Author: by Daniel Sánchez-Crespo Dalmau

Wednesday at GDC brought an excellent opportunity to share the knowledge of two experienced game developers on how to create, and grow, profitable game development companies.

In a first session, Michael Sellers from Online Alchemy (and prior to that, creator of Meridian 59) discussed the life cycle of a small development house, focusing on the critical decisions to be tackled from day one. The session put a lot of emphasis on experience-driven ideas in the launch phase, covering the incorporation of the company, the human resources area, project selection, etc.

Then, in a separate session, brothers Guha and Karthik Bala (President and CEO of Vicarious Visions respectively) detailed the critical techniques and tools they use on a day-to-day basis to keep operations under control, even in times of crisis. This second presentation focused specifically on mid-size studio finance, portfolio definition and sales, and so the two talks complemented each other really well.

Michael Sellers presentation started with some reality-checks for the audience, starting by why should anyone want to create a studio: money, power, working on complex problems, etc. Sellers quite graphically explained how a pure revenue-driven approach usually fails, as few studios actually reach an acquisition or profitability phase. He also stressed how game ideas are worth nothing, and so any new studio should begin by putting ideas on paper, detailing them, so they become plans and not just blue-sky thinking.

He then moved on to an extensive enumeration of different funding strategies for small studios, from debt financing via credit cards, to funds from the Small Business Administration (not a viable strategy, in Sellers opinion). Some unusual strategies like getting a mortgage on a property were discussed, but then the majority of the argument detailed the more common funding mechanisms, that is, contract work and investors. Sellers wisely stressed how contract work can become a test for the team, as it allows them to work on something similar to their dream project. Still, it's important to ensure the contract work does not interfere with the long-term goals of the company or even deviate us from them.

As for investors, he focused on the two key questions any investor will ask sooner or later: "How will you use my money to make more money?" and "how much do I get back and when?"

Finally, strategies for today's market were explored, like focusing on niche markets (casual games being a perfect example here) and getting to revenues as quickly as possible as budgets sky-rocket. Overall, Michael Sellers provided lots of food-for-thought, especially for the first 18 to 24 months in the life of a novel game studio.

From that moment in the life cycle of a studio, Guha and Karthik Bala's session kicked in, providing financial tools to convert a mid-sized studio into a profitable business, possibly ending in an acquisition as proven by Vicarious Visions' recent integration within Activision.

The talk followed the evolution of their company from its incorporation in the nineties, and the problems encountered along the road, providing the audience with a no-doors-barred insight on the strategic decisions taken at the financial level. The core idea was that game studios often forget finance and focus on making games, and so whenever a project falls apart or takes too long to get signed, the studio goes bankrupt. The Balas exemplified these problems with their own experience, and how they learned to overcome these issues.

The first critical decision is to invest in a solid banking relationship so you can have access to credit lines for the studio in times of need. The Balas explained how banks are reluctant to work with game studios as there is little equipment or machines, and so relationships must be slowly grown, taking advantage of the positive cycles in your studio so you don't have to run to your bank when things look grim.

A second essential component to a sustainable, profitable studio was the creation of a financial reserve, so the company can overcome a serious blow such as losing a client. Some guidelines on how to compute how much money should go into the reserve, when should it be used, etc. were given. A real-world use case was then provided: Vicarious Visions was using Alchemy as a middleware solution when the developer of this engine went out of business, leaving Vicarious Visions with no support and lacking some features. Most game developers facing this scenario would not have been able to recover and go out of business, but Vicarious Visions was able to mobilize their cash reserves to overcome this complex situation.

Both speakers then moved on to analyzing a developer's sales pipeline, and how careful planning can help choose the projects that better suit the company's goals and strategy: from lower-budget titles with high royalties, to lower-royalty projects that have a huge upfront payment. They also discussed customer diversifying as a way to avoid large revenue dependencies, suggesting 40% as the top contribution your largest client should have in your overall revenue. Finally, they blended these ideas in a project portfolio chart, which allows the developer to visualize projects (in rows) and risk / reward sources (in columns). By doing this, the developer can assign scores to the potential projects, so at the end of the day they can make informed, data-driven decisions.

Guha and Karthik Bala's approach relied heavily on analysis tools such as Excel charts, as a way to display all relevant decision making information, and making sure the right projects and negotiation strategies were chosen. It was pretty clear during their presentation that the classic saying that “information is power” holds true for game studio managers, as these tools allowed Vicarious Visions to gain a competitive advantage, grow a profitable business (having shipped around 100 SKUs in the last decade), and reach a point of acquisition by a major publisher, Activision in this case.

Overall, the two sessions provided a thick body of knowledge, extremely relevant for any game entrepreneur, but especially for small-to-midsize game studio managers. And this knowledge, when used right, can differentiate life from death in the fragile arena where independent developers try to make their way.

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