Game investment

This week I was lucky enough to attend a video game investor conference, here in San Francisco. It was a two day event that where developers could pitch their businesses to investors, and where developers could learn about what investors look for, what they are investing in, and why. It was the first conference of its kind that I know of.

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First some background information. There are two basic kinds of investors: angels and VCs. Angels are generally middle-aged men that have been successful in their careers (often they are or were entrepreneurs themselves) and want to give back in some way. Often they love the excitement of working with motivated young people and want to help them bring their vision to life. Angels are often passionate about the businesses they are involved in and as a result tend to be less focussed on recouping their investment, though it is still important to them. Angels invest anywhere up to about 1 million dollars, with larger investments often being financed by a group of angels. Because they don’t make their living off of their investments, individual angels can be hard to find.

VCs are Venture Capitalists, and these are the heavy-hitters. VCs tend to be less interested in the specific businesses they invest in and want to see something like a 10x return on their investment, often within 5 years of company operation. These firms have lots of money, and tend to invest 1-20 million dollars. They typically go for larger industries like pharmacuticals and telecommunications.

Generally, angels have been the only ones interested in games. VCs have tended to not be interested because games don’t generally have the return on investment they’d like. Also, game creators are often loathe to give up a big chunk of their company (creativity), which is something that VCs generally require to help ensure their money doesn’t get flushed down the toilet because of poor management.

So this conference was made up of mostly developers who are seeking money, and some representives from VC firms (like Apax, Trinity Ventures and Granite Mobile Ventures). While I wasn’t able to attend most of the conference, but I did come away with some tidbits that other developers might find useful:

1. While VCs haven’t traditionally been interested in games, they are increasingly investing in them.

2. Most game company startups will want to avoid angels and VCs altogether. Get contract work or begin with a mod or smaller game to get some revenue and bootstrap yourself that way. Turn to angels if you need more funding (or have rich friends/connections) and only then consider VC.

3. The #1 factor most VCs seem to look for is a strong management team. That can save a mediocre product or offering, but even a great offering generally won’t save a company with bad management. If you can get VC interested, many will help find management for you. Angels will often join your board of directors or fill a spot within your company when they invest.

4. Like in many other areas, China is exploding when it comes to VC investment. One VC guy mentioned that every time he flies on a plane to Shanghai (the “sister” city to San Francisco), he sees people he knows from other VC firms! It is starting to get so competitive there that new companies are fetching 2-5x valuations now they similar companies did even a couple years ago. As far as Chinese offerings go, they must be cheap. Even a $300 set-top box or console system apparently won’t fly in China. Apparently even though there are 250 million people in the Chinese middle-class, PCs are relatively rare and cyber-cafes are often used. The big thing right now is taking PC services and offering them through cell phones. Note to self; learn Mandarin.

5. Investors are much more interested in something that you’ve already created, tested or have proven success in. It’s very hard for them to fund an idea, no matter how good.

6. When pitching your company to investors, keep it short, concise and focussed on your “unfair competitive advantages”. These are the hooks, advantages or barriers to entry that you have that others won’t be able to duplicate easily, even if they have your exact same idea.

Thanks to the Strategic Research Institute and Game Developer Magazine for a great conference! I’m looking forward to seeing what some game companies can do with millions of dollars in the bank…

Hollywood game development model

Here’s something I’ve been thinking about and researching a lot recently. It’s a description of an emerging game development model that uses a small development team to create a big game, and is the model we’re going to be using at Unknown Worlds. I recently wrote this up for our business plan, so please forgive me if it sounds a bit impersonal or corporate.

The “Hollywood” model

A new development model is needed to allow a company to retain experimentation and innovation, easier startup, and lower risks, while still allowing large production scale and high production values. This model is a hybrid between the current, generally accepted game studio model and the movie industry. It has been independently conceived of by Unknown Worlds and other experienced studios.

The Hollywood game development model dictates a small, permanent team that creates the game design, art style and concept, script, architectural constraints, tools pipeline, and everything else that constitutes the core of the game. Instead of creating the whole game, the team instead creates a ‘blueprint’ that ensures the game can be created quickly and unambiguously. Contractors and temporary employees are then hired to create everything from this blueprint.

Pre-production

The game world is created, complete with characters, places, technology and artistic visualizations. The design is then prototyped, evaluated and iterated until confidence in gameplay quality is achieved and production risks are thought to be minimized. Any needed technology is then completed, tested and deployed. This phase will take about a year (50% of the project time) and serves to minimize overall project risk and cost.

Production

Contractors who already know the technology work remotely on specific, bounded tasks from the schematics they are given. All the game’s assets are created, including models, textures, animations and levels. The core team will create the most important assets during this time and will guide the work of the external developers to ensure integrity. This phase is projected to last about six months (25% of the project), with the majority of the work being accomplished in the first three months.

Post-production

The team then performs game balancing, performance optimization, compatibility testing, tweaking and ‘polish’. Extensive beta testing is done, feedback is taken from players, and changes are made as necessary. Sound effects are recorded and the score written and recorded. This phase is projected to last about six months but won’t end until the company is completely satisfied with the game.

Development notes

1. Core technology choices must be popular and proven to ensure good contractors can be hired when needed.

2. If the company has consistency or efficiency problems during production, those tasks can be brought in-house (extending the schedule but at an equal cost). This may be needed to achieve total integrity.

3. The company won’t be able to reduce all risk in pre-production but it should reduce risks and rework, resulting in an estimated cost reduction of 50% of the industry average.

4. Foreign outsourcing of art and programming can probably be done at high quality and low expense. The team is experienced in working in a distributed fashion in different time zones, but if this doesn’t achieve the desired quality, local art or programming shops can be used.

5. It is the company’s belief that the sales potential of a game is determined largely by quality of the initial concept and the time spent in post-production tuning and refining the game. The company believes it can make hit games instead of average games by spending as much time as needed during these two phases. The Hollywood game development model minimizes team size to allow this extra time.

Appendix

1. Companies that have talked about or employed a similar model with various degress of success: Wideload Games, Revolution Software, Stormfront Studios, Mary Margaret Walker, Surreal Software.

2. Article on Hollywood Reporter

As game requirements continue to grow, and as middleware gets better, I think that a model similar to this is a certainty, though I’m sure it will need tweaks and changes.

What are your thoughts on this? See any holes or potential problems?

Blue Oceans

I warned all of you that this blog would be not only about game design and development, but about business too. Which is why I’d like to talk a little about the concept of ‘blue oceans’ today! You can hardly wait!

I recently read this amazing business book called “Blue Ocean Strategy – How to Create Uncontested Market Space and Make the Competition Irrelevant. It talks about “blue oceans”, which are all-new markets that you can strive for (in opposition to “red oceans”, which are where all the competitors are, and are ‘bloody’ from all the fighting).

The book outlines not just theory, but tools for reliably finding new blue oceans for your business. This includes making “strategy canvas” graphs of your competitors offerings and your own, and making sure your chart looks different, not too jagged, and that you have some new axes that none of your competitors are even ranked on. This is just one of quite a few tools it describes for finding new markets and making sure you are differentiated enough.

Some of the best takeaway points include:

1. Create exceptional buyer utility. This sounds completely obvious, but the book talks about many examples where companies THOUGHT they were creating real utility, but were actually creating capabilities instead. For instance, a high-powered new game console system without any killer launch titles could fall into this trap.

2. Assign price to be easily accessible by majority of buyers. Many industries (like video games) seem to fall into this trap, choosing pricing according to a model everyone assumes.

3. Figure out how to attain your cost target to profit at this strategic cost. If your business model won’t let you profit at the price in #2, it’s important not to lessen buyer utility, but to change your business model to allow this price.

4. Remove all adoption hurdles in actualizing your business idea. Technical constraints, resistance to the idea by retailers or partners, customers not owning credit cards, download size, ease of installation, etc.

If you have all of these things, you may have successfully formulated a commercially viable blue ocean idea. It all sounds rather simplistic in my quick summary here, but I ensure the book is totally fascinating, and filled with some amazing examples of companies and people creating huge value with very little (something that’s quite encouraging for a video game startup right now!).

So how does this pertain to video games? I’ve been thinking a lot about this. Everyone talks about the escalating costs of game creation, the lack of innovation, the death of independent developers, etc, but by targetting new blue oceans of consumers, I think we can grow this industry and solve many of these problems.

Specifically, to me this means the following: a) create games that the majority of the population can afford and b) make games that can easily be bought, installed and played and c) make games that appeal to a whole new demographic not currently targetted or served by existing games (the specifics here will have to be a secret for now). We are already planning on doing this for our future games (@ Unknown Worlds), but this book makes me even more confident in the approach. I think that by making ‘hard-core’ games that are cheaper and appeal to a much bigger audience, we can get out of the bloody red oceans we are fighting with EA in and have a more prosperous future without Madden sequels and skyrocketing budgets.

You guys have any thoughts? Or is this entirely too boring and not what you were hoping to get out of Flayra’s blog? 🙂