How Should Gaming Investors and Founders Find Alignment
You’ve seen the headlines, where former executives of big games companies are starting a new games company and raising millions. At this stage, there is only a team in place, with an idea for a game, and the investors are betting on the team to deliver a new big games company.
Why are the big investments happening at the early stages, when you only have a team and an idea, and why are fewer investments happening when gaming companies are profitable?
In my discussion with Carl Fritjofsson from Creandum on my podcast, he mentioned that gaming startups, who become profitable, can achieve escape velocity without venture capital because they can fuel their growth with the money coming in from their players. This happened with Supercell and with Small Giant Games, where the game developer could afford profitable user acquisition, as the payback time for the user acquisition campaigns happened so quickly in the player’s life-time inside the game.
But how is it at the early stages, when you only have an idea. Why is another idea good and another one bad?
The main problem here is that in the early stages, you have no way of knowing if the idea for the game will be a success. I’ve seen this in countless situations, with most of the Finnish mobile games companies have had these one-year or two-year projects, then soft launching and being dumbfounded by mediocre KPIs, with engagement metrics that aren’t signaling a home run.
Why are investors and games companies together embarking on million-dollar bets when they lack evidence? How do they justify the risks of having millions spent on an idea without solid proof? For big game productions that take years to launch, the risks can be mitigated in the following ways:
- The highly experienced and networked team who have built big businesses, and had successful exits from previous companies.
- Existing competitive advantage, which can be unconventional, novel and unique expertise. Or a combination of such. Example: User acquisition skills, and building a game like Matchington Mansion or Zooba.
- The company has technology which is working and has been proven to be business viable.
- It’s a hot deal, where lots of investors are signaling the company as a winner.
What counts for success
Often times, both investors and founders, are betting on an idea that is too great to fail. But there is a way out of the idea fallacy. Steve Jobs famously quoted John Sculley saying that a great idea is 90% of the work. If you just tell the idea to your people, the people can just make it happen. Jobs marked that it’s more like 10% is the idea and 90% is the craftsmanship that comes after the idea.
The lesson is that ideas are just the start and the development process is where the magic happens. Let’s frame this in a way that both the investors and founders will understand how this can be a viable model for having success with games.
The first part of the process is conducting market research to find a corner of the market that isn’t too crowded. Earlier in 2019, a new mobile game called Archero came out and was a huge hit. The game was very simple, but had a lot of gameplay depth, both in the core game and the metagame.
I’m not advising that any founders go out and build an Archero clone, or that investors would fund any activity like that. Developers often jump into an idea and start building it without understanding what are the realities in the market. That corner of the market might already be saturated with me-too products from a developer gold rush to make the next Archero. Even when a gold rush doesn’t happen, you need to understand if the target audience is waiting for a similar game, or a slightly differentiated, but still a derivative product.
The second part of the process is to have a prototype, that enables playtesting and a soft launch in two months after project kickoff. It is enough to just have the core gameplay. Think about Archero without its full-blown metagame. You get to pick an upgrade for your character between every level, but that’s it. The player just goes through levels and gains some abilities.
The content of the prototype:
A. Have enough levels with some obstacles and possible opponent variety
B. Collecting better weapons, so that the player can feel becoming stronger
C. Introduce harder levels, where the player is able to beat harder content
When the prototype starts to be in a playable state, you should playtest it with friends and family, and also with people who play similar games, to measure the appeal. Once satisfied, you can proceed to the soft launch and measure the session length of the player playing the game for the first time. Google Play has shared lots of details on how session length on the first day is the best indicator of positive player retention. This will give you the first evidence that you need, pointing to the fact that you are moving in the right direction.
How much to raise
I believe that profitable companies are the only “best bet” worth taking when multi-million dollar investments are being considered. You have a business with some foundation, and all the investment money goes into growing that foundation. These companies don’t need the money, but they want to mitigate the financial risks of growth, e.g. hiring another game team.
In the early stages, when there is no foundation, it’s different. How would I approach a seed investment, if I would be the founder or the investor? The main question is: Will more money guarantes the discovery of a successful game?
Testing a game idea, with the previously mentioned prototyping approach, is two months of work. You have three people working on the prototype, and the cost would be $25k per game from inception to revealing possible evidence. If you want to explore ten different game ideas, that would be twenty months and $250k.
With this evidence, the company becomes more eligible for funding, and the team can grow as you’ll need more people building the engagement mechanics that make the players come back, and monetization features to get the players to spend.
Summarizing the alignment
No idea is too great to fail. When you have a process, you can incrementally prove that things are working and the upfront investment of millions on ideas becomes unnecessary.