Today let’s talk about how you get money to build your dream game or studio!
Fundraising for any startup is an interesting beast, but as a gaming startup, you’re going to have your work cut out for you. The traditional pool of venture capital firms and angel investors that many tech entrepreneurs can tap at this stage is significantly smaller for games. There’s a lot of opinions on why this is, but the most common reasons are that the industry is hit driven and game investments require a significant amount of capital to show product traction.
As we set out to build Empyrean, we knew that sourcing funding was going to be an integral piece of the picture. Strategically, I broke down our fundraising efforts into the following buckets:
- Venture Capital firms specialize in high risk/high growth investments and are able to leverage their funds, portfolio companies, and network to provide development and growth capital for startups.
- VC allow the developer to self-publish since they are able to source a significant portion of their funding by selling equity in the company.
- VC are generally aligned with long-term company value and will support studio decisions as long as things are going well.
- If the company’s growth trajectory starts to wane then VC will become hands-on and attempt to pivot your studio towards a new path to realize company value.
- You can lose control of your company if the VC are not aligned with your vision and outvote you on the Board.
- Very few VC are interested in backing game studios due to the risk profile associated with game development and operations.
- Strategic Partners are developers/publishers who are looking to diversify their portfolio by acquiring equity investments or territory rights from game developers. These deals typically require that you work to co-develop or grant territory rights to the strategic partner in return for a minority equity investment.
- Strategic Partners act like VC in that they typically acquire an equity stake in your company which affords you the ability to self-publish in your chosen territories.
- It is also not uncommon for the Strategic Partners to purchase territory rights for a title in the Asian market, allowing them to publish the game for an upfront lump payment, localization expenses, and a smaller revenue share (80/20).
- Strategic investments require that you think globally, as you are no longer creating a game for a single region. This may require that you fork development in order to support varied business models and regional SKUs.
- Strategic investments do not typically provide publishing opportunities for regions outside of their home country. E.g. if you were to source a deal from China and did not have adequate funds to self-publish in the west, you would need to close a co-publishing deal with a western publisher.
- You can lose control of your company if the Strategic Partner is not aligned with your vision and outvote you on the Board.
- Wealthy individuals who are accredited. An accredited investor must have more than $1,000,000 in liquid capital or generate more than $250,000 per year as their salary.
- Angels typically write checks between $50,000 – $250,000.
- Angel funding is typically handled in a convertible note or SAFE that is issued with a discount (this allows the Angel to buy into the seed funding round with a discounted price per share). Try to avoid a cap at this point, since company valuation pre-prototype is not a science… in fact pre-revenue valuation is tough to gauge in general.
- Angels will typically introduce you to a wider network of investors and can be great leverage for securing VC funding.
- Games focused Angels are few and far between and require a significant amount of digging to find.
- Angels typically are unable to provide all of the capital required for building the entire game or studio.
- Kickstarter, IndieGoGo, Fig, Crowdfunder, etc.. Crowdfunding allows early adopters or investors to exchange money for a promise of a future product delivery or in return for revenue splits/equity in your company.
- Depending on the way your Crowdfunding campaign is structured, you can come away with the ability to fund your game in entirety without giving up any equity in the company.
- Crowdfunding also acts as a major marketing beat, building an early audience for the studio and showing future investors or partners that a market exists and that players are interested in your game.
- Crowdfunding campaigns require a significant number of person hours to manage. You’re looking at a commitment of one to two individuals working on the campaign full time for thirty to sixty days depending on the length and goal.
- If your campaign fails, you’re also in a real pickle – you’ve now shown potential investors that the market for your game is smaller than anticipated or you’ve validated my personal opinion: that the Crowdfunding ecosystem for video games has significantly diminished over the last few years.
- Your EAs, Ubisofts, and Activisions. Publishers are to games what film studios are to movies.
- They fund both internal and external projects with varying ranges of budgets and then work to build brand awareness and acquire players by spending marketing bucks.
- Publishers typically work in two models, co-publishing or advance on royalties publishing.
- Co-publishing requires that the development studio takes on the majority of the development budget while the publisher provides the marketing and user acquisition funnel. The two parties then split revenue 50/50 and are able to negotiate IP ownership (sequels, expansions, same universe different game, etc.) and derivative ownership (games that are in a similar space).
- Advance on royalties publishing requires the publisher to pay developers an advance on the future gross revenues of the title. These payments then cover development expenses and the developer is required to repay the advance in full from their future earned revenues. This deal is typically to the same tune of a 50/50 revenue split between the publisher and dev with two caveats; the early royalty payments to the developer are paid back against the publisher’s advance on royalties and the publisher owns your IP. Typically 80% of the net revenue the developer walks away with will need to go back into paying down the publisher’s advance until it is recouped.
- Publishers have established communities, brands, and acquisition funnels. Based on the performance of your game, they can quickly scale spends up and down and drive a large volume of players.
- Publishers also understand the gaming space intimately and are more likely to take risks betting on new IP or games.
- Revenue sharing is tough to stomach, particularly when it is coupled with an advance on royalties.
- If you lose IP and derivative rights to your IP / genre then you will have a tough time uncoupling yourself from the original publisher you signed with.
- Agents are like the guy Ari from Entourage, they exist to build business relationships between developers and publishers who are looking for new titles to publish or outsource studios to co-develop with. The best description I have for them is outsourced Business Development managers. There’s a few really great stand up groups out there, ISM in particular.
- Agents remove the burden of sourcing projects and managing deal structure from the developer. They are able to draw on their networks and line up work-for-hire or publishing deals for small to mid sized developers
- Agents take a large cut. Their contracts are negotiable but expect to pay 5 – 10% of lifetime gross royalties to cover their BizDev and deal services.
As our team discussed the pros/cons of each of the different funding sources, we decided to first approach VC, Strategic Partners, and Angels since they afforded us the ability to self-publish and their investments were tied into the long-term vision/value of our studio. Self-publishing was an important piece of our early strategy as was building company value towards an eventual exit.
It became apparent early in the process that funding our equity round of $7,000,000 was going to be difficult. As a result of this feedback, we pivoted the scope of our feature releases and were able to break funding down into smaller milestones:
- Prototype – $25,000
- Alpha – $900,000
- Early Access (PC) – $2,000,000
- Console Beta – $4,000,000
- Full Release (PC, Console) – $7,000,000
I’m going to wrap this blog up here for the week. Tune in next week where Joe will discuss a deeper dive behind the design aspect of Persistent Cooperative Adventures.