The games deals "ice age" has melted away, making way a global games business that Digi-Capital, a boutique firm that tracks global game investments, says is booming.
But its latest report, which highlights the emergence of a “two-speed market” where blockbuster games rule and all others play catch-up, turns up the pressure on smaller studios to find new ways to fund growth faster.
Gone are the days when the choice was between signing with a publisher or making a deal with a VC, giving away a sizeable chunk of your revenues in the process. Increasingly, indie and mid-sized developers and publishers are 'doing it their way', taking advantage of new funding models that promise them more control, not just cash.
A prime example is Mobile Game Partners (MGP), a company working that provides an alternative to the traditional mobile game publishing model and counts developers like Ember Entertainment, Pixelberry Studios, Zhurosoft, and Uken Studios among its clientele.
Founded by mobile industry veterans Adam Flanders (Glu Mobile, THQ Wireless, and Z2) and Kevin Flynn (Kabam and Z2), MGP is on a mission to “maximise [dev] chances at making their game a success while enabling them to take home more of the revenue".
In practice, MGP operates under a success-based revenue share model, and only receives payment when it meets the goals of the developer.
Accelerate your access to cash
At the other end of the spectrum, companies including Billfront and FastPay offer a model aimed at helping developers bridge the funding gap — the period when indies can run out of steam waiting to get paid for their app sales or in-app purchases.
As the lag time between making a sale and getting paid can be up to 60 days, or more, games developers are understandably eager to speed up the pace at which they can reinvest their revenues back into user acquisition, iteration or whatever it takes to grow the business.
John Hayward-Mayhew, CEO of social casino games company TooChill, says accelerating access to earned revenues has allowed the company to optimise the metric that matters most.
“For us, it’s all about ROT - return on time,” he explains. Time savings is invested into creating more games to monetise longer. “Freeing the cash flow allows us to invest more in UA faster, and that allows us to grow faster.”
Make sure the metrics add up
Alternative funding models clearly alleviate cash flow concerns. But Adam Hadi, a New York-based user acquisition consultant, cautions developers against using the cash to make heavy investments into UA before they know the lifetime value (LTV) of their users. That, Hadi tells me, is a strategy sure to “burn cash faster than developers can access it”.
Significantly, Hadi advises developers to use working capital when possible, not venture funding, to fund early growth until a profitable LTV model exists.
The aim is to provide game developers with proven metrics with non-dilutive financing on a weekly basis to help them scale.Martin Macmillan
The real value of VC involvement is measured in connections, experience and guidance, he says, and developers squander this when they double-down on UA using cash that would be much better invested in “hitting the KPIs and milestones that allow you to grow more sustainably".
As he puts it: "Investing in a better retaining and higher-LTV product will result in more efficient and effective UA spend, while investing in UA does not generally result in a better product."
It’s why Hadi gives high marks to Pollen VC, a Fintech company with offices in London and San Francisco that provides developers free modelling tools and tech to calculate app LTV, and smart advice on when to dial UA efforts up, or down, and then capital to help them grow if the metrics indicate they can scale.
In practice, the company takes a feed directly from the app stores and ad networks, giving it visibility into app sales and UA information. It’s data that Martin Macmillan, Pollen VC CEO & Co-Founder, says gives his company the capability and the confidence to finance growth of “high potential” game developers.
“The aim is to provide game developers with proven metrics with non-dilutive financing on a weekly basis to help them scale,” Macmillan explains.
To this end, Pollen VC provides early access to funds from the app stores and leading network for a small financing margin, typically 3% to 5%, depending on volume. “If the financing margin is material to your LTV/CAC formula, then we probably shouldn’t be talking," he says.
Reinvest revenues to grow your games
While there are clear benefits to tapping alternative funding models to fund UA, some smaller studios are leveraging the cash to grow the number of games, not just users.
Nick Pavis, President & CEO of MunkyFun, Inc., an independent company focused on 3D games, did just this after he was convinced banks don’t understand the games industry, let alone the free-to-play model.
“It’s a weird kind of voodoo to them; they think studios just put a game out for free and hope someone pays for it," he says.
Rather than waste time trying to convince banks otherwise, Pavis focused his efforts on identifying a company that knew the games business and would secure against receivables.
He originally signed with Pollen VC in April to “bridge a gap in our cash flow after a number development deals had fallen through,” but has since used the relationship to bring more “predictability” to the business.
Knowing LTV and knowing the cycle that will get your money back “validates” the overall business, Pavis explains. “You’re not investing in a dream; you’re investing based on real revenue potential.”
In the case of MunkyFun the injection of cash and confidence from Pollen VC has allowed the studio to produce a new title.
Currently in the works is their virtual reality title League of War: VR Arena, being developed exclusively for the PlayStation VR platform. (An even bigger win for MunkyFun if we consider VCs are not rushing to invest in VR games).
Independent studios face fewer funding options and tougher decisions in the year ahead. Exploring your options to unlock your revenues can help you unleash the potential of your game. But it’s not just about accelerating your access to cash. You need a solid grasp of key metrics and LTV to ensure you reinvest revenues in ways that will boost, not wreck, your business.