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This railroad sim may point to the future of game crowdfunding Exclusive
This railroad sim may point to the future of game crowdfunding
March 20, 2013 | By Kris Graft

By now, we're all familiar with the Kickstarter style of crowdfunding, in which people donate money to their favorite projects, and if a financial goal is met, funding is approved and project development goes forward.

Depending on how much you donate, you may receive a T-shirt, the game whose development you put money towards, or even a credit in the final product. It's a nice gesture for your donation.

But what about getting actual money back from your investment? You know, like a real investor.

That model is known as equity crowdfunding, and it received a big score today in video games when Swiss developer Urban Game Studios' railroad business simulator Train Fever hit its 250,000 euro ($323,000) goal on equity crowdfunding site Gambitious.

It's one of the few times an equity-crowdfunded game of this financial magnitude has been successfully funded. (Slightly Mad's Project C.A.R.S. raised over 1 million euros, or $1.3 million, with a similar promise of revenue share). In the case of Train Fever, over 650 unique investors will get a healthy piece of the pie. The campaign still has 11 days left.

Equity crowdfunding platform Gambitious is a site founded by business partners from Texas-based independent game publisher Devolver Digital (publisher of games including Hotline Miami), Mastertronic and Dutch investment firm Symbid. It caters exclusively to funding video games.

With Gambitious, investors get their advances repaid, and receive a return just like a publisher or angel or venture capitalist would receive. The offer varies from project to project. In the case of Train Fever, the studio expects 822,500 euros in revenues, with Gambitious investors receiving half of that. That equates to a return on investment of 165 percent.

What about Kickstarter?

Why hasn't U.S.-based Kickstarter, in all its popularity, adopted the equity crowdfunding model? Right now, equity crowdfunding is an international legal minefield. The model was approved by president Obama in April 2012 when he signed the JOBS act, and the U.S. Securities and Exchange Commission has until 2014 to define the rules of equity crowdfunding -- it has yet to finalize these guidelines.

So for now, soliciting investments from the general public is illegal in the U.S. and Canada (right now you have to be a "qualified investor" to contribute). But when the coast is clear for everyday folks to invest, there's big potential for this to take off in the future. It could challenge -- or even supplant -- the current model.

But even after the JOBS act is implemented, don't expect Kickstarter to race towards equity crowdfunding. CEO Perry Chen said in November 2012, "We think the most disruptive aspect [of Kickstarter] is the removal of the investment component. People are supporting projects because they want to see them happen. It's so different than giving money because you want to make a profit."

Kickstarter may not be interested in the equity-based model (for now), but Devolver Digital's Mike Wilson tells us, "I think a lot of gamers and game devs will be [interested], especially after the inevitable wave of Kickstarter vaporware."

Looking at the case of Train Fever, he may be right. While equity crowdfunding in the U.S. and Canada are stuck in legal limbo, a European developer like Urban Game Studios would be wise to consider this funding option.

Gambitious will be relaunching in May this year, as the new company takes time to revise and reform its investment structure.

"For us it is of utmost importance to offer an equity based model that is tailored to the specific needs of both investors and developers, and to make sure innovative game projects as Train Fever see the light of day," a Gambitious rep tells us.

Meanwhile, the company is still entertaining submissions for future Gambitious projects. If you'd like to get in touch, the official website is here.

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Mathieu MarquisBolduc
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Its like witnessing the birth of the stock market all over again.

Benjamin Quintero
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Wow this just sounds like a train wreck. (I couldn't resist). If I were them Id wait to see if it succeeds before calling other project vaporware, especially for a toy train simulator...

Kris Graft
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Hey, train/railroad simulators can be pretty rad. :) The video (and yeah, it's just a video, but it's in-engine) shows an already-impressive game, visually anyway. I can see why people would want to get in on this, actually.

Mike Wilson
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To be clear, I'm not calling any project vaporware. I just expect a large percentage of the projects funded on KS in the past year to not have raised enough to actually get to the finish line (including localization, q/a, testing, rating, marketing, etc) and for there to be a lot of disappointed people who expected to get a game for their 'donation.' This isn't unique to games... there are a lot of people getting funding on Kickstarter for things they've never actually done before, but making and shipping a game is a bit more of a black art than people who have never done it (or have never done it without publisher support) might realize.

Our goal is to manage this opportunity so that crowdfunding for games isn't a flash in the pan, but also to offer an opportunity for more serious investor types to participate in something they are passionate about while knowing that a real business plan exists.

Michael Pianta
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I have mixed feelings about this. On the one hand, I like supporting cool projects and if I got a little money back for that, it would be great. It's not like I can't use every dollar I get. On the other hand, I'm not sure I want to have to think about it. right now, if a kickstarter game comes out and I get my copy or whatever then that's what I wanted. If no person other than backers bought the game, then the game was still basically a success. The people that wanted it paid for it and it got made. With a model like this, other questions start to emerge to muddy the water. How many people am I sharing the money with (how many other backers?), and is the game going to be popular in a larger sense? And now, instead of getting a game and thinking "Great, I got a game!" I'll be thinking "Is this it? Where's the paycheck?" I'm not sure I like that. And yeah, in theory you could still do both, but could you really? I think it would be difficult to resist the temptation to start thinking entirely like a business man, and backing things you don't care about just because they'll be popular and ignoring things you do care about because they won't be a good return on your investment.

Kenneth Blaney
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To go with your mixed feelings I wonder if a mixed strategy is a better solution. That is, if you just want the game, you can kickstart for just the game, however if you want more, you can pay more thus relegating ownership only to the higher end backers.

Honestly, this makes sense from a financial perspective too. An indie company who has neither the talent on board nor the funds for a CFO is going to end up spending way too much time managing the royalty payments to their hundreds upon hundreds of backers. That overhead can easily sink the company. However, if there are just 5 people who own 5% of the company this becomes much more manageable (especially if these external partners understand the culture of the company they have bought into).

Paul Hanraets
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With reference to managing the royalty payments;
Royalties are paid out annually or per Q,
Gambitious delivers all the data and tools for an automated process; a bulk transaction file
which can be processed by the bank. Only one transaction with X beneficiaries.

Jeremy Reaban
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I think the problem with this is that people will start investing because they want to make money, not just get a game.

And so you have more likelihood of misuse, deliberate scams and so forth. 2 of the 6 KSes I have supported apparently are dead in the water (in terms of coming to fruition), but at the same time, I realized that was a danger, and at most I would have gotten a game.

Though with that said, the really high tiers on games has worried me. Like one of the projects I backed that isn't going to be fulfilled had a $5,000 backer. I would guess he's a little pissed.

James Yee
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I've been researching Crowdfunding especially the coming changes to allow Equity crowdfunding and yeah, a "legal Minefield" is putting it mildly! O.o!

Pallav Nawani
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I don't see how equity crowdfunding reduces the risk of failure. The possibility of devs underestimating the cost of game development doesn't reduce with equity crowdfunding.

How you get money, and whether your estimation of money required was right are two completely different things.

Nooh Ha
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It does not necessarily reduce the risk of failure but it does make the risks far more transparent as the developer is having to expose their cost and revenue expectations as well as their ongoing performance to public (or at least backer) scrutiny. This is a HUGE step up from KS which has no obligations to present or highlight risks.

Nooh Ha
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Not sure I understand the scepticism around this. AFAIC, this has all of the theoretical advantages of KS and nowhere near as many of the disadvantages. KS has next to no legal or financial accountability. KS developers are under no obligation to present costs, use of proceeds or risks to pledgers. Pledgers have almost no rights to scrutinise the company or project they have backed after they have received the money. One is about blind faith and the other is about informed investment. Neither guarantees success but at least one offers full disclosure and the potential of a return on your investment.

In such an unpredictable, hits driven market, the potential return could possibly even be substantial and all it will take is one of two of these to attract a whole load of money into games development that would not otherwise have touched KS projects. Surely that is a good thing?

Mathieu MarquisBolduc
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Imagine you're a developper with little legal or accounting training. Your project goes really well, and you are supposed to send 20% of your profits to backers. Its a subtantial sum, as you say.

Are you going to calculate the profits correctly? Accounting is hard. Are you going to be honest with the numbers? Money corrupts. With no SEC watching, anything goes.

Nooh Ha
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Sure, they are complex but realistically you would not be seeking funding through an equity funding method with zero accounting or legal resources to assist you.

RE "money corrupts": Fraud is fraud. At least with equity funding you have access to the financials to make such fraud more easy to identify and you also have a degree of legal protection. There is pretty much nothing to stop a KS developer taking the money and spending it however they like while maintaining that it is going on the project people pledged money to.

Robert Clegg
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You guys should take a look at Appbackr. The proceeds are accounted for through iTunes and app stores using Paypal. There may be other methods in play at this point but it's interesting how it is set up through accounts to verify purchases and distribute payments.

Michael Joseph
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This is interesting and I don't know how i feel about it yet.

I think the trade off has to be that developers raise a lot more money through this venue than they would through a kickstarter (or similar) campaign since they are now not just attracting gamers, but investors. Investors will need to put up more.

Will that happen? Time will tell.

Stephen Chin
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Two part to this. The first is the average person believing they'll get a substantial amount of money (hundreds or thousands even) when in all likelihood, it won't be nearly as much as they expect unless their expectations are set right. The second is that with so many investors taking away from the pie, I wonder if this may increase the likelihood that developers (using this model) will use Hollywood accounting - especially when margins are low enough that you're paying someone who has no vested interest in your company (unlike a full investor, they're not interested in anything beyond the one project) or having the money to keep your workers available for a little longer (who do).

Kevin Reese
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I think this is a fantastic concept for game development funding.

I'm quite adept at predicting which games will be successful, judging from their merits and design potential, so this will be quite an interesting method of gambling...err..investing money for me in the future. I hope more developers take this route.

Andy Lundell
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This will attract a very different crowd than Kickstarter.

Kickstarter is about connecting with enthusiasts who are willing to put down money upfront to help a great idea off the ground.

Equity Crowdsourcing is about connecting with people who think they can predict the market and want to gamble.

I don't doubt that Equity crowdsourcing will find an audience, but I'm not convinced I'll LIKE the audience that it attracts.