How new life emerges from the death of creative companies

Unlike people, organisations reproduce by dying. This is how they generate 'spin-outs': small, modified versions of themselves that expand into new areas.

Industrial clusters like Silicon Valley, Hollywood and the City of London are basins of economic activity that capture the benefits of company death. And company death is one of the things that is rejuvenating these clusters, keeping them alive.

This has implications for policy, which I'll discuss at the end. But before that, let's look at a recent (and visible) death in the UK video games industry.

Earlier this month, Microsoft announced that it was closing down Lionhead, a respected Guildford developer responsible for well-loved games such as the 'god-game' Black & White, and Fable, a jaunty fantasy adventure. (Incidentally, Lionhead gave DeepMind's Demis Hassabis his first AI design job after he graduated from Cambridge university).

Websites and forums filled up with memorials. Some people voiced concerns about the future of the UK games industry. Others bemoaned those evil multinationals who buy small independents, crush their creativity and then shut them down.

This is all understandable. Nobody likes it when a creative company dies. Careers are upended, projects cancelled, jobs lost.

However, I think there could be a silver lining: Lionhead's demise will probably benefit Guildford's games industry in the future.

How does this work?

One thing to remember is that when a creative company dies, it frees up its most important resource: its people.

Another is that the company probably died because it suffered from the innovator's dilemma: it was tied to an old business model or product, and failed to innovate in response to changes in the market. This doesn't mean that it didn't have any good ideas. It probably had many, but they didn't come to fruition.

And now the company is dead. We have a bunch of creative workers looking for something to do. What are their options? They can relocate somewhere else, get a job in a business close by, or start up a new company. Let's take these in turn.

1.

If many workers move away, then the local talent pool may get depleted  –  the dreaded 'brain drain'. However, relocating will not be the preferred option for many workers. It means selling your house, changing kids' schools, and so on. It is very disruptive. Most people will try to avoid it.

2.

Getting a job in a business nearby is better, and can benefit not only the company, in providing experienced workers, but the whole industrial ecosystem. When people change jobs they take with them connections, as well as useful knowledge, which strengthen local networks. One could even say that a death in a cluster brings it closer together.

3.

The third option is to start up a new business, using redundancy payments as seed capital and turning long-simmering ideas that were never realised in the old business into the foundation for something new. Life goes on, and the dead company survives, in a way, in its spin-outs.

Can we find real-world examples of this cycle of organisational death and cluster renewal playing out?

There are many. The Black Pebbles story is closest to Lionhead's situation: In 2006, renowned Brighton racing studio Black Rock was acquired by Disney Interactive. It didn't pan out.

After the release of two critically acclaimed games that didn't sell well enough for its liking, Disney shut Black Rock down. It was 2011, and the House of Mouse was moving away from console games and towards social games and apps. Black Rock didn’t seem to fit with this strategy, and 144 developers lost their jobs.

Fortunately, the games industry is full of second acts. In this case, this involved the avalanche of entrepreneurial 'Black Pebbles' which emerged from Black Rock. Among these 15 businesses (as of 2013) we find Boss Alien, the developer of bestselling racing app CSR Racing; Origami Blue, the creator of games for kids with learning difficulties; and Second Impact, which makes browser games.

With some exceptions, these startups transferred Black Rock's high-end development skills to new platforms and business models. This was hard to do in Black Rock, geared as it was towards 'AAA' (big, expensive game) console development. However, when the company died, its castaways were able to start from scratch, and Brighton's game-making cluster was renewed.

Hybritech is another example of company death and cluster renewal. This biotech startup from San Diego was acquired by Eli Lilly, a big pharmaceutical company, in 1985. The merger was a cultural disaster ("Animal House meets The Waltons" in the words of a witness). Two years later all Hybritech employees had left the business… to start up 40 biotech ventures in San Diego, eventually turning it into one of the biggest clusters of Biotech activity in the world (PDF).

My last example – Alejandro Jodorowsky's 'failed' attempt to film Dune – is definitely the one furthest out there (literally). Fresh from filming The Holy Mountain, Jodorowsky had an epiphany and decided to adapt Frank Herbert's legendary sci-fi novel about ecology, religion and giant sandworms. He assembled an incredible creative team to do this, with artists HR Giger, Jean Giraud (Mœbius) and Chris Foss doing the concept art and sets, special effects by Dan O’Bannon, a soundtrack by Pink Floyd and a cast including Mike Jagger, Orson Welles and Salvador Dalí (among others).

Alas, movie studios got cold feet and the film never was made. The ideas behind it did, however, influence Alien and Star Wars, arguably altering the history of cinema. Perhaps ironically, Hollywood – the cluster that killed the project – was the biggest beneficiary of Dune's death. Who said that evolutionary economic geography or cultural evolution were fair?

All the stories above share one thing: a local backdrop of industrial resilience. The clusters we are talking about didn't depend on a single business or project for their survival. There was a local ecosystem of skills, knowledge and money that meant it was a no-brainer for spin-outs to start-up there, instead of some other place.

This resilience is what turned Black Rock's death, Hybritech's botched acquisition, or Dune's failure into boons for their clusters, instead of an economic disaster. The situation would have been very different if these businesses had been the only show in town.

What are the implications for local economic policy makers and cluster caretakers? Three things come to mind:

1. Nurture diversity

Clusters that are diverse in their company types, sectors and sizes will be able to withstand an economic shock more effectively than those which are industrial monocultures.

2. Strenghten networks

Strong networks inside a cluster can help speed up the process through which resources – ideas and people – are reallocated from a failing (or failed) company to those still standing.

3. Don't prop up failing businesses – support their spin-outs instead

This is self-explanatory. Local economic policy makers should keep some contingency funds to seed the spin-outs from existing company failures, because those are guaranteed to happen sooner or later. Reacting fast to them minimises the risk of an exodus of talent.

But what about Guildford? Does it have the resilience to recover from Lionhead's demise?

I'm pretty confident this is the case. In previous research mapping the UK games industry with web data, me and my colleagues at Nesta (which publishes The Long + Short) showed that Guildford is one of the strongest games clusters in the UK, with a powerful mix of small startups and established businesses. It spawned Lionhead (out of the ashes of Bullfrog Productions), and provided a fertile ground for its spin-outs, including Media Molecule or 22Cans.

I think Lionhead's demise will be the beginning of another cycle of creativity and innovation. Lionhead may be gone, but its cubs will give us a lot to talk about (and play) in days to come.

A version of this article was originally published on Medium