While COVID-19 has been disruptive to our lives, the past year has been incredible for gaming. There has never been a better time for startups, and the amount of funding available from specialized and non-specialized investors alike has continued to grow.
At Makers Fund, we have been very impressed with the talented developers setting out to create their studios and wanted to share our advice with teams starting to approach VCs for funding.
1. Understand the difference between equity, project and debt financing
The three main types of financing are equity, project, and debt financing. Each of these has different sources.
Equity financing can come from VC firms or strategic investors such as publishers or platforms. Historically, project financing comes from publishers, though independent financial investors have started to become a source as well. Debt financing is also available from financial institutions of all kinds and, in recent years, gaming debt financing firms have begun to appear.
- Equity is focused on the potential upside. It's an investment into the company rather than a specific title. The team should have a strong vision of the company's long-term future, which goes beyond the success of one game.
- Project financing is focused on sales performance, making it typical for premium PC and console titles and unusual for free-to-play titles.
- Debt financing is focused on profitability metrics. As such, it's more suited for mobile titles with a clear return on investment and payback period.
Each comes with its own set of pros and cons to think through when making a decision.
With equity financing, you dilute your ownership and give up some business control to your investors. However, you maintain your intellectual property and creative control. How much creative agency you want to keep becomes key to this decision process. This is a long-term partnership, potentially across multiple projects.
If a publisher provides project financing, they share a piece of the revenue and, in many cases, will ask for rights to the IP or sequels (sometimes both). The partnership is typically for just one project.
One way to look at this is to identify the areas you want more independence vs. more support. For example, if you want more help with marketing and platform business development, then publishers excel. On the flip side, if you think you can self-publish due to your experience and connections, other partners might be a better fit.
2. Be mindful of how VCs evaluate a team
A lot of the focus is on evaluating the founders. At the earliest stages, the leaders could be just two or three founders, but a solid composition is vital. VCs dig deep to understand that the leaders are proven in their domain; we screen the founding team by seeking out folks who have worked directly with or for the individuals for references.
A lot of the focus is on evaluating the founders. VCs dig deep to understand that the leaders are proven in their domain
Some key indicators we look for when evaluating leaders are getting a sense of their grit and reliance. We try to understand how long the founding team has worked together. Did they start working together for the first time on the endeavor they are pitching now? In particular, we look for signs that leaders exhibit both high intellectual and emotional maturity.
In addition, competition for top talent has continued to rise due to the number of new studios emerging. Hiring has become increasingly important, and we look for founders that have a proven track record of attracting talent.
Lastly, we want to see founders that are close to their players, willing to learn, and receptive to change. In an industry where gamers have ever-changing and evolving tastes, having tight and frequent feedback loops has become key to the development process.
3. When searching for investment, look for "smart money"
The number of investors interested in gaming has increased significantly over the last few years, which has been an excellent development for the industry. Still, there are only a few gaming-dedicated investors. So far, we've been impressed by the tangible impact they make on their portfolio companies.
At the end of the day, as a founder, the best thing you can do is screen the investors yourself.
Gaming VCs specialize in industry-specific support, such as leveraging strong industry connections and providing more insights on the product level. They tend to better understand the industry's unique quirks, such as the gaming life cycle, user base, etc. Many are former business operators themselves, either founders or executives.
When it comes to equity investments, it's critical to find the right long-term partner. This goes beyond just the firm itself and extends to the individuals you'll be working with on a day-to-day basis.
At the end of the day, as a founder, the best thing you can do is screen the investors yourself. We encourage anyone interested in learning more about working with VC funds to reach out directly to their portfolio companies and hear from the source.
4. Figure out how to get on investors' radar
COVID-19 has undoubtedly changed the way VCs operate. There are many examples both from our firm and others that are making sizable investments into gaming startups without the opportunity to meet the founders in person. However, one thing that has not changed is that the best way to get in touch with gaming VCs is through warm introductions. Dig through your networks, such as LinkedIn, to find avenues for these introductions.
In addition, we've been surprised with how resilient video game industry conferences have been throughout the pandemic. Even in an online-only form, these events continue to be a good entry point to engage with gaming VCs. During these events, founders and investors are hard-pressed for time, which often results in hefty prioritization of meeting requests. That being said, you can still set up pitch meetings by reaching out with a cold pitch and deck over email or LinkedIn.
We hope this quick guide has provided some insight into the process and will help you figure out how to approach raising capital for your company.
Aðalsteinn "Alli" Óttarsson is a principal at Makers Fund, a global interactive entertainment venture capital firm focused on early stage companies. Óttarsson previously spent 18 years deep in the trenches of PC online game development. He was part of the original team that shipped CCP's EVE Online, before moving to Los Angeles to join Riot Games as the development director on League of Legends.