🌠Home | 🔡 Early Stage Gaming VC 101 | 📝Patch Notes
<aside> 🧙🏽 The best way to learn about gaming VC is to speak to founders who have raised VC capital. You may know someone who knows someone, so check your own network!
</aside>
<aside> <img src="/icons/promoted_yellow.svg" alt="/icons/promoted_yellow.svg" width="40px" /> Venture capital is high risk, high reward. Not everyone needs it to be successful.
</aside>
Venture capital is a way to raise money to fund a business (usually startups) in exchange for equity. The key differentiator versus other types of funding is that venture capital funds typically invest in high risk businesses led by highly ambitious teams that are innovating in some aspect, with the potential to grow to significant scale. The VC also provides support through their startup expertise, resources, advice, network, etc.
That means venture capital funds invest in businesses before they’re making any profit, and even before revenues, and even earlier before engagement… and even even earlier before anything has been coded. The bet at every subsequent stage is that the opportunity through the product, team and market has been further validated. Founders taking VC funding typically work with several different VCs overtime, as VCs differ in stage, specialisation and their value-add.
Before founders decide to raise money from venture capital, they should understand both the benefits and the cons of doing so, if their ambitions and approach is the right fit, and compare it with other options available.
“[Venture capital is] not even a home run business. It’s a grand slam business…. If your idea is not something that can generate $100 million in revenue, you may not want to take venture capital”
— Bill Gurley, General Partner @ Benchmark, investors in Riot Games, thatgamecompany, Wildlife Studios
<aside> <img src="/icons/promoted_yellow.svg" alt="/icons/promoted_yellow.svg" width="40px" /> For gaming studio founders, there's a profound mindset shift from making a game or studio to building a company from startup to success.
</aside>
There is a real difference in those that that just want to build a game they love versus entrepreneurs that want to create a generation-defining company built on top of games.
When it comes to the initial game pitch, how founders think about commercial and execution aspects are as crucial as the creative, and the more founders can demonstrate validation approaches with milestones in their plan, the better. Founders should understand VCs are not only investing in the game but in the founding team’s ability to iterate, adapt, and build a durable, long-lasting company.
At the earliest stages, the founding team’s calibre, temperament, ability to attract talent, development methodology, and long-term strategy matters just as much, if not more than the first game idea itself. Establishing credibility that the team is uniquely placed to go after a massive opportunity yet to be unlocked is the sweet spot. The VCs that end up funding these teams should then fundamentally share their vision on the game, approach, and market/genre/platform they’re building in.
There is definitely a bias for VCs to invest in teams that have come from the established big studios out there, in theory because they know what it takes to build a successful game and have done it before. For obvious reasons, that is usually a good start but by no means is it necessary or sufficient. It is the VCs job to pick the right teams, and for each opportunity the right team will be different, spanning across long-time veterans, to younger but hungry game teams, to new to the industry with uniquely relevant experience, to visionaries - or even something else.
“We developed a very strong conviction that this little company in Helsinki had deconstructed the game development process and come up with a unique model of efficiency, discipline and agility.”
— Neil Rimer, Founding Partner @ Index Ventures, investors in Supercell, King, Roblox, Discord, REC Room, Dream Games
<aside> <img src="/icons/promoted_yellow.svg" alt="/icons/promoted_yellow.svg" width="40px" /> The founding team should comprise of the people critical to the company’s formation and success, and have the most skin in the game through equity.
</aside>
VCs want comfort that the founding team they invest in is the team that runs the company and stays at the company. The simplest and best way to demonstrate that outside of pitching is the fact that the founding team, individually co-founders, all have equity, and therefore significant skin in the game for the long-term success of the company, regardless of how many games or products are created.
This also speaks to the practical reality of building a startup - it’s really, really hard, there will be big challenges along the way and most startups end up shutting down. Co-founders need to be equally and obsessively passionate about what they’re pitching to overcome all odds.
This structure creates better alignment for everyone involved, as the value generated by the business accrues to everyone through the equity, so everyone should be working towards the same outcome of an exit.
Here is a very useful co-founder equity split guide and calculator by Joakim Achrén, General Partner at F4 Fund.
“There are so many challenges on the way to building a successful company. If you’re doing it for the wrong reasons, you’re going to wilt. You simply won’t persevere. But if you’re deeply motivated by what you’re doing, you’ll keep going and you’ll overcome obstacle after obstacle. And so that to me is one of the key starting conditions: founder-market fit, founder-problem fit.” — Roelof Botha, General Partner @ Sequoia, investors in Unity, thatgamecompany, REC Room, Dream Games
<aside> <img src="/icons/promoted_yellow.svg" alt="/icons/promoted_yellow.svg" width="40px" /> For founders, this comes down to a question of values.
</aside>
An exit is when the company is sold to another company, or to the public through an IPO. It is a means for investors to get liquidity (read: money) on their equity stake and deliver returns to the fund and their own investors. There are some other options, but for the purposes of this, I will not go into them. You can google exit strategies for investors.
The most common and expected outcome is to other companies. When you see BigCo has acquired NewCo in the news, that is an exit by NewCo. BigCo has bought a majority or all of the shares of NewCo and if there were VCs who had invested in them, that would include buying their shares. Of course, the founders also sell and get paid, and should get paid a lot as they collectively should still own more or as much as any other individual shareholder.
This is the business model of VC and how they make money. Founders should be fully aware of the expectation that investors will want to exit. Typically the expectation is to exit within 7-10 years from first investment.
Understanding that investors are driving towards this outcome means founders should be aligned with the fact some day if all goes well, the company will likely be acquired by another. If that outcome isn’t something founders want to drive towards, then that isn’t a good fit for VC.
As mentioned, the other option is going public by listing on a stock exchange, which involves an entirely different ballgame and is usually the more ambitious play. This is also a well trodden path to exit for VCs, although it has historically been less common in gaming.
A company going the VC route will typically engage with multiple investors at different stages. All these investors are share a common goal of an exit.
“If you do the math around our goal of returning the fund with our high impact companies, you will notice that we need these companies to exit at a billion dollars or more. Exit is the important word. Getting valued at a billion or more does nothing for our model. We need these high impact companies to exit at a billion dollars or more.”
— Fred Wilson, Co-Founding General Partner @ Union Square Ventures, investors in Zynga
Seeking VC funding is not an either-or situation; VCs and publishers can and do collaborate effectively. Some publishers also explore equity financing, which adds some VC perspectives to their considerations.
The below is intended to help demonstrate how working with VCs can differ to working with publishers, a domain where many founders have significant experience.
These guidelines are not set in stone or exhaustive.
| Early Stage VC | Publisher | |
|---|---|---|
| Typical structure | Pure Equity | Project financing (revenue share, recoup) |
| Value accrual | Equity Value | Game 1 revenues |
| Fundraising trigger | Stage based (e.g. Seed, Series A) | Milestone based (e.g. Vertical Slice, Early Access) |
| Stage | Mostly new studios | Typically closer to pre-launch, less likely for new studios |
| Support focus | Fundraising, company building, hiring, strategy | Game development, marketing, operational |
| Key resources | Network, other founders, strategic advice, ecosystem intel, domain expertise, partnerships | Marketing spend, launch & post-launch support, localisation, playtesting, cross-promo, tech support, other services |
| Investment criteria | Thesis driven | Game, IP, audience fit, and portfolio fit driven; additional considerations depending on publisher strategy |
| Expected return | Outcome of an exit with the company’s total value reaching upper 100s of millions of dollars, or much more | Less concerned with absolute scale (although still important versus resources spent), more with potential ROI |
"At Aperture Science, we don't just think outside the box. We ignore the box completely and invent a new way of thinking that makes the box feel inadequate and insecure. Sorry, box.” — Cave Johnson, Founder @ Aperture Science