The Definitive Guide to Funding Your Masterpiece
James GwertzmanVice President, PopCap Games
Pretty Good
So, you want to fund a GAME?
Why?
How much money do you need?
How risky is it?
How good is your team?
What is your cost structure?
How much risk are you willing to share?
How much experience do you have?
What are your goals?What’s your track record?
What are you willing to give up?
• Funding is a double-edged sword…• You cannot build a game or team without it.
• But, this choice will limit your options and shape your opportunities.
• So, choose carefully…Not all funding sources are equally good for everyone.
• Incentives must match on both sides.
Match your FUNDING…
…to your GOALS & AMBITIONS.
$$$Key steps toward getting funded
Your teamYour network
Your pitch
Doing the deal
Keeping it!
Your choices
Your story
Critical to your success Will keep you focused
Will help you make tough decisions
Key to attracting employees, partners, investors, etc.
Your story• Why games?• Your goals & ambitions?• Why are you different?
Create the best games ever.Have fun doing it.
Mission statement:
(Sound familiar? How is your company going to stand out?)
Your team
• Are your expectations realistic?• What is your cost structure –
• Working from home or in a garage?• Have you thought about mortgages, health
insurance, kids?
• Track record?• Team structure –
• Equal partnership?• Corporation?• Co-founders?
Building your network
• Friends• Conferences• Cold calls• LinkedIn• Introductions• Seminars• Referrals• Facebook• Plaxo
Your choices
Resources
Fre
edom
(cr
eativ
e, e
tc.) Self-funding (organic growth)
Venture capital
Publishing deal
Strategic partner
Your choices
Resources
Fre
edom
(cr
eativ
e, e
tc.) Self-funding (organic growth)
Publishing Deal
Venture Capital
Strategic Partner
Self funding / organic growth
• No strings, not beholden to anyone• Cost structure is everything
• Can you slash spending and be competitive?
• Accountability• Can you stay focused and motivated without external forces?• Can your team stick together without outside forces?• No one to blame but yourselves…
• Will need to partner in some areas• Distribution• Licensing• Co-development
Self-funding is risky
• Especially in a rapidly growing market• Can you keep up with other, better-funded companies?
• Where is your money coming from?• Do your partners share your goals?• Can you take sufficient risks to be successful?• Can you withstand a few early setbacks?• Beware personal guarantees & leases
• How much money is really on the table?
Self-funding: Pros / Cons
• Highest upside if successful• No safety net if a failure• Difficult in a competitive, well-funded market
Case studio: PopCap Games
• Entirely self-funded• Mixture of talent & luck in early days
• Right place at right time• Talented team• Previous experience working together• High quality games
• Early cost structure very low• Single guys, no families, worked in garage (really!)
• Growth has paced the rest of the industry
Your choices
Resources
Fre
edom
(cr
eativ
e, e
tc.) Self-funding (organic growth)
Publishing deal
Venture capital
Strategic partner
Publishing deals
• Typical deal structure• Developer creates game• Publisher funds development, provides other services• Developer receives share of total revenue (royalty)
• Many different options that can be negotiated• IP ownership• Sequel rights• Royalty advance vs. development fee• Distribution rights by territory vs. worldwide• Recoupment options• Other platform rights (e.g., mobile, console, retail, etc)
Typical obligations
Developer• Initial QA• Game development• IP creation
Publisher• Funding• Engine (in some cases)• Marketing / PR• Distribution• Game feedback• Localization• Alternate platform
development
Key variables in analyzing P&L
• Royalty advance (e.g., $100K)• How much you are “loaned” to build game
• Royalty rate (e.g., 25%)• Percentage of revenue shared with developer
• Definition of net revenue vs. gross revenue• What expenses get deducted first?
• Recoup models• No recoup – “work for hire” model• Standard recoup – “developer loan” model• Recoup at 100% – “share costs” model
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$400,000
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$600,000
Royalties
Developer net revenue
Publisher net revenue
Units Sold
Ro
yalt
ies
Pure distribution deal
Developer break even
Publisher break even
• Cost: $150K• Rev / Unit: $8• No royalty advance• Royalty rate: 50%• Publisher cost: 50% of total
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$-
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$200,000
$300,000
$400,000
$500,000
$600,000
Developer net revenue
Publisher net revenue
Units Sold
Ro
yalt
ies
Royalty advance model
Developer break even
Publisher break even
• Cost: $150K• Rev / Unit: $8• Royalty advance: $150K• Royalty rate: 50%• Publisher cost: 50% of total
Cost share model
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10,
000
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30,
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40,
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$-
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$200,000
$300,000
$400,000
$500,000
$600,000
Developer net revenue
Publisher net revenue
Units Sold
Ro
yalt
ies
Developer & publisher share revenue equally once cost is recouped.
• Cost: $150K• Rev / Unit: $8• Royalty advance: $150K• Royalty rate: 50%• Publisher cost: 50% of total
Hey, those numbers look pretty good. Why don’t all
publishers pay 50% royalties? They must be
greedy bastards, eh?
Not so fast… Not all games will be hits. Publishers have to assume some games will lose money and cover themselves.
Paranoid developer Greedy suit
Publisher risk analysis
0% 10% 20% 30% 40% 50% 60% 70%0%
5%
10%
15%
20%
25%
30%
35%
40%
Royalty Rate
Pu
bli
sher
RO
I
• Cost: $150K• Rev / Unit: $8• Royalty advance: $150K• Royalty rate: various• Publisher cost: 50% of total
Game Type Units Sold # games Revenue Advance OverheadNet Before
RoyaltyAAA 150,000 1 $1,200,000 $150,000 $75,000 $975,000
A 60,000 2 $960,000 $300,000 $150,000 $510,000B 30,000 4 $960,000 $600,000 $300,000 $60,000F 0 2 $0 $300,000 $150,000 $-450,000
390,000 9 $3,120,000 $1,350,000 $675,000 $1,095,000
Hit titles must make upfor flops or failures.
Project risk profile
•Have they worked together before? Track record?Team•Has it been used to make a game before?Technology
•How competitive is it?Genre•Original IP or a well-known brand?IP
When to approach a publisher?
• As late as possible….• Ideas are cheap• Demonstrate your potential• Gain leverage
Publishing deal: Pros / Cons
• Great way to build reputation• Great way to have an impact as small developer• Reduces your long-term value, esp. to an acquirer• Caps upside in the event of a hit
Case study: Escape Factory
• Funding over 3 years:• Angel funding ($250K)• Personal funding ($250K)• Contract work ($200K)• Publishing contract w/ major publisher ($3M)
• Publishing contract was cancelled• No other deals lined up• Studio eventually went out of business
• See extensive case study…• “What to Do When it All Goes to Hell”
Case study: Sprout Games
• Two relevant mottos:• “Spend no money” (we were total tight-wads)• “Simplicity ahead of personal gain”
(quality of life matters more than a few revenue points)
• Funded via publishing deal w/ RealNetworks• Games were very successful• Ultimately acquired by PopCap Games
• But… value to PopCap less than it could have been because of rights tied up in publishing deal
Your choices
Resources
Fre
edom
(cr
eativ
e, e
tc.) Self-funding (organic growth)
Publishing deal
Venture capital
Strategic partner
Professional investor (VC or angel)
• Not historically an option in the game industry• But casual gaming is hot right now…
• Typical deal structure• VC funds the company, all development• Developer builds long-term value• Company is acquired (few other credible exit options)• VC is looking for 10x return (at least)
• Must have clear exit strategy• Option of financing game(s) vs. company?
Typical deal options
• Funding levels / type• Valuation / dilution• Board seats (control)• Other types of influence / decision making• Will likely still need to partner with others• Common deal terms
Why investors are not created equal
• Existing portfolios of companies?• Long-term aspirations / ambitions?• “Marquee” value / reputation within industry?• Original thinker vs. herd follower• Understanding/experience in game industry?• Industry contacts?• Participation in later rounds of fundraising?
When to approach an investor?
• Different stages• Seed financing• Start-up or early-stage• First-stage, second-stage, etc
• Depends on the stage…• Early is not necessarily bad IF you have a track record• Problems with being a somewhat profitable company
(zombie)
• Depends on the climate…• “Community” very hot right now
Venture capital: Pros / Cons
• Great way to create a lot of company value• Incentives may not line up
• Different definitions of success
• How much control are you giving up?• How well do you know your investors?• The last thing a VC wants is a slowly growing,
mildly successful company (zombie)• If you’re going to fail, they want you to fail fast• You may want a “lifestyle” company• But VC has very different motives
Your choices
Resources
Fre
edom
(cr
eativ
e, e
tc.) Self-funding (organic growth)
Publishing deal
Venture capital
Strategic partner
Strategic partners
• Someone with strategic interest in your success• Distribution partners• Hardware/software companies• Territory-specific leaders
• Ideally close alignment in goals• Room for true win/win deals
• Where do partners come from?• Look around the industry…
• Sometimes a quasi-joint venture• More appropriate for later-stage investing?
Your pitch
• Your job: make it easy to get the deal• Find out what the other company needs to see• Then show it to them
• Publisher: prototype• Fun is most important in the prototype…• Quality & polish can be communicated separately
• Investor: business plan• Quality of your team is most important• Followed by a “big” idea & compelling justification
Sample prototype: Venice
Venice prototypeSubmitted Nov 17, 2005
Final version of VenicePublished June 26, 2007
Your deal
• Full time job for someone on your team• Will take longer than you think• You may need to push it along• On the care & feeding of a lawyer
• Educate yourself on IP contracts• Review the contract yourself carefully• Pass your own redlined copy to your lawyer• Review your lawyer’s changes to understand which
are true “show stoppers”• Negotiate with the other company directly yourself
Classic funding mistakes
• Too much money, too soon• Great ideas, but no team or plan for how to
execute game creation• Lack of understanding on both sides (other side
is not evil)• Following other companies too closely• Wrong audience / wrong product / wrong timing
Keeping it!
• Managing your funding source is a full-time job• It’s not about success.• It‘s about making sure your investor sees success.• The difference is subtle, but critical …
• Manage expectations carefully• Undersell, overdeliver. Clichéd, but true.
Q & A