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Definitive Guide To Funding Your Video Game Masterpiece
 

Definitive Guide To Funding Your Video Game Masterpiece

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Originally presented at the 2007 Casual Connect conference, this presentation delivers a quick tour through all the various funding mechanisms available to start-up video game studios to get their ...

Originally presented at the 2007 Casual Connect conference, this presentation delivers a quick tour through all the various funding mechanisms available to start-up video game studios to get their games funded.

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  • Now with Kickstarter, its easier then ever to fund a project. I've been backing up a few Kickstarter projects including this one below. Looks like it will be really cool!
    http://www.kickstarter.com/projects/jvgames/hard-contact
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  • Very informative. Is there any follow-up to this? A live talk?
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  • Great slide show! You could always try auctioning off publishing/distribution rights to your game in reutrn for funding at gamelicenses.com
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    Definitive Guide To Funding Your Video Game Masterpiece Definitive Guide To Funding Your Video Game Masterpiece Presentation Transcript

    • Pretty Good The Definitive Guide to Funding Your Masterpiece James Gwertzman Vice President, PopCap Games james@popcap.com
    • How good is your team? How much money do you need? How much risk are you willing to share? So, you want to fund a GAME? How much experience do you have? What is your cost structure? How risky is it? What are your goals? What‟s your track record? Why?
    • What are you willing to give up? • Funding is a double-edged sword… • You cannot build a game or team without it. • But, this choice will limit your options and shape your opportunities. • So, choose carefully…Not all funding sources are equally good for everyone. • Incentives must match on both sides.
    • Match your FUNDING… …to your GOALS & AMBITIONS.
    • Key steps toward getting funded $$$ Keeping it! Doing the deal Your pitch Your choices Your network Your team Your story
    • Critical to your success Will keep you focused Your story • Why games? • Your goals & ambitions? • Why are you different? Will help you make Key to attracting tough decisions employees, partners, investors, etc.
    • Mission statement: Create the best games ever. Have fun doing it. (Sound familiar? How is your company going to stand out?)
    • Your team • Are your expectations realistic? • What is your cost structure – • Working from home or in a garage? • Have you thought about mortgages, health insurance, kids? • Track record? • Team structure – • Equal partnership? • Corporation? • Co-founders?
    • Building your network • Friends • Conferences • Cold calls • LinkedIn • Introductions • Seminars • Referrals • Facebook • Plaxo
    • Your choices Freedom (creative, etc.) Self-funding (organic growth) Publishing deal Venture capital Strategic partner Resources
    • Your choices Freedom (creative, etc.) Self-funding (organic growth) Publishing Deal Venture Capital Strategic Partner Resources
    • Self funding / organic growth • No strings, not beholden to anyone • Cost structure is everything • Can you slash spending and be competitive? • Accountability • Can you stay focused and motivated without external forces? • Can your team stick together without outside forces? • No one to blame but yourselves… • Will need to partner in some areas • Distribution • Licensing • Co-development
    • Self-funding is risky • Especially in a rapidly growing market • Can you keep up with other, better-funded companies? • Where is your money coming from? • Do your partners share your goals? • Can you take sufficient risks to be successful? • Can you withstand a few early setbacks? • Beware personal guarantees & leases • How much money is really on the table?
    • Self-funding: Pros / Cons • Highest upside if successful • No safety net if a failure • Difficult in a competitive, well-funded market
    • Case studio: PopCap Games • Entirely self-funded • Mixture of talent & luck in early days • Right place at right time • Talented team • Previous experience working together • High quality games • Early cost structure very low • Single guys, no families, worked in garage (really!) • Growth has paced the rest of the industry
    • Your choices Freedom (creative, etc.) Self-funding (organic growth) Publishing deal Venture capital Strategic partner Resources
    • Publishing deals • Typical deal structure • Developer creates game • Publisher funds development, provides other services • Developer receives share of total revenue (royalty) • Many different options that can be negotiated • IP ownership • Sequel rights • Royalty advance vs. development fee • Distribution rights by territory vs. worldwide • Recoupment options • Other platform rights (e.g., mobile, console, retail, etc)
    • Typical obligations Developer Publisher • Initial QA • Funding • Game development • Engine (in some cases) • IP creation • Marketing / PR • Distribution • Game feedback • Localization • Alternate platform development
    • Key variables in analyzing P&L • Royalty advance (e.g., $100K) • How much you are “loaned” to build game • Royalty rate (e.g., 25%) • Percentage of revenue shared with developer • Definition of net revenue vs. gross revenue • What expenses get deducted first? • Recoup models • No recoup – “work for hire” model • Standard recoup – “developer loan” model • Recoup at 100% – “share costs” model
    • • Cost: $150K • Rev / Unit: $8 Pure distribution deal • No royalty advance • Royalty rate: 50% • Publisher cost: 50% of total $600,000 $500,000 Royalties Developer net revenue $400,000 Publisher net revenue $300,000 Royalties $200,000 $100,000 $- $(100,000) Developer break even $(200,000) Publisher break even $(300,000) Units Sold
    • • Cost: $150K • Rev / Unit: $8 Royalty advance model • Royalty advance: $150K • Royalty rate: 50% • Publisher cost: 50% of total $600,000 $500,000 Developer net revenue $400,000 Publisher net revenue $300,000 Royalties $200,000 Developer break even $100,000 $- $(100,000) Publisher break even $(200,000) $(300,000) Units Sold
    • • Cost: $150K • Rev / Unit: $8 Cost share model • • Royalty advance: $150K Royalty rate: 50% • Publisher cost: 50% of total $600,000 $500,000 Developer net revenue $400,000 Publisher net revenue $300,000 Royalties $200,000 $100,000 $- $(100,000) $(200,000) Developer & publisher share revenue equally once cost is recouped. $(300,000) Units Sold
    • Hey, those numbers look Not so fast… Not all games pretty good. Why don‟t all will be hits. Publishers have to publishers pay 50% assume some games will lose royalties? They must be money and cover themselves. greedy bastards, eh? Paranoid developer Greedy suit
    • • Cost: $150K • Rev / Unit: $8 Publisher risk analysis • Royalty advance: $150K • Royalty rate: various • Publisher cost: 50% of total 40% Net Before Game Type Units Sold # games Revenue Advance Overhead Royalty 35% AAA 150,000 1 $1,200,000 $150,000 $75,000 $975,000 A 60,000 2 $960,000 $300,000 $150,000 $510,000 30% B 30,000 4 $960,000 $600,000 $300,000 $60,000 F 0 2 $0 $300,000 $150,000 $-450,000 390,000 9 $3,120,000 $1,350,000 $675,000 $1,095,000 25% Publisher ROI Hit titles must make up 20% for flops or failures. 15% 10% 5% 0% 0% 10% 20% 30% 40% 50% 60% 70% Royalty Rate
    • Project risk profile • Have they worked together Team before? Track record? • Has it been used to make a Technology game before? Genre • How competitive is it? • Original IP or a well-known IP brand?
    • When to approach a publisher? • As late as possible…. • Ideas are cheap • Demonstrate your potential • Gain leverage
    • Publishing deal: Pros / Cons • Great way to build reputation • Great way to have an impact as small developer • Reduces your long-term value, esp. to an acquirer • Caps upside in the event of a hit
    • Case study: Escape Factory • Funding over 3 years: • Angel funding ($250K) • Personal funding ($250K) • Contract work ($200K) • Publishing contract w/ major publisher ($3M) • Publishing contract was cancelled • No other deals lined up • Studio eventually went out of business • See extensive case study… • “What to Do When it All Goes to Hell”
    • Case study: Sprout Games • Two relevant mottos: • “Spend no money” (we were total tight-wads) • “Simplicity ahead of personal gain” (quality of life matters more than a few revenue points) • Funded via publishing deal w/ RealNetworks • Games were very successful • Ultimately acquired by PopCap Games • But… value to PopCap less than it could have been because of rights tied up in publishing deal
    • Your choices Freedom (creative, etc.) Self-funding (organic growth) Publishing deal Venture capital Strategic partner Resources
    • Professional investor (VC or angel) • Not historically an option in the game industry • But casual gaming is hot right now… • Typical deal structure • VC funds the company, all development • Developer builds long-term value • Company is acquired (few other credible exit options) • VC is looking for 10x return (at least) • Must have clear exit strategy • Option of financing game(s) vs. company?
    • Typical deal options • Funding levels / type • Valuation / dilution • Board seats (control) • Other types of influence / decision making • Will likely still need to partner with others • Common deal terms
    • Why investors are not created equal • Existing portfolios of companies? • Long-term aspirations / ambitions? • “Marquee” value / reputation within industry? • Original thinker vs. herd follower • Understanding/experience in game industry? • Industry contacts? • Participation in later rounds of fundraising?
    • When to approach an investor? • Different stages • Seed financing • Start-up or early-stage • First-stage, second-stage, etc • Depends on the stage… • Early is not necessarily bad IF you have a track record • Problems with being a somewhat profitable company (zombie) • Depends on the climate… • “Community” very hot right now
    • Venture capital: Pros / Cons • Great way to create a lot of company value • Incentives may not line up • Different definitions of success • How much control are you giving up? • How well do you know your investors? • The last thing a VC wants is a slowly growing, mildly successful company (zombie) • If you‟re going to fail, they want you to fail fast • You may want a “lifestyle” company • But VC has very different motives
    • Your choices Freedom (creative, etc.) Self-funding (organic growth) Publishing deal Venture capital Strategic partner Resources
    • Strategic partners • Someone with strategic interest in your success • Distribution partners • Hardware/software companies • Territory-specific leaders • Ideally close alignment in goals • Room for true win/win deals • Where do partners come from? • Look around the industry… • Sometimes a quasi-joint venture • More appropriate for later-stage investing?
    • Your pitch • Your job: make it easy to get the deal • Find out what the other company needs to see • Then show it to them • Publisher: prototype • Fun is most important in the prototype… • Quality & polish can be communicated separately • Investor: business plan • Quality of your team is most important • Followed by a “big” idea & compelling justification
    • Sample prototype: Venice Venice prototype Final version of Venice Submitted Nov 17, 2005 Published June 26, 2007
    • Your deal • Full time job for someone on your team • Will take longer than you think • You may need to push it along • On the care & feeding of a lawyer • Educate yourself on IP contracts • Review the contract yourself carefully • Pass your own redlined copy to your lawyer • Review your lawyer‟s changes to understand which are true “show stoppers” • Negotiate with the other company directly yourself
    • Classic funding mistakes • Too much money, too soon • Great ideas, but no team or plan for how to execute game creation • Lack of understanding on both sides (other side is not evil) • Following other companies too closely • Wrong audience / wrong product / wrong timing
    • Keeping it! • Managing your funding source is a full-time job • It‟s not about success. • It„s about making sure your investor sees success. • The difference is subtle, but critical … • Manage expectations carefully • Undersell, overdeliver. Clichéd, but true.
    • Q&A