I am not an investor, nor do I claim to be an expert in the field. However, as an avid observer and enthusiast of the gaming industry, I have come across a myriad of options when it comes to game studio funding. In this article, I would like to share my thoughts and insights on the various funding strategies that game studios employ. While I may not have firsthand experience as an investor, I hope that my perspective can provide valuable information and spark ideas for those seeking funding for their game studios.
The Landscape of Game Studio Funding
Recently, there have been shifts in the way game studios attract funding. While publishers have been funding games for a long time, more traditional business angel and venture capitalist (VC) communities are relatively new to the game industry's investment table. These investors are betting on your ability to grow the value of your studio over the long term. They invest in the company, not in specific projects, and thus become longer-term partners of your studio. This means that they take equity in your studio and, although they gain certain rights and have voting power, they usually don't want to take over the company.
The primary interest of equity investors is in increasing the value of their shares over time. They want to back companies that have the potential to scale massively and deliver exponential growth, compensating for potential failures in their portfolio. Therefore, it's crucial to understand that if you are not working on projects that are scalable or situated within a business model capable of delivering exponential growth, then talking to company-level investors might not be the best use of your time.
Types of Investment
Sources of equity funding can range from your own "sweat equity," friends and family, accelerators and incubators, equity crowdfunding, angel investors, venture capitalists, to corporate venture funds. An important nuance to keep in mind is that not all equity investors are actually buying equity from the outset. Often, in the case of smaller or earlier investments, deals are done via a convertible note instrument. This is essentially a loan that is repaid in equity at maturity. The main benefit is that it allows you to accept early funding at a time when it is hard to place a tangible value/price on your shares.
Equity funding is no better than project funding and vice versa. They are simply different forms of funding best suited for different kinds of opportunities. Choosing between these depends on your game, your vision for the company, and the particular circumstances you find yourself in.
Having been part of a myriad of business transactions and deals in the gaming industry, I've had the opportunity to observe the variety of strategies employed by game studios to raise capital. In this article, I aim to shed light on the business language of investment and explain the different types of deals you could make, along with the pros and cons of each.
Equity financing involves selling a portion of your company's equity in exchange for capital. This can be in the form of private equity, angel investments, or venture capital.
- No Debt: Unlike loans, equity investments do not have to be repaid.
- Shared Risk: Investors share in the risks associated with the company. If the company fails, you do not owe the investors anything.
- Access to Expertise: Investors often have industry knowledge and connections that can help your company grow.
- Loss of Control: Equity investors become part-owners of your company and can influence decisions.
- Share Profits: As part-owners, investors have a right to a share of the profits.
- Dilution: Existing shares lose value as more shares are issued.
This involves borrowing money that has to be paid back over time, typically with interest. This can be from a bank loan, a personal loan, or issuing bonds.
- Retain Ownership: You maintain control of your company.
- Tax Advantage: Interest payments on debt are tax-deductible (different per country).
- Fixed Repayment Plan: You know exactly how much you need to repay each period.
- Repayment Obligation: You are required to repay the debt regardless of your company's success.
- Interest Payments: Over time, the interest can add up and increase the total amount you owe.
- Collateral: You may need to provide collateral that can be seized if you fail to repay the debt.
Crowdfunding involves raising small amounts of money from a large number of people, typically via the internet. This can be through platforms like Kickstarter, Indiegogo, or Fig, which allow backer participation in the game's success.
- Validation of Concept: Successful crowdfunding can indicate market interest in your game.
- Fanbase Creation: Crowdfunding can help create a fanbase and community around your game before it is released.
- No Debt or Equity Loss: You retain full ownership and don't have to repay the funds.
- Public Failure: If your crowdfunding campaign fails, it can harm your reputation.
- Deliverables: You must deliver promised rewards to backers, which can strain resources.
- No Guarantee of Success: Meeting your funding goal doesn't guarantee the success of your game.
Game publishers can provide funding in exchange for rights to distribute and market the game.
- Marketing and Distribution Support: Publishers have expertise and resources to effectively market and distribute your game.
- Advance Against Royalties: Publishers often provide an upfront payment that can be used to fund development.
- Loss of Rights: You may lose some rights to your game, such as creative control or ownership of the IP.
- Revenue Sharing: You will have to share revenue with the publisher.
Each financing method comes with its unique benefits and drawbacks. The best choice for your studio depends on your specific circumstances, including the nature of your game, your financial situation, your tolerance for risk, and your long-term goals. It's in your best interest to explore and understand each method thoroughly before making a decision.
In conclusion, funding your game studio is a complex process with many variables to consider. You have many options available, each with its own benefits and drawbacks. It's important to be informed about the possibilities and to make a decision based on what will best serve your studio's needs and goals. Good luck as you navigate this exciting and challenging aspect of the game industry!