How to be an angel investor in the games industry
The games industry is changing. More investments are flowing into games companies than ever before, and there are more and more early-stage venture funds focusing on gaming. But at least in Europe, we haven’t seen established and well-known angel investors who’d be actively seeking deals at the pre-seed and seed stages.
I believe this can change soon, and I want to talk about ways that more people from the games industry could get into angel investing. Have you been enjoying an excellent salary, or maybe you’re an employee at a games company that got sold? Then you should be looking into angel investing.
I just recently made my first angel investment, and I’m planning to do several more. I believe that it’s time for the games industry to have more angel investors on cap tables of early-stage games companies. Angels can earn their position on the cap table, and in later round allocations, by being a real value-add and fully aligned with the founders.
What is an angel investment?
An angel investment is the first money raised by founders to their company, and it comes explicitly from individuals who are investing their own money. Angel investments happen at the very early stages when there isn’t much else besides the founders and the idea they have. After I left my startup earlier this year, I’ve had discussions with dozens of founders who’ve recently started a games company and are raising funding.
Angel investments can range from $1,000 to $100,000, depending on the wealth level of the angel. Check sizes can go higher if the company has an experienced team or if they’ve built a prototype of a game that is showing promise.
Typical angel investments by individuals in the Nordics are between $5,000 to $30,000. This money can be a convertible loan, or it can be a direct investment, against ownership of equity in the company.
But what about VCs? Angel investments usually happen at the stage where the founders don’t have enough evidence to raise from venture capital investors. Angels are typically willing to take more risks and will work more hands-on to get the founders to the next stage in their journey.
Why I want to angel invest
In a Medium post about angel investing, Atomico partner and former Global Director of Marketing at Spotify, Sophia Bendz, explains why she makes angel investments. She believes that it’s
1. A way to put my money to better use (and hopefully better returns) than letting it sit in a bank account or buy expensive things we don’t need
2. A way to give back to the community by sharing my learnings, insight, feedback, and a good dose of encouragement on the tough days. I know how intense it is to be on a startup journey!
3. A way to continue to learn, especially about how things are being dealt with operationally today by the best in the industry. This helps me keep my knowledge up-to-date. Partnering with founders gives me much more than a financial reward, I also receive rewarding conversations, positive energy, and meaningful relationships and many times the best deal flow comes from the founders I have backed.
4. A way to contribute to improving the lives of others and dramatically reshaping the world. I want to back founders who are making a positive impact on our entire world, and I am so happy that I can enable that change.
I have similar motivations for investing in games companies. I recently started Elite Game Developers, which is my platform for helping gaming founders to have less struggle in the lives. I share knowledge through a podcast, book, and online courses. There is so much to be done to build great gaming companies, and I want to be a part of making the ecosystem that enables the great gaming companies.
Here is my list of reasons why I feel that angel investing is essential to me:
1. Time. I want to spend more time with founders, and I want to help them grow to become the best leaders, the best company builders. I’m continually learning, and I believe that being part of the founder’s journey with several founders is the best way to spend my time.
2. Money. I believe in total alignment with the founders. I’m not accepting monetary rewards from this work, not until the founders themselves get their payday. If you are a founder and you’re looking for help, always ask if the more experienced industry veteran would like to make an angel investment. The alignment with this individual will pay off if they are taking a financial risk in betting on you.
3. Risks. I can take on the same risks as founders when I invest my own money into their companies. I’m aligned with them to build a successful games company. The only way that I will make a return on my investment of time and money is that the company becomes successful.
I wrote a user guide on myself. This way, founders who are considering to reach out to me for angel investments can first read this and then decide if they want to talk to me. Here are seven things for you to understand better where I’m coming from with the work I do with founders.
User guide to Joakim
1. Why am I helping founders?
I don’t invest money and sit on the sidelines, waiting for a significant financial return. I want to help founders grow a successful company. I want to help founders build lasting companies in modern ways. I believe leaders can show vulnerability to show honesty in themselves. I think that this will create the right kind of company cultures.
2. I always invest in founders.
There is never an idea that will carry the company; it’s the founders that carry the company. And I will always be on the founder’s side.
3. What kind of founders do I invest in?
I invest in founders who are hungry to learn. They research the competitors in their market and play their games. They don’t hesitate to talk to the players and figure out why certain games are dominating, and others are dying or getting killed in soft launch. I can catch you on this if you haven’t done your homework and can’t apply this to the games you are making.
4. When advising, I like to be pulled in by founders.
Our time is precious, both mine and the founders. Once the founder pulls me in, I listen to what is going on and then can give my advice. Often the founder is asking for help with a simple question. But I want to dig deeper. I want to hear more about the circumstances, and what has and hasn’t been considered by the founders. This way, I can give you thorough feedback and advice on the following steps to take.
5. I will guard your cap table.
The cap table, or capitalization table, is the record of who owns shares in a company, and how many. It generates the payout spreadsheet in an exit, revealing how much each shareholder gets from an eventual IPO or acquisition. I don’t want the founders to give up too much early on and will push for them to skip fundings rounds if they can do so. Later, I support founders and early employees in selling stock at later financing rounds. These are so-called secondary rounds, and they provide the option for financial returns earlier, and not being tied to a hypothetical future exit. Also, in this way, they can become angel investors much earlier.
6. I’m a big supporter of diversity.
I wish to support women and underrepresented minorities in joining, founding, building, and leading companies in the games industry. The opportunity to push the industry forward into a better future won’t happen without inclusion. In Finland, we make people’s taxes and incomes public at the end of the year. For the last few years, exits from game companies have made much wealth for gaming people. But there are no women amongst these people. I think we can do better.
7. I don’t invest much, but I want to help.
Today, I don’t have the wealth that some angel investors have. I think there is much to gain if more people in the games industry would start angel investing. Even people who haven’t had the big exit yet would consider becoming angel investors at earlier stages in their careers. You don’t need to be filthy rich to do this. Just like there are micro-funds, there can be micro-angels. Your small check size of $1,000 doesn’t hurt, as long as you are a value-add: early-stage founders need help.
Should you become an angel investor
To the people in the games industry, people who are thinking about being an investor one day: you can start earlier than you think. Start by writing small checks like $1,000 and advance from there. The amount will be insignificant, but you will learn so much from working with entrepreneurs and helping them succeed. Then consider if you’d openly announce your investment. The announcement could be through a Facebook post saying, “I’m a proud investor in X” where you share the link to the company’s website. Openly talking about angel investments will start a change in the industry that will take us to the next level.
When you announce your angel investment, you might be worried about getting flooded with requests to invest from founders. There might be people from all over the world, contacting you with their ideas. Many will be first-time founders with no game industry experience. Keep those messages flowing in and don’t hesitate to look at all the opportunities, because it’s a volume game.
The more companies you fund with angel investments, the more opportunities you’ll have to be part of the next big games company. Most of the startups that get started will fail for one reason or another. But in time, you’ll start noticing the common reasons for failure, and how you can actively advise the founders against certain practices, that can be harmful down the line.
Think about the process of investing as a construction of an angel portfolio. It will be your list of companies that you’ve funded with your own money and advised.
If you make five angel investments and all of them fail, there’s nothing out of the ordinary about that. The sixth investment might be the one that becomes successful and starts growing, and later has an exit that will return all the money you placed into the previous bets. But actually what happens is you’ll now make ten more investments with bigger check sizes. All the winners in your portfolio will make up for the losses in multiples.
You can also invest in companies between the funding rounds. I know cases where this has happened, and it’s up to the founders to convince they’re existing investors to “let the angel in” because A) they are willing to put their own money to work for the benefit of the company, and B) they will bring so much more value at their own risk, instead of bringing in an advisor and giving up advisor shares.
The funding gives more alignment between the angel and founders, as the angel is providing advice, expertise, including some financing. The angel is paying the company to help the company.
I cannot state this one point enough. You need to be comfortable to be losing money, lots of money in the beginning. And not seeing any returns for several years, even five to ten years. But the more you work, the more opportunities you will have for a profit.
What do you do when you’ve angel invested
Once you’re on the cap table of a games company, you should think about the ways you can help them. Maybe you can help to recruit more talented people to the team. Or you can share your knowledge on how you think about making games and what kind of proof you have about ways that game-making works or doesn’t work. If you’ve previously been a startup founder, you can help the team to reach the next milestones and to raise additional funding to go to the next level.
In some cases, you might be building your own startup at the same time that you’re investing. The best way to approach your time allocation for your angel portfolio founders is to carve out time in your calendar: schedule breakfast meetings or dinners with the founders. To be effective, have an agenda in mind and evolve the discussion so that you get many topics covered over time.
I would rather see more angel investors in new games companies than advisors. The risks and salary for an angel investor are more aligned with the founder. The effort from the angel is free, without any extra incentives needed for angels to work for the company. If you necessarily want to work as an advisor, have clear and actionable milestones in place to unlock equity from the company.
If you want to start angel investing into games companies, you can always ask for advice from me. My LinkedIn is open for messages.
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Continuing on the topic
I’ve written two more parts to the series of articles on angel investing in gaming.
Part 2: 10 questions to start angel investing in gaming
Part 3: The B-team: When are you ready for an investment?