The Definitive Guide to Funding Your Masterpiece

James GwertzmanVice President, PopCap Games

james@popcap.com

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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20,

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$300,000

$400,000

$500,000

$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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000

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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

20,

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30,

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40,

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50,

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60,

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70,

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90,

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$200,000

$300,000

$400,000

$500,000

$600,000

Developer net revenue

Publisher net revenue

Units Sold

Ro

yalt

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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