Rapid-fire growth

Locked and loaded, Epic Games blasts its way up this year's ranking of private companies.
By Erin Dunn

The deathwatch started in May. Providence, R.I.-based 38 Studios LLC, a video-game maker started by former Boston Red Sox pitching ace Curt Schilling, was suffocating under an overly ambitious concept for a game and unbridled spending. It was about to default on a $75 million loan from the state of Rhode Island, and though the governor said he was fighting to keep the company alive, its nearly 400 employees, many of whom hadn’t been paid in weeks, would be out of a job within a month. Facing an uncertain future, workers at its subsidiary in Baltimore, Big Huge Games Inc., hatched a plan to create a new, independent studio. They approached Epic Games Inc. about using one of its games to build a demo on, but the Cary-based company had another idea.

“In one of life’s coincidences, Epic’s directors had spent the morning discussing how we’d love to build even more successful projects with our growing team,” President Michael Capps wrote on the company’s blog, “but that we’d need a dramatic infusion of top talent to do so. Which, we all knew, was impossible.” A few days later on June 7, 38 Studios filed for Chapter 7 bankruptcy. Two months after that, Epic opened Impossible Studios in Hunt Valley, Md., hiring 36 of Big Huge’s roughly 100 former employees.

That’s one way for a company to grow, but the main reason Epic leaped from No. 91 to 30 on Grant Thornton’s North Carolina 100, an annual ranking of the state’s closely held companies based on the previous year’s revenue, was its release of Gears of War 3 in September 2011. Originally retailing around $60, 6 million copies have been sold. Epic, which declines to release its revenue but was ranked among companies with between $250 million and $499 million, was the biggest gainer on this year’s list. From a business CEO Tim Sweeney started 21 years ago in his parents’ basement in Potomac, Md., Epic is now a company with global reach that employs roughly 300 people.

Though it’s anything but your typical Tar Heel private company, Epic is growing the same way that others on the North Carolina 100 are: by investing in people, products and partnerships. “Successful companies started stockpiling cash and sitting on the sidelines during the economic downturn,” says Mike Ryan, Grant Thornton LLP’s audit practice leader in the Carolinas. “Today those companies are looking for ways to deploy capital and grow their business. Not only are they making capital investments that were deferred during the recessionary period, they’re considering acquisitions to achieve their growth objectives.”

Recruiting talent is especially important in the ultracompetitive gaming industry, but it’s tough for applicants to win their way onto Epic’s payroll. “It’s harder to get a job here than the CIA,” Chief Financial Officer Joe Babcock says, half-joking. Median experience is 10 years, but the 165 employees at Cary headquarters who have made the cut get extras such as in-house fitness classes, a stocked kitchen and pantry and surroundings that exude cool — a giant slide connecting the first and second floors, a rock-climbing wall and a stairway tagged with graffiti depicting many of Epic’s gaming characters. There’s a motion-capture studio where actors are filmed, their movements used to make animation more lifelike. This summer, it reportedly hosted crews filming Iron Man 3, a claim neither denied nor confirmed by the company. But the security code required to enter the building signals that serious research and development is under way.

Nestled between a sprawling suburban strip mall and luxury apartments, Epic’s 115,000-square-foot headquarters is identified by no more than a stone marker inscribed with its street number. After moving from Maryland in the late 1990s, its staff grew to the point the 30,000-square-foot building had to be expanded 2½ years ago. The company has always thrived on new technology. A downstairs corridor showcases the covers of the more than 40 games it has released, starting with ZZT, which was distributed on 3½-inch diskettes, to its latest hit, the Infinity Blade series for mobile devices. It’s a reminder that every Epic product must surpass not only competitors but also its previous games. “It’s very hard to succeed as an independent game developer,” Babcock says. “It’s a high-risk business. Most game developers have a hard time making it. If their game isn’t as successful as they hoped, they wind up having to close their doors.”

That’s how Epic wound up with the Big Huge Games employees, who are helping it expand in mobile gaming. Epic is betting its complex, graphics-rich games will set it apart from other popular offerings. “Angry Birds is doing very well, but Angry Birds is a casual game,” Babcock says. “We’re trying to bring that AAA experience, that high-quality game play and stunning visual graphics, to the mobile device.” The Infinity Blade mobile game and its follow-up have raked in more than $30 million. The role-playing game will get a second sequel later this year with Infinity Blade: Dungeons, which is being partly developed by Impossible Studios. “They have a very cohesive team for game development, and we’re looking to leverage that,” Babcock says.

In August, days after opening Impossible Studios, Epic announced that it had bought People Can Fly, the Polish studio behind the popular Painkiller personal-computer game. It has held a majority stake since 2007. The studio is helping develop Gears of War: Judgment, a prequel to the billion-dollar trilogy that will be released in March. Epic’s latest venture is a new studio in Seattle, a U.S. gaming hub. It will hire at least seven developers there, tapping talent to work on its newest software, Unreal Engine 4. Unreal Engine is an important part of Epic’s success story. It’s not a game but a platform the company developed that allows designers to make their own games and create effects such as reflections and shadowing as well as establish how characters interact with surroundings. Epic began licensing its technology in the mid-1990s, but business really took off in 2006 with the introduction of Unreal Engine 3. It has spawned more than 300 games. In addition to Epic’s own Gears of War series, they include Quincy, Mass.-based Irrational Games LLC’s BioShock and a series of Batman games by United Kingdom-based Rocksteady Studios.

Epic unveiled Unreal Engine 4 in March at the Game Developers Conference in San Francisco. Contemporary consoles — Seattle-based Microsoft Corp.’s Xbox 360 and Tokyo-based Sony Corp.’s PlayStation 3 are more than 5 years old — will soon be obsolete. Unreal Engine 4 is partly an attempt to dictate the power necessary in the next generation. “It’s always a race between the software and the hardware, and this is true in the computer industry in general but very true in gaming because it’s so leading-edge,” says R. Michael Young, a computer-science professor and executive director of N.C. State University’s Digital Games Research Initiative. “It’s not uncommon for the toolmakers, the software makers like Epic, to create tools that are so demanding that no commercially available hardware can run the games you can produce with them. And then the hardware makers just race for the next six months to eight months to put out the capabilities. It’s like leapfrog with the back and forth.”

To illustrate Unreal Engine 4’s power, Epic created a demonstration featuring a monstrous knight awakening in the ruins of a mountain fortress, flames shooting from his eyes. Lava spills out across the craggy stone floor as he dislodges a massive sledgehammer that was seemingly frozen in place. Once he emerges from the collapsing edifice, snow swirling around frozen peaks and a smoldering volcano become visible in the background. The sparks that fly around the magma and other effects are examples of Epic’s advanced technology, but the software’s most important feature might be the time it promises to shave off development. “You can string together different objects and game-playing components basically without writing a lot of code, which has not been done,” Babcock says. That efficiency means time and money saved for both the company and its customers. Wired magazine called it “nothing less than the foundation for the next decade of gaming.” It’s still in development, but its first release will be the personal computer-based Fortnite, a survival game expected out next year.

More games, ultimately, mean more revenue and more chances to reinvest. The company isn’t looking to go public anytime soon, but does want to continue growth into new platforms and markets. It already has several offices in Asia as well as London but is eyeing more global expansion. It took on a minority investor, China-based Tencent Holdings Ltd., in June for an undisclosed stake. “A lot of the value there comes from the partnership and their ability to allow us the access into those markets. The Chinese market in particular is very hard to break into,” Babcock says. Tencent, an Internet and mobile company, also has strong ties to Latin America, which has devoured the Gears franchise. “I would say our acquisition strategy is that we’re looking for something that happens by a serendipitous relationship,” Babcock says. “They’re just a group of guys and talent that we cannot walk away from.” 

See how other top private companies are growing.

Download a full list of the NC100 list here.