The rocket fuel scenario

What happens when a games company is poised for growth, then goes to investors for finances?
In our ongoing series of articles on raising money for games companies, let’s look at the investor’s optimal scenario – rocket fuel.

In this scenario your studio’s growing nicely but organically. Your games are selling well, with good commercial metrics and growth prospects on whatever platform you specialise in.

You might already be profitable or you might not but you need additional funding to grow at a faster rate - the team, the operation, the number of games, your revenues, and so on. 

Your strategy relies on growth and it can’t be delivered without an injection of funds.

Investors love this kind of opportunity.

As the cliché goes, investors love to be the rocket fuel for the spaceship you’ve built.

Investment to power growth is one of the most common drivers for games studio fundraising but it also comes with numerous trip hazards and things to consider.

Control: Ceding control of a share of the studio so it can grow more rapidly and inorganically by adding staff and capability to grow the pie is arguably the most acceptable use of funds there is. But it does mean you invite new shareholders onto your board who may have different views about how and where to grow.

Voting rights: Some trade investors (i.e. games companies) can demand more control than their share of the company might suggest, effectively giving them a louder voice in the Boardroom. Are you ready for the politics of letting that kind of investor into the organisation? Trust is all well and good, but voting rights are in black and white. Can you still achieve what you want for the company if a major investor disagrees with your approach?

Hidden costs: there are definitely costs such as the legal fees for creating shareholder agreements if you haven’t done so already and perhaps accountancy fees to create the forecasts to justify the valuation and the cap tables showing everyone’s share before and after the round. Some investors will want to see your plans for future rounds and all will want to see your financial projections – revenue, costs and profits/losses – usually based on multiple games’ performances. Arriving at a fair valuation is an art in itself and there are a range of advisors who can help with this.

Paperwork: This will land on your desk before the money does. You will need subscription agreements, tax incentive scheme paperwork (such as Advanced Assurance letters from HMRC for SEIS and EIS in the UK) and likely a whole lot more (such as interim tax credit certificates showing you’re provisionally accepted on the right schemes (such as Video Games Tax Credits or its successor Video Games Expenditure Credits in the UK).

Dilution: Your negotiations will dictate the degree to which your existing shareholders will be diluted in return for the investment. The founding team will need to be reconciled to the value provided by the investor. If you’re providing an options scheme for existing or forthcoming staff, you will need to communicate the details of this to the new investors too.

Fundraising merry-go-round: Most CEOs find the time between rounds is shorter than expected. There’s usually less time to deliver, operationalise, fine-tune and get involved with production and day to day management than anticipated. Some almost have to begin fundraising shortly after they’ve just finished the previous round.

Reporting: Many investors (and all institutional ones) want to be reassured you’re heading in the right direction. Some will be on your case frequently while others are content with the odd update. Whatever the type of investor, good governance is required, which means transparent and regular reporting, meetings and a lot more data on company performance. This will make your business stronger in the long run but is a necessary, time-consuming new layer of bureaucracy.

Team growth: Many founders find they’re not quite ready for their board, management team and staff to grow. New faces, opinions, skillsets will change the mix, the products and the culture of your company, sometimes in ways you didn’t see coming. You might use this as a big opportunity to bring in a more diverse team with different perspectives. All this change usually means growing pains. Are the processes used for a team of, say, 5 still viable with a team of 15? Probably not. Will the visibility you have of your products be reduced? Possibly. More fundamentally, are the people you needed for your brand new start-up the ones you need for your rapidly growing company? Some mature into new roles, some do not. A hard look at the composition of your team will become inevitable as you grow.

 Want more on this? Read our post on 7 consequences of a successful round (apart from the cash!).

What this means to the investor

Looking at a studio in this position will put a smile on most investors’ faces. A studio that can demonstrate traction, ground its use of funds in solid data and has a plan which allows the studio to grow in value? That will sound great to most investors. 

 Being in this position doesn’t mean you’ll avoid the hard questions but you’re well placed to provide strong compelling answers that reassure the investors. 

 Presented with this kind of opportunity, the only real blocker could be their confidence in you and your management team’s ability to grow, adapt and learn how your studio makes money.

What this means to the studio

You can make a good case for a strong valuation, perhaps even seeing what people offer and allowing investors to compete for your shares. 

Obviously playing one off the other won’t help but be transparent and honest and you’ll win kudos with investors. 

Vet investors with care. There are so many questions you need to ask investors to ensure they will be good for your company. The most important questions to ask is what do they bring apart from money?

If you’re in this situation, you’re in a strong position – as long as investors are placing funds, which seems more likely in 2024 than 2023.

Key takeaway: Concentrate on finding the right fit and negotiating the right deal at the right valuation.

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.