Investment Discussion: Your money could be gone in a Flash

After my post on Tyler’s business development, I read today that Tyler has recently provided an update:

I received a lot of criticism for the investment opportunity I put forward, but I still stand behind it. In fact, I think it was actually a very generous opportunity. But I’m fine with how things turned out, as now I can now reap all the rewards (if any) myself.

There is a lot of risk though – I’ve never developed a game before, so this is a completely new venture for me. Together with Movie-Vault, this will have been $20,000 that I’ve invested into my projects during the past 6-8 weeks, which is the most I’ve ever invested at once before.

I still have a mortgage to pay, so this really is quite a risk for me. But few people get anywhere by always playing it safe.

My response: So we really begin to see what is going on.

First, Tyler needed the cash. It’s likely he didn’t have all the cash up front to invest, so he decided to tap these loans. Unfortunately, taking out a loan to fund an investment isn’t usually a good idea if the investment has no assets, no income and no known market. Risk for the lender is high, so a conventional loan would have had a punitively high interest rate, if one had been available at all.

So to raise the capital, he then tried to create a deal where the risk was on the shoulders of the lender, rather than the recipient of the loan. Which he then framed as an ‘investment’. The problem with calling it an investment is that he has capped the upside and offers a deal where the lender can lose upto 100% of the initial investment.

In other words, if the site does well, he buys out the lender; if the site does poorly, the lender could lose his share of the cash (if the site is pulled totally) or could be paid back very slowly indeed (increasing risk because of technological development and game fatigue). But other variations are also possible: what if the site needs more money (many investments do become money pits); suppose he brings a co-owner to shoulder the costs and development, what happens to the upside; what happens if the site is never finished because he encounters intractable developers or serious development issues; what happens if the game becomes outdated so fast that no-one wants to play it;… and so on.

I’ve already gone over the rest of the details in the other post, why I think any ‘investor’ would have to work hard to get due diligence done. The real issue is that while he’s never developed a game before, he clearly also has never had a business partner before either. I wonder what he would say if I offered him a similar deal for one of my projects. But that’s what concerns me the most: he never admits that the deal is a problem for the other investor, never actually discusses the alternatives to this approach, only pushes forward his confidence in his deal and his abilities.

Yes, it’s a risk. Of course, it is. That he’s putting up the money himself will highlight the concerns of the other potential investors. The odd thing is that he revealed so much of the project, yet didn’t reveal the most important details at all, avoided the hard questions in the discussion, refused to refute many of the points raised, and then went about claiming "I think it was actually a very generous opportunity". Well, it was: it was very generous to himself, …

The facts that the people he talked to would also have shared these concerns and that he is now funding the site himself both highlight how ill-conceived the financing arrangements were in the beginning. I only hope the development for the site itself shows more sophistication than this. Don’t get me wrong, I wish him well in this project, and all of the others he has, though I cannot help but feel that this bravado will prove ill-founded.

Oh, and if Tyler didn’t want someone to critique his investment opportunities, then why on earth would he advertise so openly, leave the comment thread open, and then post again later? He may stand by his ‘deal’, but I stand by my criticisms, too.

The hardest thing he did, to which I give him credit, he is trying to create a new project, he is trying to find his value, he is trying to do something that he is challenging himself to do. That is the huge upside for him, come success or failure. He will walk away with experience that he will be able to use later.

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