Complex VFX work can be less profitable than simpler work. Small studios need to keep an eye on their margins as they grow, and clients seek to leverage their lower overhead for increasingly complex work.

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Want to grow a great small VFX studio into a great mid-size studio?

This trajectory follows a predictable pattern and leads to a predictable set of pitfalls. You’ll need to be proactive if you want to counteract margin erosion and avoid the descent into mediocre client relationships that plagues many studios at this stage.

 I’ll talk solutions in future posts; this one is about understanding how the problem comes about.

The Beginning

The raw material of VFX production is artist time, and salaries are by far the biggest expense. These days, the hardware and software needed for an individual artist to produce high quality VFX costs a couple of thousand dollars. So, you can bootstrap a garage shop VFX studio without a lot of cash.  

For a talented artist who wants to be their own boss, or a producer with strong client relationships, the biggest investment they’ll make to bootstrap a garage shop is their own time.

From there, two key factors impact business performance:

1. Complex VFX work is not necessarily more profitable than simple VFX work. In fact, the opposite is often true. The margins on Oscar-winning work can be lower than the margins on very simple work that any VFX studio can deliver. Why? Because complex projects require more creative exploration with the client, and more technical problem-solving.There’s more room on complex projects for communication to break down, and less certainty in bidding the work.

2. Complex VFX work requires bigger teams of specialized talent working with more powerful tools. Studios equipped for this type of work invariably have higher overhead costs than studios producing only relatively simple work. Clients know this.

The story of your small VFX studio unfolds from here…

The Thriving Garage Shop

As a garage shop, you can deliver simple -- but high-quality -- VFX work with very low overhead.

This allows you to offer clients competitive pricing and still maintain a healthy margin. In fact, clients will gladly take simple (and lucrative) work away from larger, more established VFX studios and give it to you. Communication, both internal with clients, is reliable and direct. Clients speak with the company owners and the people doing the work. They don’t have to ask twice.

Clients’ trust in your small studio grows. Emboldened by their success producing simple work with the small studio, they begin to request more complex work. This provides the small studio with an exciting opportunity to scale up and develop new capabilities. They’re thrilled to work on more prestigious projects and enjoying the warm glow of happy client relationships.

So why is their margin dropping?

Because of the two  factors mentioned above. More complex work is (1) less predictable and (2) requires higher overhead.

Many bootstrapped VFX studios try to resist increasing overhead by delaying hires for business support functions (IT, HR, and Finance) for as long as possible. Painful lessons are learned when communication with clients starts to break down due to insufficient structure and production support. The operational needs of the growing business overwhelm owners, and production staff asked to do double duty. Risk of burnout increases. Early key employees who don’t have equity start to leave in search of a less stressful environment.

The Bumpy Transition to Mid-Size

Faced with the tradeoff between growth and margin, the growing studio raises its prices. Clients start to complain about the increase in cost. They also find it harder to get hold of the busy founders, and notice more balls being dropped as  production staff at the studio struggle to keep up with an increasing number of more complex jobs. Before long, clients stop sending the truly simple (but high margin) work to the studio. In fact, they’ll choose another garage shop with a lower overhead to do that work.

Meanwhile, your growing VFX studio needs more work than ever to support itself. You're forced to take on increasingly complex, and thus low margin work, to sustain growth.

Within the span of 2 -3 years, your great small VFX studio has morphed into yet another mediocre mid-size VFX studio. Now, it’s your turn to be predated by the next generation of hungry, bootstrapped, little garage shops, who are doing simple but high-quality work with low cost and low overheard.

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And so the cycle continues. I’ll share approaches on how to get out in front of these challenges in another post.