Deep Dive: Game Investors

Looking at the game industry from an investor’s perspective.

Game Investor Rationale

When looking at the game industry from an investor’s point of view it is important to keep in mind that this industry is quite different from most other tech-related industries. It has been argued that companies developing new products and solutions for e.g. commerce, digital platforms for human interaction, or software for the health sector meet the needs of the society in general. It is harder to claim that video games are being developed because the world needs more of them from a rational point of view.

The Purpose of Games

Games serve another important purpose by addressing some of the emotional needs that the public also seeks to be fulfilled. Almost 2.5 billion people are forecasted to have played a digital game by the end of 20191 This fact underpins that digital games play as central a role as non-digital games have previously in many people’s lives. People are spending not only time, but also money on video games.

A Constantly Changing Industry

And to meet that demand, new games are constantly being developed. New ideas, new platforms, and business models must constantly be explored by game developers, by producers of hard- and software, and by publishers and investors. The game industry and market is constantly changing. To keep up with these changes is one of the challenges that investors face when getting involved in the game industry.

The Scope of Game Investment

Nevertheless, investments in game studios reached no less than $5,7 billion worldwide in 2018. That was more than double the amount of the previous record from the year before.2 Large investments in some of major game studios in the world – e.g. Epic Games, developers of Fortnite – count for a substantial part of these investments.

Indie studios and start-ups are also to a larger extent than ever on the radar of game investors. These investors are looking to invest early in promising studios. They hope for return on their investment from a successful game. Another option is that the studio that once has proven itself on the market, gets sold on to another and bigger investor. It could even get fully acquired by a larger game studio.

The Return and Risks of Game Investment

Not surprisingly, all investors in the game industry (as with other industries) are primarily looking for one thing: to make as big as possible a return on their initial investment. This can be achieved through the revenue created by a single game or by owning shares in a studio that gets picked up by an even larger investor, as mentioned above. Investors who are interested in younger studios essentially scout for the next big thing.

The game industry this is often described as a “hit-or-miss” investment type. Only a low percentage of available games on the global market actually make enough money to recoup the costs of development. Investors know that they are taking a risk when they get involved in a studio that shows potential, but has yet to prove itself on the market.

More Investors, More Funding

Even if many games and investments fail, the global revenue of the game industry continues to grow every year. In 2018, it was forecasted to be twice as big as that of the movie and music industry combined.3

These figures keep game investors going. They also attract a growing number of new investors, ranging from business angels to venture capital funds. They look at the game industry as a potential market to invest in. The rationale being that even if you as an investor do not own a stake in the next big global hit, the market is still so huge that even less can mean a healthy return on investment. This is good news for new and soon-to-be-established game studios. Investors and funding are out there and more seems to follow.

Early Stage Investment

Early stage investments in game studios, i.e. in the type of companies that are typically part of an incubation programme, can generally be divided into investments in a company, or in a game.

Investments in Companies

Investments in companies mean that the investor – or investors – will acquire a share of the companies. As it is more commonly named in the industry, the investor will take equity in the studio. How big a share depends on a number of factors. How experienced is the team? Do they have a proven track record showing that they are capable of developing and launching commercially viable or even successful titles? Or do they just have a prototype that illustrates their first game. The size of the investment obviously reflects the equity that is taken by the investor.

Trust is Key

But to get to that point, the investor needs to believe in the start-up. The game or prototype shown matters here of course. It will demonstrate the technical, artistic and innovative competences of the core development team. But there are many well-educated and skilled game developers out there. Thus, most investors will put even more importance on getting the right feeling about the vision and mission of the company, and on the internal team dynamics.

The latter is often considered extra important in the game industry. A complete development team consists of people with different core skills. These are e.g. programmers, artists, designers, business developers, etc. They will have different educational backgrounds and potentially also different approaches to game development. The investor needs to trust that the team can work together on shared goals. The teams needs to agree on the mission and vision of the company in the long run.

The long run is important for an investor, especially when getting financially involved with younger game studios. Realistically, their first game is often not going to be successful – and the investor knows this. The second game is expected to do better. An investor would therefore commit the funds necessary to develop more than one title if investing in the game studio.

Investments in Games

The other typical investment into younger game studios is in a specific game – i.e. in the intellectual property (IP). The investment will typically be based on a teaser, in the industry termed a “vertical slice”. This teaser shows the core mechanics of the game, the gameplay and the artistic style of the game.

The investor will then fund a part or all of the development of the full game. In return, the investor will ask for a share of the revenue it generates once launched on the market. Again, this share will depend on the amount of the investment and on how big a percentage of the finished game will be developed on the invested funds.

This kind of investment can often be hard to attract for early-stage game studios, though. Apart from liking the game and having trust in its chances on the very competitive game market, the investor also needs to trust that the core team of the game studio can actually develop, finish, and launch a quality product. Therefore, the company should have at least one game in their portfolio that has performed well on the market when aiming for investments in their coming IP.

The Role of the Game Incubator

A game incubator can also play a role when it comes to helping incubated studios attract investments. If a start-up has been screened and eventually approved by a respected incubator, this can potentially serve as a quality stamp that the investor will notice.

Better even if the incubator has developed (or at least plans to) a network of game investors. Such a network can be approached when new promising studios are accepted into the incubator, or new titles that need external funding to be completed are under development. The incubator can make the initial approach to get the investor network interested. Afterwards, the incubator can connect studio and interested investors.

This also helps the investor who will have one point-of-entry to a number of potentially interesting start-ups. It would eliminate having to scout for these in numerous locations or rely only on meeting new potential investments cases at industry events.