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Funding your game startup

by Burak Tezateser on 05/12/15 01:45:00 pm   Expert Blogs   Featured Blogs

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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.

 

Two weeks ago, I wrote an article about the problems of weak game industry ecosystems. I received some nice reaction for it and I thought I should elabarote some of the main problems even more. I can't say I'm an expert when it comes to fundraising but the things I learned over the past 5 years don't exist on textbooks. There are few articles here and there but they don't seem to analyse all the possible ways of raising an initial capital in depth. 

Here is an interesting article by Rachel Presser that offered a few alternatives for fundraising.

This one is very good and more in-depth than others as it makes a distinction of pre-demo and after-demo fundraising. 

Here is another one that also talks about the grants in UK.

Before listing all the possible methods of generating cash or finding external resources for your game startup, I should mention that we tried to use almost all of them but in the end we funded Monochroma with 5% contract works, 12% crowdfunding, 20% tech grants, 30% self investing and 33% bank loan. Our studio is located in Istanbul, Turkey and it's a unique case in its special ecosystem. In the article I tried to cover all different possible scenarios.

-Self investing (including friends & family)

This should be the last resort for all studios and indie developers. While it gives you a larger credit in case of success think of at least 50% of games in the market for PC and consoles that can't make it break even. This ratio is even worse in mobile markets.

If you have a considerable amount of wealth, I think it's ok to invest around 1/10 of your wealth depending on the risk (if it's a PC & console game 1/4 is ok for example but for mobile, 1/20 would be safer as there is a higher possibility of not being able to sell anything). to the game you're developing. Don't underestimate your own effort when you're investing and that you have an opportunity cost (working somewhere else for X salary) as well while calculating your total cost.

If you can't handle stress well, you should always avoid self investing. Some people aren't used to taking risks and I saw many of them going nuts, self-destructive and toxic under such stress when things are not going very bright.

Also keep in mind that there will be a point in the development where investing more in the project would increase the expected value of your profits and it would be really difficult not to invest more at that point as you already invested for a lower expected value earlier. 

If you're taking money from your family and friends make it an investment, not a loan. There is a very high failure risk and they should be aware of it. They might trust you and you might have a high self confidence but there are millions of things that can go wrong and you wouldn't like to find yourself indebted to your close ones. You may become a self-loathing and desperate person.

-Funding project B with the continuous income from project A

This is not much different than self investing unless Project A and B have same business models, same markets, same scope and same production pipeline. It makes sense to start another company for project B if it has a different nature than project A. This lets you better analyse their profitability, makes you focus on the project with higher ROI and enables you to make an exit much easier than running all of your projects under a single company. 

The income you make from project A actually belongs to your wealth and if it's the only wealth you have, investing all of it to another project is the same mistake as self investing. It's also a perfect example of the endowment effect explained in behavioural economics.

Focusing on a single project if you're not a very experienced developer is told to be a better idea but eventually you find yourself running multiple tasks quite often. Some people are good at it, some are not. Find it for yourself.

-Contract Works 

There is a nice article on Gamasutra about contract works. 

Some people make a distinction between a service company and product company and say that success in one of them doesn't correlate with the other. But I think that the right contract work might be an excellent way to bootstrap a game startup. 

If you are making a 3D shooter game and trying to fund it while making websites for e-trade companies that's probably not a good idea. But if you're developing a 3D software for your government's city planning institution and you can develop a city building game afterwards with the same assets, it means you are sitting on a goldmine. Remember that many succesful companies used such contracts for growth. Crytek is a good example.

Another good example of entering the business is focusing on your strenghts. For example you can produce quality 2D & 3D assets (characters, props, textures) in Turkey for very low costs but a good animator is harder to find. Each region has its own benefits. Knowing the strengths of your region can be your entry ticket to game industry.

The endowment effect is still persistant in contract works and you should always remember that the income you made from the contract work is part of your wealth and you should invest  accordingly. 

-Government grants and incentives

Most government grants work as a cost-cutting option rather than cash injection to the company. You spend first and get a percentage of your costs back from the government. So not all of them are a proper solution for fundraising. Yet using them effectively might help you bootstrap quickly. 

This is the most region dependant part of the article. I made  a research for all available grants that game companies may apply. I don't think I could even find half of them. I appreciate any help to broaden this list. You can find a tech grant & an export subsidy in most of the countries. You should look out for them and if they don't exist you might consider moving your business to somewhere else.

US grants are listed here  with advices about how and when to apply them. 

Creative England grants look like the only cash injection grant I've seen so far. I don't know the terms of eligibility for each of them but they sound dreamlike for small startups. Only available in UK.

European Comission Research Grants¬†are available for companies that are doing R&D . Last year a call for Game Technologies offered up to 8M ‚ā¨ grant. Currently only option to apply with a game related research is radically new technologies. It sounds a bit difficult to be eligible right now.

Creative Europe program prepared by EGDF and funded by European Union looked great. Right now Horizon 2020 applications are open.

Nordic Game Program offers funding options every year for a limited number of projects, this one expired last month. Must be nordic is the first rule. 

New South Wales Government once had a wonderful grant for game development unfortunately they canceled it a while ago. Canceling it created a large outrage in the media. Looks like there were lots of companies surviving with that grant.

Last but not least Turkey offers a few great opportunities as well. While developing Monochroma we applied for a research grant of Tubitak and it was a success. We received a payback of around $150.000 in one year.

Here is a list of all research grants in Turkey. For eligibiilty you need to make the R&D in Turkey. Basic obligations for the project are:

-the research area must be new in Turkey (pretty easy in most cases),

-the research should be done in Turkey (makes sense)

-well documented (ok, no problem) and

-should generate a potential income (very subjective requirement).

Hopefully, recently they started to see a very high potential on game related research projects as they realized the market is huge, therefore it's easier to be accepted. 

If you are interested I can give more tips about how to apply and increasing your chance to be accepted. There are some foreign companies that moved their R&D department to Turkey because of these grants. The grant we received was 75% payback (almost a year of delay) and up to $240.000 right now.

Turkey also offers a 50% cost reduction for marketing of games in foreign territories which covers PR, digital & printed advertisement and attendance on international conferences & expos. The marketing grant is up to $300.000.

There are project writing companies that handle all the paperwork for you. Honestly I don't even know the differences between dozens of grants given in Turkey, these project companies help you finding the best grant suitable for your needs.

-Private Loans

Bank credits or other forms of private loans are extremely dangerous in game development and should be avoided if you are developing your own game.  Banks are looking for collaterals if you're financials aren't strong enough. So it's not much different than self-investing.

Yet it can be combined with other methods with a good risk analysis. If you made a deal with an IP owner or a publisher (it must be a company with excellent payment record) but you will receive your payment after the shipment of gold master, it makes sense to seek for a loan if there are no big development failure risk.

If they exists, government incentivized private loans  should be used it as a way of cost-cutting while keeping your own investment money on the depozit interest or another safe investment.

For example, in Turkey if you're a product export company you can get a special loan lower than LIBOR. Unfortunately this causes an opportunity for arbitrage and its being exploited.

-Crowdfunding

Including Steam Early Access, crowdfunding is a very nice alternative of funding your game. But it's very difficult to raise enough money for development unless you're a celebrity. There are of course some success stories telling the opposite but they are rare. We raised $85.000 from Kickstarter in our campaign for Monochroma but it only covered the 12% of all the development costs and we were already past 60% of the project when we submitted our game to Kickstarter.

I wrote an article soon after our Kickstarter campaign. It was in 2013, a lot of things changed in crowdfunding since than. Thomas Bidaux, from ICO partners have some very nice articles on the current state of Kickstarter and crowdfunding. 

Equity crowdfunding is a brand new concept that has some legal issue to overcome in most of the countries. Also the power of crowdfunding is coming from the strenght of the traffic of Kickstarter and Steam right now. There is no strong traffic to equity crowdfunding yet. But it might be in a few years.

-Investors (Angels, VC's)

Finding the right investor is probably the best way of starting a company. The right investor would put his know-how, business network, vision and capital to the startup. It's not much different than a good partner but a partner that doesn't micro manage or at some cases doesn't manage at all (which is probably good if he doesn't have a stronger vision than you do)

Unfortunately finding the right investor is harder than finding the prince charming for teenage girls. You might have to kiss a lot of frogs in your search. Let us distinguish the different types of investor and have an according strategy for all of them.

Angels: They usually offer some seed money and consulting for the start-up. They don't have a huge wealth like a Venture Capital and they are most likely looking for a safe exit in a year or so. Finding an angel that would carry the start-up for a longer period and that have the possibility to re-invest is important. Hopefully they have some game-industry knowledge and will understand your vision and needs. They would prefer to be near you as they would like to offer their business know-how and network easily while also keeping you under radar.

It's probably best to approach with your concept and you can build a demo or a prototype (minimum viable product in game industry) of your game with their seed. Some are patient to re-invest, let you do several pivots around your first idea and some of them just want to see the result of your first idea and if that doesn't work, stop.

Venture Capitalist: They rarely invest in the early stages of a company but depending on the business idea they might. The problem is that they are mostly looking for huge profits and don't care if you're taking too much risk for it. They tend to invest in 100 different companies and seek to find the one that would grow 1000 times more. Thus, scalability in your business model is key for VC's I met so far.

It's probably best to approach a VC with a high potential - high risk concept, such as an innovative technology that would change a genre of games or create a new genre. Or maybe a game with a high retention that you would like to start serial production (like the case of zynga and farmville)

What do investors look for in a game compan is a nice article written by a Venture Capitalist. And here is an entertaining article that tells about the hardships of finding an investor from a developer perspective.

The key feature of the right investor is the understanding of game industry. You won't be able to make a strategic or profitable deal with someone that doesn't understand your needs. They just can't see how good your team or how solid your vision is. They will just look in your financials and probably offer you a terrible deal. Even if such an investment saves the day, it won't get you anywhere. I'm not in a perfect financial position right now but I never felt guilty of turning down an offer of $1M cash injection to Nowhere Studios in return of a 50% equity. Because it wasn't a strategic fit and I felt the studio would be a playground for him to try weird game ideas. It was a hard decision back then, but now I'm proud I didn't let that happen.

Good angel investor networks and venture capital firms have some people (working for them or a partner) coming from the game industry. This would dramatically increase the probability of closing a healthy deal for both sides.

-Publishers

The last ten years in game industry has changed a lot for the busines models of game publishing. Here is a fairly old article that depicts how things were working 15 years ago. Here is a recent one that tells how digital publishing is shaping the future of the game industry.

Platform owners as publishers:

Technically, if you're self-funded you are an indie studio, you can still publish your game with 3rd party publishing programs but that won't help you funding your game. If you are a 1st party developer I won't discuss it here as the company is owned by the platform, it's an investor issue. But in between, 2nd party development might be the solution to get your game funded by the platform while also remaining independant as a company.

Digital and retail publishers:

Nowadays most of the publishers aren't interested in funding your game or don't care about your development process. You usually pitch them after your alpha build. They look for revenue shares from 10% to 60% in return of their marketing efforts. This is clearly not a man/day calculation as usually the real added value from a publisher is the use of their brand name. 

If you have a good track record, you can still find some publishers that get involved in the development and help with the funding. Unfortunately while starting a new game studio you lack that track record and individual backgrounds are not the same with the studio background. 

IP Holders as publishers:

IP Holder might be a book publishing house, a famous band, a sports team, a TV company, animation studio or an entertainment giant that collects various IPs. The terms of your deal may vary.

Some of the big IP owners in the world are working with cost&profit sharing with selected developer studios having good track records. Which means you can receive some upfront payment from them as well.  

-Private funds, awards and other miracles

It's impossible to list all of them here as they are changing rapidly. 

There are some private funds around the world that helps content creators, technology pioneers or visionnaries financially. Some of these funds are giving a non-refundable lump sum of money and some of them provide low or zero interest on loans that you pay back if you become financially succesful. 

Unreal development grants are available right now.

Ouya gave lots of similar grants and I believe it is still active.

Indie fund happens to be there for a while. 

There are lots of charity minded funds as well for example TTGV was a private technology fund in Turkey that offered up to $2 Million loan without interest to companies pioneer in technology.

There are similar humanity caring funds available. They all have different eligibilities.

Most of these funds would like to see a prototype of the game before deciding to take part in its development.

Awards are not really a way to fund the development of a game as the monetary reward is quite small most of the time. If you happen to receive an award it usually enables you to reach to other financial solutions (publishers, investors and platform owners) 

Miracles exist as well, we as game developers are telling stories that create bonds with other people beyond our means. They might help you by giving cash or by externalizing some of your costs. You can not directly seek a miracle like this. But know that they exist and be open.

-Incubation Centers

With all their mentors, seed money, office space and the access to investors game focused incubation centers are offering a "starter pack" for all those game development teams. From the ones I have seen, they have quite different models to support game start-ups. Some of them require an equity around 3-20% and provide seed money, some of them require a smaller equity 1-5% in return of mentorship and office space without making any cash injection.

The quality of the center depends on mentors and the investor network. Most of the centers have a close relation with a university or members of the academia. Incubation centers are also visited by headhunters and talented developers receive offers from bigger studios.

The idea behing incubation is to support the startup until they produce something marketable or at least get an investment for a longer period of development. Therefore most of the incubation centers offer a support for a limited amount of time (usually varies between 6 months to 1 year)

Here is a list of a few game incubation centers with the help of commentors:

USA:

NYU Game Center Incubator

CANADA:

Execution Labs
 

Estonia

Game Founders

Sweden:
SWEDEN GAME ARENA 

STUGAN

 

Turkey

Startup bootcamp

Atom


 

 

-Combining different methods and conclusion

Success in a game startup lies in creating a good business model, finding a good team and business partners and developing a good game. I didn't talk about the latter ones in this article, this is not a guideline of how to start a game company. This is merely a list where I mentioned the available cash generation and some cost-cutting methods for your business model. It's not even a guideline for creating your business model but it can give you some ideas.

You should combine various methods wisely to optimise your cash flow and profits. Some examples:

Model 1: Find an angel investor for the first 6 months of your development, build a demo, apply all the available festivals, get noticed and start seeking a publisher. If that doesn't happen quickly, try staying alive with contract works.

Model 2: Make some little savings from your other projects, apply for a tech grant, develop something innovative and start seeking a VC

Model 3: Start contracting art assets, create a  concept and go seek crowdfunding, if succesful apply for Ouya grant.

As last words, I am quite sure there are things I forgot to mention and other things that I misinterpreted. Please correct me as well whenever you think I am too subjective. Looking forward to receive your help to improve and edit this article in time.



Edited May 25, 2015 (Incubation Centers)


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