Venture-backed game studios often fail due to mismanagement of funds, treating venture capital like production financing instead of long-term company funding.
Investors with limited gaming knowledge frequently misallocate capital, treating gaming ventures like conventional investments and overlooking industry-specific challenges.
The struggle for studios to secure capital stems from the misalignment of resources, focusing too heavily on product completion without adequate marketing strategies.
Deep dives
The Risks of Venture Financing
Mismanagement of venture financing threatens the stability of game studios, leading to challenges in obtaining funding. Many venture capitalists have experienced significant losses, causing hesitation in financing new ventures within the gaming industry. This reluctance reflects a broader trend where studios struggle to secure capital, especially when venture backers are no longer optimistic about potential returns. Consequently, a cycle of caution in investment emerges, fostering an environment where many promising game studios fail to thrive due to lack of financial support.
Attributes of Successful Ventures
To attract venture financing, game studios must exhibit specific traits beyond just creating quality products. A key attribute is the desire to build a valuable company rather than simply a good product, as many studios fail to transition their quality offerings into sustainable businesses. Additionally, having a meaningful competitive advantage is crucial; this goes beyond minor gameplay tweaks and must include unique features that differentiate the game in a crowded market. Founders also need a blend of product taste and business savvy, ensuring that both creative and financial decisions support long-term success.
Investor Missteps in Game Financing
Investors often mishandle capital allocation, particularly during lucrative yet risky funding periods, leading to misguided investments. Many new game-specific venture funds, lacking substantial industry experience, treat gaming investments like any venture, overlooking the unique challenges faced. These rookie errors can result in funding studios without solid strategic backing or understanding of market dynamics. Consequently, some investor-backed companies fail to deliver meaningful products, making it essential for investors to critically analyze both the founders and the underlying gaming concepts.
Common Pitfalls in Game Development
A predominant issue in the gaming sector is the misalignment of spending, where studios focus funds excessively on product completion rather than on comprehensive market strategies. This often leads to situations where companies finish their games without sufficient capital for marketing or reaching customers. The frequent practice of prioritizing product over business sustainability can result in studios running out of resources even before launches. Without the necessary financial groundwork, even the best-designed games struggle to gain traction, causing unnecessary product failures.
The Future of Venture in Gaming
The venture capital landscape for gaming is fraught with uncertainty as previous funding strategies yield mixed results. Companies that raised substantial capital often find themselves in precarious positions due to unsustainable operating models, leading to potential failures. The industry's trend of overfunding without adequate planning points to the need for a shift in approach, prioritizing smaller, more focused investments that can adapt to market demands. As the game landscape evolves, investors and founders alike must learn from past failures to ensure future successes are driven by strategic thinking over mere financial backing.
Mitch and Blake address the unpleasant topic of how and why venture-backed games companies fail.
They look first at the nature of venture financing and the inherent differences between venture and publisher money. This leads to a conversation about how developers who were used to working with publishers treated venture capital like production financing as opposed to company financing, and why that distinction matters.
They then turn to the flawed strategies and tactics of gaming funds and investors, who tried to make up for their lack of judgment and taste by placing many bets on startup studios. They address several other factors that made games investing tricky for venture capitalists who often had little experience managing creative businesses and lack a basic understanding of the peculiarities of game production.
Mitch and Blake look at reasons why venture backed companies fail, and why catastrophic failure appears to be more common among venture-backed games companies than other software companies. They discuss the concept of the "naked B," why growth rounds are rare in games companies, and why games companies are uniquely difficult for conventional venture capitalists to evaluate.
They conclude with a look at some examples of companies that failed to return capital to investors -- in some cases very significant amounts of capital -- and discuss a few companies that appear to be in danger of following suit. They explain why the cumulative effect of these failures is one of the factors behind the current difficulties game companies experience raising money from venture capitalists.
[Ed.: since recording this episode, one of the companies in the deadpool, Elodie Games, has shut down.]
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