10 Reasons Your Game Studio Will Never Get Funding
Getting funding for your game or company requires not just a great game idea and a talented team, but a sound business plan backing up those grand ambitions.
Yet not all developers prepare carefully enough before pitching for investment, which could result in a good idea and skilled team of developers losing out on that cash injection.
Speaking at Brazil’s Independent Games Festival, Execution Labs co-founder Jason Della Rocca discussed this topic in his session entitled 10 reasons why developers asking for money won’t get any.
He said he received an “unbelievable number” of pitches from developers asking for funding, and those who don’t plan appropriately aren’t likely to get support.
#1 You are making crap
Starting bluntly, Rocca said that if you are making something crap, “no one is going to give you money”.
He said it was amazing how many developers are just making stuff, then realise they’ve run out of money and want investment so they can “just keep making stuff”.
“Don’t come to an investor if you don’t have something amazing,” he said.
#2 Pitching a problem instead of an opportunity
Rocca said a typical pitch he receives is a developer approaching him, showing off the game they’ve been making and then presenting the problems preventing the game’s continued development.
Issues could range from running out of money due to development taking longer than expected, not budgeting for marketing, not allocating funds for events like PAX or BIG, or lacking the money for something like audio or QA.
Rocca said developers are typically accustomed to solving problems, and when they hit a problem of not having money, they then call up investors.
This is a very typical approach from developers, he said, who are framing the investment as fixing a problem for the developer, rather than reframing it as an opportunity for the investor.
Developers need to tell investors what the market potential is and why the game is going to succeed, rather than simply explaining their own challenges.
Rocca said this is one of the most critical pieces of advice in this list.
#3 Trying to offload all the risk and/or get someone else to pay for your learnings
Rocca said one thing investors want to see is a real commitment from developers who are asking for funding.
For example, those who say they’ll quit their current job as soon as they get the backing from an investor probably won’t get funding. Even if they’ve been working in a good job at a big publisher.
Rocca explained that he was not willing to invest in developers who aren’t willing to invest in themselves by taking the risk to start up the company and the project on their own before chasing investment.
#4You don’t know what you are raising funds for
When looking for investment, it’s important for devs to realise exactly what they need funding for: their game or their company (or perhaps something else entirely).
Rocca said that funding a project is dramatically different from funding a company and will therefore affect the terms and economics of a deal.
Project funding might see an advance against future revenues, and if negotiating with a publisher, they may want IP or sequel rights, for example.
Company funding meanwhile means you’re selling shares in your business. That doesn’t mean losing control – typically investments might see a developer selling 10% or 20% of their company, but the point is selling a slice of the business to receive money.
That means the investor will become an equity holder who has some rights to the direction of the company and may also take a seat on the board. The mindset here is often for the long-term with an eye on the potential growth of the company.
Given these key differences, Rocca said it’s important to understand whether you’re seeking partners and finances for your company, or looking for investment to get a project to the finish line.
#5 Asking for too much, or too little
Developers often don’t know how much money they actually need, claimed Rocca.
He said the worst pitch he gets from developers is that their monthly burn rate on cash to live is ‘x’ amount, so they need 12 times that to keep going for the next year.
Rocca said he doesn’t want to give a developer money so they can just buy food for the next 12 months, he wants to give them money so they can do something with it.
To explain what he meant, he used a metaphor of building a bridge.
Developers shouldn’t ask for 12 months of bridge building money to only get them to the middle of the river. They need to ask for how much it will take to get all the way to the other side. That’s the money developers should be asking investors for.
To that end, there needs to be discussions on project milestone and how much will it take to get to soft launch, global launch, etc. It’s a very granular thing, said Rocca.
#6 Asking at the wrong time
The best time to raise money is when you don’t need it, according to Rocca
He explained that typically developers will come to him when they’ve run out of money, and are desperate and struggling.
Rocca suggested a better strategy is to do a project timeline, look ahead and see that in nine months’ time it could be tight on the current budget. That way, developers can start looking for those extra funds now and have time to obtain it before they really need it.
Other developers may also pitch for funding when the project isn’t ready. So it’s important to understand where you are on your timeline and find suitable investors for that stage of your company or project.
Rocca also said pitching to publishers should start once you have a prototype, not right before launch.
#7 Your corporate structure is screwed up
Investors want to invest in real companies with proper corporate structures. What they don’t like is a company based on a handshake between the studio’s partners with no actual corporate structure in place.
Rocca said if that’s the case, “I’m not giving you $1 million in your bank account”.
He also advised developers on capital structure, where there may be more than two shareholders, and ensuring extra shareholders don’t have a disproportionate reward for what they bring to the company, as well as ensuring you have your own financial incentives moving forward.
An investor wants to know the people behind the business have sufficient motivation to make it successful.Rocca said that when it comes to corporate structure, developers should talk to their lawyer about it.
#8 Your revenue share economics are messed up
Some indies who don’t have money may promise a slice of the revenue share to collaborators – such as a 5% share for providing audio, for example.
But too many of those deals could cause problems down the line if you’re trying to negotiate a deal with a publisher, creating a messy revenue share that might not leave much left for you or the publisher.
Rocca also advised developers to cap revenue share deals, such as 5% of revenue up to $100,000, for example. That way, a publisher can calculate their revenue potential when looking at the economics of a deal.
#9 Legal entanglements
Rocca said developers should be careful to make sure they have proper contracts with their employees.
This could help alleviate issues down the line if your partner wants to split from the project or company, or if there is a dispute with someone on the team.
In the latter, you need to make sure the rights to their work are assigned to you, or they may ask for their work back, such as animations, following a dispute.
Rocca said that when signing a publishing contact or investment deal, you have to make warranties and promises. The more loose you are with contracts, the more trouble you could be in down the line.
He added whilst this particular point may seem mundane, “it’s actually super important”. If you go and give an amazing pitch for your game or company, but don’t have contracts worked out, it’s not a good starting point.
#10 Sovereign obstacles
The last point Rocca made may not affect all developers, but mitigating real-world factors could affect investment deals.
He used examples of unrest in Ukraine, unstable political climates or countries like China in which companies have to work with a mainland partner. Situations like this can make an investment proposition more difficult.
Rocca cited an example of working with a studio in Romania, where the legal system is different to what Execution Labs had been accustomed to.
The legal and tax fees almost cost the incubator more than it had actually invested in the studio.