EDITOR'S NOTE: Author Mike Futter is a freelance journalist and gaming industry consultant. "Finding Funding" is a series of articles contracted by Epic that are designed to help developers understand and navigate the funding landscape.
Welcome back to the second of our multi-part series on finding funding within the game-development industry. In our first part, we discussed the different types of funding and the first steps in tailoring your search for investment.
In this installment, we’ll explore how different types of investment align with the development timeline and how to prepare to secure funding for your company or game project. A big factor for developers in making this decision is the type of game a studio is working on.
Equity investment versus project funding
One of the most important things to understand is the difference between seeking funding for your game and investment for your studio. Venture capitalists, angel investors, and other institutional funders are looking for equity (partial ownership of your company). They aren’t likely to bite on a request to fund a single game.
And, unless there’s a meeting of the minds with a publisher or platform holder that includes the sale of your company, those groups aren’t often interested in minority ownership of your studio. They’ll be more likely to sign a deal for one or more specific games.
The tricky part is figuring out which is the best fit.
“Rule of thumb is if you're doing premium or a game as a product—something linear or story-based: project funding only,” Execution Labs co-founder Jason Della Rocca explained. “If you are doing something that's free-to-play or game as a service, it's more about user base and scalability and then that's company equity-based funding.”
Image courtesy of Scavengers Studios
The Darwin Project by Scavengers Studios
That’s not to say that there aren’t exceptions to the rule, but a venture capitalist is not likely going to be interested in a short, narrative game with no opportunities for post-purchase monetization (microtransactions or long-term content strategies that can be used to incentivize additional spending).
He also urges developers to lead with empathy when seeking funding. It’s important to understand who potential investors are and where their interests lie. Once you’ve gone through that exercise, you can start to see if your studio or project is a good fit for a particular investor.
“A big part of the work that we often do with developers starts with asking them, ‘What are you doing, where is the opportunity, what kind of game or studio are you building?’”
The hard work of starting out
There is an evolution to funding opportunities. At different stages of your company’s growth or project’s development life cycle, you’ll have your best chance of securing different kinds of funding. Early on, the going is likely to be tough. Unless you’re a high profile creative moving from AAA to an independent studio, it’s not likely you’ll find institutional or angel investors willing to take the plunge right at the outset.
Many new studios instead seek what Della Rocca calls “love money.” This is funding that comes from relatives and friends. That doesn’t mean it always comes without conditions. It’s not uncommon for those giving love money to request equity or revenue share.
Love money can be an important early boost, especially since it’s so hard to find prototype funding. The other options are to rely on savings or other sources of revenue.
“You have to bootstrap or self-fund in order to get a prototype to the point where you can pitch a publisher or fund – and this can be really difficult,” said Robot Teddy co-founder and Kowloon Nights portfolio manager Callum Underwood. “Think about how limiting this is to people from underrepresented minorities or countries that don't have that amount of access. They don't have the finances or the connections. They may not have close connections to a wide variety of game developers, as those from say, LA do.”
Thankfully, there are things you can do early on to set yourself up for securing investment and project funding. Networking can be a valuable precursor to pitching.
“We knew we weren't going to raise money right away, but we had the idea that networking was going to be very important for the purposes of finding funding,” said Polyarc CEO and co-founder Tam Armstrong. “We started socializing, I guess I could say, with that intent in mind potentially immediately. Once we had the first prototype complete, which was for what eventually became Moss, we actually actively went around to some of the connections that we had been developing. Up to that time, we'd been talking with people about what we were doing and what we thought our process looked like.”
The Dos and Don’ts of Pitching
Most pitching begins with a cold email, and a lot of developers often provide too little information when making their initial approach with a potential funder. Experts recommend including everything in the first email instead of waiting for permission or invitation.
“It can be a minefield of knowing what to do and what not to do,” Underwood says. “Why send me an email and ask if I want to see a pitch? Just send it. If I don't want to see the build, I just won't click the build. That said, this is simply annoying at worst, and never a blocker to getting signed.
“It can be stressful to try and figure out what to send and you don't want to send too much text or too little, so use bullet points, ‘Here is a build, here is a video, here is what I want, and here is the timeline.’ Now I care about this pitch. I'm going to sit down and play the game and I'm going to talk to the team. It’s really important to know that a prototype is likely to gain more traction than a paper pitch, unless you’re a very well known developer. In that case, it’s important to have a paper pitch that’s very clear. Many teams consider using intermediaries or agents, but Kowloon will talk to everyone and look at every game regardless of the team’s background or geography.”
Underwood encourages developers to be as complete as possible. If a build requires a specific controller, mention it. Identify the budget range you’re targeting. Provide a top-level look at what the budget covers, including whether it includes QA, localization, porting to other platforms, etc.
Image courtesy of Counterplay Games
Godfall by Counterplay Games and Gearbox Publishing
Once you have a meeting set, there are a few things you’ll want to bring with you. You’ll want to have a pitch deck with information about your team, the game, and some assets; a one-sheet with basic information, and a top-level budget (you don’t need to get granular yet). You’ll also want to bring a playable build, if you have one, especially if it’s been updated. Don’t overthink your pitch deck. It should be clean and well organized, but it doesn’t need to win awards. The content, not the design, will make the difference.
Of course, it’s also important to properly identify the right funders to pitch. Once you’ve determined whether you're better off seeking project or equity funding, you’ll want to have a sense of what types of companies or games each potential partner is interested in.
“Genuinely understand what it is that you want from a partner and feel empowered to make that decision before you start approaching everybody,” Underwood urged. “I'm in a slightly unique position in that I work with Kowloon Nights on business and scouting. I work with Superhot at which I set up Superhot Presents, and I do consulting and scouting for Oculus.
“Now, it does not make sense for anybody to pitch all three at the same time. Understanding why that is true is core to the problem that a lot of developers have. If you look on the Kowloon Nights website, it says no VR or AR. Therefore, why would you pitch a VR game to Kowloon? We've said the same at Superhot—no VR or AR. If you take this specific example of the three companies, then you would go pitch your VR game to Oculus, not the other two. It’s surprising how often people make this mistake. It’s really important to spend 10 minutes learning about the partner, and not just throw stuff at the wall to see what sticks… that’s how you burn your chances.”
If you’re pitching a project to a publisher or a fund, it’s also important to know the budget ranges of each of your potential partners' targets. Coming to the table with a scope mis-match can end a conversation quickly.
“If you want $3 million for your non-VR game, it’s important to understand which publishers can even afford this amount, or find this an acceptable scale at which to fund. We get a surprising amount of pitches for this amount to Superhot Presents, which is sad because it just wastes the developers’ time.”
If you’re looking for equity funding, there is another aspect to consider. Project funding is relatively short term. Pitching your company to angels and VCs is a longer proposition, with relationships potentially lasting a decade or more. Polyarc explained how it focused its conversations for each type of funder.
Image courtesy of Polyarc
Moss by Polyarc
“We always knew ahead of time when we were talking to people which party they were,” Armstrong explained. “We could tailor what we would say based on what we believed they were interested in hearing from us. The folks who are investing in the company are very invested in the strategy of the company. They want to see what's going to happen in 2, 3, 4, 5 years and what the plan is there. For project financing, that explicitly doesn't matter because what they want to see is the product. Then they want to make some educated guesses about the performance of that product. If that product will return favorably then they're interested. It's a question of incentives. The equity financing, their incentive is to see the company be successful, whatever that means, and for project financing, their incentive is to see the project ship and be successful.”
It’s also important to consider the metrics each funder looks for. Equity funders have shifted as the industry moves toward games-as-a-service (both premium and free-to-play). Della Rocca suggests moving away from production-based milestones to have a better chance of connecting with investors.
“If you are too focused on production milestones then I would say you're in trouble,” he explained. “The converse is what I call community milestones where it's like, ‘Okay, we did a closed beta and we had 1,000 players. Then we did another closed beta and we jumped to 5,000 players. And we were tracking, and everyone who played came back the next day and everyone played 20 sessions.’ If you are thinking in terms of community milestones, you go to investors and show growth. That's especially true if you're talking mobile games, but it's also true whether it's a PC or console game or in early access. This idea of community milestones is important, and it's a shift that most developers don't make.”
According to Della Rocca, it’s more valuable to communicate user acquisition and retention to equity investors than it is to talk about the number of levels or weapons in your game.
“That means you've got some eyeballs, you've got some engagement,” he said “Whether you have to build one more weapon? That's irrelevant.”
A sample equity funding timeline
In a 2018 GDC presentation, Della Rocca laid out a sample timeline for seeking different levels of equity investment. It all begins with self-funding and love money (if available).
In his talk, Della Rocca indicated that pre-revenue angel investment might begin as early as six months into a fully established company’s life cycle. That includes having key personnel in place and work beginning on a project. Once the company starts earning money and crawling back toward break-even, venture capitalists and equity funds may start to see long-term promise and provide seed funding.
After break-even, additional funding rounds can help spur growth by providing capital for staffing to support a thriving audience.
Della Rocca also provides a visual aid for those taking the project funding path. Publishers, which we’ll talk about in-depth in a future article, are best approached when there’s a team, prototype, and budget in place. Note that crowdfunding has shifted since 2012, when Double Fine kicked off the video game Kickstarter gold rush. Over the past eight years, crowdfunding has slowly shifted from the concept phase to much later in the production cycle.
The realities of rejection
In fundraising, you’re going to get a range of feedback. Some of it is going to be an outright “no.” Hopefully, you’ll get the “yes” you’re looking for. But you’re also going to get a rejection that may not be entirely discernable. Sometimes, you’ll run into people who are just interested in finding out what you’re working on.
“I didn't expect to get to have as many calls as I did with people who were not interested in our industry,” Armstrong said. “I don't mean that negatively, I just mean some people will take calls because they're just interested in hearing what you have to say or maybe it's an interesting conversation for them. If your goal is specifically to get investment from them, some number of those calls, they won't ever have the intention of giving your investment. Once again, not maliciously, just, ‘Hey, I'm interested in hearing this person is working hard in this industry that I don't know anything about. I'm interested in hearing them talk about it.’"
And sometimes a potential investor that might be interested in your game isn’t ready to commit, but they also might not want to shut the door on a deal down the road. That kind of “no” is more of a “not right now.”
“We heard a few of those, but most frequently, people would simply say that they would love to keep in touch and hear about any progress,” Armstrong explained. “It's a way to shift the conversation into the future. I think that's the one that's most commonly referred to as the ‘soft no’ and most of it was that.”
Sometimes you might be in the position to make a decision about which funding partner to work with. That means saying “no” to someone in order to move forward with the best fit for your needs.
“The approach to that, from our perspective, was once the basic terms and interest level is established, you want to spend enough time talking to these people that you feel good on a personal level about making them a partner in the company,” Armstrong explained. “If you're very careful and deliberate about selecting your co-founders, you would want to be equally careful and deliberate about selecting whose money you take because then they are basically buying up position in the company. I say that being fully aware that not everyone has the liberty to choose from a large pool. In an ideal situation, you spend enough time talking to the investor about their values and what they want to see out of the company that you feel that you're aligned."
Image courtesy of High Horse Entertainment
Disc Jam by High Horse Entertainment
You may also decide that you don’t want to move forward with investment at all. Independence is hard-won for many developers coming from AAA. High Horse Entertainment, a two-person studio that balances contract work and their own development, is in a unique position. The duo of Tim Rapp and Jay Mattis worked at Activision, and both have expertise in live services and networking. That was a contributing factor to the success of their first game, Disc Jam.
High Horse has been staunchly independent despite entertaining acquisition and investment offers.
“When it comes to offers for acquisition, it usually stems from one or two places,” Mattis said. “It either stems from, ‘Hey, we're a company that doesn't really participate in the online space. Maybe we made an attempt or two, just enough to realize how hard it is and how complicated it is, and that we need people who get it right and to build technology for us.’ That's one avenue. Then there's another channel that's, ‘Hey, Disc Jam's really cool. You guys had a lot of users, and you did this as a cross-platform network title. We want to get in on that and whatever else you guys are doing. How about we acquire you and go forward there?’ Then there have been versions where it's, ‘We like what you guys have done. What if we just take you guys specifically and install you over at some other studio that we're either building or already exists.’ All three of them look a bit different, but actually our considerations all come down to the same thing. The reason that we left Activision in the first place was because we wanted to make our own stuff. That independent way, that has always been in each of our dreams.”
Leave time for fundraising
It’s easy to forget that fundraising is a process that happens outside of traditional physical events like GDC and other trade shows. It isn’t localized to one or two weeks each year. Rather, it needs to be part of your company’s operating profile.
Developing a pitch, creating a playable build, researching, making calls, and sending emails can eat up a large portion of your time. When your studio is small and bootstrapping, it’s likely to be a major focus.
“I can say that it's a significant amount of time,” Armstrong explained. “It is a job. I can say that the degree to which I was doing it was less than full-time only by virtue of the fact that I was also doing engineering and design work on the game. It was certainly more than an average of a day a week. I would say it was definitely north of one day, so it was definitely more than 20% of my time. It could have been 50% of my time. It was a fair amount.”
And even then, Armstrong wonders if Polyarc spent enough time securing fundraising. The studio didn’t have a dedicated business developer.
“Would that have made it go faster and more effectively? It's quite possible,” he said. “I definitely didn't see the upper limit. I've not yet seen someone put too much time into it.
Mike Futter is a freelance journalist and gaming industry consultant. He is the author of the Gamedev Business Handbook and co-host of the Virtual Economy podcast. Find out more here.
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