Funding is central to the development of every game and the life of every studio. But it isn't always easy to get. And even when you do, you need to understand what kind of relationship you're entering into and what it means for the direction of your game and studio.
Amy Wu is an investment partner at Lightspeed Venture Partners. Earlier this year, at GI Live, Wu offered useful advice for developers and studios seeking investment partners.
In this article, we've summarised the advice she gave, as well as her thoughts on why she feels now is a good time to seek investment, and the things Lightspeed is looking for in potential studios to invest in.
Opportunities for investments are booming
This will comes as no surprise to most of you: gaming is booming. Last year, the games market was worth almost $175 billion, according to Newzoo. While the global COVID-19 pandemic led to a significant rise in engagement in 2020, Wu says investors are keen to invest in the sector because "unlike some of the other categories, such as crypto[-currencies], it has been consistently growing".
In 2020, the Asia Pacific region and North America accounted for two-thirds of global revenue in the gaming market, according to Newzoo. Wu highlighted that China ($44 billion) and the US ($41 billion) alone accounted for almost 50% of global revenue in the market.
From a platform perspective, mobile is leading with 49% ($86 billion) of the market. Console is second with 29% ($51 billion) and PC last with 21% ($37 billion). Mobile also continues to be the fastest growing market, increasing 26% year-over-year.
"There's more funding in gaming than ever right now"
Some 2.7 billion people played games in 2020, according to Newzoo, and this figure continues to rise, particularly thanks to the continued adaptation of smartphones across the globe.
All of this engagement has led gaming to become the number one entertainment sector, ahead of music, film and digital video. And although competition is fierce, Wu is optimistic.
"There's more funding in gaming than ever right now, which is great for studios," she says.
"Historically, publishers have always been around to provide funding, and there also have been long-time funds, such as Makers Fund, Galaxy, London Venture Partners, and others, who've been investing in games for years. That ecosystem has only expanded."
Tips for studios seeking funding
- Identify what you want in a partner
Wu has four main tips for developers and studios funding raising. The first thing she encourages is to understand what you're looking for in a partner.
Wu says: "That seems pretty obvious, but I think in the gaming ecosystem, there are publishers, early-stage funds, there are life-cycle platform funds -- like Lightspeed and others. There's also private equity firms. And each of these partners will come with pros and cons, depending on what you are looking for.
"Some of the things that you should think about are: do you want to a deep, gaming-focused fund? Some of the pros are they have some of the deepest networks in the industry. They only invest in gaming companies, and have been for year.
"Or, are you looking for a platform fund, like a Lightspeed, or Sequoia, Index [Ventures], or Andreesen Horowitz? [These firms] have billions of dollars under management. They will support companies through multiple stage of their lifecycle, but they're going to be a little bit more generalist. Individual partners may have long-time experience [in gaming].
"Overall, the firm is a general VC. And so, you're going to get the benefits of a platform that will help you hire, find partners, and so on. But you may not get as deep a knowledge as you would get otherwise."
- Identify what your potential partner wants
Next, it's important to understand what investors are looking for.
"The flipside of understanding what you're looking for is also understanding what different funds are looking for," she says.
"There are funds focused on specific stages of investment and ideal cheque sizes. For Lightspeed, we have a broad range of cheque size: we can invest as little as $500,000 or $1 million, and our largest cheques are in the hundreds of millions for late-stage companies.
"Some funds are looking for more mature businesses, and have high-risk tolerance for pre-launch, [for instance, a] five-year development at a studio."
Understanding what they look for and what geographies they invest in is key, she says.
- Get references
With a short list funds that you plan to approach, and an understanding of what they're looking for, getting introductions and references on funds is the next priority.
"It's when the road is very rocky that it's important to see how a partner is going to work"
"It's always great to get a warm introduce into the funds, and especially into the partners that actually look at gaming," says Wu.
"It's important to get references on the funds and the partners. In venture, we always say that reputations are built with companies that don't do well. Because [with] companies that do well, everyone always has a great story to tell and relationships are fantastic. But it's actually when the road is very rocky or when a company fails that it's important to see how a partner, and how that fund, is going to work with the entrepreneur through those situations.
"So it's important to get references, because you will likely be partnering with these people for years."
- Think ahead
Finally, Wu says it is always easier to raise money when you don't need it, and you should raise more than you think you need for the unexpected changes and pitfalls of extended development cycles.
Wu says: "We're in an unprecedented time in terms of the amount of funding available for young and growth studios alike. For the first time in years, there are opportunities outside of publishers to find funding. And many studios are choosing to do so, because venture firms actually offer a lot of flexibility around uses of funding and raising future funding. The trade-off can be less help with distribution and, sometimes, not as deep connections or knowhow when it comes to making games.
"We tell companies to raise more than they think they need because, for example, with pre-launch games, everyone is hoping for a hit when they launch the game. But most of the time that doesn't happen. So it's good to raise more to be able to iterate on the game, when it's in beta, which is a period that may be longer than you anticipate.
"I will say that the situation you don't want to be in is to have to raise another round of emergency funding months before you launch your game."
What Lightspeed looks for in potential studios
Beyond your product and market, all investors are interested in particular qualities that you, and your team, can show when you approach them. When choosing companies to invest in, Wu says Lightspeed looks for vision, experience, unique insight, and demonstrated performance.
"The first is strong vision. We are excited to partner with entrepreneurs who have the vision to build generational, category-defining businesses. We are looking for entrepreneurs that want to build multi-million and multi-billion dollar businesses, and have the risk-tolerance and patience to do so.
"We're looking for teams that can really articulate what is the unique insight they have"
"[Next,] we're looking for management teams with relevant experience or the ability to recruit teams around them with experience in whatever they're building.
"Third is unique insight. What that means is we're looking for teams that can really articulate what is the unique insight they have in either the game genre that they are launching into, the game mechanic, or post-launch services that they are executing. We're looking for a clear understanding and articulation of that.
"Lastly, is demonstrated performance. And this doesn't necessary need to be measured in dollars of revenue, but rather what has the team done with the time and capital that it has raised or spent to date, and how does that benchmark against other teams?"
Wu stressed that there are businesses that are not a fit for Lightspeed, just as some businesses will consider Lightspeed not a fit for them.
Where Lightspeed sees gaming going next
As well as explaining what things Lightspeed is looking for in potential studios and game makers, Wu also shared a number of directions in which the company feels gaming is changing, and specifically areas it is looking to invest in.
- Games as social networks
The first of these is games as social networks. This includes the likes of League of Legends, Fortnite, Grand Theft Auto Online, and Animal Crossing, as well as emerging games such as Among Us, Rec Room, and Valheim.
"This has been a topic of the last several years: this transition from solo play to multiplayer, entertainment and community experiences," says Wu.
"What's interesting is this transition has only accelerated since COVID. And now we see that the average user on Roblox now spends more time playing than the average Facebook user [spends browsing] the leading social network."
Wu also sees opportunities in this space for games and game studios to develop. Cosmetics are now a common staple of free-to-play games, and Wu expects monetization in this category to deepen.
Another opportunity she believes is for game studios to hire from social networks.
"As games are shifting to a more social network type of experience, it's important to hire more people that really understand how to operate"
"Because some of the leading social networks in the world, like a Facebook, Instagram or TikTok, they deeply understand how to nurture and grow communities. As games are shifting to a more social network type of experience and utilising a games-as-a-service framework, it's important to hire more people in that really understand how to operate.
"And social networks are absolutely trying to build gaming experience within their ecosystems, and are hiring individuals and executives with deep gaming experience. And I believe this is an opportunity in the reverse as well."
Wu also emphasised the need to continue fighting toxicity, which continues to be one of the biggest issues stopping games attracting, and retaining, female players.
"In attracting female players, we think that there is an opportunity for more casual AAA titles. From example, Animal Crossing but with a deeper social, interactive environment."
Finally, she also noted that the popularity of the survival games, such as the inherently social Valheim and Rust, presents an opportunity for indie developers, because there's "relatively lower budgets to create great games in this genre".
- Gamers as creators
Games built around user-generated content, such as Minecraft and Roblox, continue to attract massive audiences. Lightspeed is interested in seeing how the "cold-start issue" -- games that lack exciting creators, who can attract new players -- can be solved.
Wu also believes there's more potential for user-generated content games targeted at adults, and titles purpose-built for the education sector.
- Making games for women and girls
Lightspeed is also thinking about how the games of the future can reach even more players.
To start with, Wu says: "I would specifically like to call out bringing on more female gamers. Women make up about 46% of the total gamer population -- it is a fast growing segment. And over 50% of casual and mobile gamers already.
"Importantly, we have seen in the social network world that female users are important in early-stage social networks in driving a lot of social and positive interactions.
"One of the reasons is around a reduction of toxicity of the content, and also women are shown to drive deeper engagement in interactions. You can see that [historically] with social networks, like Facebook and TikTok, which began with a higher percentage of female users."
To appeal to more female gamers, Wu suggests embedding more dating simulations and narrative into games, as well as creating deeper social interactions for casual games.
Furthermore, Lightspeed also sees games for the older demographics as another market with untapped potential.
- Games-as-a-service and other trends
Wu says Lightspeed is looking closely at emerging sectors, including AR, VR, and cloud gaming, as well as crypto-currencies. But free-to-play games is where she believes there is much potential for PC and console studios to expand their market.
"I believe it's an absolute paradigm shift that is now mature in mobile gaming, but is still quite early in PC and console," says Wu. "There's still limited expertise in how to run a successful free-to-play playbook. And I think some of the places where studios can access this talent is in mobile gaming studios and also outside of gaming in commercial companies.
"We're having a lot of conversations with gaming studios that are thinking through the conversion from early access beta launches to free-to-play. This can be a fairly tricky conversion process that when executed well can largely expand a title's monetization and player lifetime, but when done [poorly] can feel very intrusive to players and be damaging to the player ecosystem."
Wu and her fellow investors certainly see lots of potential in all kinds of games and gaming experiences. Make an effort to understand what you need from an investment partner, what they are looking for, and take your own development dreams to the next level.