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The bankruptcy of Flagship Studios, an ambitious videogames startup, provides a startling example of what not to do when it comes to finding funding for your startup. The company, founded by CEO Bill Roper, formerly of the Starcraft team at Blizzard North, leveraged the intellectual property rights for its two games, Hellgate: London and Mythos, as collateral in order to secure loans to keep the company afloat. When the company finally ran out of that money, the two core projects immediately reverted to the lenders, Comerica and HanbitSoft, respectively. HanbitSoft, a Korean company which had the exclusive rights to market the games in Asia, ended up in a position where it was in the company's interest to let Flagship go under: Why pay licensing fees when you can own the game outright after the owner goes under?

It's a long-held truism in the Valley not to risk your own money on a project when there are plenty of people willing to let you risk theirs in the hope of a return. You can now add that you probably shouldn't risk your company's most vital assets in exchange for loans from interested parties. As it stands, all of Flagship and partner Ping0's employees have been laid off, and HanbitSoft along with competitor Perfect World are now sniffing around the remains looking to poach whatever engineering and development talent they can, while Roper and other executives are said to be paying the last of the team's salaries out of their own pockets.

And according to our source, the death of the company couldn't have come at a worse time. The development team were just putting the finishing touches on the code to allow players of Mythos to make "real money transactions" — in other words, pay for in game items and new content as they played. By offering the game for free or nearly so and then charging the players nominal fees afterwards, the game can benefit from wide adoption early on and a revenue stream to pay for the development of more features and content as time went on.

But it meant that Flagship would have to eat the cost of early game development (which can be wildly expensive) and would almost guaranteed not to recoup the full cost on release. While it's an interesting business model that could prove wildly profitable a well-funded company, at one where Roper's old pal from Blizzard, CFO Ken Williams, couldn't keep the burn rate under control and was pawning IP off to licensees in exchange for bridge loans, it might make a little more sense to get some sales in first and nickel-and-dime players later. (Photo by Gamerscore Blog)