Investors aren’t interested in products, they’re interested in companies. A startup is a company in search of a business model. Metrics, customer acquisition and processes are really important. Consider China, location markets and smart TVs. It’s not them, it’s you. Do you really need investment?
These were some of the many messages that came out of an event called Games Invest. It’s very Silicon Valley led, thinking of any business as startup, transition and exit opportunity. Find your business model, raise money at the right time and then grow or sell. Fail fast and validate through tests.
And yet even if you do all of these things, I still think you wouldn’t get funded by people who invest in games. While the investor community wants game companies to think like the Valley, investors themselves still think that ‘product’ and ‘business model’ are different things. It’s paradoxical thinking foisted on game developers that leaves developers justifiably confused, and it needs to change.
New Economy Developers
Many traditional game developers are not investable. While the software industry has leapt forwards in terms of building sustainable companies by using measurement in place of intuition and niche marketing in place of PR blitzing, the games industry by and large doesn’t. It behaves like an entertainment industry for the most part, and that means game developers are usually only looking for production money. They have an awesome idea for a game, want to make it, sell it and hope for the best.
Game developers are like novelists looking for advances or film directors looking for funding, and just like the publishing and film industries, they are struggling to find people who’ll fund their likely failure. It’s old-economy thinking that wants to externalise the business part and just get paid to make stuff. These are just the sorts of companies that investors don’t want to deal with. They want new-economy companies instead.
The difference between old and new is that new-economy companies internalise the business. They are usually working toward building a single franchise to operate through a platform or via the internet. So, like Google or Facebook, their product and their business model are tightly intertwined. They are focused.
Game developers that operate in a new economy fashion are open web, social, massive multiplayer or mobile developers who like to use business models around virtual goods, in-app purchases or subscriptions. Their methods are relatively low cost and their attitude is test-driven. Since they are working in games, and games are based on loops rather than features, they are perhaps not able to pivot quite as quickly as some technology startups, but equally they are not spending millions of dollars and many years getting lost in development hell.
The problem that they have is that many investors haven’t realised this.
Products or Portfolios Paradox
Most investors wouldn’t have invested in Moshi Monsters, probably the biggest UK games success of this decade. Most of them wouldn’t have invested in Jagex either. They would have not looked at Erepublik twice, nor would they have even considered EVE Online. All of these and many more are highly successful new-economy developers whose whole business is based on one product.
They are startups in the true meaning of the word. They developed a product and business model all as one piece and validated it as they went along. Like a Silicon Valley startup, they had focus, found a niche, served that niche and then pushed to form a tribe from it.
They are precisely the sort of company that Valley thinking breeds, and which investors claim they want, but actually don’t invest in. Each of the above companies has an outlier story of how they managed to create the game on their own, found unusual investors that just liked the idea, or took some of the money from another project to make it happen. Unlike Valley startups, in no way could the path to funding for any of them be considered ordinary.
No typical investor would consider them because rather than thinking of them as they would a Twitter or a Foursquare, investors think of them as game publishers. They see the ‘company’ and the ‘game’ as separate when they really aren’t. And the central principle for successful investing in publishing industries is to consider their portfolios rather than individual products.
Big Point and Zynga are portfolio companies. Each has multiple games that they use to churn customers. The geometric effects of a portfolio are enormous and they are a safety net for investors. If one of the games doesn’t catch on, there are always others to fall back on. Typically, portfolio companies are funded to create multiple products, and they are the companies that attract most investment. Which, while metric-led, is not really a startup mentality. It’s physically impossible to create a portfolio of games with just seed funding.
If the same thinking were translated to Valley startups, investors wouldn’t fund an Evernote unless its owners also had a portfolio of ten other productivity apps. They wouldn’t invest in a social networking company unless it ran five other social networks. Because investors still see games as old economy products, it means that no matter what new economy developers do, it won’t matter. They will still be reliant on luck to find money rather than diligence, and most games investment will continue to plough into portals and publishers looking for Series B.
Any new economy developer would be hard-pressed not to think of that as incredibly unfair.
Here’s why I think investors think of games differently to software. A software product, as an investment opportunity, is not hard to understand. A game, on the other hand, seems like voodoo.
An Evernote is not a complicated idea to get. The average investor understands what it is, how it works, how it could monetise, what the market for it might be and how it might interface with other applications. They see that it has potential for a trade sale or an exit. The reason is that a notebook application is a common-sense idea. On the other, a pitch for a Space Marines-themed HTML5 RPG service? They just don’t know where to start.
Most investors don’t play games. The conversation usually starts with ‘I don’t play these things but my kids do’ or ‘I used to play Sudoku’ or some variation on that. Their familiarity with the product category and its potential is incredibly low, and that’s scary. Would you invest in an industry about which you knew essentially nothing, where you could be of little value as a mentor, and the market for which you couldn’t visualise? Not without strong assurances, which is what a portfolio provides.
Investors know that some game companies make enormous amounts of revenue and profit, but they don’t know how. They have no tangible sense of the difference between a good product or a bad one, and so investing in games is just a lottery from their perspective. It’s a big problem, and one that motivates the writing of this blog and book, to get past this idea that games are impenetrable.
As long as that perception remains, however, I think game investing is always going to be a tough sell.
Is Investment Needed?
As I’ve said before, $100k worth of cash and time is the absolute minimum that a games startup needs to get going. It’s enough to develop one fairly small service and test what works. There are some outlier exceptions to that rule, but games budgeted below that mark are usually severely lacking. And to be honest, a more comfortable range is $3-400k.
So the question is: How do you get there?
One possibility is to build up a cash reserve. Lots of developers work on contract projects and try to save some of the funds from that work for a project of their own. This usually takes years, and often the conditions of the business change so that savings inevitably turn into emergency cash during a bad period.
A second possibility is charging long before the game is ready. Markus Persson did exactly this with Minecraft, releasing the game in a barely functional state and charging a few dollars. He was so successful that the rest of his game’s development was funded without the need for outside help. And then some.
A third possibility is to work on a smaller product first. Could you write and publish a comic set in the game world? Could you develop and sell a T-shirt or a plush toy before the game comes out? Could you create a software product completely independently of games (as a Valley company does) with a plan to segue into a game later? Could you take some aspect of the game that you plan to make and create a gamification service to license to other companies instead?
A fourth option is to be patient. If you have enough time, or a group of friends to work with, could you part-time your way to that $100k of work over the course of 2 years while doing something else? This may sound simple but it’s actually very hard to keep enthusiasm going for that long.
It all sounds a bit tough, doesn’t it? It often is. As an industry perhaps we could do something about it though. Could we create a Y-Combinator for game startups? Could we create agencies that act as rating services for prospective games to help investors navigate the territory better?
What do you think?