Originally presented at the 2007 Casual Connect conference, this presentation delivers a quick tour through all the various funding mechanisms available to start-up video game studios to get their games funded.

1. Pretty
Good
The Definitive Guide to
Funding Your Masterpiece
James Gwertzman
Vice President, PopCap Games
james@popcap.com

2. How good is your team?
How much money do you need?
How much risk are you willing to share?
So, you want to fund a GAME?
How much experience do you have?
What is your cost structure?
How risky is it?
What are your goals?
What‟s your track record? Why?

3. 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.

4. Match your FUNDING…
…to your GOALS & AMBITIONS.

5. Key steps toward getting funded
$$$
Keeping it!
Doing the deal
Your pitch
Your choices
Your network
Your team
Your story

6. Critical to your success Will keep you focused
Your story
• Why games?
• Your goals & ambitions?
• Why are you different?
Will help you make Key to attracting
tough decisions employees, partners,
investors, etc.

7. Mission statement:
Create the best games ever.
Have fun doing it.
(Sound familiar? How is your company
going to stand out?)

8. 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?

9. Building your network
• Friends
• Conferences
• Cold calls
• LinkedIn
• Introductions
• Seminars
• Referrals
• Facebook
• Plaxo

10. Your choices
Freedom (creative, etc.)
Self-funding (organic growth)
Publishing deal
Venture capital
Strategic partner
Resources

11. Your choices
Freedom (creative, etc.)
Self-funding (organic growth)
Publishing Deal
Venture Capital
Strategic Partner
Resources

12. 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

13. 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?

14. Self-funding: Pros / Cons
• Highest upside if successful
• No safety net if a failure
• Difficult in a competitive, well-funded market

15. 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

16. Your choices
Freedom (creative, etc.)
Self-funding (organic growth)
Publishing deal
Venture capital
Strategic partner
Resources

17. 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)

18. Typical obligations
Developer Publisher
• Initial QA • Funding
• Game development • Engine (in some cases)
• IP creation • Marketing / PR
• Distribution
• Game feedback
• Localization
• Alternate platform
development

19. 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

20. • Cost: $150K
• Rev / Unit: $8
Pure distribution deal • No royalty advance
• Royalty rate: 50%
• Publisher cost: 50% of total
$600,000
$500,000 Royalties
Developer net revenue
$400,000
Publisher net revenue
$300,000
Royalties
$200,000
$100,000
$-
$(100,000)
Developer break even
$(200,000)
Publisher break even
$(300,000)
Units Sold

21. • Cost: $150K
• Rev / Unit: $8
Royalty advance model • Royalty advance: $150K
• Royalty rate: 50%
• Publisher cost: 50% of total
$600,000
$500,000 Developer net revenue
$400,000 Publisher net revenue
$300,000
Royalties
$200,000 Developer break even
$100,000
$-
$(100,000)
Publisher break even
$(200,000)
$(300,000)
Units Sold

22. • Cost: $150K
• Rev / Unit: $8
Cost share model •
•
Royalty advance: $150K
Royalty rate: 50%
• Publisher cost: 50% of total
$600,000
$500,000 Developer net revenue
$400,000 Publisher net revenue
$300,000
Royalties
$200,000
$100,000
$-
$(100,000)
$(200,000)
Developer & publisher share revenue
equally once cost is recouped.
$(300,000)
Units Sold

23. Hey, those numbers look
Not so fast… Not all games
pretty good. Why don‟t all
will be hits. Publishers have to
publishers pay 50%
assume some games will lose
royalties? They must be
money and cover themselves.
greedy bastards, eh?
Paranoid developer Greedy suit

24. • Cost: $150K
• Rev / Unit: $8
Publisher risk analysis • Royalty advance: $150K
• Royalty rate: various
• Publisher cost: 50% of total
40%
Net Before
Game Type Units Sold # games Revenue Advance Overhead Royalty
35%
AAA 150,000 1 $1,200,000 $150,000 $75,000 $975,000
A 60,000 2 $960,000 $300,000 $150,000 $510,000
30% B 30,000 4 $960,000 $600,000 $300,000 $60,000
F 0 2 $0 $300,000 $150,000 $-450,000
390,000 9 $3,120,000 $1,350,000 $675,000 $1,095,000
25%
Publisher ROI
Hit titles must make up
20%
for flops or failures.
15%
10%
5%
0%
0% 10% 20% 30% 40% 50% 60% 70%
Royalty Rate

25. Project risk profile
• Have they worked together
Team before? Track record?
• Has it been used to make a
Technology game before?
Genre • How competitive is it?
• Original IP or a well-known
IP brand?

26. When to approach a publisher?
• As late as possible….
• Ideas are cheap
• Demonstrate your potential
• Gain leverage

27. 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

28. 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”

29. 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

30. Your choices
Freedom (creative, etc.)
Self-funding (organic growth)
Publishing deal
Venture capital
Strategic partner
Resources

31. 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?

32. 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

33. 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?

34. 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

35. 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

36. Your choices
Freedom (creative, etc.)
Self-funding (organic growth)
Publishing deal
Venture capital
Strategic partner
Resources

37. 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?

38. 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

39. Sample prototype: Venice
Venice prototype Final version of Venice
Submitted Nov 17, 2005 Published June 26, 2007

40. 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

41. 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

42. 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.

43. Q&A