Making games has become easier than ever, but building a business to sustain them is far more challenging.
From ambitious start-ups to small studios looking to expand, funding is essential to ensuring the future of your company. And while there many sources out there, few come with the advice and support of established investors and VC firms.
Devs might think these corporations have little to no interesting the games industry, but many have been keeping a watchful eye on our sector for some time. Investments in Mojang, King and Supercell are just a few high-profile examples, and these have caught the attention of yet more investors.
“Up until recently, institutional investors haven't been interested in developers because the opportunities to scale the business isn't there – only publishers, distributors and hardware have a scalable model,” Tenshi Partners’ managing partner Ed Daly (pictured above right) tells Develop.
“The fact that a single game, like Minecraft or Candy Crush, can make more money than most console publishers have managed over a decade with a slate of titles mean that those, very, very few developers in this bracket are highly investible.”
The longer you wait for your ideas to confront the market, the bigger risk you take. It is easier than ever before to go to market, even at an early stage, and it is a great opportunity.
Thomas Bidaux, ICO Partners
However, ICO Partners’ CEO Thomas Bidaux (pictured above left) says there is more the industry can be doing to attract more interest from financiers: “Where we can improve is probably on educating the investment entities about what a gaming business entails. We sit across that strange cross roads between technology and creativity and it is not uncommon to see investors underestimate one or the other.”
Of course, some VC firms still see the hit-driven nature of the games industry as a massive risk. With so many developers shooting for the same audience, most will inevitably fail. But there are steps studios can take to reassure potential investors.
“The best way for developers to mitigate this risk is to build in to get revenue early on – it can be because they have a short development cycle for their games or because they plan their games to go on Early Access or through crowd funding,” Bidaux explains.
“The longer you wait for your ideas to confront the market, the bigger risk you take. It is easier than ever before to go to market, even at an early stage, and it is a great opportunity.”
WHAT ARE INVESTORS LOOKING FOR?
Obviously, investors aren’t able to offer funding to every studio that has ambitions of big time success. They will be looking for the diamonds in the rough, the stand-out companies that could have the next big hit, but that might not mean what you think.
“Investors are all looking for is a great business – not a great game – to invest in,” says Bidaux. “For some companies, their business is intimately tied to one core project and the distinction is not necessarily obvious, but that needs to be kept in mind in all discussions with investors.”
Daly adds: “Investors care about future returns so they look for evidence of previous success, from teams and from games – and success that can grow once their cash is applied.
“Increasingly that means games, in a F2P context, retaining and monetising players without reliance on expensive paid user acquisition on which it is hard to make a profit. Whereas once a large number of installs was enough, now savvy investors realise that only a few games with lots of players will ever last long enough, and monetise well enough to generate a return.”
Investors care about future returns so they look for evidence of previous success, from teams and from games – and success that can grow once their cash is applied.
Ed Daly, Tenshi Partners
With the likes of Supercell and Mojang receiving third-party investment, developer awareness of this source of funding is rising all the time, but there are some common pitfalls that many stumble into.
For one thing, Bidaux reiterates, it is important to explain why your business is the worthy investment, rather than pitching the game you’re currently working on.
Daly says: “Investors see any opportunity in the context of a competitive market so developers need to explain how they will beat that competition - bearing in mind that everyone is trying to do that. Otherwise an easy mistake to avoid is getting the materials right - the succinct punchy deck, maybe 6 slides, that had the credibility to stand out for an investor that might follow-up on 1 in 50.”
A major source of finance for developers and games start-ups nowadays is crowdfunding: Kickstarter, IndieGoGo and the like. But while these can be great start to funding your game, this is not an avenue devs can bet their business on. Fortunately, successful crowdfunding campaigns can help attract interest from investors.
“A successful crowdfunding campaign can provide that evidence of market demand without the costs of making a game,” Daly explains. “So even if you can't wholly fund a game through a Kickstarter, it can help build a compelling story to tap into other funds.
“The other intrinsic appeal comes from the ability to begin building awareness that will ultimately merge into a marketing campaign, and because of course there are no equity or debt costs.”
An investor's expertise, network, and portfolio of companies it has built can be as important as the funds.
Thomas Bidaux, ICO Partners
Bidaux adds: “I am a big proponent of crowdfunding. It has lots of advantages and has almost no barriers to entry. But, a lot of studios don't understand how it works and go for it ill prepared. They overestimate the attention a crowdfunding campaign generate on its own and how much they need to do to make it successful.”
But why, if you’re able to raise hundreds of thousands of pounds through Kickstarter, would you still need to seek out an established investor?
“An investor will come with its expertise, its network, the portfolio of companies it has built,” Bidaux continues. “This can be as important as the funds. A crowd funding campaign will help the studio build its community as well as perfect its marketing message way ahead of its launch.
“The different paths are not exclusive from one another. We have seen a few campaigns that were pitched as ‘if we are funded on Kickstarter, our investor will feel reassured and will invest more into the game’. This was the case Kingdom Come: Deliverance and Camelot Unchained.”
Daly adds that if a developer or game is in the early stages, the initial finance still needs to come from families, friends and anyone else you know that is willing to help get you started.
“If a studio is up and running and profitable then it's about demonstrating why those profits will take off with an investment behind the firm and that requires a credible team and an evidence based case for market potential,” says Daly.
“The good news is that studios can soft launch early versions of a game at relatively low cost to seek some market validation – or Kickstarter to do the same without writing a line of code.
“Also, in the UK, tax schemes like SEIS/EIS do reduce risk, these should be a given as they apply to any investment at that level, but they have spawned a number of games specific funds, also encouraged by the production tax relief.”
Our investment experts also advise developers to thoroughly research other sources of financing that are available, particularly in the current climate where the creative industries and start-ups are expected to play a major role in the future of the UK’s economy.
Investors see any opportunity in the context of a competitive market so developers need to explain how they will beat that competition - bearing in mind that everyone is trying to do that.
Ed Daly, Tenshi Partners
“Grants are available for innovation in games, something Tenshi has had lots of success helping studios access,” says Daly.
“They typically provide around half the costs of an innovative development project, with no need for repayment. The trick in a winning application is making the case both for the innovation and also in its potential to generate the economic benefits that the Government is looking for.
“The trade associations provide a lot of good information on private funding already, and generally information is out there online. The trick is to quickly determine what is and isn't relevant for you. In the case of grants there is a problem in that information is often in buried in Government websites, full of jargon that make it difficult for game developers to figure out whether it is really targeted at them. The information on EU grant funding is unbelievably difficult to navigate.”
Bidaux adds: “It is very important to do your homework on the different grants and governments supported schemes to make sure you get all you can for your projects.
“The industry has shifted to a point where talking about how to make the games is not the only topic we should discuss and how to make this a sustainable business is also important. So, we see more information shared on the topic overall. We should just keep talking with each other and share experiences.”
Bidaux and Daly will both discuss investment and other sources of finance at this week's Games Funding Forum, which takes place in Shoreditch, London on Thursday, October 23rd. Click here for more details.