Why VCs Won't Fund Game Companies
gamasutra.com
gamasutra.com
* 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.
What you're saying is that "VCs shouldn't invest in studio based game companies" and I think you're right. There are other development models that do not have the same schedule/single-release problems. Free to play is the first that comes to mind, just looking around at the facebook scene (where games are launched and often fall flat until someone iterates and finds the right spark, only to then watch their game blow up). Another example would be WoW. They did a lot of things right at launch but if you look at the product today it really shines from the years of public iteration it's been able to go through.
Unfortunately those development models really don't work for boxed retail console games today, so there are lots of valid reasons to work in a studio model.
The social elements of the game should lend themselves well to the existing social structure of Facebook.
The technical and artistic requirements are much lower.
The game would probably not be fun as a standalone. The fun comes from competition and cooperation with your friends on social platforms. The game should be structured to reward persistence over skill. Doing easy and menial tasks over and over is much more fun when you're competing with your buddies.
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.
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.
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.
So, it's the enablers of such high value but short life products that are truly valuable.
"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."
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.
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.
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.
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.