Investor dealings: Common game developer mistakes

Investor dealings: Common game developer mistakes
Nick Gibson

By Nick Gibson

November 7th 2013 at 9:56AM

Nick Gibson offers essential advice on securing external funding

In such a competitive market in which new studios are launching at an unprecedented rate, the ability to secure third-party funding can be the key differentiator between a fast start and slow organic growth, and even between a successful and unsuccessful venture.

One of the roles that Games Investor Consulting performs is helping investors and other funding bodies decide what games companies and projects they should back and which to avoid. We spend quite a lot of time on this, having conducted well over 120 professional commercial assessments in the last three years alone.

Unsurprisingly, the funding proposals, mainly from UK games studios, have spanned the full gamut from good to awful. Sadly, a great many fall into the latter, so this month I want to discuss how to avoid some of the most common mistakes made by studios in presenting their investment case to third parties.

KNOW YOUR TARGET MARKET

A surprisingly large number of studios have gaps in their knowledge about the market they are targeting; some quite clearly do not understand it at all. Games genres, platforms and demographics can be mixed almost infinitely to yield large, small and non-existent addressable markets. Funders need confidence that the studio not only understands what their target market is, but also how large and accessible it is. Research and demonstrate this.

KNOW YOUR COMPETITORS

In such a crowded market, ‘unique selling propositions’ are critical. The two most common mistakes made here are the attempts to fudge the USPs and the failure to discuss the studio’s points of differentiation at all. These days it is very easy for funders to search for competing products and services, and yet some will declare they are unique in spite of ample evidence to the contrary. Thoroughly investigating and honestly explaining the competitive positioning of the studio’s projects not only allows the funder to recognise where the studio sits in the market, but can inform the studio about where the gaps in the market are.

GETTING TO MARKET

With so many markets now open to self-publishing, many developers understandably opt to avoid third party help in getting to market and instead go it alone. We often see the assumption that a game will sell itself, its superior quality creating a self-sustaining viral ripple that delivers millions of players. The reality is that acquiring customers is incredibly challenging and can be very expensive; most games fail to raise themselves above a modest player base. These risks needs to be recognised in any funding proposal and countered with comprehensive and innovative solutions.

BUSINESS MODEL

This is the most common area of weakness we see, and mistakes come in many forms. Here are a few: Firstly, providing an overly-simplistic or erroneous financial model (or not providing one at all) won’t endear you to funders, most of whose professional lives revolve around spreadsheets, financial analysis and forecasts.

Secondly, make sure any assumptions you make are backed up by precedent data. So often we have seen forecasts based on unrealistic expectations, for example 15 per cent conversion rates, 75 per cent 30-day retention rates or inexplicably massive new user flow. These need to be conservative – so beatable – and able to stand up to scrutiny.

Another common error is revenue model choice. As one frustrated angel investor complained to me recently after seeing dozens of UK studios: “Why do UK developers have no interest in making money?” Funders are ultimately after a return on investment, which they will not achieve with a weakly executed, overly benign or inappropriate revenue model.

FUTURE FUNDING

Studios may well need multiple rounds of funding to get their great opus to market. This is not in itself a problem, but the failure to recognise or quantify this necessity is. Provide information about how much more is needed, where you hope to secure the funding from and when it is needed. Ignoring or obfuscating this simply adds to the funders’ risks.

For many seasoned studio heads, most of the above points will be obvious. However, a surprisingly large number of less experienced funding applicants get them wrong, focusing instead on their more demonstrable technical or creative skills. Whether you’re a £25,000 grant-seeker as a £5 million VC funding pitcher, following these rules of thumb – or finding someone to help you do that – could make the difference for your investors and thus your project’s funding.