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Raising Venture Capital for Mobile Games - Part 1
by Seth Sivak on 11/26/13 10:02:00 am   Expert Blogs   Featured Blogs

The following blog post, unless otherwise noted, was written by a member of Gamasutra’s community.
The thoughts and opinions expressed are those of the writer and not Gamasutra or its parent company.

 

I gave a talk on raising venture capital (VC) at GDC Next 2013, which is currently available on the GDC Vault. This is also a cross-posting from the Proletariat Blog.

Funding is one of the least discussed parts of the development process. Publishers dominated this conversation for a long time, but in the past few years, venture capital investors have become increasingly involved in games. The process of raising VC involves two key pieces: networking and pitching. I’ll cover these topics in later posts, but for now, let’s try to understand venture capital.

Disclaimer: This is my experience and my opinion. There are certainly other ways to go about this process; think of this advice as just another tool in the toolbox, not the only tool for the job.

What is Venture Capital?

When I talk to other developers, there seems to be an air of mystery around the idea of venture capital and what accepting it would mean for their company. Most developers think of venture capitalists as Scrooge McDuck with piles of money to swim in and (apparently) ski upon.

In reality, taking an investment is a viable way to fund a game company and most developers are surprised to know that it’s fairly common in our industry. Everyone knows about companies like Zynga and Supercell taking VC investments, but they don’t always know that Riot Games, Meteor Entertainment, Harmonix Music Systems, and Oculus VR have as well.

When considering if venture capital is right for your studio, it’s important to understand that a VC investment is actually selling part of your company. This is markedly different from a traditional publishing deal, so it’s important to know the differences.

Venture Capital vs. Traditional Publishing

It’s a good idea to consider a number of funding options when building a company and it’s important to understand the differences between each option. The table below outlines a number of differences between VC investment and publishers:

Venture Capital

Traditional Publisher

Invest in the company

Invest in the game

No revenue share

Revenue share

No help with distribution, production, research, or other services

Help with distribution, production, research, or other services

No ownership of the IP

Take ownership of the IP

No creative control

Take creative control

No production/scheduling control

Take production control

No milestones

Withhold funding based on milestones

Take board seats

Do not take board seats

 

The most important piece is the first one. When taking on VC investment, you aren’t just signing up to work with the investor for a single project, but rather for the life of the company. This is why it’s critically important for the team and the investors to get along and be aligned in their expectations and goals.

Another key point in this comparison is that the VCs will mostly stay out of the development process for single products. This can be a good or bad thing, depending on what the company needs in terms of feedback and support. It may seem obvious that a game studio would want total autonomy, but that also means getting very little support.

Keeping control of the intellectual property (IP) is always the right option if possible. Since the VCs are invested in the company and not a single game, they want the IP to be valuable because it will increase the value of the company. A publisher wants the IP because it gives them the ability to produce further titles with it, regardless of the development team.

Publishers will usually have considerable input into the milestones, budget and scheduling of a project; this does not happen with VCs. This was mentioned above but a company going the VC route will have less support but also less oversight, so the decision is on the development team.

Lastly, it’s important to discuss board control. Companies need to have a Board of Directors, and it is very likely that investors will want to be a part of the board. It’s a great chance to have mentors available that are very invested, but it also means giving up some control of the company. The board can typically block mergers or acquisitions, have input on salary levels, and even push to remove the CEO. My best advice is to be open and transparent with investors about your expectations.

Keep in mind that the traditional publishing deals referenced here are not representative of every publishing deal. It’s always a good idea to meet with multiple publishers and understand the opportunities available. Some publishers are trying new strategies and looking for ways to be different.

Conclusion

I would recommend considering VC investment to any game studio that is looking to be more than just a lifestyle business. There’s currently a hunger for good game investments, and the amount of investors interested in games continues to grow. No matter what sort of partnership a studio is involved with, it’s important to make sure there is mutual trust and respect from both parties. Just like hiring new team members, make sure that a publishing partner or VC is a good fit for the company and for the team.

Up Next…

In the next post, I will talk about networking, including some good places to get started and the lessons I’ve learned along the way.


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Comments


jeff grant
profile image
Having done a couple of software startups and having dealt with many different VCs for 20+ years, I have to say that I take a bit of an exception to your table, as there's no such thing as a "typical VC deal". At least in my experience. Sure there's the ideal VC deal where they just give you money and then disappear until you're done and making millions, but that very rarely, if ever happens.

VC investment into a/your company can take many forms, and involve many different provisions. There is nothing set in stone that defines what makes up a VC deal, other than that they all want a way to cash out and make their money. They very well could want or provide any or all of those items in the left column of your table, and then some... it's totally up to them, and you, to work out what makes sense for both parties.

If you're someone who's new to the game development business, without a track record or experience, without a prototype, etc., then you're going to probably have to give up way, way more of your company (both financially as well as operationally) than you thought in order to secure financing. That could include 50%+ ownership, operational control, multiple seats on the board, performance/delivery milestones to secure your next traunch, etc.

For that matter, every VC project I've been involved with (on both sides of the table) had very strict scheduled milestones that were closely tied to funding.

$0.02

Eric Diepeveen
profile image
This year Stolen Couch Games got their first investment from a foreign party. We've since been looking for another investment of about $250.000. It's pretty hard to find investment firms that want to invest in your company. Many of them have little experience with gaming and can't make an accurate risk assessment. Even if you're making a game that resembles Animal Crossing but for mobile (which has HUGE potential).

It's very easy to take the publisher route. But giving away (partial) control of your IP can really hurt your prospects. I've heard many stories of publishers removing games from the app store. This leaves the developer with a game no one can play. Working with an investor has been very good for us. After we launch our game Castaway Paradise we'd love to talk to VCs to help us grow our business faster. Fun times!

marty howe
profile image
Which VC firms are interested in investing in video games? If anyone knows or can recommend some.

Dave Friedman
profile image
As with all such business deals, I think it bears reminding that before a game developer considers selling a piece of his company to a venture capitalist, that developer should find an attorney with experience in venture capital deals.

Zachary Strebeck
profile image
Great post. I wonder how much impact the new equity crowdfunding rules will have on the gaming industry. There are some issues, like the lack of a secondary market and the restricted nature of the securities, that may make investors hesitant. If they think the wait on a Kickstarter reward is bad, wait until they can't unload their shares for over a year, or possibly not at all if no one is selling.


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