Revenue is vanity, profit is sanity, but cash is king. Every start up and every project requires cash to get it off the ground. This is especially true in the gaming industry where, as an investment, computer games development is costly, risky and requires plenty of continued cash flowing in.
Unfortunately, all funding comes with a cost which can be varied and difficult to quantify. So how should you fund your next project? What funding is available? What is the cost of this funding? Some common forms of funding and their cost to your growing company are:
Equity funding is effectively encouraging individuals or corporate investors to provide cash in exchange for shares in your company. This means that instead of being charged a monthly interest fee, you are giving up a share of your assets and profits instead. You may have already been to an industry convention to show off your game to potential investors. On the face of it this provides the least risky option with nothing being paid out as dividends until the company is profitable. It is certainly the most widely available option for developers.
However, there is a hidden cost here and that is the loss of control. Being a 100% owner means you can do what you want. Investors may request you do things you don’t want to do such as costly accounting procedures such as audits. They may require you to give updates and may even want to be involved in the creative design of what you are doing.
You need to be fully aware of what your investors will want before accepting their money as once a contract is signed, it’s difficult to get out of. Shareholder disputes can be hugely disruptive and expensive to resolve.
Loans are the second main source of funding. These vary but the vast majority will have a finance cost attached to them, generally interest. This is in effect the flipside of the equity funding as mentioned above. The cost of funding here is usually constant over a period until the loan ends. As such unlike equity investors who would be difficult to remove especially if the company is profitable, once a loan term is up there are no more costs involved until you take out a new loan for a new project.
The problem with loans is that costs are incurred during the life of the loan, such as arrangement fees and interest charges. This leaves less cash for developing the games themselves. This in turn may result in you needing more funding than you would if you just got equity investors. There is also the issue of availability. Gaming projects may well be seen as risky and as such you may only be able to get loans that are expensive and unaffordable.
Crowdfunding uses a platform such as Kickstarter or Steam to fund game development by getting people to pay for it in advance or contribute to the costs of development through priority information and offers. This is probably the easiest form of funding and arguably the most cost effective. You also get a more accurate idea of how popular a project will be, and you get a lot of your potential sale income in advance, if the funding is in the form of advances against the games release.
Most of the costs of this funding however are hidden. Firstly, often you have to offer a game at a lower price than you would if someone bought the finished article. Therefore, although you may not be paying interest or dividends, by doing this you are effectively reducing your potential income. You also may put off future customers. An alpha version of a game, or a poor looking concept pitch, may not truly represent the final product and it may, after provisional game reviews, put the average consumer off buying the game on its eventual release.
So, which funding is right for me?
Unfortunately, there is no one correct answer for everyone here. All companies are different and what might be right for one company will probably not be right for another. I would suggest you talk to someone about your long term objectives to determine what is best for you and your company. After all you don’t want to be stuck in a contract you don’t want to be in but can’t get out of. You also want to give your project the best chance of success. With your funding secure maybe there will be a new king in town?
The information in this article was correct at the date it was first published.
However it is of a generic nature and cannot constitute advice. Specific advice should be sought before any action taken.
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