

Why VCs Won't Fund Game Companies - csbrooks
http://www.gamasutra.com/blogs/NicholasLovell/20100324/4758/Four_Reasons_Why_VCs_Wont_Fund_Game_Companies.php

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reitzensteinm
I'm a game developer, have built a profitable but small studio and I wouldn't
invest a cent of my money into a game company I didn't have control over. The
risks of developing a game are:

* Technical. Modern games of the retail console variety are incredibly complex pieces of technology. I would not be surprised if building an MMO was comparable to designing a car in terms of engineering effort expended. If your schedule slips, you need to rework major pieces of code just so your engine is no longer dated.

* Artistic/Creative. The game world needs to be interesting, believable and engaging. Asset production is very expensive. Let your schedule slip, and it will all feel dated.

* Gameplay. The game needs to be fun! This is much, much harder than it looks.

* Market. Distribution is incredibly hard, and even very good games often fly under the radar. Is your game the genre of the month? Is it fun enough that everyone talks about it? etc

Very rarely is someone great at all 4. I'm reasonably good at #1 & #3 and
hopeless at #2, and average at #4.If you manage to somehow succeed at all four
points, then you have a game that makes essentially a one time income of $x
(it's spread out over a few years, but it spikes high and rapidly diminishes).
Hopefully you made a profit!

And that's _per game_. All you need to do is mess up your next game (for
instance by being too ambitious and letting your success get to your head),
and you're bankrupt. The trouble is that you're essentially engineering new
products each year or two. There's none of that nice, slow maturation of
product and increased customer base you may get if you make, eg, bug tracking
or database software, operating systems etc. Each release is potentially a
very big, maybe-the-company-won't-survive flop.

There are a lot of companies that are established enough that they can survive
on their fan base and income, but they're the exception, not the rule. I
admire every one of them.

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benologist
I agree with everything you're saying, however I think the same risks are
readily found in many startups as well.

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reitzensteinm
I agree about the initial risks - they are probably equivilant for a startup
making a webapp versus a startup making a game - what I'm saying is that the
position you find yourself in as a game developer after getting traction for
your first product is much worse.

With a webapp you can build a company around that traction and potentially get
acquired without developing another product. With a game studio, you then have
to make the next game, and past success isn't nearly a guarantee of future
performance. You can do sequels, but even this isn't bullet proof.

As other commenters pointed out, there are exceptions within the marketplace.
And if you're doing a gaming startup that's where you want to be.

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mattmaroon
Totally. I've gained a lot of insight into this specific topic lately. I've
spoken at great length to a gaming company that's received lots of funding
from big name VCs (can't say who or how much) and they approach their first
game, recently released, as more of an example of their business than a
project that is their entirety.

They're working on building out a platform that they can use to publish other
games that handles things like virtual goods, payments, chat, etc. All of the
myriad of things that go, in some combination or other, into every mid to
hardcore game.

Also, social gaming companies, which have been receiving a lot of funding
lately, are doing much the same. No particular game is their bread and butter.
They're all working toward a full portfolio of games and usually have a lot of
shared technology between them.

The title here is a bit of a misnomer. They fund gaming companies. They don't
fund games. There's a big difference.

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pxlpshr
Exactly. I use to work with a company funded by Benchmark that approached it
the exact same way. Their first game was just the start, and most definitely
not the end. A lot of game designers fail to understand this; very few game
empires are built upon a single IP. The half life of most games is pretty
dismal.

Our angel investor runs a social gaming company backed by Sequoia, his company
approached it in much the same manner. They have a backlog of game ideas. It's
growing a big gaming businesses with multiple IPs that interests VCs, nobody
wants to juggle the risk of game development on a single IP.

So yeah, the title of this post is definitely wrong. They fund game companies
not game ideas.

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csbrooks
This was the takeaway point for me (which was depressing):

"Traditional games developers are really difficult for any investor to fund.
They look like quite late-stage businesses: they may have hundreds of staff,
millions in turnover and a proven track record. But fundamentally, they are
always just one deal away from bankruptcy. They look like startups from a risk
perspective but are like late stage investments from a reward perspective."

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pw0ncakes
I'm surprised that what passes for "traditional games" even gets made at all:
huge budgets (which means that the moneymen have too much power for anything
decent to be produced), excellent ($$) graphics, but mediocre game design at
best. It seems like they're studios for 30-second ads rather than games.

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sblank
When I got my game company funded by VC's in 1993 it was an exception. Sounds
like its still true today. The rationale was that VC's don't fund "hits-based"
businesses. The feeling was that the game business had additional risk than
just a software product. Not only would they be betting whether your startup
could actually make and deliver the game, they were betting whether it would
be a "hit" like movies, books, and other entertainment. VC's recognized that
they had no "gut instinct" for cultural fads. In fact, VC's partnership
agreements restricted them from funding real estate, etc. and they felt that
games fell into that same hits-based category.

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wwalker3
Back in the late 90s, my partner and I were getting a startup game development
company funded. I pitched quite a few VCs, and ran into this same problem. The
typical objection was "The game business is like the music business -- it's
based on hits, and we're not confident we can predict those."

And it's true, from the VC perspective. A game developer often creates each
new game from scratch, so it's not like a traditional product that is created
once, then enhanced and refined over time. Each new game is a fresh new chance
to fail.

Maybe these days a middleware startup could get VC funding, since they create
a product that's used to make games, but not the games themselves.

In the end, after I accumulated a stack of more than 60 rejections from VCs,
we got our funding from a traditional computer game publisher.

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dstorrs
I worked in the game industry back in the 90s and early naughties. There were
pretty much two routes forward: work for a small company making new, creative
games -- and watch the company go bankrupt after 18 months on average -- or
work for a big company (e.g. EA) and make the same damn game over and over
again. And I mean that literally -- when I interviewed at EA, it turned out
that they had one guy on staff who had done EA Soccer every year for 20 years.

Even if you worked for a small company on "new" ideas, they weren't that new
-- most likely, you were coming up on your own tweak to last year's big
success story.

Overall, the field was just too depressing, and I got out.

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mrcharles
I guess you can summarize this as "show potential investors a business plan,
not a game". I thought that was implicit.

I've been considering starting a game company on my own, and I have a friend
who has done it before. His advice was "show resumes of people who will work
for you and how successful they have been. Investors care more about your
potential than what you want the money for."

Seems like this article agrees.

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jakarta
I have always considered the gaming business, especially social gaming, to be
similar to the pharma industry.

Basically, if you are investing, you are not so much investing because of one
game or one drug. You are investing based on their ability to execute and the
pipeline of games for the future. It is a bet that the pipeline will be robust
enough to generate future cash flows as current games lose popularity and are
ripped off by rivals (being released as generics).

Looking at a team that has only created one game or has just one game in
development is more akin to taking a wildly speculative bet.

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crystalis
Another counterexample: [http://www.virtualworldsnews.com/2009/09/tencent-
joins-in-8m...](http://www.virtualworldsnews.com/2009/09/tencent-joins-
in-8m-round-backing-riot-games.html)

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bradendouglass
I am surprised no one has brought up NGmoco? They are a gaming company and got
heavy backing from Angels / VC's from their start (it seemed like it at
least).

~~~
nc
Have a look at Plus+

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sabat
This flies in the face of huge, recent investments by mainstream VC firms in
(profitable) game companies like Zynga and RockYou.

