Glitch might have profited $1 million per year and still been shut down

edited January 2015 in General
Here's an overlooked fact about the finances of Glitch. We don't know that Glitch wasn't profitable. We just know that it was considered a financial failure by its investors.

Let me explain. At the time it was working on Glitch, over $17.2 million was invested in Tiny Speck by outside investors, mostly by the venture capital firms Accel Partners and Andreessen Horowitz. (Source: Venture capitalists typically expect a very high return on their investment: 20% per year at the very minimum, but preferably 40% or more.

In 2011, Tiny Speck had 41 employees. Let's assume those employees were being paid $50,000 per year on average. That's just over $2 million in wages that Tiny Speck paid out every year. Let's assume they had $1 million in other costs, like office rent and servers. So, that's $3 million in expenses every year.

What, then, would have been the annual rate of return on that $17.2 million investment if Tiny Speck's revenue is $3 million per year? 0%. The company wouldn't have generated a profit for investors, but it would have been perfectly sustainable as a business had it not relied on venture capital in the first place. With that revenue, all the business's expenses could have been covered, and all the employees — including Stewart Butterfield and Tiny Speck's other three co-founders (Cal Henderson, Eric Costello, and Serguei Mourachov) — could have been paid a salary.

What if Tiny Speck's revenue was $4 million per year? That leaves a maximum profit of $1 million for investors (excluding the four co-founders' share), an abysmal 5.8% annual return on their investment. At that rate, it would have taken them 17.2 years just to make back their investment, which is unacceptable to most venture capitalists.

So, even if it had been bringing in $1 million every year in profits — let alone breaking even — Glitch still would have been considered a financial failure.

Tiny Speck would have needed to make a profit of at least $3.4 million per year ($6.4 million in annual revenue) for their investors to earn 20% per year on their investment (the minimum return that venture capitalists expect), and a profit of at least $6.9 million per year ($9.9 in annual revenue) for their investors to earn 40%.

We don't know exactly what Tiny Speck's revenues were, and we don't know exactly what it's expenses were. Tiny Speck might have been losing money on Glitch. It might have been breaking even, just making money for its employees in the form of salaries. Or it might have been profiting millions of dollars per year. Stewart Butterfield said he hoped Tiny Speck would earn $30-$40 million per year from Glitch, but it clearly fell short of that. (Source:

All we know for sure is that the fact that Glitch shut down doesn't indicate that it wasn't self-sustaining or profitable. It just wasn't making a profit of 20% of $17.2 million per year.

This should be encouraging to those of us who want to see Eleven succeed. It seems very likely to me that Eleven will be able to have a business model that — at the very least — brings in enough revenue to cover the cost of the servers, even if the game still has to be run on a volunteer basis. It also seems very possible that Eleven will bring in enough revenue to become a bonafide business with full-time employees, perhaps even including Tiny Speck alumni.


  • WOW! Intense. Money figures hurts me braaaaaain. All I gotta say dat is alotta dough. Here is my ten bucks 33999990. more to gooooooo! I will do my part if small to help it succeed as much as I can.
  • I didn't know the figures but I did suspect that the reason they had to close was that they could not make the profit needed for the venture capitalists and now that I see the figures it is even more clear. If Eleven and/or CoU can get it going with subscriptions and without millions in venture capital it may be sustainable longer. I hope that happens.
  • edited January 2015
    Thank you, @"Pastel Forever"! I knew it wasn't just "wasn't making enough money to cover costs" but "wasn't making enough to cover the ridiculous amount of profit that VC's expect" - wasn't making big enough money fast enough; long-term profitability is considered irrelevant.

    That means they may well have had PLENTY of money to give everyone refunds, give employees a nice severance package, and cover various other expenses... and still not had enough to keep running Glitch. Refunding a few thousand dollars to players wasn't going to make a difference in the millions they'd need each year--they probably could've manage to survive another few months, maybe another year, but they decided to cut things off when they still had that cushion, could still reward their staff and give players as many bonuses as they could insert into the game.

    And no amount of friendly player offers to buy things or donate money was going to make a difference; they needed, from the bits of info I picked up, at least 10x the paying player-base--and they needed that immediately, and to increase it over the next several years. As was mentioned--many glitchen had already dragged every friend they could into the game; the gaming world as a whole wasn't going to jump into Glitch without some kind of marketing hook, and wasn't going to keep playing (and paying) without a change in its strategy and game-tone.

    The game couldn't make the jump to grow that big, that fast; part of it was the limitations of flash as the gaming market moved to mobile devices, and part was Glitch's quirky nature and part was probably a swarm of other contributing factors.

    That doesn't mean Eleven can't be sustainable or even profitable--it just couldn't, and probably can't in the future, sustain venture capital levels of income.
  • Insightful! Thanks for posting!
  • Thank you, I never thought of it in those terms, I now admire Stoot and his crew even more.
  • I get the numbers, but with so many programmers and a business located in California, I highly doubt the average salary was $50,000. The thesis of this piece is sound, though.
  • I still wish they had let us know earlier that they were in trouble. I think there would have been a lot of Glitchen willing to pay if they knew what was going to happen.
  • Soon we'll have a second chance!
  • Interesting. I hope Eleven does succeed. I do not think Butterfield was aware of how much an impact this game has made to us until later on when they released the game to public domain.
  • I knew it! Greedy bast@&?$ds!!!! How could they sleep knowing how many glitches were devastated. Good thing we are made of ur. So even though they broke our hearts, they could not break our spirits!!!
  • edited January 2015
    Excellent piece, @"Pastel Forever". The two takeaways I got were: We don't know that Glitch wasn't profitable and - Glitch had outside investors. Perhaps many people already knew this. I didn't and I appreciate the information.
  • @Aley, I suspect they didn't know they were in trouble right away--they needed months of testing and gathering user data (and income) before they could run the predictions to see if they were going to be profitable enough to make the investors happy.

    It's possible that they decided, "well, we *could* make as much money as they want us to... if we plastered the game with ads, removed half of the free items and made them premium credit items, and shut off half the skill tree to free players." They may have decided they'd rather shut the game down than become another "free to play; pay to get anywhere interesting" game.

    I'm pretty sure if the amount they needed could've been raised by a shout-out to existing players, they would have. They saw the Indiegogo campaigns for the art book and music--they knew a one-shot k'start or i'gogo campaign could raise them tens of thousands of dollars right away--but that wouldn't be enough.

    I think they needed to at least triple the number of paying players pretty much immediately, and to keep that number consistent and growing. And the game just couldn't handle 10x as many players, which is probably the minimum of what it'd take to greatly increase the number of paying ones. Platform was part of the issue--everyone was going mobile, and Glitch wouldn't port to iphones or android without a complete rewrite.
  • edited January 2015
    Also even if rewritten which wasnt really feasible, and unless major changes were done to displays, and even then im not sure itd work, because there is nowhere to have a chat and the game playing, and moving for jumping and other things ,would most likely be too difficult as well on a mobile device / phone / ipad. The game really needs a full size screen to have everything that needs to go on effectively and with enough space.

    From what little thats been said it seems that is was investors and they wanted a huge return which they werent going to get, i think the game brought in money just not on the scale it needed to be to pay investors back. They needed to drastically increase thier playbase and the game did not appeal to most ppl. In most games and im sure this is the case with Glitch too, about 10% - 5% ( might be a bit off on the % ) of ppl that try a game stick with it. Some dont like the players, some the game interface, some the game itself, theres many reasons ppl dont stick with a game but the retention rate is always low. If its a very popular game the % is higher and ppl stick with games more if they already have freinds playing too, but in general retention rates are always low. Glitch had a few things that confused ppl , for one thing there was no combat, and also the game is weird, by design but things like egg trees, milking butterflies and talking rocks, bewildered ppl and when ppl left they seemed to say one or the other for leaving (weird or wanted combat) (if they said anything that is).

    Platform wise yes Flash is on its way out, but they did have various offsite tools, websites or Apps that activated skills, or a wardrobe, & various market checkers or buyer tools, and the craftybot was meant to be controlled this way too but he wasnt finished, the route website offsite too, and that listed who had what on thier street or tower, which made it so you could do some things remotely without having to enter the game itself, which is a good compromise IMO, with Flash and needing a laptop or desktop to play becasue of screen size
  • The expense costs are way off. Stoot posted in one of the threads on the old forums that they were spending $500k per month on server operations. I think the amount was exorbitant, but that was one of the bigger barriers to profitability.
  • Staff salaries might be included in that figure servers alone thats ....waayyy too much
  • Yeah, I thought so too. He may have used the term "operations" which I interpret one way and perhaps Stoot another. He was repeatedly asked about that figure as things were shutting down. In any case, there were numerous discussions over the point of operating costs and the 500k figure was repeated.

    That would make expenses at a minimum of $6 mil/year, or twice the amount quoted in the OP. Revenue of $4 mil would result in an annual $2 mil deficit.
  • edited January 2015
    That was the $ amount that was stated yes, i figured that # would of made them break even but not make a profit is what i thought was meant. So servers and staff and other basic exspenses. But it was never said exactly what it did mean either
  • edited January 2015
    The exact numbers you plug in for Tiny Speck's expenses and revenue don't really matter. Suppose expenses were $6 million/year and revenue was $8 million/year, for a profit of $2 million/year after staff salaries (including Stoot and his co-founders) and all other expenses. That's $2 million/year *profit*. The game still would have shut down for lack of revenue because unless they're pulling in a profit of about $7 million/year the VCs (venture capitalists) aren't happy.

    Tiny Speck had an engineering team in San Francisco and a design team in Vancouver, so maybe the $500,000/month figure was the cost of running the whole San Francisco office, staff and servers included.
  • edited January 2015
    The overhead was large as well as what the investors wanted is most likely the bottom line, nomatter what was being made it wasnt enough to satisfy VCs and probably what profit was made was very short of what they wanted which more than likely was a very large sum of money. But yeah that doesnt mean it wasnt profitable just not profitable fast enough
  • edited March 2015
    Gigaom's unexpected closure this week is a reminder of how dangerous it can be to accept venture capital. This probably goes without saying, but I would caution Eleven against accepting any outside investment at any time. Slow and steady wins the race.
  • We certainly have no plan to do so. :)
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