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What Do Investors Look for in a Game Developer?

December 6, 2012 Article Start Previous Page 2 of 3 Next

Hit After Hit

A first great game is necessary, but not sufficient, to building a great game company. When games were simply packaged software, we all knew that games were projects, with a defined "end of life." Now that we think about games as a service, we build games that can hold players attention for longer periods of time. We want to retain players for months and years. But at some point a player will tire of your game and move on. At some point, you will run out of your universe of potential players. And at that point, your game will start to die.

If things go well, this might be many years and billions of dollars in revenue after the game has launched. But even games such as World of Warcraft are now showing signs of aging. League of Legends has supplanted it as the most played game in the world, but one day League of Legends will enter into its twilight years as well. To build enduring enterprise value, to build an enduring enterprise, you must build an organization that can build more than one great game. You can't just build a hit; you need to build a hit factory.

As the Chinese game publishers have shown, you can only ride on a single great game for so long. You need to have a strategy for how you can leverage your success and learnings from your first game into future games.

You need to have an unfair advantage based on your first success that you can leverage into future games. This can take the form of cross marketing to your player base, reusable code libraries to make the next games faster and cheaper to build, or even insights into what players want that you uniquely have.

But if you aren't thinking about how the success of your initial title can be leveraged into future success, you run the risk of being a one hit wonder. It could end up being a tremendous hit, like League of Legends or World of Tanks, but it is still only one.

CCP Games (EVE Online) and Jagex (RuneScape) run this risk right now, while Zynga, Kixeye, Gameforge and Bigpoint are all examples of companies that have been able to replicate their success. Both Riot and Wargaming are rumored to be working on new games to make this transition.

Getting Discovered

The good news about the game industry today is that it is easier than ever to get your game in the hands of players. Between the web, Facebook, and app stores, distribution has seemingly been solved.

The bad news is that everyone else has figured this out too. All these channels are flooded. The game marketplace is crowded and noisy. Traditionally, game developers have relied on publishers to get their games discovered. As a result, creating strategies for discovery is a new area for them, and they are often glib about how to solve the problem. "We'll just get viral." "Best game wins." "Apple will feature us, my buddy works there." All easier said than done. So while design, development and distribution are important, the real difference between a successful game and a failed one is often discovery.

In 2009, viral growth through invitations and notifications were the way that Facebook games could get discovered. As these channels became better policed, discovery moved to the feed. But today, even the feed is no longer a reliable driver of discovery. As a result, games that rely solely on viral growth will have a harder time replicating the success of Zynga.

For mobile, charting is the primary mode of discovery, and this led to widespread app store manipulation. Today, mobile game publishers use various techniques to "burst" to the charts, hoping that game quality will keep them there for a while.

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Xavier Moore
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Great article

Serge Versille
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A great team, a first hit, and the marketing power to create more hits are what attracts a banker. It is strange a VC would have the same risk approach to investing as a brick and mortar bank.. This must be why game devs have been flocking to Kickstarter. But I guess, as the article points out, that the early bird will get the worm, and that the investors with the ability to bet on the right team and project BEFORE the first hit, are the ones who will get the sizable returns.

Rodolfo Rosini
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Jeremy Liew is a smart man but this article bends reality a little. First of all you have to consider that there are many steps for funding before you get to meet him and raise money from Lightspeed.

Investors generally will look at your existing traction (vs. overall spend) and see if that can be leveraged with more capital, then will analyze your customer acquisition model and distribution (which is a big issue in games since you have big gatekeepers like Steam and the iTunes store and it's hard to bubble to the top organically).

Which is why investors tend to favor tech/platform type of deals rather than games. Also the examples are so cherry picked to be misleading. Unity was founded in 2004 and for years top VCs would not have touched them with a 10 ft pole (attitude changed with the explosion of social games and the need for x-platform development) and Supercell's first product was not even on iOS.

Again the way to make money as a VC is to find a company that is successful but is constrained by lack of capital and expertise to grow (and on this factor is the reason why VCs are better than banks). The bonus scheme of a VC is not designed to invest in small companies and nurture them slowly to a modest success.

If you want to make games, Kickstarter is awesome. If you want to build a business and capitalize on a shift in consumption then go for external investment.

Jonathan Blow
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Let me summarize this article:

"To be appealing to an investor like me, become a highly successful game company."

Gee, thanks. Nobody would ever have thought of that.

Daniel Kaplan
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Edit: Naww..cant seem to push out links in the comments =D

Lewis Pulsipher
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Another, more practical, summary would be:
"to obtain venture capital you need more than aspirations and hopes and passion - every developer has those." You need a track record and a plan.

If this article doesn't help stars-in-their-eyes devs recognize what they're really up against, nothing will.

jeremy liew
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Rodolfo, I definitely love to invest in game companies with positive unit economics (CAC vs LTV) that are constrained by capital in their ability to grow. But that is where the other factors that I mentioned come in. I also want to see the team (so that I have some sense it isn't a fluke that the first game is working) and a thoughtful approach to both discovery and subsequent game concepts in the pipeline. In the absence of that, I think that your'e looking at a project (with a defined end of life) and not a company (That will build equity value over time).

As Serge rightly points out, if you're looking at building a single game, which by definition is a project, then kickstarter is a better financing source than venture capital. That way you can sink your money into up front development, run the game until it eventually peters out, and definitely in the middle and back end of this period if you recognize the situation and don't try to overinvest to turn back the inevitable, you can create very nice cash flow for yourself as a developer.

Betting on great teams and project before they are a hit requires a greater degree of foresight than I have (and some might argue more than anyone has!) as with all games there is title risk. There are no "sure things" - so it comes down to risk tolerance. Some are willing to take title risk. I'm not. I prefer to take scale up risk.

Luis Guimaraes
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Makes a first hit. Makes hit after hit. Has a great team. Has a powerful cross-promotion network.

Needs money.

Eric Schwarz
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I like how this article has a lot to talk about regarding branding, social media, sequel milking, games as a service model, and all that stuff, yet the author is apparently clueless about what makes a good and successful game. "A First Hit" is possibly the most important section in the piece, yet it's the shortest and says absolutely nothing at all, not to mention is also contingent upon everything else said afterwards. Funny how that works. Oh, it's hard to predict if a game will be successful? Thanks for the advice.

Neal Nellans
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If he could tell you that he'd be a developer and not a VC

Laura Stewart
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The title would better be "How to get a VC to Fund a Sequel to Your Homemade Indie Blockbuster."

Nicholas Bellerophon
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One interesting approach that some companies are taking to overcoming the discovery problem is the creation of very cheap, very simple, non-monetizing games designed purely to drive users to other games via cross-promotion. Especially on mobile, with the small screen sizes and short play sessions, hyper-casual games with a strong core loop can scoot up the free charts.
An example I downloaded recently on my iPhone: "Flow Free". But there are really quite a lot out there. The question is to what degree we're acquiring the kinds of users we want. From a base of 100k hyper-casual players, how many have the potential to also be mid-core whales who will buy hard currency in the premium product? 10k? 1k? But here's the great thing about cross-promotion: you have the power to find that out and adjust as needed, because you run both ends of the pipe.

Machine Works
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I think this is one of the best (because it's clear and no BS) articles I have read about VC game funding. While it is not that different from a publisher's point of view, it is pretty concise and the author shows that he has a much better insight than most VCs on the subject matter.

Arturo Nereu
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Thanks for the advice, I know not every investor is interested on the same profile but having your opinion is really helpful for us on this moment.

- @PhyneGames

Matthew Burns
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Thank you for this clear and upfront article on VC game funding.