Financing video games: 3 elementary principles

How do finance and gaming industries collaborate?

Fundraising for video games is all about choosing the right partner
Make sure you have the right financial partner before the big jump

That’s it – you have graduated or dropped out from college and you are all set to follow your dreams and develop that awesome game with your killer dev team. Eventually you have been able to develop your MVP while on your pizza and caffeine all-nighter diet and now you wonder how you will fund marketing. We feel useful to recap what type of partners you will encounter on the bumpy road of fundraising, what makes the ideal candidate for it and finally, how to approach them.

Who are the usual gaming buysides?

Money is good but smart money is better
Size does matter in terms of financing

In terms of funding game development, there are two worlds: asset managers and gaming industry. Asset managers as a buyside category vary from indie family offices to private equity including venture capital and business angels with each one having their own ticket size and investment approach in the sector, whether they prefer F2P or premium, usually preferring minority tickets, limited ownership and less gaming-related discussions because the art of being a VC can compare to betting on the right horse and have him or her run his or her laps faster than the rest of the row.  This approach is not magic neither because you spend more time discussing balance sheet and financials but you have to remember than asset managers have a portfolio of startups and/or studios to live on – and they live with cash. Therefore, the VC who has chosen you has already decided which market you should serve and will fund you for it – or he/she will pick another market you find attractive if you fail. 

As for industry, corporate M&A departements also differ one from another in terms of leaning towards conserving their golden cohort and selling it more titles or going full potential in new territories with local partners. In practical, the industry approach is more likely based on full or majority ownership, important strategy meddling but market synergies being the rationale of the transaction from the beginning, your game can use a piggyback ride to get that extra million Chinese users because it does not only require a translation of your content in Mandarin. Finally, money is not the issue with them since you will seldom encounter a ticket size problematic – both by lack of excess. We have already seen AAA corporates chipping in series A rounds with 200k tickets along with their competitors just to be sure they will not miss a hit while their following acquisition has cost them more than $2 billion.

Am I ready?

Take your shot to raise funds when you are ready
Do. Or do not. There is no try.

Reaching the goal of funding game development is not a sprint, it is a marathon. You may be familiar with the odd vocabulary of finance such as teaser, roadshow, roadmap, LOI, MOU – not to be confused with an offering memorandum. Undertaking your first round not only takes guts but also time and skill. While we are not preoccupied about the gut part, we believe the first point on your checklist should be budgeting. If you feel your demo is not up for it or that you should add more levels, just improve first. While VCs will not bluntly reject you, they will stay in touch until they feel you are ready anyway so you should not waste your precious time prematurely pitching rather than doing more development because in both cases it will push the real talk back to several weeks if not months.  Exceptionally, a VC here and there will want to enter as early as possible – in their own words. But in practice, they are gathering leads in their pocket and will fund the sexiest studio.

Thus, as much as there is a time-to-market, there should be a time-to-finance term. For each stage of your studio and this applies to startups too, there is a possible funding roud so the first question you should answer is where do you stand on the startup financing cycle. One does not need to consider this chart as the ultimate truth however, its underlying principles are useful for you as an apprentice because they help you establishing your plan and decide at which stage you can start pitching or looking for an advisor if suitable. The typical VC can review many thousands of decks per year, he or she is not happy when you waste his or her time and you should not be either. You do not necessarily need a new equity partner now. As we have said previously there are viable non equity-based options among publishers. You want to make the best use of your time but it implies chosing the right moment.

How do you want to approach a buyside?

Raising funds for video games is both art and science
Instinct versus Rationality

Is funding game development art or science? Each one of you can raise money by itself – there is no doubt. There are a lot of global and local events scheduling meetings with VCs for you or via their favourite mobile app and there is a plethora of tutorials or online services helping you drafting your deck and pitching it. The job of selling is not rocket-science, and raising money consists in selling an investment in your company therefore raising money is possible for you. To put it differently, just because you can, does not mean you should – there are many pitfalls of going my way or the highway in this business. We see one main exception here in early stage funding. One VC even told us clearly systematically reject a pre-seed/seed deck if it already has an advisor at this stage but this is easily overturn by hiring the advisor as an employee or giving the person a board position. Finally, you will agree that the later stage you are, the more rational and investment banker-friendly your deck has to look.

This being said, finance has its own culture and terminology – as my strategy professor used to put it: “You need to speak an expensive language”. As we put it earlier, it is all shiny and stuff when you prep up to raise your first ticket but once you have made it to the deep end of the pool, it gets more complicated and this is where you start lacking time and energy on finance and where comes the what-is-the-risk-free-rate sort of question. Actually, raising money at later stages than series A gets more and more sophisticated both in terms of capital source and pitching techniques. Also, this is where valuation may run out of control and eventually miss its target. Even though we have explained earlier than in some cases, ticket size does not matter, it will still be a casus belli when discussing with a high-caliber fund and even though it may feel like taking a gun to a knife fight, you have to come prepared. Besides, a private equity fund manager has already explained us why they preferred to be approached by advisors for that matter: a direct approach from the buyside would make the valuation take-off while if an advisor proper process outlines the limit of each discussion and each topic is well expressed at the right time. The process is mastered and you can focus on creating awesome games while we focus on our mission.

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