With money, one thing is constant: Risk. What do you give up to get what you need? And as a startup, where should you look first for money? This is an attempt to answer those questions using my gamedev modification of the pecking order of finance.
[For a slightly expanded version of this article with developer spotlight on Dean Razavi's Kickstarter campaign, click here. Otherwise, enjoy!]
In the financing world, there is a generally accepted pecking order to help find money. The order is significant, and for good reason.
You see, money is a dangerous commodity to trade in, as you give up various amounts of control to get it. If financing were a chain, it would get more precarious the further you walk along it, so understanding the pecking order is valuable to us. It keeps us a safe distance from risk until we feel ready to handle it. And when I say risk, I mean the risk of having people banging down your door asking to pay up. I mean having that shady Chinese mafia member from noir films smile sadistically as he holds up various instruments of torture and demands his dollars back. Risk is what you and I don’t want, at least not starting out.
Therefore, I’ve taken the traditional model and modified it to better suit financing video game development and handling risk. The resulting pecking order is below:
It’s always best to begin with the least risky source of funding and move to the more risky only as you feel capable of handling them. There is always a measure of risk in every area of the pecking order, but we’ll begin with the one that won’t result in losing the house, the kids and the spouse – at least we hope.
It’s time to whip out that money you’ve got saved up! You might be asking, as this SNL sketch famously asked, “Where do I get this ‘SAVED MONEY’?” Well let me tell you. Those couches in your living room – you know the ones – well, they probably have a few quarters in those cushions. Add those up and BOOM! One dollar! You’re well on your way now!
But investing your savings, while they may be scant, has its perks. Namely, you don’t owe anyone anything, you are free of debt, and there aren’t other interests to clog the vision of your game.
I’d also like to stress that personal funds will often be your chief source of finance in early years. No one, not even family and friends, will hand over cash without seeing personal investment. That’s because what we put in displays to the world how much value we place in an idea. If we aren’t willing to finance a portion ourselves, why should we expect others to?
Some cautions, though: Don’t drain your savings dry. If you are single and without children, then you can probably afford to risk more of your own money, but accidents happen to everyone, and you don’t want to be stuck with a wrecked car or a medical problem without backup funds to cover it.
Traditionally, the F’s stand for: Family, Friends, and Fools. These are people who will give you money and ask nothing in return. No ownership in the business or game – just straight up helpful people who want to see a dream realized.
Fools, while I don’t love the label, are often friends-of-friends or family acquaintances who have hearts of gold and money to burn, so if you wish to reach them the first place to start is with your immediate connections.
Many people are reluctant to ask these groups for financial help, but there is no harm in writing up a brief letter (for the older crowd) or email explaining what you want to do and mentioning ways your social circle can help. They shouldn’t all be financial ways, either, and so long as you don’t place burdens or expectations on people, you might be pleasantly surprised by how much your family and friends are willing to do.
When I did my undergraduate, someone I never met decided to front a significant chunk of the tuition fees. Magnanimous people are out there looking for opportunities to help, but it’s our job to make them aware. Whether they give or not is their choice.
Here is where the options become interesting. Investment money always comes with some sort of obligation. If crowdfunding, you owe products or services to backers. If angel investors, you will probably owe a portion of the game proceeds. If grants, you owe some sort of research data or reports on progress. Each has its own form of repayment, so it’s best to look at them individually.
The new normal for game financing, crowdfunding poses its own unique challenges (some of which can be found here), but it is probably the best avenue for investment funding.
Simply put, you give away so little with crowdfunding. Financing video game developments can be tremendously expensive, and you aren’t going to make much money from the endeavor immediately, but crowdfunding has created an avenue to build awareness and raise money at the same time. Often, the likes of Kickstarter or Indiegogo are also ways to rally the “Three F’s” in a public sphere, giving your friends and family a hand in marketing your project.
There are various categories of investors (you know, the people who give you copious amounts of money in exchange for some kind of financial return and partial ownership of a business) but very few are interested in financing video game developments. Why should that be? Well, most investors want a semblance of stability with their money, and start-up game developers don’t have much of a track record.
Even developers with a few games under their belts have to have a strong team, as most investors care about skills more than past projects. Skills can get even a weak game idea over the hump from mediocre to great, but past projects are past – certainly no guarantee of the future.
Angel Investors are labeled that because they operate on more altruistic terms. They are people who love the industry and hopefully love you. They will still have terms, some of which are usually:
Partial Business Ownership - Typically in the form of shares. Investors can ask anywhere from a very small percentage of the business to a controlling interest (over 50%), depending largely on the amount of money you’re asking for versus how much your business is valued at.
Exit Strategy - This is a ballpark idea of what the investor will get in terms of a return on their invested money, and when they can expect to get it.
Decision Making Powers - Often, if someone is fronting a lot of money, they’ll want control over certain functions of the business. They may also dictate certain people on the team to cut or add, depending on skills they feel are lacking.
But generally speaking, very few game developers should seek out angel investors. They are illusive creatures, and very rare in the video game industry. The main reason is video games aren’t considered “high growth” industries. Tech firms with radically innovative ideas – that’s the sort of thing most investors foam at the mouth over.
That’s not to say it’s impossible, and if you’re serious about your team and think your business has a compelling offer for investor funding, check out this article at the Guardian for more advice.
It is possible to get grant funding for video game projects, but there are strings attached. Sometimes lots of unsightly strings that you probably won’t want to mess with, as many grants have one thing in sight: research. If your game doesn’t provide the specific form of research the institution is looking for, they won’t bat an eye at it.
However, there are promotional grants put on by specific engines from time to time. This one comes to mind for developers using the Unreal engine. Just a word of advice for these: find out how much the grant is for and weigh if the effort is worth it. $5000 may seem like a lot of money, but what hoops do you have to jump through to get it? If very few, then grab that sweet cash and run, but otherwise… might be best to do your own thing.
A helpful resource if you’re serious about seeking grant funding can be found at Ben Sawyer’s Gamasutra article here.
Ah debt, what a curse and blessing. If you charge anything to a credit card, then congratulations – you’ve been approved for debt financing! Hooray! Now buy that Camaro you’ve always wanted!
But when it comes to big dog debt, like going to a bank and asking for a large loan, you’re probably better off not bothering for two reasons. First, no bank I know of will give you a decent loan without some collateral behind it, which might be your house or your shiny truck or your favorite dog, Coco. Coco might be a prized beast with a silky sheen to her fur, but unless you put down something of great value, banks won’t hand out cash of great value.
Second, debt of that magnitude is horrendously dangerous for small game developers. You likely won’t make enough of a return quickly enough to pay off the loan with interest, especially not unless you’ve been around the block a few times and know exactly how to make realistic financial forecasts and budgets for banks to scrutinize.
I’m going to just blanket statement this pup for you: avoid large-scale debt like the plague. Credit cards are fine, but stick with them until you can swim in the deep end.
Financing video game developments is very similar to financing everything else: get some starting capital through the means listed above, and then depend on sales. Your aim should always be to become self-sufficient, partly so you can pay off the people who were kind enough to loan you money (Grandma Sissy Pants, I’m looking at you), and partly because it’s necessary to a stable business.
Investors, whether they be family, friends, fools, angel investors, Kickstarter backers, or Jennifer Lopez, don’t expect to have businesses come back to them continually asking for money. Investment funds are meant for one thing: to build enough momentum to make something that is self-sustaining. That’s the goal, and it’s a beautiful goal.
Have any of these worked particularly well for you in the past? Sound off in the comments and tell us your experience!
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