20 July, 2010
They say money makes the world go ’round. It certainly makes it easier to eat and live under a roof.
My thoughts have turned to funding lately. Now that my focus is entirely on my own projects, I’ve been considering options on how to keep myself fed while completing a project. Most of you enjoy seeing a glimpse behind the curtain, so here are my thoughts about funding a smaller project.
First: I know this is a long post, and business makes most people’s eyes glaze over. But, I think this is an important issue. If you’re in a hurry, take a look at the last few options below, starting with “Community support”. These are probably the parts most readers are going to care about.
I’m a fairly rare beast: I’m an independent MMO developer. MMOs are a niche within the game industry, and independent developers are another small niche; the intersection of the two is pretty tiny all things considered. And, given news that Blizzard keeps spending more and more on games, the thought of doing a game for “only” a few hundred thousand dollars, especially an MMO, can be daunting. But, that’s my lot in life.
But, this can have certain advantages, too. MMO players tend to be online more and willing to form communities easier. An independent MMO developer can potentially tap into an audience easier through online channels.
In addition, I want to focus on a project that will potentially bring in money to live off of. Not to slight people who run small games as a hobby, but as Dave ‘Over00′ Toulouse is realizing, there’s something really terrific about working on games for a living. I also tend to be the type of person who likes to hyperfocus, so working a “day job” would take a lot of my time and attention and leave little for working on something as large of an undertaking as an MMO.
So, keep this perspective in mind as we discuss funding. Also, this isn’t intended to be an exhaustive primer. I wanted to cover some of the options I’m familiar with and options I’m considering.
I define bootstrapping as taking no outside money and investing primary “sweat equity” into a project. Initially, nobody gets paid in this model. It takes a team pulling together on a project they believe in to finish. The goal is to use the first project as a springboard for future projects through income, attention, and/or code that can be re-used.
The big benefit of this option is that it’s very low risk from a financial point of view. The only thing you put at risk is your own time, which admittedly can be very valuable. It also allows you to remain the most independent, since almost no money is being poured into the project.
The biggest downside is that it can be very hard to find people willing to join you. I’ve had poor luck with volunteers in the past. While money isn’t the only motivator for many people, it can be a powerful motivator to keep people focused. It seems some people don’t quite understand the depth of work required to make a game. There can be problems with communication and conflicting goals as well. Not to say that you can’t find good people, but good people who can commit to a project seem to be fairly rare in my experience.
The other problem is that some things require some amount of money. Effective marketing either requires a lot of time (as in, a very long-standing reputation) or a lot of cash. Sometimes you might strike it lucky (or perhaps have a blog that’s been going for over 5 years), but in general you will need some money to not languish in obscurity. “Build it and they will come” is a nice sentiment in movies, not for building a business.
Self-investment (including personal debt)
This is related to bootstrapping, but it assumes that you have money to throw into a project. Now, the source of that money can be an issue. As I wrote before, I used credit cards to fund my share of the purchase of Meridian 59. This method definitely carries some more financial risk. But, some people might be in a good position to save up money and only risk money they can absolutely afford to risk.
Another option, especially if you’re an experienced developer, is to work on a game but then do jobs on the side to bring in cash to fund the project. Of course, this takes time away from working on the project, which can cause some problems if your game concept has a definite “launch by” date or it becomes stale. There is also the risk that you (or the company you own) becomes known for doing contract work instead of original game development. I’ve read a lot of stories about companies who started out doing ports of games to pay the bills, but then the company just became known for doing ports and never got the opportunity to do their own work.
The advantage of self-investing is that you have actual money to spend on the company. You can perhaps pay for some art or for a contractor to help out with some part of the game. As pointed out, however, self-investing carries some risk. There’s the risk of losing your own money or losing focus. This option also requires that you actually have money to spare, or are willing to go deep(er) into credit card debt. Currently, my savings is a bit thin and I’ve already been in the abyss of deep credit card debt.
Traditional game publishing
Yeah, go ahead and laugh. Traditional game publishing agreements aren’t really an option, especially if a developer wants to remain independent. But, let’s take a look at this option anyway.
The advantage is, of course, that you get money that may be more than you can personally invest. Most publishers, however, will want you to have some skin in the game, so you’ll probably have to fund a prototype or even the start of development yourself. You can also, theoretically, tap into the expertise of the publisher to help you confront problems during development.
The big downside is that you’re going to lose a lot of control. Most publishers won’t give you the time of day if you aren’t willing to give them your intellectual property (IP) in exchange for funding; retaining your IP is the best way to make sure your company stays profitable in the long run. Even if you do retain your IP (or if you believe you can still build a business without retaining it), the publisher will still have a vested interest in trying to ensure that your game returns the maximum amount of profit for them. This means making changes based on their feedback, including creative decisions. Additionally, it will take a lot of time and effort. First you need to spend time finding a publisher who will work on an agreement, then you will spend a lot of time reporting back to the publisher to give updates and demonstrate milestones. Doing a dog and pony show in front of different publishers eats up time that could be used for developing.
Also keep in mind that publishers will only invest in projects they understand. Something new or untested is hard to get interest in. This is one reason why we see a lot of clones and sequels in the game industry, because that’s what publishers can understand. Ultimately they tend to chase fads (or “trends” if you want to be generous), so that limits your creative freedom even more.
Ultimately, the publisher’s loyalty is to the project, not to your company. They will do everything they think is reasonable to ensure a certain level of success for the project, even if it means harming your business. In fact, it may benefit them to make sure that your company is struggling, because it gives them a negotiating advantage on the next agreement; if you’re getting short on funds, you’ll be more willing to negotiate the next deal fast and in the publisher’s favor to keep money flowing. Many times publishers will require that part of the publishing contract gives them the right to acquire your company at a bargain price; this means that if you are successful, you might not see a lot of return on that success if your company is acquired.
This is taking money from a venture capitalist or angel investor to fund your company and project. Again, it’s hard to remain independent when you take someone’s money because investments are generally made with the desire to make a return on that investment. In many ways, it’s similar to a traditional publishing deal; for example, most investments will have no return, but it’s the few big successes that cover all those failures. There are some similarities between this and the hit-based nature of publishers.
The advantage to traditional investment is that it’s a well-established system. There are even ways for you to present your company in front of a lot of investors at once. Also, if you can find a good angel investor, they may be more willing to take a chance on you for the psychological benefit of supporting someone “artistic” creating games, even if your business plan doesn’t promise big returns on investment. If you do end up selling the company, you will likely get a better deal on your stake in the company than with a publisher’s contractual provision to acquire your company at a bargain rate.
There are still a number of disadvantages. Like a publishing deal, it will take time and effort to find an investor and then to maintain the relationship. You will almost certainly have to give up equity in your company to get investment of this type; eventually the investor will want to sell their stake for a profit, so you’ll need an ‘exit strategy’ that usually ends with you either selling your company to a larger one (like EA), or doing an initial public offering (IPO) to create shares the investor can sell on the stock market for a big profit. Given how rare IPOs are these days, your investor will probably count on you getting acquired, and may force an acquisition you’re not fond of.
Most of the venture capital firms won’t invest in small projects. If they’re going to go through the hassle of giving you $250,000, they might as well invest for a few million and expect proportionally larger results. This philosophy means that they will only invest in certain things, and like publishers, usually following fads/trends. A while ago I talked to an investor about a mid-scale MMO project. The investor wasn’t interested in my proposed project, but I was told that social games were hot to invest in….
Another disadvantage compared to a traditional publishing deal is that you may not have access to game development experience like you would at a game company. In the worst case, you might have an investor who simply doesn’t understand games, and therefore makes demands that just aren’t feasible. On the other hand, investors usually know successful entrepreneurs, so you might get assistance on technical or business issues that the publisher might not be able (or willing) to give.
This is slightly different than traditional game publishing, and is similar to how Hollywood movies are made. In very simple terms, a project is “owned” by a separate company, and investors get a stake of equity in the company that corresponds to a share of the income made from the project. All the major companies working on the project will get a share of this company based on negotiation. The project’s company pays bills and earns profit from the project which is paid out to the owners, including the production company (the people usually making the movie), the publisher (distribution company), etc.
The advantage here is that it still allows outside investment without interfering with the company you own directly. Investment goes into the project company and any failure of the project does not necessarily harm your own company. (Harm to your reputation, however, is another matter.) It’s also a very standardized procedure at this point, so it’s familiar to most people, at least in the film industry.
Disadvantages? First, most industries outside of the film industry are unfamiliar with this system. It can also be fairly complex to the uninitiated; there’s a whole industry of completion bonds for film to guarantee that a movie can be completed and insure the amount invested into the movie. Guarantors are the ones that crack the whip in this scenario to keep the creatives on track, and they are the ones that demand the paperwork and updates to insure the investment. But, it seems that this does remove some of the incentive for the investor to inflict harm upon the developer (production company in the case of film) in order to get an advantage later. Finally, it still results in a lot of conservatism on the part of approving projects, as witnessed by the majority of films coming out that fit within a narrow formula.
Another option is to get funding from the government. The news has had information about tax breaks that the government might give to certain businesses. There can also be loans and grants.
In the U.S., government funding tends to be fairly restrictive. There is the Small Business Administration, but loans are fairly hard to get and require a lot of paperwork to even apply for. Last time I checked (and, admittedly, this was over a decade ago when starting up Near Death Studios), they focused more on businesses with physical locations like shops. There are also grants, but writing government grant proposals is an arcane art. “Serious games” developers usually qualify for grants since their games are often used to educate. You can also find grants for minorities and women intended to encourage them to get into business, so you might be rewarded for having a diverse group of founders.
The big advantage is that the money might be very cheap, meaning you will have a low interest rate on a loan or you might not even have to repay a grant. However, you will have to jump through some hoops in order to qualify. It could take a lot of time and effort to seek out and apply for the loans and grants. Your typical shoot-em-up game probably won’t qualify for a government grant, sadly.
Now we’re getting to the first of what could really be considered “indie” style fundraising from people other than the developer. In most of the styles above, you’re still on the hook to an investor who wants to protect their investment. This means that they will usually want a degree of direct control over the project to ensure their investment.
One way to raise money with less of this problem is to go directly to the community for who the game is intended. These people have a vested interest in seeing your project succeed if you can present it to them well enough. The main advantage of this funding model is that it spreads out the risk between a large group of people. 5000 people chipping in $50 each results in a budget of $250,000, which is a fair budget for an indie-scale game. If the project flops, you might have a few people miffed at you, but it’s not as awkward as facing one person who gave you a quarter of a million.
The downside is that you have to be a pretty good salesperson to pull this off; people are unlikely to throw fifty bucks at you without a lot of convincing. You might also have to promise something to the people who chip in, potentially creating a legal obligation. In fact, this whole system is fraught with legal peril if things are left too ambiguous. You also have to work hard to manage expectations for a larger group of people. Someone throwing in $50 is going to want to give you some feedback, and while this isn’t quite as bad as a publisher making contractual demands, it’s something that will still take some time to deal with properly.
Finally, the community might be more skittish than traditional investor. Someone who invested $250,000 into your project will probably understand the risks they are taking and might write you another check (if they can afford it) if you come along with another good idea. I suspect a lot of community investors will think “once bitten, twice shy” if the project isn’t completed for some reason beyond the developer’s control, or if it doesn’t turn out quite the way they wanted.
This is another way to raise money, but you directly promise something to the community who sends you money.
We actually did this in the early days of Meridian 59‘s relaunch. We needed a quick infusion of cash, so we sold CDs with the client burned onto it. We also promised people a 3-character account on a server instead of the normal 2-character account, making it a bit more special. We commissioned some artwork for the CD and got 1000 CDs printed up. We sold about 700 of them at $35 each, making about $10 or so profit on each. Of course, it took a lot of work to get the CDs printed, and my business partner (Rob ‘Q’ Ellis II) and his family turned into a shipping station for a while as we worked to fulfill orders. There was also some issue with shipping the CDs to Canada due to customs issues, unfortunately. But, this gave us a nice cash infusion to keep us running for a few months while we worked to get our proper billing system implemented for subscriptions. This resulting in a lot more money than when we asked for donations from the fans.
A recent game to do this is Sanctuary 17, a free Flash game where you can buy a paper manual to support the developer. A clever idea, even if you might beat the game before the mail with your manual arrives. (Now, if they only had a referral program…. ;)
The advantage here is that it’s a traditional transaction. No potentially empty promises, you send the user something or give them something in exchange for sending you money. People will also tend to appreciate getting something physical.
Of course, there are some disadvantages. The first is that sales of items can cause tax issues. If you live in the U.S. and will ship to people in the U.S., you’re looking at sales tax issues, at least in the state you live in. You will be required to get a seller’s permit to collect the taxes, and will have to file additional sales tax forms on a quarterly or yearly basis. As governments are looking for additional revenue, many are starting to look at the “lost” revenue from mail order and internet purchased items. There have been discussions about requiring companies to track and remit sales taxes on purchases even beyond the state they live in for many years now. Hard economic times is making this more and more likely. Also, as I pointed out above, it can be quite a bit of work to ship the goods to users. You also have the costs of producing the goods and shipping them. Outsourcing to a company like Cafepress is easier, but it reduces your potential income.
This is a very interesting development. The current example of this is the Indie Fund, where a group of independent developers who have seen some success with their own work contribute to a fund that will seek out and invest in independent projects. Hopefully this is the vanguard which will lead to other similar investments.
The advantage here is that you have investors who understand your struggle and are likely to be patient. From the sounds of it, they’re looking for a return on investment, but they aren’t necessarily looking for the huge multipliers a traditional investor is looking for. Like a traditional publishing deal, you are likely to benefit from this fund’s expertise. Plus, being indie, they know how important things like retaining the rights to your IP is, so they aren’t going to take it from you in the name of profit. They also explicitly state that they want the project to bring something new to gaming, so they aren’t likely to fund another clone like traditional game publishers are wont to do.
Disadvantages? It’s still an investment, so someone still might exert some control to ensure that return. They also require you to have something playable, so you still need some way to get your game to a playable state to show that the core concept is good. The requirement of having a video seems to imply that the visual aspects of the game are going to be rated highly as well.
Of course, there are tons of other ways you can fund a game. Winning a contest, playing the lotto, working nights and weekends for years on end, releasing a game and getting financially rewarded when it manages to become a runaway success. Unfortunately, a lot of these options are hard to plan for, so I’m not spending a lot of time on them.
So, what do you think is a good way to raise money? For me, this is more than just an academic question. I’m thinking of ways to make some of the ideas in my head a reality. So, leave some advice for me to consider! :)