EGD News #73 — CAC to LTV Ratio
It’s Joakim here. Greetings from Helsinki!
I’m kicking off the project on my second book! The goal is to have it launched in twelve months, right around March 2022. I’ll spend every Friday on the book and will probably take time off later this year to write.
If you haven’t read my previous book, you can get a copy on Amazon by looking up “Long Term Game: How to Build a Video Games Company.”
This time I’m going to publish it differently. There will be 200 pages in an eBook, an audiobook, and video lectures on the book, all bundled up and sold on Gumroad. I’m fascinated by how Derek Sivers launched his book “Hell Yeah, Or No” in 2020, where he packaged the eBook and audiobook as MP3s, all in one zip file, and then sold it.
If you want physical copies, I’m exploring the possibility of setting that up through Amazon or other alternatives. I’m trying to embrace new ways of self-publishing.
Now, onto this week’s news.
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🎙 Susana Meza Graham, ALDEON
This week on the podcast, I have a chat with Susana Meza Graham, Co-Founder of ALDEON, an investment company from Stockholm, Sweden, focusing on games and tech start-ups in their early stages. Susana started her career in gaming when she joined Paradox Interactive and later took on Chief Marketing Officer and Chief Operating Officer’s roles. For the last two years, Susana has been focusing on investing.
In this episode, we discuss culture, bravery, trust, and how the Nordics have built an amazing gaming ecosystem. Here are my favorite highlights from the episode.
Joakim: Your ex-colleagues said that you had a significant influence on the culture at Paradox. Can you expand on that?
Susana: Having the privilege of coming in when something is just a small core, and helping it grow and helping it like creating a more solid and a larger structure, of course, you’re going to put your own spin on it or like, your beliefs and your values are going to be very reflected in that.
One of the reasons I was able to have a big impact on the culture is because we involved everyone in the process. There was a lot of anchoring and a lot of ownership in the organization because everyone felt like they have a say, and everyone felt like the culture we were molding together. They had a part in that.
Joakim: What is your approach when you meet first-time founders who are scaling. How are they addressing culture—how do you approach them with that topic?
Susana: [At Paradox,] culture and the leadership were also very much pushed by our board and our investors. I think that so having that view that this is an important area from the top and leading by example, I think is super important.
I think that having a solid culture when things don’t go as planned is absolutely critical.
Joakim: Talking about the founders you’re working with: what are founders’ characteristics that you believe are signals for success?
Susana: I spent 14 years in a company that made their niche hugely successful and also very profitable. I believe very strongly that there is not just impact to be gained by focusing on a niche, but also a profit. Often, the founders that I work with are not necessarily going to be the biggest fishes in a big pond, but they might be a big fish in a small pond. And I’ve seen what profit and what impact that can have.
Read the full transcript and listen to the episode by going here.
💰 Investment and CAC to LTV ratio
I get a couple of new game startups approaching me on LinkedIn every day.
I think it’s incredible that I can spend time helping all these entrepreneurs. But the fact is that I can’t take calls with all of them. Why? Because I’m building EGD and trying to serve thousands of gaming entrepreneurs around the world. Online content scales much better.
But, as I want to continue doing angel investing, I’ve been working on the criteria that I use to take calls with a filtered group of founders.
Game studios with a positive CAC to LTV ratio
The first filter that I’ve now been asking is, “Are you a game studio or not?” Yes, then proceed. No, I won’t proceed. Why only game studios? Well, the reason boils down to my expertise in helping the founders in the long run. I’ve built two game studios previously, but I haven’t done any gaming tools or tech startups with B2B or SaaS, so my time and capital are best spent in places where I can be beneficial.
So, you are a game studio, then what?
The following filter: “Are you building live service games?” The CAC to LTV ratio is the essential ingredient. What is CAC to LTV ratio?
The player’s life-time value (LTV) should be higher than the cost to acquire this player (CAC). That means that you can make a profit, pay salaries and continue building the company to make more games.
The team doesn’t need to have achieved CAC < LTV to be ready for an investment, but the possibility should be imminent with their product and platform choice.
Let me put my investor hat back on: Why is the CAC to LTV so essential? It is again an area where I’m most familiar. I don’t have expertise in premium games, so I’m sticking to the CAC to LTV game studios for now.
Some game studios can have future possibilities for a positive CAC to LTV ratio, but they still are hard for me to decide upon.
Esports is tough for me at the moment. I concur with this London Venture Partners article from a year ago that it just isn’t a venture-scale business yet.
Kids games. Impossible business, can’t get CAC to LTV to work without substantial work on the parents’ layer. Example Roblox developers: the studios in Roblox can rely on Roblox to run the economy and creating parent trust, and devs can focus on games.
Premium games for hardcore audiences. Some genres have potential where marketing does start to work. My favorite is the strategy and simulation games, i.e., Paradox games, which have strong communities. But still, the CAC to LTV ratio is challenging.
VR and its long-horizon potential are interesting. But as venture backable businesses, you’d want to have insight that a positive development for CAC to LTV is coming in the next three years. Adoption rates, signals of first live service games popping up, and the platforms supporting VR with initiatives. Otherwise, it turns into wishful thinking.
🇳🇱 Midgame.fund launches
A group of Dutch gaming professionals has started an initiative called Midgame Fund, which funds new game projects in the Netherlands. I talked to the investor who is spearheading this group of investors, Adriaan de Jongh.
Joakim: Adriaan, the Midgame Fund is a fantastic initiative! How did you come up with this?
Hidden Folks’ success gave me some money to spare, and I realized I could use it to enable the kinds of games I want to see more of. I’ve always been an active community member in the Netherlands with various events and initiatives to support the Dutch game industry. I was inspired by what I saw at IndieFund from an investor’s standpoint and thought I could bring those two worlds together: the Dutch community + the ‘hacky’ way IndieFund funds games = Midgame Fund.
Joakim: There’s a group of you in the Midgame Fund. When a founder wants to pitch to you, do they pick a particular member approach with the pitch?
Teams pitch to all investors, and each individual investor decides whether they want to contribute to a project – not the other way around. I expect investors with particular expertise to ‘automatically’ get matched to the projects that best use that expertise.
Joakim: Can you talk about the investment terms?
In short, investors give a developer money, and the developer provides investors a part of the revenue share. Our standard revenue-sharing split is 25% developer / 75% investors before recoup, and 75% developer / 25% investors after recoup but up to six times the original investment or until five years after the game’s release.
Joakim: Does it matter if the game is in the idea, prototype, or soft launch stage of its maturity?
We’re open to funding projects at any stage, as long as there is something playable.
Joakim: You invest with a revenue share and no equity? How much profit do you seek for your investment?
We think revenue share makes more sense for project funding, and equity is too much paperwork anyway 😉 Combining my experience from investments I’ve done with IndieFund and the difference in terms between their and our agreement, I expect an average ROI of 200%. But it’s not just about what the investors hope to get out of this deal: I also expect us to support developers in invaluable ways, such as connecting them to the right parties, sharing our experience with specific services, etc. The end goal is more sustainable, independent, and diverse game studios, so if money is the only thing we’re getting out of this, I think we’ll need to reconsider our model.
Joakim: When will you start taking pitches from outside the Netherlands?
I don’t know yet! An expansion outside of the Netherlands could be years away. For now, the priority is to contribute to the Dutch game industry. If we’ve established that we can do that, I’ll consider how and when we can take our money abroad.
Adriaan’s model is fantastic. I mean you could implement something in any country, with existing devs investing in new projects. Pool up twelve “investors”, create revenue-share agreement templates, and start taking pitches. 🤔
Read more about the initiative by going to Midgame.fund
📃 Articles worth reading
+ Incremental Data Science for Mobile Game Development — “Sometimes it’s difficult or even impossible to know what you should do next to improve the experience for your players. Or how to nudge those KPIs up a bit. The development team may have great ideas but they often aren’t sure which ones they should work on first, or which ones could have a positive impact. This is where data can come to the rescue.”
+ You Won’t Think About RPGs the Same Way — “Experiencing fantasy stories with friends is an evergreen concept. Dungeons & Dragons was created in the 1970s and is still played by millions. In fact, now it’s more popular than ever and many famous RPGs are based on the world and mechanics of Dungeons & Dragons.”
+ Interview: Patrick Collison, co-founder and CEO of Stripe — “While we have to be careful to not over-diagnose explanations involving low-hanging fruit (since they can easily be excuses), I think it is clearly the case that the major open problems in many domains involve emergent phenomena and complex/unstable systems that often have lots of complex couplings and nonlinear effects and so on.”
💬 Quote that I’m thinking about
“You want to know how to paint a perfect painting? It’s easy. Make yourself perfect and then just paint naturally.” — Robert Pirsig
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That’s all I have for you this week. Until next week!