Straight talk on funding -- five top tips
Fundamentally Games' Ella Romanos on forecasts, fees, the value of debt, and why failure can be useful
I spend a lot of time reviewing pitches, talking to developers regarding funding, and working with financers. I often get asked similar questions, regarding worries about debt, what different funds types there are, or the difficulty of valuing products.
Two years ago, we launched the financer list, and since then we've had more than 5000 unique visits to that part of our website. There is a clear need for more easily available information that helps developers find the right funding solution that works for them.
Since we often hear the same questions and worries, here are five things that we hope will help developers to prepare for the funding process.
What is a revenue forecast really for?
When we talk about revenue forecasting, we often worry about what data and assumptions to base it on, and how accurate it will be; whether the forecast we've built will reflect what the game or business will make.
In my experience, the likelihood of a forecast matching what you will actually make in revenue is akin to Douglas Adams' theory on restaurant reservations: "the given time of arrival is the one moment of time at which it is impossible that any member of the party will arrive." In other words, the only guarantee that you have is that your actual revenues will never match your forecast.
So, what is the point of a forecast if we all know it's not actually going to come true? Because what we really care about is the answer to this question: What could success look like?
"What is the point of a forecast if we all know it's not actually going to come true?"
We know that you can't predict how much money your game will make. We know that games is a hit-driven business, and that we can't guarantee success. We know how fast the industry changes and how difficult it is to get discovered.
But what we want to know is: Why is this the game we should take a risk on? What evidence can you show us that this game has market potential to be commercially successful?
And to do that, we need to look at the data from other comparable games and understand the assumptions you've made to draw your conclusions on why, if your game is successful, you could have a commercial success.
The key to a revenue forecast, therefore, is actually to make funders confident in your assumptions, your knowledge of the market, and your understanding of how games can be turned into commercial successes.
Why debt is not evil
There are so many types of financing available to developers these days, that it can be difficult to work out what sort of funding you should apply for. However, funding can be broadly split into 3 categories:
- 1. Debt
- 2. Equity
- 3. Project funding
There is often a lot of discussion about the pros and cons of equity versus project funding, yet debt is often viewed in a negative way by developers. However, debt is an extremely valuable source of funding, and one that should arguably be given equal consideration alongside equity and project funding.
So why is debt not evil?
"Debt is a valuable source of funding, one that should arguably be given consideration alongside equity and project funding"
Firstly, it's a significantly cheaper source of funding than either equity or project funding. Whereas with project funding you will be giving away a large percentage of your game revenues, and with equity you will give up a share in your business, with debt you will likely pay only a few percent in interest on the amount you borrow.
Secondly, it's much quicker to get debt financing (assuming you meet the criteria). Debt financing can usually be completed in a matter of weeks, if not quicker, and the process can be quite straightforward. The debt financer doesn't particularly care about your story, they don't necessarily need a beautiful presentation or to be wowed by your amazing team and game idea. They require a set of factual information on which to base a yes/no decision.
Thirdly, debt is a very useful form of funding to allow for acceleration of your business, whether that is cash-flowing production via loans against tax relief, or cash-flowing user acquisition spend. Debt does usually require collateral to secure against, but between tax reliefs, revenues, data, assets and more, this is a viable route for many businesses -- and it provides access to a debt facility that allows you to cashflow and scale your business effectively.
This is becoming particularly relevant for cash flowing user acquisition spend, but can also be used to cashflow your production, through loans against tax relief or other collateral.
Why do some investment funds charge fees?
One question we hear a lot of developers ask is, why does one investment fund take a fee out of the amount of money they are giving me, when another one doesn't?
On the surface, that doesn't seem fair and developers often look more favourably on the funds that don't take fees. However, this isn't something that investment funds just decide to do or not to do. Investment funds actually operate in two completely different ways, and this dictates which model they have to use.
"Showing financers how you have handled challenges in the past will allow them to build confidence in how you will act in the future"
The first model is one where an investment fund (typically a venture capitalist will fall into this model) raises money themselves from investors. This money goes into a pot which the investment fund manages and later invests into companies or projects that meet the agreed criteria. These criteria will have been agreed on by the investors into the fund itself, and therefore the investment fund cannot invest in companies or projects that do not meet these criteria. This is the model that most developers are aware of.
However, there is a second model, which is also common in games (several SEIS/EIS focused funds use this model). That is where the investment fund has a group of investors who are interested in investing into companies or projects. The investment fund will know the types of opportunities that these investors are interested in. When the investment fund finds a company or project that it would like to invest in, the fund goes to its investors, and raises the money from one or more investors specifically for that opportunity.
In the first model, the investment fund has already written its own costs into the funds it raised from investors. However, in the second model, the investment fund has costs which are incurred for every project it raises money for. Therefore, they charge some of these costs to the company for whom they are raising money.
What's the value of data?
A common frustration for developers is that funders don't want to fund your game until you've got quite a long way through making it. It's all about risk and demand -- the funders have plenty of games to choose from, so why take the risk on games that are at an earlier stage?
This has become even more common since games have become services. Data can be a double-edged sword. Data gives the funder the ability to assess more reliably whether or not the game can be successful, but it also means that funders don't want to invest until you have data.
So the question is, how early can you gather data that can give funders confidence in your game?
Hypercasual games have become exceptionally good at this -- they are able to gather data after a few days of production. Funders will only continue to fund the ones that show positive data, and this method of failing fast and data-driven development is one that more games could take lessons from.
If data is now the key to investment, how can you gather data to convince funders as early as possible in your production pipeline?
Failure is okay
It can be difficult to talk about failure; however, failure is how we learn. When talking to financers -- or, in fact, to any stakeholders -- it's important to be transparent and honest, which means not trying to hide the challenges you've faced in the past. Being open about the failures you've had, and most importantly the lessons you've learned, can help demonstrate how you will deal with challenges that come up in the future.
Financers know that things are going to go wrong at some point -- all projects face challenges. What they need to know is whether you're the type of person they can trust to deal with those challenges pro-actively and constructively. Are you determined and good at problem solving? Have you learned from previous failures and come through it stronger and unlikely to make the same mistake again? Are you someone that they want to trust with their money?
Showing financers how you have handled challenges in the past will allow them to build confidence in how you will act in the future. Pretending that you have had no failures in the past won't help, because it won't appear honest. People invest in people, and to do that, they need to trust you and understand you.
Ella Romanos is a consultant at Fundamentally Games. Fundamentally Games provides strategic support to developers and organisations to help make better and more successful games. They assist with access to finance, production, marketing, live ops, game design and monetisation -- www.fundamentallygames.com