Digital distribution has radically changed entertainment, not just gaming. And while game creators now have more control in directly distributing their products to players (and building a customer relationship along the way), little progress has been made in the way that studios raise capital. Industry veteran Howard Marks, who aided in the respective rebirth of Activision and Acclaim, hopes to change the financing game with his equity-based crowdfunding platform StartEngine, which he co-founded with Ron Miller, a four-time Inc. 500/5000 Award recipient.
StartEngine has actually been around since 2011, but has essentially served as an accelerator, investing the "old fashioned way," as Marks put it. It still has the accelerator but now, thanks to the SEC having just made equity-based crowdfunding legal (through a section of the JOBS Act called Regulation A+) Marks believes that startups will see a revolution in financing.
"[The industry] gave indies and developers an opportunity to reach consumers directly and sell their art directly but we never gave them the ability to get financing. This is what we're doing here," Marks told GamesIndustry.biz.
"What we're offering on our platform is a business opportunity for game developers, studios, IP holders, old designers, new designers - you have fans, share your profits with your fans. Sell a piece of your dream"
"The game industry is an industry that's extremely lucrative and growing very fast but the capital that's going into that industry is typically not venture capital. It's typically people who bootstrap their companies or get friends and family money or they get advances from publishers who are controlling their IP," Marks continued. "I've been in the industry for quite a long time and I've seen that a lot of the great game projects that are available are not getting funded, and our view was, 'hey, we need to solve this.' Now, it turns out, it's very hard to solve this problem unless you can have fans themselves invest in these ideas and that was not possible until recently, when the SEC introduced the Regulation A+.
"So we built the platform with the mission to help the game companies realize their dreams - that could be as simple as someone who is an IP holder, and has a brand, like an old game, and wants to make a new one; this time allow the fans to share in the profit as opposed to Kickstarter, where the fan does not share."
Kickstarter, of course, is the de facto crowdfunding platform everyone thinks of, but it's a system that's inherently flawed, Marks believes.
"I don't think it's all happy and rosy on Kickstarter. I think Kickstarter offers a great service and it's a valuable one, but not everybody has the ability to go viral," he said. "What we're offering on our platform is a business opportunity for game developers, studios, IP holders, old designers, new designers - you have fans, share your profits with your fans. Sell a piece of your dream. When I say sell, you're really selling - give them an opportunity to invest, give them an opportunity to share in your dream and help you realize your dream and be an ambassador of that company. That is a whole new concept."
Marks cited VR headset Oculus Rift, which began life on Kickstarter, as a prime example of what can go wrong when people donate and receive no equity.
"When you have all these people who were backing Oculus Rift, it established jobs for Oculus Rift to get out of no man's land... and unbeknownst to the backers, they raised $80 million from VCs, and then one day they learned that the company sold for $2 billion. Some still haven't received the headsets... and then next thing you know they didn't share in the profits and the whole internet went crazy. There was a huge backlash," he said.
"I think they felt let down. And you know what? It's not really Oculus' fault, because at the time it happened, they were not entitled to receive anything. But now, with the new Regulation A+, they're entitled to reap a share of the profit. You can imagine that a $2 billion profit sold would've made tons of money for them."
With StartEngine, unlike Kickstarter, fans will be backing entire companies, not a specific game project, and while a company selling its shares on StartEngine isn't a public company, the investors will still get dividend payouts just as with any other stock purchases. "They get dividends and they get a cash payout if the company's sold, and if the company goes public, they can also trade their shares. The shares they receive are also tradable if they find a buyer, but they have to find a buyer. There's no established market for the shares at this time. The system with Regulation A+ offers you more liquidity than a standard private deal," Marks noted.
According to Tier 2 of Regulation A+ a company can raise up to $50 million, but there's no minimum amount enforced. It's up to the company to set what the minimum share price is and how many shares they want to sell per shareholder. Marks said that for his eSports focused company XREAL, which he started with YouTube star Jordan Maron ("CaptainSparklez"), they will probably set shares around a couple hundred dollars minimum.
"We would like the industry to wake up the next day and say, hold on a second. The ball game is a little different now"
StartEngine already has a number of companies on the platform, but XREAL is the first pure games company leveraging it. While Marks does have some marketing plans in place to spread the word, he doesn't think a very aggressive push will be needed because a lot of collective buzz from the companies on board should give StartEngine some momentum.
"A source of capital doesn't need to be too pushy in advertising. People find you. When you're in need for capital, it's like oxygen, you're out of air, and you're done. So you're going to be very, very aggressive in finding sources... I may be a little naive in thinking that way, but I think people will find us because they need money," he said.
Marks also believes that his reputation in the industry, along with Jordan Maron's YouTube following (8.6 million subscribers), will be very helpful in getting the ball rolling with potential shareholders. But for Marks and StartEngine, this is really only the beginning. "We are in discussions with others, but I have to be honest with you, we haven't really done our job of telling the whole industry about it. That's why we're on the phone with you. We would like the industry to wake up the next day and say, hold on a second. The ball game is a little different now."
Indeed, equity-based crowdfunding could be a legitimately solid alternative to VCs or publishing deals or traditional crowdfunding, but the good news is that none of these things are mutually exclusive. Nothing prevents a new games company from seeking out funds from multiple sources.
"As long as it's disclosed it's no problem," Marks explained. "They just have to explain to the consumer, 'hey, by the way, we're also doing a Kickstarter raise' and then on Kickstarter say 'oh, by the way, we're also doing an equity raise' ... What we're doing is very flexible. They can even find their own investors and sell privately to other investors if they want to on another crowdfunding platform. There's no restriction. The only restriction is for the Regulation A+, we're going to be the exclusive platform for that raise."