Mitch and Blake discuss game financing, including publishing financing and venture capital. They explore the trade-offs of securing funding and the promises made to venture capitalists. They also discuss aqua hiring, innovation in distribution, spending money in game studios, going public, and the current state of venture investing in the game industry.
Venture capital has become a major source of funding for video game companies, providing an alternative to traditional publishing financing or bootstrapping.
Publishing financing often comes with significant trade-offs, such as giving up revenue and control over intellectual property, while venture capital financing offers ownership and potential liquidity events.
Investing in companies with strategic value and focusing on distribution and business model innovation are essential for long-term success in the game industry.
Deep dives
The rise of venture capital in funding video game companies
Venture capital has become a major source of funding for video game companies, with a significant increase in venture investing over the past 15 years. This trend has provided game developers with an alternative to traditional publishing financing or bootstrapping. Venture investing generally occurs in the early stages of a game's development, before its launch or proven commercial success. While later stage investing does exist, it resembles private equity or public stock picking more than early stage venture investing. The influx of venture capital has expanded financing options for game developers beyond relying solely on publishers or self-financing.
Publisher financing: pros and cons
Publishing financing was a common method of funding games in the past. When pursuing publisher financing, developers present their game to a publisher and receive capital to complete the product. However, this type of financing often comes with significant trade-offs. Developers typically give up a substantial portion of their revenue, potentially over 50%, and may lose control over their intellectual property. Publishers may also require commitments for sequels or derivative works. While publishing financing offers the security of getting the game to market, it often limits creative autonomy and poses challenges for revenue sharing.
Venture capital financing: promises and risks
Venture capital financing differs from publishing financing by providing funding in exchange for shares and an ownership stake in the game development company. Venture capitalists focus on building valuable companies rather than solely funding specific products. Startups that secure venture capital must deliver on a promise to either sell the company or go public, offering a return on investment through a liquidity event. However, there are risks and downsides to raising substantial venture capital. Some companies may struggle to iterate or pivot their products due to the fixed investment and high expectations associated with large funding rounds. Additionally, the prevalent trend of credentialism in venture funding may overlook promising founders and unconventional success stories.
Investing in value-driven attributes
The podcast episode discusses the importance of investing in companies with strategic value, rather than solely focusing on content-driven investments. It emphasizes the need to look for attributes of value and strategic advantages that can contribute to the overall growth and success of a company. The example of Roblox having a higher valuation multiple than Activision is cited as an illustration of how people ascribe strategic value to certain companies. The podcast highlights the significance of identifying and investing in companies with unique attributes that can drive long-term value.
Importance of distribution and business model innovation
The podcast emphasizes the significance of distribution and business model innovation in the success of game companies. It highlights the importance of factors such as frictionless access to the initial customer base, innovative distribution strategies, and leveraging online platforms to drive growth. The example of Riot Games' success with League of Legends and the importance of their distribution innovation is discussed. The podcast emphasizes that many game pitches focus on building great games without articulating a real competitive advantage or insight into the market, which can be a risky proposition. It suggests that companies should focus on developing unique distribution and business model innovations that set them apart in the industry.
Mitch and Blake discuss the nuances of game financing. They begin by explaining how the publishing model of advances against royalties functions, and what the expected costs and benefits are for both the developer and publisher.
After a brief discussion of bootstrapping, they do a deep dive on venture capital financing for games. They reveal how venture capital firms make money, drawing a sharp contrast with how traditional game publishers make money. This leads to a conversation about the implied promises that game studios make when they take venture capital. Mitch talks about how ill-prepared he thinks most game companies are to deliver on those promises, and how willing some venture investors have been to fund studios with no obvious competitive business advantages other than their ability to make cool games.
The hosts conclude with a discussion about liquidity. Mitch and Blake provide an overview of the initial public offering market for game companies over the last 20 years, and Mitch shares his experience taking a game company public. Mitch worries that most of the high-profile founders of new game studios are not prepared to be public company CEOs, and how that will affect the venture capital environment for game companies in the future.
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