Games Funding for Real: Lessons on Getting the Financing You Need

all right all right it's working very good all right folks this is the the funding session funding for real my name is Jason de Larroque I'm the co-founder of execution labs were a seed fund and accelerator based out of Canada although we do investments with Studios from all over the world we've been around just over two years and have done about 20 investments in independent game studios so far so in fact one of the more active investors in the in the game space I often do presentations on funding at various conferences and it's an area that developers don't often have experience with right most developers or developers they you know they know how to make games and not necessarily how to chase investors or get funding and so you know we're quite open and like to talk about these topics and when I present when I pitched GDC to do it they said they wanted something with a bit more detail that oftentimes the presentations tend to be call it textbook here's your funding sources and here's how you prepare a pitch and you know here's how due diligence works and this kind of stuff and they said well you know we get that type of talk often and so we want you know more nitty-gritty and so we're actually dive in to specific examples and case studies from studios and how they were were funded so what we'll dive into there in just a moment it's important to understand that I mean the one hand the best time to take someone else's money is never right ideally you don't need external funding there's always strings attached it's always gonna cost you but you know the reality is we all we are not all rich individuals or we don't all have a rich uncle you know at some point we do need to take on some form of funding and the same time it's also kind of dealing with this tension that we often see where developers don't necessarily embrace the entrepreneurial side of being developers right there's this kind of tension between being a starving artist you know someone that's suffering to make something of impact or meaning but also being commercially driven and trying to build a business and and you know generate revenue and funds to you know be a sustainable business and it's something we see quite often another sort of trap that we often see is this kind of the magical pot of gold at the end of the rainbow I always think of I don't do they have Lucky Charms in Europe I don't know I've never I don't eat much cereal when I'm over here but you know we often hear developers were like oh I think I need some money I'm gonna go over there to the people who have money and go get some without really understanding how funding works who has the money at what stages you know what's appropriate for the type of company or project they're doing there's just kind of this there's still this myth about the you know the magical pot of gold the the bags and money on the other side of the rainbow and it's not not really the case and so you know we try to do what we can to educate developers and get into more nitty gritty alright so so the first part of this presentation we're gonna dive into a bunch of case studies of developers who were kind enough to and open enough to share with me and now share with all of you and the vault you know they're their stories now as a caveat what I've written down the slides has been kind of a paraphrase or summation of often what was quite long summaries you know so it's not accurate to the penny and there's probably a few little bits and pieces missing but overall we'll give us a sense of these different companies and studios and projects and how they were funded so the first one we're going to dig into is a studio called Kitfox Games Kitfox is actually one of the investments we did as execution labs last year so they're part of our portfolio they're working currently on their second game which is called moon hunters and this is their their story now I apologize for the wall of text normally I don't present with wall of text but for the purposes of these case studies you know this is what we're gonna go with so importantly this was a studio that was formed by four co-founders to apply to execution labs so these were all experienced developers they had worked at triple-a and other studios around the industry they were coming together to apply to execution labs to take on a hundred k dollars of investment plus the the love the mentorship that we provide and they they launched their studio as part of our program they do their first game shattered planet last summer as an ios and android release later Portis team and it generated not even enough money to sort of gain back the initial seed investment as they were launching that game they prepared their second game the pitch concept from moon hunters and applied to the square Enix collective for those who don't know the square Enix collective is a sort of community driven platform that's hosted or sponsored by Square Enix where developers are able to put forward a project looks a little bit like a Kickstarter campaign but it's order to get feedback and input and votes from the community and then those projects that get you know a lot of votes or a lot of support then Square Enix will offer to support you during your Kickstarter campaign and or offer you publishing deals and stuff anyway so that's a whole other topic but they had a very successful squaring is collective campaign there was this kind of period where they were panicking and so they picked up some small work-for-hire contracts and then through our network got some seeded additional seed investment from one of the VCS in Canada and then they launched their Kickstarter campaign the ask was 40k they netted about 160 and then in Canada because they're based in Canada we have something called the cmf which is a can it's like a media fund that's partially government-funded and so within a week's time they got both the successful Kickstarter campaign as well as the cmf money in sort of two tranches to close up the funding for the project and then their plan is to launch on Steam they're skipping early access and doing a PlayStation 4 port so it's interesting in this case is there was no self-funding right they didn't put in any initial investment on their part they took they took on both private sort of VC money as well as project based finance and they leveraged community based tools like screen is collective as well as as well as Kickstarter of course alright so we're just gonna drive through all of these so that that's their story they have yet to get to launch another one I'm guessing not many people have heard of this game this is an example from a small studio in Montreal not not from our portfolio called todo temple de luxe from a studio called juicy beast this is a four-person industry that was founded but six years ago five six years ago had done a bunch of previous games that were all self-funded and now in order to do the next project this total temple deluxe they're sort of putting together a bunch of resources in the company side right 90k from their past game sales from the previous nine games 30k of tax credits so in Canada were well known for having access to various tax tax refunds and so on so they're able to apply for some of those they took on a little bit of friends and family money as well as a bank loan which is quite rare for game companies most Indies are usually not eligible for for bank loans or bankers tend not to like indie Studios and then you know amazingly they got 55,000 from a year but this was before the whole free the games and Kickstarter stuff this was you know quite a quite a while ago and they're about to release about to release the game they're about to release again this summer so again a much different profile than the previous one you know their first games were very much bootstrapped and they sort on the company side we're able to put together a bunch of resources and funds in order to do the game and then they kind of top up from from which is you know kind of a rare source of funding but then leveraging the tax breaks for a little help another example switchblade monkeys creators of a game called secret ponchos this is also one of the games in our or team our portfolio secret ponchos was launched on PlayStation 4 in the fall of last year they were part of the PS plus one of the PS Plus buyouts and they got several million downloads and we're working with them on the the steam steam relaunch this is a team of a bunch of X Triple A developers Activision EA etc they put in some of their own money but also sweat equity so they they put in about 50 K and a few months of their own time to come up with the concept to kind of flesh out their idea start building an early prototype in order to secure other forms of funding this team is also from Canada so they were eligible for this media fund the cmf of which they got 300k and they put in a bunch more sweat equity meaning they weren't drawing salaries or much of a salary for another two years of development they got a few hundred thousand dollars from Sony for a ps2 a PS plus buyout and they launched in kind of the the one of the the launched time frames titles they raised a bunch more money from friends and family to kind of prep to go to early access generated about 70 K it's still on early access now generating you know moderate sales and then we came in as external investors with 200k as part of our finishing fund we have we have two different funds ones a much earlier stage seed investment only 50k 50,000 a pop and then we have larger sort of finishing fund investments that come in at the end of the project for larger larger amounts of money and so we're working with them to kind of make the whole game at that triple-i standard interestingly here is the sort of last line that they estimate and track the sweat equity at about a million and a half dollars so they're actually keeping track of you know how many hours how much time an allocation all the different team members are doing sort of visa vie what they would be getting paid normally if they still have their jobs at Activision or EA or blizzard and whatnot and and you know they're they're being compensated someone on a revenue share model on the on the backend so keeping track of the sweat equity is important and and is and is quite quite significant in this case all right another example castle story from sauropod this happens to be another montreal studio and they've been around for a little while but haven't shipped anything so they started as a student project a few years ago and I think was only two of them at that time beginning of 2012 they decided to go full-time and they took on 15,000 as a family loan and these guys did an amazing Kickstarter I think they were asking for something like I don't know forty or fifty thousand and they got seven hundred fifty thousand dollars in the summer of 2012 but that was like you know the heyday of Kickstarter so they they did they did really really well you know a bunch of I mean essentially kids out of school getting almost a million dollars on kick-started but they did put in a tremendous amount of effort they spent about three months preparing their campaign preparing their video you know working on things in great depth and that represented 30,000 backers so really impressive for a young sort of no-name team they released on early access and generated almost as much on early access sales $700,000 in the fall of 2013 and then right away during the holiday sales there are another half a million dollars and now they're up to a team about 15 and there you know expected the ship next year still a bit fuzzy on the the timing there but interesting you know I don't know who which family member gave them that $15,000 low but I'm guessing they got paid back and you know who knows what the deal terms were on that on that loan but you know an impressive both in terms of the Kickstarter money but then also leveraging that on on early access to then take that money grow the team and to deliver the or you know will deliver the the finished game and so we see some examples like that where where you you generate enough funds to get something on to early access that generates more funds but it's quite rare alright next example cardboard utopia this is another team from our portfolio some ex ubisoft and i das guys working on a game called war the saudi arcs sort of a JRPG style game yes the folks from the childhood light team Far Cry cetera they quit their jobs at Ubisoft back in 2013 in bootstrap mode they did $150,000 from friends and family so they were able to convince the sort of rich uncle together I don't think it was actually their rich uncle but you know the family members to give them some funds and then they were part of our earlier stage program so we went in with a 50k seed investment plus the mentorship and so on but they're still in production right now they're there they were also part of the screen its collective before they came to us and they're one of the most highly approved titles 93 percent approval rating as I said currently in production and now they're looking at their options right there in sort of just getting out of pre-production they're there they're putting their vertical slice together they themselves are looking at Kickstarter they are based in Canada so they're looking at cmf publishers and so on you know but we'll have invested a decent amount of money and time before getting to that stage all right a team from Europe play raven based in bayson finland very you know very hot market these days for for investment and and funding play raven launched spymaster on mobile now they're working on robo sy+ some other games a growing studio out of finland here's just sort of the some of the summary of their their their funding when they founded this is in euros not dollars i but i I didn't know which key to press to put the Euro sign so so the founders themselves who were industry veterans were able to put in some of their own funding to get started then they were able to pull together various sources of public funding for an additional 70 K euros and then the very famous tech is which is the the government driven R&D funding agency went in with a hundred k of matching matching funds that was enough for them to them work on their prototype and then do a full route of full sort of investor round of which they raised five million which is impressive for a start-up but again these are industry veterans and they're in Finland which is a hot market so a lot of investor eyeballs are in that region and then again another 600k of matching funds from from teca's and then while this year they kind of got their follow-on dollars from tech is what's interesting with tech is is it it's a matching fun but it's delayed meaning you have to raise the money from private sources spend that money and then if you're part of the tickets program then they kind of reimburse you at a matching level you know for the actual expenses you do so tech is is very helpful in terms of that kind of leveraging you can't just walk into the door at teca's and say hey tech guys I hear you invest in games give me a million dollars they'll say well no you have to go out in the world get your first million spend it and then you come to well you'd probably be signed up already but meaning you have to do your own hustling you got to do your own raise you have to start actually spending the money and then they start matching so that's why you kind of see this delay pattern on the part of tech is their first game spymaster was a top ten release was very very well reviewed I mean not a huge amount of sales but what's important particularly in the mobile context is the funding they got the five million plus the tech is money was meant to fund multiple productions right it wasn't just to sort of blow the whole load right on the first game sort of do-or-die on one project you know what we're seeing is you you have to raise funds for a larger duration of time for a portfolio of projects because unlikely that especially your first one is gonna be a huge success so they put out spymaster row besides in soft launch now they're working on the next by master game they have a third IP that I don't remember the the details is is in production as well so again larger amount of funding so the studio can kind of survive long enough to get multiple projects out of the door all right I think this is the last example another Nordic studio called snow castle working on a game called earth lock Festival magic this one is three slides long and I'm not going to go into into detail but but it's quite sort of dramatic you're gonna be taking three pictures so and I even left out some of the details but you know it's a company founded in 2009 also from some industry veterans you know it started with $15,000 of self-funding and they start doing work for hire work for hires not enough to stay in business so then they say let's go get some you know some funding from some of the Norwegian innovation funds and public funds and let's start working on our own IP and they go through I mean you can sort of see here several rounds of founder funding getting some angel investors you know going to the Norwegian Film Institute Nordic game grants you know leveraging literally every every stores possible to pull together funding I mean here you know they've already done several rounds of funding and getting several chunks of money from from granting agencies they had a failed merger you know all this kind of stuff and and they're still putting in their own money and this is like barely two three years into the into the into their efforts again I'm not going to go into all the details but it's you know it's like almost four or five years later now they're working on the fourth game earth lock and you know still kind of they had a failed Kickstarter you know trying to get all the different sources of the Film Institute and and Nordic game grants all this kind of stuff all all along the way and continuing to put in you know funds from from the investors you know taking advantage of got the D R&D tax deductions and then you know raised another chunk of money you know now they've gone through all this and 20:15 they're attracting you know us investors another 200k coming in and the game is still not done I mean there's three four games in right this is the fourth game target launches first half of 2016 they have a cash in the bank for January so even even after all of that they still don't have all of the funds they need to actually ship the game so there's they're gonna go through another round of angels and tax breaks and and Norwegian film fund etc etc if you add it all up approximately the private funds that have gone in from the founders and sort of friends and family 700k and total budget about 1.5 million but in all these sort of little little little chunks little chunks all along the way all right so those are the examples I was able to pull together in time for for GDC again you know thank you to each of those Studios who were were open enough to share their stories and really we kind of rushed through those but you know time allowing so now we'll talk a bit about you know some of the sort of traps issues challenges you know with regards to to getting funding and the first one is just the kind of smell test right it's interesting just looking at those few examples you know the extent to which people put in their own money have have you know allocated sweat equity or meaning giving up opportunity costs you know chase down every source of funding from from Film Institute's and tax breaks and public funding agencies you know as well as going after VCS and investors etc etc I think a lot of people who think they want funding don't necessarily understand all of the different sources and the amount of effort to kind of patch things together and how much how much work it is in many cases you know if you're doing real fundraising that in and of itself is a full-time job and and you know if you're a small independent studio and you're the CEO but also the lead programmer you know you don't have much time to be programming if you're also chasing all of these sources of funding and reading up how all the different to to work etc etc and so you really have to be honest with yourself and think you know what would I even invest in myself but if you're gonna go ask your mom for a loan and the government for money you know all these different things it's amazing and we see it still every day where were the developers and I don't want to use the word entitled but it's just they've got this idea and they think it would be cool and if someone gives them the money you know then they'll do it but if they had to put in all that sweat equity in their own money oh oh no well that's I wouldn't do that and yet they're asking us for money so so there's that smell test like think about whether or not you would actually do it yourself the next one is this notion of incremental 'ti if that's even a word or incremental nasai don't know where there's a sense that you don't want to be filling up your gas tank partway right you have to put enough gas in the tank to make it across the finish line and so you can see a big difference between the last example I gave snow castle where literally every three months they were taking on new investment new investment just to last another three months - then go chase more funding is a much different approach than for example castle story right where they got the big chunk of funding in one shot they did their early early access and then they kind of hunker down and they're able to produce all the rest of the game or if you look at play Raven right where they took on a little bit of funding at the beginning and that was enough to sort of put the team together and build the prototype in order to secure the larger round of funding the five million from from institutional investors and tech is you know so they were able to you know use a little bit of funding to get more funding and then they're done so usually investors don't want to fund you to only get halfway around the track right they want some sense that their resources their funds are gonna get you to some actual objective now that objective could be the launch of the game but it doesn't necessarily mean that it could mean like in the case of of play Raven it could mean that if I'm an an early stage investor I want the sense that my money will get you to do a full round of investment and to me that's the finish line or that's getting a bit more like a rally right that's so the next checkpoint so I want to I want to fund you enough to get to the next checkpoint and that next checkpoint could be the launch of the game but in some cases it's you know able to being able to secure additional front funds from other sources and so it's very dangerous to kind of get stuck on the treadmill where you're only taking on enough money to last another three months or another six months because then you're always on that treadmill and chasing investors and you have no no time to do do the real work so it's something to to keep in mind another another concept is what I call scaffolding in that investors generally want to see that what they're investing in serves as scaffolding to do the next thing right so so that people you're hiring the tools you're using the technology you're building the expertise you're learning on game one should apply to game 2 and game 3 agreeing for etc such that as a team as a studio you're accelerating the pace at which you're making games and you're also accelerating the quality I'll give the example of Kitfox the vision for their studio is to build games with interactive narrative and procedural generation and this has both design as well as technical implications and the very first game they did shattered planet was a sci-fi game sort of a roguelike where you're you know you're landing on a planet you're exploring stuff you're killing aliens and you die and sort of repeat the process or in regenerate and so they the whole world was built procedurally so they had to build some technology on top of unity that allowed them to do procedural world generation and then the story the narrative was like sort of built in snippets where as you a bit like Bastion so as you kill the monster there's a little story a story piece about how you killed the monster and then you explore and it's sort of built a little story as you went and they were building those systems because they had moon hunters in mind as the second game so they were able to take the procedural generation stuff that they used for that our planet and extend on it to do moon hunters and then the story snippets piece the design and technical technology bits that went into that they also real everage that and extend it upon it in moon hunters where you're like looking at the stars and building your mythology as a hero and all this kind of stuff whereas if they started at moon hunters and said let's do moon hunters with all this complicated stuff it would have taken them way more time way more resources but because they were thinking of the scaffolding at the first game that made the second game better and then already on their third game you know they have similar ideas of community driven narrative all this kind of stuff we're all of the tech and tools and design learning everything that they've done on the first two games will then sort of apply to that third game and in theory should make that third game better easier faster to build and they'll it'll enable them to innovate on new elements and and this is I wouldn't say it's rare but we don't often see that kind of vision on the part of studios right many studios are one building this robot game right now and I'm ignoring the rest of the world and everything is on this robot game I have no clue what I'm doing tomorrow because I need to make sure this robot or whatever game succeeds and and as an investor that worries me because I want to see that scaffold I want to make sure that the next game you know goes smoother than the first one and you know you can imagine if let's say the game you're working on right now is using unreal it's a VR game and it's I don't know a narrative single-player store you know whatever and then you tell me that the next game you want to do is ninjas and robots and space multiplayer on unity for mobile you know like you know the tech the tools the skillset the design principles are so dramatically different from one to the other that you just sort of lose lose a lot of efficiencies there so scaffolding is very very important another one is this kind of sense of ambition and this one's hard to get around because if you're being a very pragmatic independent studio you're gonna build a game for the resources you have on hand which may be very limited resources right so you do something small you something quick you do something that only takes three people whatever the case may be it's very hard to take that sort of pragmatic game and then pitch that to investors because then as an investor we say well that's not enough it's not it's on Bish's enough like I totally understand why you're doing that's that size or scale of game but then just do it on your own don't come to an investor to invest that that you should just get done on your own and get it get it out the door and so there's often this sort of mismatch and it's weird because on the one hand I like to hear developers who say that well we're only three people and so we have to think very smart about how we use our resources so this is the scope of the game and then but that's it's hard for me to get a sense that you really need my money and or that my money makes a difference right so there's always this sort of sense that you have to you have to be shooting slightly further ahead than what you can actually get done on your own so there's a sense that okay with my funds and plus my you know coaching or mentorship or connections okay together well now we can really do something awesome together so there's kind of balancing the the pragmatism versus the ambition of bringing investors on board and it's a subtle one but it's but it's tough all right another one the lawyers I don't when I think of lawyers is I always think of him are there any lawyers in the room no well now that they're too ashamed to put up there anyways so so it's super super critical to get the call them the professionals involved right the accountants the tax specialists the lawyers etc they they absolutely have to be involved anytime you're taking on funding you know talking to investors all this kind of stuff super super crucial you know on the one hand it's easier for us I mean when we do investments in studios most of them will say I looked over the documents it's fine they and they and they want to sign and we stop them and say no you like we're the good guy like we're the indie friendly investors but you as as a form of good practice you need to have a lawyer look at this so that you know they can make sure that there's not something that needs your attention or whatever but still so many developers you know think they understand legalese and or don't think it's worth the investment of paying lawyers and accountants and stuff to look at their their documents but absolutely absolutely critical so when you're looking at investments funding you know talking to the lawyers it really comes down to two parts economics and control everything about a deal everything that you're gonna be negotiating it's gonna be some element of the business the economic piece and the control piece and those things are quite dramatically different whether or not you're looking for funding for your project or whether you're looking for funding for your company and we'll kind of go through some of these differences all right so project versus company from an economics point of view is the difference between revenue share deal versus equity or shares right so on a project based deal usually an investor is gonna give our publisher or whoever is gonna give you money in exchange for a share of future revenue and you're gonna have a negotiation about how much money do they give how much revenue share do they give up are they gonna recoup you know hundred percent on the first dollar you know what are all these nitty-gritty elements of the revenue share and it's a very intense part of the of the discussion whereas for a company based funding it's how much money am I gonna give you in exchange for how many shares of your company what percent of the ownership of the company will I take over as an investor and all of the rules around that equity in what kind of shares are they and what voting rights do I have et cetera et cetera so that that's really the economic discussion revenue share versus equity from a control point of view on project based investments our funding it's usually control over the IP your intellectual property your game now even if you're gonna do a deal where the publisher or whoever says oh well you get to keep the IP I won't take it from you it's yours they're still gonna be rights and hooks and vetoes that they have on that IP maybe they have the right to sign the the sequel maybe they're gonna want rights to do movies and TV shows and merchandise maybe they're gonna want you know some kind of creative veto right on I don't know whatever character designs or something right so even if you're able to negotiate that the IP is yours from an ownership point of view there's no question that in the contract there will still be certain rights and and you know hooks or advantages that that investor maintains on the company side really what you're talking about is control the company or board control right as an investor now if I buy 20% of your company I get 20% of the vote or maybe I get a board seats and I have one of the five or one of the six seven more board seats it's rare that you're relinquishing entire control of your company which is also you know often we sort of get that as a myth so I don't want to take on investors because that means I lose complete control of my company I mean unless they're buying out all of your shares then that's not the case right normally it's an investor buys ten percent twenty percent you know thirty percent of the company and then that represents how much control they have so in most cases the co-founder of the co-founders would still maintain majority control but you know investors will have certain rights certain vetoes so for example when we invest in studios you know it's it's usually a very small amount of equity 15:10 5% usually always under 15% so relatively small amount of equity so it really gives us no power when it comes time to vote because everyone else will say yes and we'll say no and then you know the yeses have it and and so we have very little control but we do have certain veto rights so it was one example we have a veto right that says we need to approve the sale of your IP and this is to avoid shenanigans so let's say you want to trick us and say I'm going to have my set up a new company and I'm gonna sell my IP to my mom for $1 and then execution lab is gonna own 15% of essentially no value like nothing the old company that now has been emptied from its value so we would even though we only have let's say 10% ownership of the company we still have a called a super priority right to approve any sale of the IP so that you can't do that kind of you know trickery now you know hopefully that would never happen and you'd never want to trick us and we have a good relationship and all that kind of stuff but you know those are the kinds of things the little sort of control elements that we would have as a company based or an equity based investor also if the bear in mind the so called the goals or priorities in that the goal of a project based investor or financier is to get the project to market why because they're the economics for them is based on revenue share the game only generates revenue when it's on the market so they all they care about is getting that game to market so there's gonna be a lot of cause short-term pressure to release ideally you have a good partner and they'll give you the time it takes to make a good quality product so when the product is released it does well and you don't you know push something not ready out of the door but definitely a short-term you know get the product out there type of mindset from those who are investing in a project where they're incentivized or rewarded based on revenue share on the company side slightly different right they own equity in the company they want to see the value of the company grow and so their focus is on growth and it's a slightly longer term orientation so execution labs as one example you know we take a five plus year horizon right we're investing in someone we hope that in five years time you know that's really when they're doing their sort of blockbuster level work we're not necessarily expecting that the first game they do right away will be you know make us all all millionaires but we want to do the things and put them on the path and coach them in such a way that the studio is viable sustainable long term so all that scaffolding pays off by the time they're doing their fourth or fifth game so slightly longer term you know more of a growth orientation because they want the value of their equity the value of the shares in the company to to gain to gain value alright project funding source it's now we're getting a little bit in the textbook stuff well I won't well on this in too much detail but we can already start to see if we look back at the examples I ran through you know some of the sources that have been used right so folks taking you know sweat equity their day job past jobs their personal savings you know investing in their own projects their own companies you know taking on loans and debt credit cards you know leveraging friends and family you know patronage doesn't happen as often that could be you know your your spouse maybe has a good job and so you can sort of you know have fun making games while they you know bring home the bacon you know winning festivals and prizes I mean is a nice little bonus but it's hard to really build a business plan around winning festivals and the amounts are relatively low I mean crowdfunding of course early access you know alpha and pre-sales publishers remain today probably that's still the largest source of funding for projects on the planet you know as we saw in many of the examples access to different government programs like the tech is like different tax breaks in Canada there's the Canadian media fond you know Norwegian Film Institute Nordic game grants I mean even in in Germany there are various you know film agencies and media agencies in the different states and stuff that do provide funding banks are rarely a source of project financing for games right they just banks just don't like us a game relaaax of the bank and and you know they're just not not interested now if you are a large game studio that's had you know lots of success and has sold millions of units and you have you know who to look at you go to the bank and you say hey I'd like a credit line or a you know find the loan at you but if you're in start-up mode if you're an indie you know handful of people you know still sort of struggling to make ends meet the bank is not is not an option so those are just some of the the sources I mean these these should be the sources that most of us are from with or have experienced with you know less so on the VC side of things so when we're talking about equity based financing the options it's really a question of time so there's my little graph where the horizontal axis is time zero intercept and I mean the vertical can revenue or profit I mean it depends on the investor if we think of the sort of life cycle of a company you know we start at time zero we're not making any revenue we're spending all our money so it's kind of negative you know revenue or profit over time and then slowly you know we start generating revenue hopefully and we kind of cross over the the the break-even line so I mean it did oversimplification but for for our purposes we'll just we'll just go with that and so there's different stages of funding and different sources of funding on the on the company on the equity side so in the very beginning you have the three s which is known as friends family and fools or or where they call love money because only someone who loves you is crazy enough to give you money at that stage and usually it's small amounts right so which was the exact like Castle story got the fifteen thousand you know from friends and family there are a few other examples where there was a little bit of money coming from from friends and family investors you know this is from your mom this is from your spouse this is from your rich uncle and you know they love you and you know it sounds like fun they got a bit of spare money so they kind of they help you out with a few thousand a few thousand dollars a few thousand euros you use that money to you know fund the development of your prototype start building your concept maybe bring on a team member a co-founder and then you go to the next stage of funding which is what we call angels angel investors angel investors are defined as you know rich individuals that invest meaning meaning they're people they're not formal you know companies or funds that are just you know rich people it tends to be people who got rich in the same business you're in this in part is why we see so many angel investors in the general tech world or Silicon Valley you know because every time Google or who you know Amazon or whoever buys a tech company and those co-founders you know each put a hundred million dollars in their pocket well then they tend to take some of that money and then invest you know back into the ecosystem and serve as angels and so on you know the game industry there are not that many angels around because we haven't seen that many exits in that sense there are but it's but it's quite rare so angels are is a hard segment and there's generally kind of a big gap in that chunk but again we saw some examples like snow castle they were able to go out and get angel investment part of the problem with the Angels is we don't know who they are right normally this is through personal connections you know through a friend of a friend you know there's no you can't open up the yellow pages and say show me all the angels or you know there's no they're just they're just hard hard to find particularly in games the next level up is seed VCS and I mean these numbers are also ballpark numbers I mean they're probably slightly higher if you're in Silicon Valley slightly lower if you're I don't know somewhere in Europe I mean in Canada it's lower than that mean so these are these are super rough ballpark numbers but now so seed VC is still generally they're coming in before you've really proven that the product is gonna make millions of dollars right so they're right they're kind of coming in right before the crossover point so you're still selling them on faith you're still selling them on on the sizzle on the potential on the how awesome your team is and how much buzz you've been building you know everyone everyone before the crossover point you know they're they really are taking a gamble because you haven't yet been profitable right they're still they're still betting on that that vision the you know the the belief and the team all all that kind of stuff once we cross over there now you have the more traditional VCS putting in a couple million bucks generally though you're already generating you know a decent amount of revenue decent amount of profit and they're there mainly to fuel your success but they want to see you're succeeding a little bit already and they're gonna invest more so you can succeed more or succeed even faster and then you kind of have the you know growth growth VCS you know they're putting in big big checks big amounts of money you know but are very late stage so if you are going to chase equity investors if you want you know formal investor money to invest in your company you have to be thinking about where on this blue line are you right and one of the biggest mistakes is oftentimes people who are starting it over here say oh I need to go talk to some VCS and they start calling up these guys and these guys will say well you're wasting your time right you haven't even built a prototype yet and and you want a million dollar like so you do have to think about where you are and this sort of speaks to the increment allottee side of things right you have to take on a little bit of money from your uncle to get a team member to build your prototype to then seduce an angel who gives you a hundred grand and then you but you get two more team members you build your vertical slice and that allows you to go get seed VC and then that allows you to have funds to launch the game and now you're making money and you know so you have to sort of layer it or stage it in this way now in some cases your own funds where there was your sweat equity or a government grant or whatever you know may allow you to skip a few of those stages right or you got lucky on your first two games and now you're you've already made a couple of million dollars and you're putting those millions into your third game and you're kind of already here you know fine then you can go straight to the to the VCS and ask them for you know a matching million dollars or whatever but you know you know don't go see the VCS if really what you need is friends and family money likewise if you need a million dollars don't go talk to your mom for a loan for fifteen thousand you know it goes and goes in both both directions all right in terms of some good books venture deals is an excellent excellent book that really breaks down all the details of term sheets and how deals are put together you know the economics of investors in VCS you know if you're gonna go down that path you I I mean you absolutely must read this this book art of the start is also a nice book kind of a more holistic book on being a startup and chasing funding and working on your pitch and and all this kind of stuff so those are two good two good books to start with for those who are interested in these these topics another thing I want to cover is what is what does Indian mean and sort of what what types of studios are suitable targets for for investment and there's a lot of debate you know who's in India what is independent mean all this kind of stuff and so I'll give my own version of that so here I have my nice little quadrant set up vertical axes is the degree of which you have creative freedom so the top that means you're making your own ideas you have ownership and control of your IP so you have creative freedom or creative independence you know where's in the bottom you don't and then on the the right side for legal legal independence means it's your own company it's it's me and him and we're co-founders and we you know own the company and no one else has bought it we're not on the stock exchange whatever we have legal independence and so to me the definition of an indie is is that is that you have creative freedom and legal independence it doesn't matter what style of game you're doing is it pixel graphics is it retro are you one guy or ten people are you you know like are you making money not make it like to me that doesn't matter it's creative freedom legal independence if you have both that means you are independent work-for-hire Studios go down here right so your own legal company right so we're now it's outsourced shop that does art assets you know but we're making tanks for World of Tanks so we're doing character drawings for Disney or something so we don't have that creative independence so so work for hire in here would be internal studios right so you don't have creative freedom and you're not legally independent you know you're the team at Ubisoft that's been told to make the 13th Assassin's Creed you know cool but you know you're an internal studio and then up would be the more rare kind of R&D or skunkworks where you you're you're an R&D team at Ubisoft or Activision whatever and someone says here's the oculus rift go hide in a closet for six months and do crazy stuff right so you have all the sudden you have creative freedom but you're not you're not legally independent you're still the R&D team at Activision or whatever so as an investor obviously enough I'm interested in the in the Indies right first of all these ones are not independent so they're not really invested well they're on the stock market and work-for-hire is not really attractive from an investment point of view because it's such a low margin very tough business to be in so I'm interested in the indie and that's sort of in large part why now we can take the Indy Square and and blow it up further across two other axes and now this is kind of like a you know we're diving into the indie square and then I think of Indies across all so two spectrums one is the degree of commercial intent so the top is you know to what extent are we actually doing this because we want to make money generate revenue etc or not and then to what extent is is the work that we're doing having impact right from a gameplay innovation design visual aesthetic you know the story we're telling it has some kind of meaning has some kind of you know vision to it this quadrant this quadrant is what I would define as independent entrepreneurs right so they're doing work that's meaningful that's creative that's innovative they're making fun games but they're doing it with commercial intent they're actually doing this to make money generate a profit etc down here would be the proverbial starving artists where they're doing interesting work doing something visionary but they're almost you know they're stunning economics but they almost are ashamed to make money they're there they're suffering for their for their for their art the folks down here are just lost right they're not doing visionary work they have no commercial intent you know a geek I mean I'm teasing it could be just a hobbyist or someone that's just getting started they're not quite sure where they're going and then the sellouts are up here right so so they have commercial intent but what they're doing is not really impactful so everyone that's doing a candy crush clone can go up here writer or clash of clans right so they are there they have creative freedom they said let's make a candy crush clone they're legally independent because of their own company they have commercial intent if we make a candy crush clone we're gonna make millions but they don't have vision they don't have impact so I put them in the kind of sellouts quarter there's still Indies they're still in these but they're in this sort of sellout mode obvious it should be pretty obvious as an investor I'm interested in the independent entrepreneurs you know because I as someone who's been in the game industry 20 years I believe in games I believe in the potential of games I want to I want to get behind projects that I'm excited about that I think actually have you know potential to impact the industry but I'm an investor so I also have to make sure that I'm backing an entrepreneur that actually wants to make money and generate revenue from that so just quickly then a few examples Rami Romi's mal from Vlambeer you know no one would question that the games they're doing are artful interesting innovative fun games but also you know he's a cunning ruthless businessman I mean he's super open very very sharing he helps everyone but the end of the day you know he's making he's making money and that's definitely his intent Nathan Vella from capybara also one of the co-founders and partners of indie fund one of the probably the more famous game they did was sword & Sworcery on an iPad one of the best-selling iPad games of all time you know awesome little indie team 20 people in Toronto you know but very shrewd very smart businessperson you know making innovative artful games but also building a very strong business Jenova Chen from journey right that game company did Flo flower journey right know would question that the games that they're producing are amazingly innovative compelling games but also very good at business right they had a 3 a 3 deal a three game deal with Sony coming out of school they raised I think five or six million VC money last year you know all their games have been successful to a certain you know to varying extents and then of course you know this guy also an independent entrepreneur so I mean oftentimes when I talk about funding I do get this I understand to be in this sort of tension of well I'm a developer I'm creative I wanna I'm so focused on making meaningful games and and and interesting impactful games that anytime you talk about bankers and investors it kind of makes me cringe and and there's this very sort of binary view of again either either I'm a starving artist or I'm a sellout and in reality there are very successful independent entrepreneurs and if you're gonna be that kind of independent entrepreneur you need to understand who can who can support you who to partner with what sources of funding are out there it's not all the same you need to do your homework and hopefully that give you a little bit of an insight into the funding process thank you very much we we have some time for some questions I'm happy to take any questions is there a microphone or yeah there's a microphone checking if it's on yeah yeah I was just wondering in your last first slide where you divided up the in this this is no no them that one yeah and you called the candy crush people for sellouts like if they made the copies of candy crush and I can agree with you on that but and but if you think of the independent entrepreneurs as like an I want card movement that always pushed the barrier or what we can do what about people who just make games within a genre I like after a while candy crush becomes a genre and then you can make candy crush clones like keep doing clones in the beginning and where do you stand as an investor if you just want to make games in bit in a popular genre like for instance a cell like long but it's its genre of games it's you yeah that's a fair question and certainly you know anyone who's making a first-person shooter or RT I mean you have certain set jobs but I think the difference is with the sellouts you know they're very intentionally doing a candy crush clone because they think they can make a quick buck and they have no intent to do anything interesting to innovate to do something artful you know like I just don't waste my time there if you if you're independent entrepreneur and you come to me saying hey we're making for example a first-person shooter but you know we're gonna innovate in this way or do this interesting art style here's a compelling story that we're going to tell through you know I get that you're not making a whole new style of game but at least you're trying to do something you're pushing the boundary you're making something interesting why because that game has to go to the market it has to get the attention of press and players it has to get well reviewed in order to sell and if you're just like well I'm making candy crush but instead of candies it's marshmallows I'm like like who cares whereas if there's a story to tell and we think there's actual potential and it's interesting even if it's a first-person shooter or whatever standard Jean I mean as long as there's other stuff that's that's innovative there yeah and that's your intent yeah high in the broth feet on towards time slide what's reasonable what's a reasonable amount of equity that I should sort of have at the very end I mean what's the equity towards lying yeah so so the amount of equity is so I should I could actually draw two lines where the amount of equity you give up here usually is quite high and then over time the percent of equity goes down in part because there's a opposing line which is risk right the risk here is very high even though it's small amounts of money like for every mom that gives you 20 grand the chances she's a penny of that back is very high so the risk is very high and even though over there the dollar amounts are very big the risk is quite low because the business has been proven you're making lots of money and I may give you 50 million dollars but that's a way safer bet than giving you you know 50 K over here so generally speaking the dollar amounts are smaller but the equity you give up is higher and then over there the dollar amounts are bigger but the equity give up is much smaller I mean there's rules of thumb you can search on the web I mean we're coming in kind of in this sort of halfway sort of here and we're taking you know 15% give or take but I mean it's it's highly it's highly variable but as a rule of thumb you're giving up more here less there for smaller amounts of money yeah there was another question over here microphone hey microphone they went to run yeah I mean it's there's no there's no heart rule of thumb yeah just back there with a white shirt on well you should you should do some research you can definitely use the general tech industry as parallels yeah how much well how precise of an estimate do you actually need well you need an estimate how much revenue there's actually going to be with this game and how precise this actually has to be because there's just this knowledge you have for marketing yes I'm not a big fan of sales forecast because it's mostly you're just pulling numbers from your butt and so you know it's mostly just made up you have to go through the exercise so you understand like like you know okay if if steam is gonna take this percent and here's what I you know like you have to build the model but it's largely made-up numbers what I tend to prefer is comparables where you say well my game is kind of like this one and this one and this one and I can go and use steam spine a few other tools or articles and see what kind of sales they've done and you know visually I'm like this one and started gameplay-wise I'm like this one and you can kind of get a sense based on the quality of my project you know where I might land in there I mean so it really is super subjective but you know even if you build the most complex spreadsheet with all you know I'm gonna look at that and I don't really care that much about it but that but I mean but we understand the game industry so a more traditional investor they put a lot of emphasis on that sales model so so you know mileage may vary all right we I think we're going qui-gon overtime so all right we have no more time for questions sorry thanks folks for everyone for coming

Channel: GDC

Views: 20,676

Keywords: gdc, talk, panel, game, games, gaming, development, hd, design

Id: AGdcAPdyqWI

Length: 60min 30sec (3630 seconds)

Published: Wed Jun 22 2016