t keep everyone happy. Some backers are impatient and didn’t want them to keep stretch goals going early on in the campaign and it’s obviously contributed to the delays of the project. Star Citizen is clearly Chris’ opus and I don’t blame him for keeping it going to the degree that it has. It would have been a lot simpler to just do the kickstarter, get the funding he needed from it and the venture capitalist backers he had lined up, stick to the original scope and go quiet after funding to build the game. This is the model that most games seem to take and sometimes it works, sometimes not, but from a development perspective, it’s simpler as you don’t have the continuous demands of nigh on a million backers always wanting different things. Some people don’t understand the development and pledging/donating process, they think they pre-ordered a static item and it’s late so they should be able to get their money back, they don’t realise the money they paid is to fund jobs and salaries to make the game and in large scale development, the unexpected will occur, delays will happen, things will change”.

As much as I can’t be bothered to go over some of the controversial pieces floating around the internet these days, I probably should if for no other reason than to give a little reassurance.

1. “They’ve only got $Xm left of $93m! They’re going to crash and burn!” etc.

Really, anybody that knows anything about budgeting should be able to explain that this is sensationalist rubbish. First of all, we don’t know how much money they’ve got left. Secondly, the company has been going for about 3 years now. Of course they’ve spent a lot of the money they’ve raised. That’s what’s getting the game made! They’re a 260+ employee company with some external contractors thrown in to boot. To think all that money is sitting in a bank account untouched is either pure naiveté or sensationalist click-bait attempting to scare people away from funding. Both are a disservice to the people who read them and the unfortunate truth of the matter is that the second is obviously an intentional attempt to damage the project by reducing the amount of funding it receives and thereby try to bring their prophecy to fruition.

In general, if they’ve got a cushion (and there’s no reason to think they don’t), and continue raising funds at a reasonable level (hint, they’ve raised over $4.2m last month), there’s no reason to think that the current business model is not sustainable for them to continue building out the game.

Financial audits of the company books etc are not something which we’re entitled to (at this stage). Casting my mind back a few years to when I first pledged, I remember them committing to an accounting if the project failed. It’s clearly not failed with new content and releases making its way into the hands of backers regularly, so if someone was ok with that when they first signed up, I fail to see why they’re not ok with that now. None of this is to say that the project won’t fail, but it seems pretty unlikely since if you’ve read parts II and III of this series, you already know that (I’ll keep saying it until I’m blue in the face!) WITH ENOUGH TIME AND MONEY, ANYTHING IS POSSIBLE!

I’ll address one other ridiculous rumour going around:

2. “Look at that fancy car the exec is driving! They must be embezzling money!”

The bottom line is that CIG is a multi-million dollar company. How much is the company actually worth? That’s a difficult one to work out. As stated, all funds raised are going into the development of the game. Now, that doesn’t literally mean every single dollar is spent on a developer. They need accountants and lawyers and IT staff and customer support etc, same as most other companies. But it’s fair to say that making the game is about providing the infrastructure to allow the developers to make it. Additionally, Chris Roberts himself is the CEO and (likely) majority owner of CIG. What do you think the CEO of a company that makes over $90m in 3 years gets paid? I’ll give you a clue. A lot. The trouble is the traditional method of valuing a company doesn’t really apply to CIG since it isn’t really making a profit as such. All money raised is paying for the salaries and facilities to allow them to make the game and keep raising funds to finish the game. Once the game is made, money will be made by selling the game among other methods, but that isn’t yet a proven business model for CIG.

So, if you’re the CEO and owner of a several hundred employee company that makes that much money, it’s pretty likely you get paid a good salary, live in a nice house, drive an expensive car etc. Are these things proof of embezzlement? Of course not! The company and hundreds of jobs wouldn’t exist without him attempting to create his dream! Additionally, he’s gone on the record stating that given his successful background in games and Hollywood, he’s now independently wealthy. So in fact is even more likely to have these things.

Do yourself a favour and don’t read too much into sensationalist headlines and click-bait. Additionally, even if and when some company filings come to light. Don’t read too much into those either. It’s easy enough to hide corporate money in today’s world. Look at Starbucks, Amazon, Apple, Google etc who have money sitting in low tax jurisdictions and accounts around the world just sitting there not being counted for tax purposes. CIG releasing full accounts at this stage is a terrible idea because all people who don’t understand all of the above will see is that the company has spent a lot of the money they’ve raised. They don’t stop to consider the implication that with a consistent revenue stream, there is nothing to worry about.

Ultimately, budgeting for CIG is going to be similar to you budgeting your household. You have a likely primary income stream (your earnings or pledges for CIG), possibly some secondary income (partner income, investments for you, investments, sponsorship, venture capital money possibly for CIG) and you keep a buffer in case something unforeseen comes but otherwise you plan for your car payment, mortgage/rent, monthly bills on the basis of the incoming money you have. If it’s enough, you keep going, if it isn’t enough, you can borrow against future earning potential, sell some of your assets (or maybe shares in the company) to give you the ability to keep going. Whether you’re looking to cover a mortgage/car payment or the rent on your office space/pay your employee salaries, the basic principle of budgeting is the same.

As long as you’ve got your costs covered and can continue working and bringing in money, no problemo.

So when it comes to budgeting, a few things are important:

• Ongoing funded projects (very common in the commercial world) are no big deal. There’s even a term for it. It’s called Business As Usual (or BAU). Keeping a company running costs money each and every day. You don’t have all the money in a bank account that you’ll need to forever fund your company. You keep the company running by paying for it with money you earn or borrow.
• If the budget grows, scope, quality and resourcing can also grow, but in this case don’t expect an immediately linearly scaled increase in productivity. If you do, YOU KNOW NOTHING JON SNOW!
• Budgets are often done in a fixed environment where the price is agreed after the scope and timeline is locked down. Continuously crowdfunded projects are not this kind of an environment. If more money comes in, quality, scope and resourcing can be scaled up, if less, they can be scaled down. Don’t confuse budgeting in a traditional business environment with that of crowdfunded games development.

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