Burn out or not burn out? Or how can developers get investments to create a game?
The development budget for an average PC game is between $1 million and $5 million. Indie studios can make a product cheaper, and large corporations release AAA games with budgets of tens and hundreds of millions of dollars. It is very important for the company to at least return the investments invested in the game, or better, to earn more than that for the creation of the next game. Let’s see what are the main sources of fundraising for game development now.
Author: Konstantin Sakhnov, game designer
I am developing an indie strategy “Shadow of Vengeance”, in which the player acts as an ancient god, the creator and arbiter of fate for the civilizations of elves, humans, orcs and other peoples.
I recently spoke at CIPR Tech week with two reports. One of them was dedicated to gamification, and the second was about investment in games and their payback. I spoke on the example of my game. In this article I will reveal part of the abstracts of the report, which I could not fit into an hour-long lecture.
Game funding problem
The studio game development budget is quite high these days. If we are not indie, building a product on free assets and art created by a neural network, then we will have to pay well for experienced employees and their social guarantees. Next, we’ll look at an example of a budget to give you an idea of where the $2+ million development price comes from. Where does a start-up studio get these funds?
The most common sources of funding for game development are:
The main option here, of course, is own funds. The studio already has products that bring in money for development and creation of new ones. But what if you are just starting your journey?
One option is publisher funding. If you have the resources (time, money for outsourcing, a d team, etc.) to develop an MVP and demo a product with a small amount of content, but in the final quality, you can interest the publisher and get money from him to complete the product as soon as possible. It can be both small money and larger amounts up to $ 0.5-1 million. The publisher usually takes these investments at the release, starting to transfer his share to the developer only after he returns all the costs.
What if we don’t have enough resources to develop a vertical slice (one of the MVP options in game development, read a little more about Vertical Slice and stages here)? Either try a simpler product, which we can do without outside help, or look for an investor.
Since 2022, the latter has become much more difficult. This is due to the first negative dynamics in Western game development in many decades, caused by a rollback after rapid growth into a pandemic, restrictions on the Russian market, and tightening of China’s regulatory policy. Investors are in no hurry to invest in the industry, which showed an annual increase of -4%. By the way, the only segment that showed a small but positive trend is PC.
Non-core investors
Sometimes game development is financed by wealthy people who have nothing to do with game development. Their motivation is very different from “better understand what it is – game development” to “risky investments with high returns.” Often such people have extensive experience in related fields: cinema, series, media. They are usually very business savvy or have professional consultants and auditors.
The amounts that such investors can allocate may vary. That’s $10k for building a prototype and $5m for a long-term development of a big game. Often the main investor brings another group with him, each member of which buys out a small share for $100-200k.
However, this funding model also has its downsides. Where can you find such an investor? If you have such friends, then you are very lucky! Most often, their search takes from six months to several years. It is very important for the development team to hire an experienced lawyer in order to understand exactly what they are signing up for.
Also, private investors charge a very large fee for their money: 50-70% of the studio. In fact, the developer will make them a new business for their money, only this time it will not be a candle factory, but a game production studio. By investing in a non-core venture area, the investor wants to remain the main owner and key final decision maker. Few of them prescribe in the contract the preservation of the right of the final vote for the founder of the studio, regardless of his share.
Strange as it may seem, an unexpected advantage follows from this problem: for the state and foundations, the failure of one of the thousands of products is invisible, while for a private trader it is the loss of his personal money and his personal studio. That is why such investors often finance the development if the team has gone beyond the deadlines or budgets.
Let’s summarize the results for private investors:
Institutional venture investment funds
Here things are different. Funds are usually not very interested in making money from your games. They don’t mind taking dividends, but it’s more of a nice bonus. Their main task is for you to grow as a company and start to cost more. Much more expensive. In venture capital, there is such a term as pre-money valuation – an assessment of the value of a company before a round of investments. So the purpose of the fund can simply be described as “bought for X, sold for 3X.”
From this model follow main advantages of a venture fund:
The fund is public, which means it is much easier to find than private investors;
The fund does not take all the business, but only 20-30%;
The Fund helps with expertise, because it has dozens of companies like yours;
The foundation promotes you to the publisher, because your success is beneficial to them.
What then are the main disadvantages? Everything is very simple: there are hundreds and thousands of people who want to get money there. The chance that your application will be approved is usually extremely small. Here you can find a pretty solid list of venture capital funds investing in aspiring gamedev studios.
To go to a venture fund, you need to prepare a solid package of documents and have an MVP of the game.
They usually ask for:
PnL – calculation of business payback, indicating the publication model, development costs, revenue and commissions;
Cap Table – shares of co-founders with an offer to the investor and an assessment of the value of the business;
Budget – the cost of development, divided into articles, employees and terms;
pitch deck – presentation of your business;
Market analysis – analytics of revenue, audience and trends, understanding of competitors;
road map – a list of stages and milestones with the designation of deadlines and results;
Team – information about the experience of the participants, how much the games they made earned;
Business plan – on what and according to what logic the business will be built;
Product information – what kind of game, what will be released, what is unique.
Here I speculated a little and showed screenshots of some of these documents. However, it is worth devoting a separate article to the methodology for preparing each of these materials.
State grants and co-financing
Government structures and foundations very often finance the development of games. Such examples can be found all over the world from Poland to the USA. Russia is no exception. Within the framework of the already mentioned CIPRand shortly before REEF, there have been discussions of state participation in the financing of domestic game developers. Now the main structure that allocates grants for game development in Russia is IRI (Internet Development Institute). But this is far from the only option.
Main advantages:
Government agencies (for example, Iran) usually do not ask for a share of the studio in return;
Commercial success is not always evaluated, it can be coverage or other pre-agreed KPIs;
Grant amounts can vary greatly.
Flaws:
Often this is post-payment, i.e. first make the game, and then we compensate for development costs, which is not suitable for indie studios;
The circle of projects is narrowing, because the promotion of Russian culture or patriotic themes is required.
So far, government agencies do not have a goal in developing the gaming business in order to receive taxes from it and create jobs. Although such initiatives are being discussed, and the Ministry of Finance has clearly stated that they are interested in it. Games are considered primarily as a tool for promoting culture and meanings, which means that it’s impossible to enter simply with any project.
Accelerators
A little advice. Before you go to any investor, collect as much feedback as possible from experts, because you will only get one chance. The second time, funds, private traders and government agencies will not look at the same team in a couple of months. It is important to find acting experts in the gaming industry. You can meet them at educational programs where they often teach, and at specialized gaming conferences. If this fails, it makes sense to look for accelerators for game developers. One of the famous ones is AD Gaming (Abu Dhabi). In Russia, you can try to present games as a startup in Skolkovo or read about them in specialized VK groups dedicated to game development. Like Indymaker, Indie Varvar’s or Indie Space. I also recommend a podcast with my participation – I want to join game dev, where we regularly invite various experts from game dev. One of the main results of work in the accelerator is feedback. Don’t expect money there.
If you have a team, presentation and product prototype, you can write to me. I will try to suggest if you have a chance to raise money in the current realities. And if so, where to find them.
Crowdfunding
Previously, there was another effective way to attract money – it was to collect them from the players. For the last 5 years, this channel has not been working for regular projects. Seeing an opportunity like crowdfunding, large companies and publishers also began to use it, spinning up competition for the attention of the players. To convey to the players that you are making a great game, it is not enough just to create a Kickstarter company for it. It is also necessary to purchase advertising traffic, create creatives (rollers, banners and video games), hire specialists who will work with players (community managers). Give players a discount on a product and then pay taxes and platform fees.
I was lucky to see the numbers of one of the major Western projects on Kickstarter: with +-$1 million in revenue, they spent $1.3 on marketing. They considered this a good result, as the company on Kickstarter raised the hype around their RPG and, as a result, increased sales on Steam.
However, crowdfunding has not become just another marketing channel for all games. Franchise products do well for the company, because they already have a franchise audience, which they monetize with a new project again. A couple of years ago, crowdfunding for a board game set in the Darkest Dungeon universe was extremely successful. Hardcore board games are also sold well on crowdfunding. On CrowdrepublicFor example.
Instead of conclusions
2023 is a very difficult time to find investments in game dev. The market fell 4% for the first time in decades. Cutting down around the world developers with more experience. In Russia, Belarus and Ukraine, the game development market has practically disappeared due to all known events. Thousands of people with 5-10 years of experience have lost their jobs. Is it easy now to attract investments or even find a job for beginners?
On the other hand, a couple of years ago, during a pandemic, money for games both in Russia and in the world was handed out “by helicopter”. Just show a more or less worthwhile project and team. Fluctuations, crisis times and upswings are a natural part of the market. It’s just that IT, and especially gamedev, are not used to crises.
I am sure that the current crisis is only temporary, which means that now is the best time to prepare the product for a new take-off. I can give predictions on the gaming market, but the only thing I’m definitely not ready to vouch for is the impact of the political situation on the gamedev market.
