EGD Special: Inside The Gaming VCs Brain
Have you every wanted to know what gaming VCs think? In this webinar from March 2020, I went through the most important things that gaming investors will think about when they meet a game founders and when they need to make a decision — to invest or not to invest.
- VC reading the founder
- Getting to a Yes
- Investor relating to the founders’ situation
- Amount to be raised
- Cap table
- Displaying progress
Full transcription of the episode:
Joakim Achren 0:08
I’m Joakim Achren, founder and CEO of elite game developers. I founded elite game developers last year to help entrepreneurs so that they would thrive in building great games companies. That’s the mission of elite game developers. That’s what we’re focusing on specifically helping people start gaming companies and building them. And if we can do that, I’m going to be super happy. We have the podcast
Joakim Achren 2:52
54 episodes today. Today’s episode is with Simon Hill. He had a startup In London called gumbo, he used to work at mine candy and play at Space Ape. And then then he went and started his own company on the US the last year, they merged with Voodoo. So he’s basically running the Voodoo London office nowadays, check that out. It’s a very interesting story about like, how somebody jumps over that cliff, you know, or like takes the leap of faith to start their own company, and what that entails. Then I have a blog and trying to keep up with a weekly rhythm of coming out with an article that’s really related to gaming entrepreneurs. This week, I’m going to be sharing a cap table template with people where it’s basically looking at how you can model how you give out ownership in the company and future rounds to investors. What does it do? lie because I’ve been going through that in my own career a lot where we needed to do several funding rounds. And each time there was a dilution on the founder ownership and how that looks like it’s very interesting. And something you can look at and you should look at early on. Then I have the book. I have a physical copy here. It’s actually in my hands now. So it’s really cool. It’s 146 pages. So to pick it up on Amazon, you’re going to get a printed version pretty quickly. It’s so it’s a lot of stuff that I wanted to kind of like put on paper. And the work still continues on the blog. So you know, there’s a lot of stuff there in the book that I won’t cover in my blog post. So the book is really essential as well. And then I have the online courses I just recently launched, pitching our games company online course which I will talk about later. In this session at the end, check that out as well. There’s more coming until I’m building a another course around how you start building a games company what is essential to have, you know, the right kind of phase early on for building a company. So a bit about my background, I was the co founder of next games and we started early 2013 working on a game called Columbus point West and during the summer of 2013, we faced to work on external IPS. We started negotiating for the Walking Dead IP, we got it, raise the series A.
Joakim Achren 5:42
There was a lot of stuff along the way I left last year, I wanted to do something different. So I wanted to go into coaching entrepreneurs and helping them out It felt like something that I had done earlier in my career before next games. Where I had helped entrepreneurs and it felt so natural for me so I left. But like in my career I was also at Supercell for a while running the analytics team. Before that I had my own first games company called iron star Helsinki, which did a virtual world called my pal, you can go to YouTube and see a few clips if you want about that product. It’s a it’s really fun to watch. So my work with with VCs during my career in each of these cases, besides Supercell, where I wasn’t involved besides meeting and talking with the investors who are on board, so that was my relationship there. But at iron star, I went and pitch to probably like 80 different venture capitalists back in the day like 2007 2008. And back then there wasn’t any specific gaming. This is what we’re talking about today. So it was kind of like an educated Have a what is what is this free to play? Which was really new back then? What does it mean? There was no iPhone, there was no Angry Birds yet. So there’s a lot of education. With next games, it really changed because we actually went out to raise the seed round from people I knew from Supercell who were investors there so they knew where I was coming from with my knowledge and my understanding of what was going on in mobile. And also the series A was kind of like backed up with that message plus SoftBank deal to buy Supercell had just happened when we did the series A so it was a there was a lot of timing involved as well. But yeah, let’s go into like these topics that I wanted to talk to you about today. First off, how is the investor reading the founder, there’s, there’s a lot of things going on there and this this moment, first off, it’s A lot about the founder, not really faking anything or not hiding anything, more or less, it should be an honest discussion where, where details are shared, concerns are shared, and, you know, hypothetical situations where certain things need to happen. For this to succeed, all those, if the founder is going very much like into those kind of details early on, it will create a lot of confidence for the investor, for hearing out the founder and really like, going even deeper.
Joakim Achren 8:38
And showing focus, this kind of clarity of mind from the founder is very important that there’s, there’s a certain steps that they’re taking at the moment and they can clearly articulate why those matter. That’s always important, but it isn’t all about, you know, something big and huge that you know, could happen Or that, you know, we’re making this game because we know know the market that there’s a lot of details there. But it makes sense to talk about steps versus going for, you know, a lot of details too much early on, where there isn’t a lot of focus going on. And then showing that you’re a learning machine. And this is something that I’ve been gradually understanding more and more that if you can show that you’re super curious, as a founder, who believes that there are, there’s so much knowledge to be learned regarding what you’re going after, what is the idea that you don’t know everything that is always like a big plus for the investor to hear that you are curious to understand more? And that you know, what is your kind of circle of competence, you know, you’re, you’re working in a certain area of knowledge, but there’s knowledge outside of your circle of competence that you want. To move towards and to understand better, so that you could even keel some of your earlier ideas or concepts in your mind, because you’re gaining new knowledge. So that’s that’s very beneficial. And then the question that the investor will have in their mind is that is this the founder who make this happen? And this is all about the really like going into the confidence, having kind of like looked at everything that could happen and pointing out that there’s really no you know, kind of like the the boat isn’t leaking and things are really like settled that the, the vessel is ready to take on the adventure that it really requires a lot of this kind of building on like, this is really a solid business case that we’re going after. And the domain expertise a lot of gaming VCs are doing investments because they see That the founders have, you know, work that Supercell at Rovio at next games, they’re starting a company, hey, let’s back them up with you know, a seed round. This is fine. But there it still goes into like having an idea that consistent itself once you go live. So if you worked for 10 years in the mobile industry, it still might not be enough to raise money even though you have that domain expertise, because there’s something that isn’t, you know, there yet. So try to figure out what needs to be, you know, visualized or kind of like pointed out in your idea or team or the business you’re going after that you are on top of things. Besides having that domain expertise of working in gaming for a long time. And the short term clarity and long term thinking big is really a not like I think the the kind of like scale, you need to kind of discuss there that you have a short term clarity of what you want to do in the next six months to get things going. That, you know, everything might be huge later is too short, but the long term thing thinking big, but like what are you doing right now because usually things don’t, you know, explode like crazy early on, even though you might want them to, you might want to, you know, build a product a bit more understand what the end users are, how they’re using your, you know, first MVP product, and pointing out all of this really makes sense. Like if you’re spending one year, two years just building the game in, in a dark room where you know, you’re not getting input, that’s not going to be the right short term clarity that the investor wants to hear. Getting to a yes.
Joakim Achren 12:54
What does it really take? I wanted to point out five different things that I think really matter in gaming? So first off, can you define your market and the audience it’s a lot of people start building pitch decks where they’re looking at data from app and from Sensor Tower there may be copy pasting something from deconstructor funds. You know, this bubbles, you’ve probably seen this out there. It’s all fine. But this really like, is the first screen like surface scratch really about what you want to kind of like convey to the investors about your knowledge about the market and the audience. Or First off, one of the key components there is to discuss why the market that you’re going after is either a blue ocean or a red ocean. So meaning like what is the competition? Looking like how much because that will affect everything, basically like how tough will it be for you to stand out from other people. Who are already doing what you’re doing? And also user acquisition costs? Like? How can you actually acquire players cheaply? Will there be some kind of network effects that bring people to kind of like, get their friends on board to use the product? or will there be an opportunity there that the audience is so huge like for hyper casual, for instance, the audience is still so huge that the user acquisition costs are low, but it still is a red ocean because you have the best minds in user acquisition already taking up that space. Like, where do you actually find your space in? Or your position in that space is super interesting. And how do you keep your user acquisition costs slow? And then the final point I want to bring up here is how are you defining the audience? Especially Why will they pick your product your game instead of Another game this this is often like hard to articulate for, for gaming founder, since they’re they’re going after an idea that they love that kind of, you know, does certain interesting things in gaming that others aren’t doing yet. But how do you prove that early on without spending a year building the game and then trying to see if the you know, hypothesis was right or wrong? How do you do that early on when you’re raising money? There’s a lot of ways to look at data regarding playing prototypes, and look looking at the competition, what they’re doing, what the similar games in the genre are doing differently and articulating those in your in your pitch. So the next point here for Getting to Yes is how do you navigate all the possible failure situations I I really like bumped into a problem that I really never The pitch deck or in my discussions with the investors really could nail this thing I was concerned like, I talked about this earlier about when we were building Columbus point West at next game. So I, I had the concern that, hey, in a year, when we probably are getting this game out into the market, that, you know, build battler games will probably be already saturated, right? like crazy. But I didn’t have the knowledge to know how I should react to this insight that I had regarding the failure situation where user acquisition costs would be crazy. So
Joakim Achren 16:39
there’s a lot of things like, like, you might be going into a cash problem as well. But I think those are really obvious ones. But these are the things that I often think about, like there’s the pitch where they, the founder is saying that we’re going to be the first ones to, you know, bring this proven game from Asia to the west. Certain market, like it’s proven into the Asian market, but what do you need to do regarding bringing it to the Western market? And how can you prove it without building the game? Like without raising capital to? To do that? Do you need the money before you approve it? Or should you first prove it somehow? without raising? That’s always a good question. The investor will also want to kind of like, hear that point of view. How do you prove things early on without spending too much. And then those things this is a similar point like transitioning a game from PC to mobile or going cross cross platform or making it for a different audience. There’s, there’s all of these nuances here, but you should definitely prove this early on. You might have the stellar team in place, you might have a really cool idea. You want to raise half a million to go forward to build a prototype. It’s gonna be very costly for you and your cap table to prove out an idea. And if it doesn’t work, you already gave out, you know, one four of your company to investors. And then you need to start out with another idea, and you already spent the money. So like if you know how you can navigate through these failure situations, with the discussions with the investors that you know that there’s these situations that could happen, it’s going to really like show up as a big positive going forward investment decision. And then the third point here is how does your game make players feel? So a lot about like the sentiment why why would they pick the game, it’s not so much about like looking at retention and pointing out you know, numbers, but rather, talking about the emotions that you’re delivering. Like if you look at the number one game at the moment on the App Store, Download from plage and dairy, this perfect cream. If what do you see this game it really shows the kind of emotions that this game is bringing. It’s It’s very simple, it it uses emojis to communicate stuff does nothing like you just press the button down and you lift to not do something. So it’s super simple controls, but you’re getting these cool emotions of making this delicious treats for people so that they can really talk about it really easily if they know their audience and what they want to convey. And another example is when Clash Royale came out in early 2016 I remember the moment when I picked up the game for the first time after downloading it was in soft launch in Finland I think and Canada and playing it was like wow, this is like Something that I’ve never felt before. Like it was so enjoyable as a core experience immediately. Where do you want the players to feel this excitement? Is it in the core gameplay? Is it over time through some kind of meta game elements? What is it? There’s so many nuances there regarding the player emotions. But it’s, it’s super beneficial to go into these details in your talks with the investors because then you can talk about things that are really, really relatable
Joakim Achren 20:36
to the investor will also have feelings I hope most investors do. So think about that a bit for your pitch. Then the fourth point here is that does the team have some unique insights? Like what is their competitive advantage? How are they are they building a moat around their castle there their company that the competition can’t really take over. So usually the unique insight goes either into this the product side, where you’re making the game your understanding who it’s for, why they where they will pick it. And then the other side is distribution, which means what is your advantage on the marketing side user acquisition side, reaching more people getting a high k factor of people bringing their friends into the product, what is the the unique insight on either product or distribution going to point out an interesting company in Berlin called pop core, the the founders or the Heinz brothers who left Apple loving to start this hyper casual company, their their unique insight is that they’re really like kings on the distribution side. They know everything about how you market apps on the app stores. So They have all the skills needed for running, you know, building software that really does automation really well on QA. So they’re they’re the best in distribution. But on the product side they need to learn the gaming side but they were like picking up really quickly like what do you need to do in hyper casual you don’t want to create difficulty for instance, like level one and level hundred feel as difficult. These these kind of details they picked up, but they had a unique insight on the distribution side that the competition didn’t have.
Joakim Achren 22:38
So point number five, why now it’s a it’s a timing question. Like, why are you at this stage going to be the winners? Or let’s say why why you were? Why are you going to become a big company? I don’t want to talk about winning or losing but it doesn’t really it’s more about like being in the game and growing. and becoming something that is a great company. So why, why is the timing right? I’ll give you another example from a Christian Sega stroller who’s the founder of macro space, the founder of play fish. And he was an investor in Supercell. Now he is the CEO of super evil megacorp. He has always had, I think, this kind of insight on what is the market going towards right now kind of like a step earlier than anybody else knew. So he knew that Macrospace he’s founded that I think in 99 or 2000, there was a hint of Java, mobile phones coming out. And he wanted to be there really early when that became available so that he could build the first mobile games and later on Macrospace fused merged with glue and glue is now possible In the US stock exchange, doing really well. And then, in 2006, or seven, he founded Playfish, which was also at this kind of like moment when there was a platform shift happening towards Facebook, Canvas games. So people started playing games on Facebook. And he, his idea was to bring high quality games to Facebook immediately, they had really cool products like, remember pet society, restaurants, city, really good looking flash games on Facebook, which were free to play. And then they sold the company to EA for 400 million or something. And then at Supercell, I remember these kind of moments. When he was he was an investor, but he was also advising the management team there regarding the shift towards Facebook Canvas kind of dying out and people moving towards iPhone and Android, as the app ecosystem started bubbling like into Something I’ve made sense. So he was instrumental in that shift towards going at, you know, clash of clans and heyday, like at the right point when it really makes sense, not six months earlier or six months later, because if you’re too early, there won’t be the users. You can’t sustain something. And you know, you might be burning too much money and suddenly or you’re at a disadvantage, when, like six months later, you could have been like us with Columbus warned west where, you know, we’re late to the game and everybody’s already brought the user acquisition costs really high. So this is what I’m talking about why now for talking to the investors kind of like these kind of things. So if you can reach us with all of these things, I think that’s a very good probability already that you’re gonna get funded by this investor. If you get like, you know, half of these right, it’s constantly going to be less probable that you’re going to be getting a check from the investor. Another thing I want to talk about today is the investor relating to the founder situation. This is something that I definitely can relate to kind of like you as the founder are walking in the desert, you’re running out of, you know, food, something to drink, waters running out, you’re, you’re meeting investors who, who might be backing you but they’re not. You’re running out of cash in the real world. And you’re sort of like stranded but it’s, it’s the business of the investor to actually back companies that can return the money three, three x minimum or five x 10 x. So if if you’re thinking that Oh, man, this is so unfair, I’m going to die here without getting some money from somebody. Buddy, that relatability is so tough if you can’t take the investors position of like, why did they raise a fund why they’re investing, they cannot invest into something that just doesn’t make sense. So even though you’re going to be, your company’s going to die, but like do your homework before you start on the adventure into the wilderness, bring enough resources, make sure that you’re, you know, doing the right things before your expedition starts taking small steps, not grand steps, that we’ll call it be costly for you
Joakim Achren 27:40
and the amount to be raised. I’m not going to talk about valuation or ownership here, but I’m talking about like, more or less how much money you’re raising. So more most investors that I talked to, they really like to hear this kind of ambitious numbers behind an ambitious plan. So Something that is credible, if you hit all the points that are on my list previously, you you can definitely like look forward to, like, going after a bigger number. And I think the reason for this is that a small number usually doesn’t get you far and you need to raise again. And that’s not good for the investor and for you either because of the cap table dilution, like the more rounds you do, the more like people are going to be owning your company where the founders will have less ownership. So what does the founder want to achieve ownership wise, like when you still own hundred percent of the company, this is crucial work that you need to be doing, thinking about the company and not just one game, because the game could fail. The subsequent game could also fail, but what are you building towards like in your company, that you can you know, have an advantage there? Regardless of your first game or the second game, and displaying progress, what is going on in the company? This is often talked about by by the investors. And there’s a term for this called traction. How do you display traction when you still haven’t launched a game? Well, there’s something that games companies aren’t often thinking about. I think it’s more or less. Hey, here’s my idea. What do you think could we raise? And it really should think about it in a way that you’re kind of like breaking down the months that you will be doing in the next six months? What does the first month look like on achieving something that means that you’re going towards the right direction? And this should be highlighted in your deck in the updates that you send monthly? I have an article about this on my blog. So you should check out the investor updates there. And what is the progress for a games company, it really depends on the stage that you’re at if you’re pre product market fit, so you don’t have the right retention numbers yet to start spending user acquisition money. You want to kind of highlight what are you taking the steps there to, to understand more about the game and the audience. So hey, this was the content that I had for today. We’re going to go to q&a soon, but I wanted to highlight that I have the course pitcher games company. It’s an online course you can go to elec and developers comm slash pitch for this. The course in there’s a lot of lecture videos, I think, five hours, and I’m going to do more videos as time goes on. And there’s templates for a pitch deck, but I’m also doing like one on one live sessions with people who purchase the course. So you’re going to get three live sessions where we go through your deck And we improve it. And I’m going to go through kind of like the different things that will make sense in the discussion with the investor and what won’t make sense. So please put your questions into the question section. And I’m going to start going through them now in the video. I only see one question so far. So put them in there. I’m going to start off first with this. One person wrote here an anonymous attendee, what would you consider to be a reasonable seed round in terms of euros for a five person startup with a believable 18 month runway? What can be expected to be reasonable from the investor side based on your experience? It’s a good question to reasonability here really matters so much regarding what is your idea? What is your Our team’s expertise, like all of the points that I just went through. And in a sense, you might get a lot of nose from people. But also ask for the feedback, like what is missing? In this story that I’m telling you that you are saying no to look at
Joakim Achren 32:22
also, like, if you want an 18 month runway, figure out what is the minimum salary that your five person startup people want. So if you can achieve, like, you know, a small, small salary, you could even go really far with 300,000 euros. But that’s very, very much like a minimum. And I think more or less what you want to look at is a valuation where you’re not giving away too much percentage of your company before you achieve at least 1 million valuation. Next question, perfect time to approach investors for funding. Well, you can start discussions with people quite early on, if you if you’re sort of at that stage, where you have a team, where you have the idea for the game or whatever you’re building. And you have credibility around the topics that I just covered. And you could go from there, buddy, you could start practicing. Like, if if you if you want to find out your local investors in town, like what is, you know, just give me feedback on my pitch. And we work we work on it together. Not a question here. So from what I hear, is it’s still business as usual for most gaming basis with the coming months to I heard that valuations might be a bit lower and the bar for investment may be better. Hire anything that you can say about this particular time and show that to show in the deck that we meet this kind of new grade things like focusing on experience distributed team cetera. So thanks Eugene for this question. I think that that is a really good point that there is a is a moment now where it might be hard to open new discussions when the investors so if you have existing relationships with investors, it’s much easier to go to those people and you know, ask about their situation, how they’re looking at things. It’s there’s a lot of unknowns. There are investors who definitely don’t have time now for new deals, because they’re so preoccupied with the current portfolio having problems, but most of them cannot really sit around and not look at the new deals because people might be then saying that okay, those guys aren’t investing. So Let’s not talk to them. And if the word spreads, that’s really bad for the VCs. So I think if you can point out what are you doing differently now? Because the world is changing, like you pointed out the distributed teams, like if you have a certain kind of like insight into that area, it definitely can help. Not a question Where do you VC see the best growth opportunities in gaming? Is it software enabling tech platforms or studios? I haven’t really like thought about this question a lot like what is what do I see as an opportunity and I usually work at the early stage where I help founders who have a unique opportunity to go after something like I pointed, pointed out, pop core here in the presentation that’s like you have a unique insight into something that most competent competitors won’t Have. And that’s something I really look forward to, like if you can point out that, hey, I did this earlier. That’s why we’re doing this. I know this space so well. So that’s, that’s my answer to that. So do you have a publishing plan for your game? Or when you’re going for a seed round? What should it look like? I think that is it’s more important to talk about the audience and why they were picking your game and why you might have a lower user acquisition costs than the competitors. So detailed publishing plan, I wouldn’t, I wouldn’t put that in there. I would rather just focus on your advantage is regarding going after a market. So Hayek asked the question, isn’t there a fundamental conflict of interest between between investors and founders when the investors want to give a larger amount up front Wouldn’t valuation be higher during a later round? There is definitely the issue here that if you cannot prove a very audacious idea
Joakim Achren 37:12
with a high valuation early on, you will get a lower valuation on the company coming rounds, if you cannot really like justify that what you were doing was part of the idea all along. So, the larger amount upfront really depends on you nailing down what you’re doing in all the failure situations. I think that is an interesting area to take a look at for raising a bigger round early on. Yes. Interesting. You mentioned popcorn, do you still see investment opportunities in hyper casual or are there now too many publishers like popcorn? I think there are too many similar ones. And there will be more and more Coming. So I would more like start niching down on a certain area where, you know, it’s not something that pop core is looking at for instance, like you could go towards a more hardcore, kind of like a male skewed audience segment of hyper casual or something like that, where you can differentiate and you have a big enough audience there that you can really like so that you’re you’re ruling that genre because of your unique insights, something like that would be interesting to see. What’s your opinion on safe the simple agreement for future equities investments I I’ve seen a lot of convertible notes recently. I think the the main difference there would save is that you don’t have the expiration dates. So I think safe is fine. We don’t do it that often in Finland because it has some there’s some irregularities that I have Not from like, I don’t recall right now, why specifically, we don’t have a version of safe in Finland. But yeah, the notes are really, really a good way to, to avoid a lot of paperwork early on when you’re bringing investors on board. So, last question, Alessandra asking, how do you usually approach investors? From my days in next games, what I did was started, you know, building an Excel spreadsheet where I put the name of the investor the conduct details, and then I started figuring out who knows them so that they could do an introduction for me to the investor that that’s the obvious way to approach this that you’re not you can do like a cold email as well or called LinkedIn message. Most of the investors will be, you know, accepting your messages through that way because they want to talk with founders. They want to have a good deal flow happening. But it’s always much more interesting to go through an introduction where then the investor will have somebody common, a common friend with you who they can talk to later for doing reference checks what not getting kind of like bouncing ideas off. Like, what do you think about his pitch? Like, has he talked to you yet, and things like that. So that’s a really good one. Anybody else? Want to ask any questions? All right, I think we’re gonna be wrapping it up a bit earlier. This video will come on the new YouTube channel that we have for elite game developers and can also post it on the blog as a video, you can check it out there. So yeah, have a good day. You guys. Good week. Try to stay away from the virus. Stay at home. Eat some Good food, some snacks and stuff and we’re gonna be fine. See you. Bye bye. That’s it for this week’s episode. If you like our content, please do hit subscribe or follow on your podcasting app. And also, sign up for our mailing list, you’ll get our Friday newsletter, which contains something super interesting for people who are interested in founding games companies. Check it out and sign up on elite game developers.com. See you next time. Bye bye.