3 vital questions before you start raising money for your studio
So you’ve decided it’s time to raise finance for the next stage of your games studio’s development.
Do you take a deep breath, brush off that press kit, contact that person who knows that games investor, press the flesh, strike a fantastic deal and get the money?
Here are 3 vital questions to ask yourself before you start fundraising.
Question 1: How much do you want to raise?
This simplest of questions tells investors so much about you and your studio.
They’ll quickly see the scale of your ambition, your expectations, your projections and ultimately your opinion about your company’s value.
This question needs a robust answer.
A good place to start is your immediate need. What is the cash required to deliver the game, project or technology at the heart of your company’s current focus?
Obviously you need to quantify that immediate requirement, get a clear idea of your costs and expenses.
Then you should consider what you might need after that and whether you want to raise that at the same time or subsequently.
Once you have a ballpark for the size of the round, you’ll need to consider what % of your company you are willing to give away in return for that cash. That’s valuation.
Valuation is a judgement call, a difficult one at that.
Go too low and you could undervalue your studio. Go too high and investors might think you unrealistic and walk away.
Valuation is best established by talking to people who’ve raised recently or people like us who see a lot of companies.
Negotiations heavily focus on valuation (and therefore the level of dilution of existing shares).
Valuation is largely driven by your company’s age, team’s experience, commercial potential and assets you’ve already developed.
Bear in mind the type of investors you’re talking to (e.g. friends & family vs angels vs VCs) and any minimum investment level you want to set per investor.
Note also that valuations will vary widely depending on your location. North American valuations are typically higher than European ones which can in turn be higher than so going too high or low is more likely depending which side of the Pond you’re on.
Don’t worry, your first stab at valuation probably won’t be the one you and the investor settle on.
Find the solid ground of projections you’re reasonably confident in, then negotiate, which means finding flexibility.
Key takeaway: This most basic calculation will be your negotiation ground - choose it with care.
Question 2: When do you need the money?
This important question allows investors to gauge several things, like…
Have you given yourself enough time to raise funding?
How well do you know your costs and income?
How sustainable is the company?
How urgent is the need?
Equity fundraising is rarely a quick process. An angel round in the low hundreds of thousands can come quickly if you make the right connection. Often angels cluster around a reliable lead angel so land one of these and others can follow.
But institutional investors will have a process which starts at the front door (which may not be easy to open) and ends months down the line once you have convinced them that you’re the kind of company they want to back.
Raising a round from institutional investors can take between 4-6 months.
You’ll immediately impress an investor by saying that you’re looking at closing the round within 4-6 months. Any less and they’ll decline because their due diligence will take time and because your ‘rush’ might trigger warning bells for investors.
You should really read our blog series 6 reasons to raise money and what they tell investors.
Answering this question accurately means you should have a good understanding of your runway - how long the funds you want to raise will last, what your costs are and how that stacks up with your sales or projected sales.
You should be able to state your monthly cash burn rate until your cash flow breaks even.
To deliver this, your projections must be in realistic shape and able to withstand the scrutiny of an investor.
So your expenses are costed and scheduled, your revenue is scaled and reasonable, and your reserves, bolstered by the round, play their important role. That means you can answer questions about any element in the financial model.
You’re striving for an overall picture of your company’s sustainability - with investors’ help.
Key takeaway: Knowing when you need funding is a fundamental reassurance to investors that you’re investible.
Question 3: What are you going to do with the money?
Investors want to see the impact of their assistance.
How you use their funds should improve the value of your studio and your chance of commercial success.
More of the same is not usually a good answer to this question!
This is a great opportunity to demonstrate your company’s strategy for making money from your players.
How you spend investment money will be driven by how you’ll make money.
Use of funds depends on your business model so let’s break those models into 3 very high level categories - pure development, self-publishing (single or premium purchase) and self-publishing (free to play).
Model 1: We develop, someone else publishes, we get paid
If your commercial equation is to create high quality games that someone else sells, then your ability to monetise is based as much on those relationships as the quality of your development team’s execution.
Your use of funds here might be a combination of the following:
Co-fund production to increase royalties or move to day 1 revenue share
Grow the development team to improve production values
Start a second product line
Market your studio to more publishers.
Investors will have questions about this model, especially if work-for-hire is involved, which may well be satisfied by previous titles’ success and strong publisher support, perhaps by funding production, but mostly through marketing.
Model 2: We develop and sell premium or one-off purchases
If you’re self-publishing with a premium model (i.e. whole game + DLC) on Steam/console/Quest store, your ability to monetise is based on the quality of your games and impact of your marketing, especially Store featuring.
Your use of funds could therefore be some or all of the following:
Grow the dev team
Develop more games/DLC
License branded IP
Invest (a little) in marketing, such as staff or PR
It’s not a hard and fast rule but typically investors need more persuading about premium models (vs. free-to–play). That’s because the premium business model can be really viable but is high risk due to the one-shot, hits-driven nature of the premium market. It can be harder to scale this model as a result, although the costs are lower than free to play.
Model 3: We develop and sell free-to-play games as services
If you’re using a free-to-play model, your ability to monetise your game is based on how well your analysts can interpret metrics to upsell, the ability of the dev team to iterate towards better monetising games and the effectiveness of your User Acquisition.
Your use of funds could therefore be any combination of these:
Grow a bigger UA team
Expand the dev team to run titles in parallel
LIcense branded IP
invest in higher levels of UA.
Free-to-play models can be a little more predictable and so if your metrics are right, then investors can easily see potential for rapid growth. However you answer this question, investors want to see an achievable but ambitious target.
Key takeaway: Your use of funds will naturally flow from your commercial model.
Conclusion: Preparation is everything
Be prepared for scrutiny: Your answers will convince investors you know what you’re doing and are worth backing.
Successful games fundraising comes from a combination of factors including:
Know your numbers: how much you need and what you value the company at?
Know your timelines: when do you need it and what’s your burn rate?
Know your commercial model: what will you do with the investment?
Have any questions - join the discussion with us by commenting below:
Sound easy?
No?
It’s not easy but it’s doable with the right advice.
We’re here to help.
You can access some of our products like our Pre-investment checklist (10 reasons to raise money for the first time and when to act on them), 5 ways to plug skills gaps in your top team’s experience, our forthcoming Games Investor Profiles, our Games Investment Deck template (with explanations and advice for creating a strong pitch deck), the Art of the Pitch (10 pitch recommendations to read BEFORE you do your first investor pitch)
You can also book an Investment Deck Review, conduct a Practice Pitch Session with us before you face the investors as well as a range of one to one advice from a team that has reviewed hundreds of games investment pitches.
