For years I've been actively talking with investors. At every conference - be it GDC, DevGAMM, Casual Connect, etc - I meet with a couple of Venture Capitalists, Angel Investors, and sometimes bigger funds or possible strategic investors. I'm very interested in the subject of funding in general, and to understand the logic behind how it works. It's also great to understand investors' perspective on certain companies' IPOs -- and where to invest in for myself.
The subject of funding has been a weird one in the games industry - with the rise (and fall?) of Kickstarter, people started more actively talking about how to manage a game studio, and the studios themselves had to become more transparent about their business -- when it comes to crowdfunding and Early Access. This is especially evident with the recent crowdfunded game fiascos, be it a studio being forced to release a non-finished game, or a flat-out scandal on accountability and promises. This is why I believe sharing my personal experience can be valuable for some people seeking non-crowdfunding.
The experiences I describe in this article are very subjective and aren't aimed to be a guide or a how-to. This is a collective experience of 5 years of talking with investors - be it as an employee of a larger company, as a friend of an investor, or as a CEO pitching to raise money.
The easiest way to get funding is to approach a Venture Capitalist, have an all-stars team, and say that you're going to build the next League of Legends, Farmville, Candy Crush Saga, Clash of Clans, and so on (depending on the time and the current trend, of course). If you're laughing at the example of Farmville, you probably missed the bandwagon 4 years ago -- when everyone wanted to become the next Zynga, which was accumulating mountains of cash and had every single VC screaming at this new "social games" phenomenon and how "virility, metrics, conversion rates" define how much money your game makes. I loved how everyone seemed to have forgotten about the "fun" part of video games.
Chasing trends is easy. "Someone is making X with Y; market is growing; let's invest more into it and capitalize". Before you know it everyone has so much spam in their Facebook feeds, that the platform shuts down virility and companies go bankrupt. They’re all left wondering why everyone jumped on the bandwagon in the first place.
Personally, I find it infuriating when start-ups appear just to chase a specific trend -- even worse, when large (public market) companies start chasing a trend. I remember at last year's PAX East, when we accidentally got booth space between several AAA-companies, we noticed we were stuck between 4 MOBAs. League of Legends is huge, DOTA2 as well, and it's great to have competition -- but when everyone is doing the same thing over and over again, and others are funneling money into start-ups doing the same thing, why does nobody stop for a moment and think? Isn't it obvious that users will get tired of the same thing over and over again? That it'll end up with scammy "traffic agencies" spamming the web with suggestive banners, just to get players into yet another [this style] game?
This is the kind of crap you'll have to deal with if you're going for easy funding. Nobody is going to invest in your company if you're doing something completely new, unproven, artistic. You need to make a story, describe the market, find statistics, make an excel sheet with formulas where you invest $X, and get $Y back (where $Y is more than $X).
Europe vs USA
Having an All-Stars Team always helps - people with proven track records in the games industry. What I found very interesting is the difference in perception between the US and Europe -- especially Sillicon Valley vs West EU.
If you fail in West EU (the old part of Europe), you've failed. That's it, you're done. Not a single investor will talk with you, banks will turn their back on you, failing is not an option. This is why these things take ridiculous amounts of time -- everything gets planned out meticulously, and there are no big risks being taken.
Meanwhile in the US, if you've built a company that failed - you have experience as a CEO, with bonus points. Failing is considered experience. The more - the better.
I can really see this difference in mentality, even in entrepreneurs. "I burned through my savings, so I'm going back to being a full time employee" someone said to me at a recent conference. The problem here goes both ways - you can't get funding at an early stage, and people aren't willing to take risks (it's their savings after all). In Europe, only people who have built a successful product on their own - something that gets profitable in a very short period of time - have any chance of getting additional funding. Please correct me with examples if you have any.
The other difference in mentality is that people in the EU learn to save money early on in life, and specifically in the Netherlands and Nordic countries the laws are very pro-employee. By hiring people you take on a big liability as a business. If you give someone a permanent contract - you're responsible for their well-being. If you give someone a temporary (say 1 year) contract, and half-way through decide it's not a good fit, you still have to pay for the full amount for the whole year. It's a good thing for quality of life, general well-being of people (you walk around here in the Netherlands, and everyone is genuinely happy and not stressed out), but it creates a business dilemma which goes back to funding start-ups.
In the US, however, it's all very opportunistic. A "let's do this!" mentality. The flipside is a less stable economy, but we get start-up hubs like San Francisco and Seattle.
I spent all of January in the Seattle area, and after posting on Facebook asking if there are places a bit more laid back, I got flamed -- apparently Seattle is as laid back as it gets. Yet, the perception was that everyone is running. Always running. Never stopping to take a breath of fresh air, thinking about what they really want. Not just sitting for an hour in the sun, enjoying themselves. It's always go-go-go. This is my perception as someone who was raised in the go-go-go culture, and after moving around a bit, realized it's important to take some time off and relax.
These are some of the reasons why I love doing business in the US, and living in Europe. We are incorporated in Seattle, and do most of our publishing initiatives from there -- and development is spread out, with a bit of concentration in the Netherlands.
Without a product (a game) out there already proving itself, and if you're not willing to chase a trend, your best bet to get funding is likely an Angel Investor. Someone who gives you seed money in exchange for convertible debt or equity at an early stage.
Angels tend to bet on many companies at once, spreading their risk - and if they're connected in the industry, they can be an incredibly valuable strategic asset - introducing you to platforms, press, etc. Do not underestimate that. You really want to be focused on your product (game) first and foremost - and if someone who is financially vested into your product helps make connections, it becomes a big deal.
This industry is based on trust and transparency. Remember that.
I often found myself in rather awkward situations during pitches. People who worked with me know I can be rather... direct. I don't believe in wasting my own or someone else's time. Life is short, so we might as well make it productive, rather than worrying about our feelings.
That said, I've found that some investors try to power play, especially when it comes to chasing trends. In the middle of my pitch, someone would interrupt and throw their own idea into the mix, steering the initial business plan into a completely different direction. Sometimes it's an idea I also thought about before, and within a new context it's a good one -- other times it's completely irrelevant to the conversation, and you quickly realize there's no strategic fit between the company, and the investor.
I remember the most awkward meeting I had when building a product within a larger company -- the product was showing great traction, and we needed the board's approval (specifically the investors on the board) to go forward with expansion. It was a very strict pitch, where I wasn't allowed to talk about anything other than the points listed. "Why are we not doing iPhone apps? Why are we not doing this and that?"-- thinking to myself before the meeting.
During that meeting, we had a natural conversation start midway through the presentation. A conversation about doing things slightly differently from the plan, and I could feel the investors were super excited about it. Unfortunately, my superiors shut me up and that was a missed opportunity, and an awkward moment.
Have a conversation during your pitch. Feel the audience. It's the best way to understand where your potential business partners are -- and what they'd expect from you. If you are on the same pages about the issues and opportunities of the games industry, you know it can be a valuable partnership. But if you're making a pitch just to cross off bullshit bingo keywords -- re-evaluate your business as a whole, and the investors you'd want to back you up.
My highest rated presentations are the ones that shift depending on who is in the audience, and how they interact with me at certain parts. Just like game design, you want everything to be context-sensitive (aka intuitive) - so start off with questions, i.e. do they know what Steam is? It can become an awkward situation if you start explaining what Steam is to someone from the Indie Fund (they know what's up!), and it can be even more awkward to assume a Sillicon Valley investor who poured money into several social game studios knows the details of how Steam Workshop works. Always ask and verify. It shouldn't be an interview - just a simple short question if they are familiar with the platform.
The Main Thing during a pitch
Don't be desperate. Your business should be able to bootstrap itself if you don't get the funding - make sure that your plan assumes you don't get funding, and you're going to do all the things listed regardless. With an investor though, you can do those things faster and better.
If you're just begging for funding, agreeing to everything - it shows off you have no vision. Show that you'll stick to your vision (and adjust accordingly if new information comes in, if the market changes, etc), and don't follow the herd.
Investors you're pitching to likely hear the same thing over and over again. Remember that, and stand behind what you believe in.
"But it's just this little amount of money, why wouldn't they invest?"
It can be difficult to understand the logic behind some investors saying they only look at $X-$Y ranges of investments. As a rookie, I always thought it'd be OK if I ask just a little under of what I need - because it's a smaller amount of money, right? Wrong.
Ask for what you actually need, and add on top - this is game development, we have unforeseen costs all the time. Console certification will take you 5 times longer than you scope, you will find more bugs than you expect, and sometimes features will just take longer to develop.
If someone is investing into your company, they need to make sure it's successful. So there is a lot of overhead being added - in terms of due diligence during the actual investment phase, and you will now have a new person joining board meetings. It's often not about the amount of money, but about how you plan to put it to use, and if you understand the possible risks -- and are prepared for them.
Always ask for what you actually need, and justify it.
Preparation, preparation... when to develop games again?
Pitching to investors takes up a lot more time than you might think. Putting together relevant pitch decks, doing forecasts, revenue reports -- all of these things will eat up your time and distract you from developing your product.
What I did is developed a network of contacts from the investor world, and I just keep everyone updated on how we're doing. Just a quick updated deck every few months really does the trick. Tell a story. Prove that you're doing what you believe in -- and that it's working, and when you have an actual great opportunity for investors, they will help you out.
One more thing - NDAs
People like to be secretive and pitch things only after signing NDAs. Don't do that. What do you have to hide? It's just like showcasing games at shows/conventions - you want to get as much feedback as possible.
If anyone has experience that contradicts mine, I would love to hear about it - the more information the better!