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Thursday, December 18, 2003

Comments

Barret de Nazaris

Venture Capital is only based on the supposed capacity of the "Venture Capitalist" to evaluate a company.

Few, very few of them are competent. Most are Finance Major that don't understand that you need to understand the activity and the processes of a company to judge it. They just apply generic financial evaluating tools that are at best slighly inadapted, at worst completely wrong.

How many of theses skilled VC do know the game market and the game producing process ? I'll bet z-e-r-o.

The only VC available in the game market are the publishers. that's, after all, their "core business". One suppose they are slightly more competent. One wonders...

Jeffool

Not even being in the industry yet (I'm in school,) I will soon be relating on a smaller scale with the "How do you get experience if you don't have experience?" problem.

That totally aside, how often is it that companies making money require venture capital? Turbine is a great example I guess. But if a company is "stable, proven, established" and a "hit maker", why do they need someone else's help? Sure there's bound to be cases where you need just a little money to tide your company over until your game hits the shelves, or you want to push it up a notch in production and it requires more cash, but still. Is it that often?

And in case you're not tired of hearing it, I started reading blogs a few months ago with GameDevLeague, and read quite a few you guys link to. Thanks for writing these.

Cristopher Boyer

Venture capital in general is in this same sort of mindset right now. VC firms want to invest in companies that have an established customer base, positive revenue stream, created product and are moving along at a relatively stable clip.

In other words, companies that don't actually need money.

What is unusual is that relatively few key players in the VC industry even realize this. Or if they do, they're satisfied with it. They would rather take no chances and make no money rather than risk something and find a potential windfall.

You could point to the dot-coms for an easy scapegoat, and not even be far off. When you've got guys throwing money at anything with a website, and losing their shirts on it, you know they're going to be reluctant to put money into anything technology-related that they don't already understand. And if they're not tech-guys, then the only thing they're going to understand is straight-up success.

But it's not always the super-successful that needs cash.

 Barret de Nazaris

(I've work a lot with or for VC).
The fact is they are the main responsible of the dot-coms crash.

A this time, they were throwing money at anybody *without any analisys*. The dot-commers were doing the only things reasonable, they asked for more money (and became more numerous (sp?)). Now, they're throwing money at no one except the very successful, still without any analisys except one (superficial) financial evaluation.

In theory, to be a VC should be harder than anything else : you need to be tech savvy and business savvy. One half is not enough. And Damn ! So many don't have even the quarter of the skills necessary.

I know some VC are very good but they are older (around 50), they were there before the dot-com thing and they know their stuff. The young generation saw the opportunity and the easy money without the hard side of the job.

 Barret de Nazaris


so many spelling mistakes.I suppose it's because the end of the day (in europe) ...

Scott Macmillan

A couple things that don't help the game industry at all when trying to attract VC are:

1) Hit driven market (uncertainty on your return)
2) High dependency on personnel (not much to sell off if the thing goes under)

Rahat

In ways, VC funding and general investing are pretty similar: People want what's hot instead of what makes sense. Most people tend to go for seemingly sure-fire ideas, expecting big payoffs. 95% of the time, I would guess, they have no idea what the product really is.

One simple example are the B2B firms of the dot-com crash. I mean, seriously, do you really think the average investor knew what i2 or CommerceOne actually did?

Dave

This is a paradox. They only want to invest in winners and you can't be a winner without venture capital. It's very hard to set up a shop from scratch and becoming profitable without a source of income.

I can't blame them for investing in "sure fire" winners, but if a company has proven itself, it doesn't need to sell it's soul to venture capitalists. The better games you make the more bargaining power you have with a publisher, unless the deal has already been made.

J.

Last September, I went to the Austin Game Conference, in part to meet all the acquaintances I know in the game industry.

The main reason people "in the biz" told me they liked the conference over GDC: Not so many startups with pet projects or wanna-be game developers begging for a hook-up. (Though there was this weird guy wandering around the outer hallway offering his business card for his Flash services. I politely refused, but he tried to insist.)

Scott, you offered this woman the opportunity to be the target for a feeding frenzy. Of course she backed way the hell off. :)

Aki Järvilehto

Met with a VC yesterday who wanted to know about games and how a VC could "get into that market". He'd been doing research on game companies and was pretty informed about the field.

One issue that he pointed out was the fact that VC's can't really get involved unless you've somehow secured distribution for your title. Small development houses are simply way too risky investments unless you know that the games made will get international distribution. I completely agree with him.

On the other hand once you've secured distribution i.e. gotten publisher for your title, then you hardly need the VC money anymore.

To generalize: It seems to me that in the "business as usual" mode the game devs do not really need VC's. Or in otherwords the publisher acts as a VC and gives the needed capital for devs.

VC money only becomes useful when you're entering into situations that are more exception based. For example if you're pitching a title to publishers and in a situation where "buying more time" would make sense for negotiations etc. There's also situations when the size of the studio is so large that you're looking to get listed when VC mezzanine certainly could be useful.

But for us regular devs it seems easier to "deal with the devil we know" i.e. publishers. :)

Cheers,

AJ

 Barret de Nazaris

Dear Aki,
I don't agree with you and with the VC you met ("VC's can't really get involved unless you've somehow secured distribution for your title").

I think quite the opposite, i.e that VC money should be a good help for a studio until it got a good publishing deal. From this moment, the VC start to get his ROI (and a good one).

Venture Capilism is about risky businesses : it's about picking (and financing) the winner among the very innovative young companies that need money.

Because they are so innovative, their futures and their potentials are very uncertain. You need Specialist to evaluate them : VC.

that's the difference between a banker and a VC. VC is the specialist of risky (but very profitable) investment.

I left the field sometimes ago, the definition of a VC may have changed since then, tho.

Charles E. Hardwidge

There's some comments that highlight the management experience and finance VC's can bring to the table, and the need for careful scrutiny; what are these people doing for me and how much does it cost? Any good book on general management should get someone this far. No need for me to add anything directly, though I'd like people to consider the value of their "network," and whether organic growth might be a better option.

Now that someone's mentioned publishers, I thought this extract from todays Guardian might be thought provoking.

"These are examples of successful, daring publishing that is easier to achieve within small companies," said Sheila Bounford of the Independent Publishers Guild.

"The chain of command is short. There is far less of a culture of corporate procrastination, they can act quicker when they spot an opportunity. They are probably less likely to be brought down by bad commissioning decisions because there is simply not funding to take huge risks."

The Guardian: Cult author Moore scores more than Beckham in book sales.

Ryan Hagan

There are other considerations when dealing with VC. One that readily comes to mind is the amount they wish to fund. Generally, smaller companies that are trying to break into the business approach VCs asking for less than $1mil (sometimes $500,000 or so) and most VCs don't deal with programs less than $5mil. VCs generally want to invest serious money and expect serious returns. Most development houses don't need that kind of investment and certainly can't generate the ROI that VCs are looking for.

Turbine securing $18mil is more in line with what I would expect to see the VC money for, especially when you consider that they're an established developer with no real NEED for VC funding. As I understand it, Turbine is using the money to buy back the rights to Asheron's Call 2 from Microsoft and to expand their offices and development teams. In the long run, owning the rights to your IP is a REALLY good investment, as Scott has already mentioned in this blog and provides a much greater potential for returns.

Paul Jenkins

I have to disagree with one of the points most people seem to be latching on to. People seem to presume that the only ways to gather funding are through VC (Venture Capitalists) and Publishers. This is not an accurate depistion of the options available to start-ups.

In fact, there's an incredible amount of funding available to start ups via private interests and federal grants. Most often, these forms of funding don't expect returns, but require certain obligations that a start up company needs to consider whether or not they can live with.

When I decided to start my development company I specifically approached a partner who has a very limited knowledge of game development, but who is heavily schooled in business and marketing. Within a few weeks I'd realized how limited I'd been in my thinking that I'd need a miracle to attract funding.

I'd personally encourage anyone looking to go to start up to start researching grants and special interest loans. While this form of funding won't turn you into Microsoft over night, it will help to provide operating capital that can establish your IP, and put you in a very strong position to approach VC's on realistic terms.

Note: Rekonstruction (an MMORPG due out late this year) is being developed and published by a small group whose initial investment was 600,000 dollars. So far they've raised millions in venture capital. Most of their start up was funded by severance packages and borrowed equipment from VALinux. :>

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