EGD News #62 — How much should I be raising?
It’s Joakim here. Greetings from Helsinki and welcome to 2021!
We’re still wrapping up the year 2020 here at Elite Game Developers. A few weeks ago, I published my annual review for 2020, and on the 14th of January, I’m joined by Anton Gorodetsky and Sergei Evdokimov from InvestGame to review the year of investments and M&A for gaming in 2020. Register for this free webinar by going here.
An update on Gaming Angel Fellowship: Since the launch of the 7th of December, we’ve now had 25 members join the Fellowship. So far, I’ve shared seven companies seeking angel investment on the Fellowship Slack channel. If you want to know more about GAF and how to get your company featured on the Slack channel, ping me on LinkedIn.
Let’s kick off this year’s first EGD News.
💰 How much should I be raising?
I often get asked, “How much should I be raising?” from founders who are doing their first startup. The follow-up question to that is usually something like this.
Why a startup raises $7m with a team and an idea? And another startup raises $500k with a team and an idea?
I think the industry is creating this dilemma by not being clear enough with how companies get funded.
Why are these sums so different? The ultimate reason is that there is a law of supply and demand in venture-backed gaming startups.
Investors show demand for the best startups to allocate their funds into. The supply of such startups is scarce.
I’ve previously talked about founders landing in A, B, C, and D teams. C and D teams aren’t capable of raising investor money because they lack the perceived quality and experience to pursue opportunities that could yield outsized returns. The B team can raise from angels, and the A team can raise from VCs.
Double-A and Triple-A
I believe there’s also a double-A and triple-A team. These teams are a scarce resource, but since they are in such high demand by investors, the teams can raise a lot more with a team and an idea.
Double-A and Triple-A are often founded by managers, directors, VPs, or C-level from some of the most successful venture-backed gaming companies: King, Supercell, Playrix, Jam City, Peak, Voodoo, Zynga, Scopely, Riot and others.
The double-A team was part of the success story at this big gaming company, but the triple-A team were the ones who played a vital role in the success. “We set up the Berlin studio… We create the hit game…”, or so goes the story.
The double-A can raise $1-2m and hire a team of eight to ten. They pay modest salaries, enough to get along. Their runway will last for 12 to 18 months.
Triple-A raises $3-7m and starts hiring a team of ten to twenty developers. They pay market price salaries. They operate closer to the ways that big companies work. Their runway will also last for 12 to 18 months since the costs are higher.
In a recent VC panel, David Gardner from LVP commented on the raise of $7m by Robin Games.
“Robin Games is interesting because Jill Wilson is an experienced leader, was a senior at Jam City. She’s not a newbie. And she’s focusing on where the market is headed. It was an easy yes. She could have probably said, “I’m going to do storytelling games” or Match-3, and we probably would have done [the investment]. It depends on who walks in the door is the ultimate answer.”
I recently wrote on Twitter: “Gaming studios seeking investment: the strengths of the founder matter 100x more than any game idea, but founders need the pitch a game. Investors will read the strengths of the founders, based on the game they are pursuing.”
Why it’s good business for the investor to put in $7m
In the same VC panel, Graham Gockley from Transcend Fund said: “We filter mostly on the quality of the founders, their experience, and then the business opportunity that they’re pursuing.”
This logic dictates that with more experience, more capital, and more people, the triple-A team can have the best shot at going after more challenging opportunities.
For example: “We’re going after the lifestyle gaming market on mobile” or “We’re going to take over social match-3.”
Investors have limited time (how many boards can they sit on), and they want to deploy their cash in startups with the highest possibility for an outsized (100x) return. Price doesn’t matter that much. What matters is how much ownership the investor gets in the company.
Raise smaller amounts first
Why it’s a good idea for founders to raise only $500k?
I’ve previously written about an optimal product strategy for gaming startups: you’d first start by creating games as small attempts to gain a foothold, but then having the boldness of going after bigger bets with the cash that your smaller attempt games are generating.
No amount of money has ever proven a great game launch. Success is often the result of innovation becoming a reality because one or two people have an insight.
Founders might argue that they could have a longer runway with lots of cash if they raised more. If you raise $7m, you’re most likely to spend it anyway in the next year or two because you can.
Here’s a few articles that I’ve previously written about fundraising in the early stages.
📄 Update to my articles worth reading
In October, I posted my favorite articles that I had read in Q3 of 2020. Now it’s time for an update to list. Now including my favorite articles that I read in Q4.
My top 5 articles that I read in Q4 were:
- 100 True Fans by Li Jin
- Apple Arcade, one year on: no killer games, can’t compete with free
- How to Be Great? Just Be Good, Repeatably
- Six Lessons from Six Months at Shopify
- What it feels like when you’ve found product-market fit
Read the full list by going here.
🎙 Podcast highlights from 2020
In the latest podcast episode, I’m looking back to all the episodes from 2020 and the highlights from all of my favorite episodes. If you don’t listen to any other episodes from 2020, I definitely suggest you choose from these! They cover everything from company building, fundraising, product and so much more.
Highlights are from these episodes:
- Harri Manninen, Play Ventures
- Minwoo Lee, Dodreams
- Callum Brighting, Netspeak Games
- Kristian Segerstråle, Super Evil Megacorp
- Salone Sehgal, Lumikai
- Jörgen Larsson, Stillfront Group
- Paul Murphy, Northzone
- Celine Pasula, Fingersoft
- Shaun Rutland, Hutch
- Gigi Levy-Weiss, NFX
Listen to the highlights by going here.
📚 10 Favorite Books of 2020
I’ve managed to read 34 books during 2020 and wanted to share some of the fantastic books I’ve come across.
1/ Mastery by Robert Greene
Possibly my #1 favorite for 2020. This book describes what it takes to achieve mastery by analyzing the life of dozens of masters from the past and today.
2/ The Almanack of Naval Ravikant by Eric Jorgenson
If you haven’t brushed up on Naval before, each page in this book will enlighten you with new insights, whether on wealth, business, meditation, or philosophy. Your mind will be left in awe at the amount of wisdom that Naval has.
3/ The Psychology of Money by Morgan Housel
Early in the book, Housel lays out the premise of the book: “Financial success is not hard science. It’s a soft skill, where how you behave is more important than what you know. I call this soft skill the psychology of money.”
Read the full list of my 10 favorites by going here.
📃 Articles Worth Reading
+ Mass market, mystery boxes and metric-driven design: The legacy of FarmVille — “While there was less of a data-driven ethos behind its monetisation, Skaggs says this mentality certainly increased when it came to post-launch game design. Zynga had already dabbled in this on Mafia Wars, YoVille and other titles, but suddenly metrics were as prominent a part of the team’s day-to-day as creativity.”
+ Using Limited Time Events to Improve ARPDAU in Established Games — “Through this increased pressure and carefully curated batch of IAPs, we saw in-app purchases increase 25 percent, and a 15 percent increase in overall ARPDAU, helping the game hit its highest revenue peaks in nearly three years.”
+ 10 Common Mistakes of F2P Product Managers — “Commonly inexperienced PMs get caught up in what they’re making and find themselves (and their teams) lost in the wilderness. Yet teams led with a defined statement on the reason they’re working find their paths much easier: They know where they want to go, even if they don’t know how.”
💬 Quote That I’ve Been Thinking About
“Until you make the unconscious conscious, it will direct your life and you will call it fate.” — Carl Jung
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That’s all for this week. Take care and stay safe!