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.
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…
