With the average cost for producing a computer game topping $2M per title (that’s twice as much as it cost just two years ago on average), how does an independent producer get the money to create that killer game concept?
Production costs may be growing exponentially but so are gaming industry revenues. Unit sales of video game and computer entertainment are worth an estimated $5.3 billion in 1997. Sales are up almost 60% for the first quarter of 1997 over the same period last year thanks to strong Sega, Nintendo 64 and Playstation sales. With sales of interactive entertainment software expected to explode to $8 billion by 2000, this seems like an ideal time to attract a finance partner to an independent gaming project.
The unfortunate reality is that even though the industry taps a huge consumer market, most independent gaming projects don’t get past the concept phase because they can’t get the money they need to start production.
The only way to get your foot in the door with potential investors is to have a good gaming concept and a well-written business plan. Unfortunately, as many “digital entrepreneurs” are finding out, writing a business plan for a new media venture is not easy and writing a business plan for a gaming project is as much art as it is science.
Of all the types of ventures to finance, I’ve found gaming projects to be the most difficult. Why is it so hard for an independent gaming project to get financed? I think there are a couple factors that make it tough to convince investors that independently produced games are worth investing in:
- Very few titles ever make their costs back – It’s estimated that only 4% of titles released in 1996 made money.v EA, Interactive Software, CUC and the other large producers dominate the market. Smaller players have either had to play ball with the bigger boys or fold up shop. With the cost of producing a commercially viable game climbing into the millions, it’s a challenge to guarantee that enough units will sell to break even.
- Very few projects ever make it to the shelf – The industry has consolidated to a point where a few large companies control distribution. Just like the record industry, it’s almost impossible to sell units to retailers as an independent. Most successful games have to find a distribution deal with some major even if they are produced independently.
Does that mean that you can’t get the money to do your project? While the process of getting financial backing is tough, it can be done. A sound, well-written business plan that deals head-on and convincingly with these two aforementioned issues is the key.
All investors, regardless of the industry, look for projects that will give their investment back, plus a premium. Risky projects, like computer games, can still interest an investor if he/she can be convinced that the return, relative to the investment, is large.
Creating a business plan that tells the story of your gaming project accurately, while at the same time relating its money making potential, requires finesse with both words and numbers. Especially because the traditional benchmarks that you might use to measure the success of, for example, a light bulb manufacturer, don’t apply to a video or CD-ROM game.
You’ll find in writing your plan that it’s not enough to have a general idea of what you want to do. You must nail down the specifics of every aspect of the project in order to prove that it is executable. In other words, if you are going to ask someone to fund your project, you have to do your homework. A professionally written business plan consultant can cost upwards of $10,000 per plan. When you hire a business plan consulting firm or an investment bank to handle your financing deal, you’re mostly paying for the background research that the analysts collect. Surprisingly enough, doing the homework necessary to get the plan done yourself can often be very cheap and it doesn’t have to take more than a few days of diligent work to get the plan started.
The following are some tips and tricks that I have learned the hard way while pitching gaming projects to various types of investors.
Hit The Books
Finding benchmark data that works for entertainment and new media projects is tough to do. Background data is valuable because it creates the foundation upon which all your financial and strategic assumptions are based. Professional business plan writers know that reference in the plan to a secondary report, study, survey or business case study can do a lot to satisfy a skeptical investor.
Because reporters have the access to information and studies that most of us can’t get, magazine and newspaper articles are a fantastic source for statistics, growth rates, analyst predictions, and consumer and distribution trends. Competitive analysis magazines like Game Developer, do a thorough job of tracking consumer, technological and industry trends. Even the most unusual trade magazines (like Supermarket News, Texas Monthly, Forbes) track sales figures and growth rates for the video game industry – everything you need to fill your business plan with cold, hard facts.
A really good resource for data (that’s also cheap) is your public library. I spent a little more than an hour on my library’s magazine search system and was able to email myself over 50 articles that offered industry statistics, trends, consumer buying patterns, market share of the top producers, etc. You are adding tremendous credibility to your plan by including this secondary data but be sure to include quote citation in a footnote in your plan.
Keep in mind however, regardless of how thoroughly you research, you’re going to have to do some “guesstimating” to come up with the numbers and the strategies that will make your project work. Don’t be afraid to put down your best guess. Also, don’t be afraid to change it later if you find contradictory data.
Nail The Executive Summary
The Executive Summary is the one section guaranteed to be read by everyone who looks at your business plan. If they aren’t impressed by this one (or at most two) page summary, they won’t read any further and your “sales pitch” will be over.
How do you know what to put here? The easiest trick I’ve found for writing the Executive Summary is to write this section last. Once you have most of your sections finished, it’s much easier to take a few of the most descriptive sentences from each section. Then all you do is create a summary paragraph headlined by each section title.
In the Executive Summary, you’ll start to feel like you’re repeating yourself. Don’t be afraid of that. Many potential investors won’t have the time to read through the rest of your plan before they make a decision to talk details with you. The Executive Summary should reiterate the most crucial points from each section, even if it sounds like a repeat.
The final paragraph of your Executive Summary should be the Funds Sought paragraph. There you should clearly state how much money you need and what the return on investment will be. An example of how you might word this follows:
The Company anticipates one round of financing with $1.5 million being sought from a single investor in return for passive equity. These funds will be utilized for start-up expenses in addition to production, staffing, distribution and marketing costs related to “Your Game Title Here.”
In The Game Business, Distribution Is King
This paragraph clearly states what you want from the investor. Of course, you can tailor the language to match the type of deal you are looking for whether it be a debt, distribution or multiple investor deal.
The key to any game business plan in my opinion is a sound distribution strategy. Killer gaming elements and smooth graphics don’t mean a thing if you can’t show how the product is going to get to the cash register.
Distribution is a very complicated business in and of itself. For this reason most gaming projects sell their rights to distribute to the big boys who have a distribution network already in place. 10 vendors control 90% of the market and much of that is due to a lock on distribution.
Dealing with the distribution issue is like the egg and the chicken phenomenon. Big distributors won’t be interested unless you have a financial backer. Investors will be looking for a strong distribution partner and a sound marketing strategy to ensure that the product will get into the stores.
The easiest solution to the distribution issue, of course, is to partner with a major distributor. If you’re lucky, you can package the financing and distribution deals with one major company. Partnering with a major distributor also means that you’ll get help with the marketing. They may dictate the platform you launch first as well as creative issues, but given the difficulty in getting retail shelf space, it can save you a lot of where and tear.
If you do decide to go with “do-it-yourself” distribution and marketing, make sure your sales estimates show a slow build as you get awareness up. Also, show your investor that you have some smart strategies for getting your game into customer’s hands, whether it’s via direct mail, on the net or via shareware or in small, independent retail sites. Don’t neglect to include a PR plan which can give you some inexpensive market awareness.
Be sure to include bios or resumes from every person you know who could contribute to the project. Even if the project team isn’t set yet it’s important that investors know that you have a crew of experienced professionals ready to go when the money comes through. Also include support personnel who might not be directly involved with the production of the project, but who support the company’s activities. That includes your legal counsel, business advisors, accountants, etc. These are the people who your investor will need to know and work with to make sure his or her investment is protected and being managed properly. Include an organizational chart even if no one is on payroll yet, or if almost everyone will remain a freelancer. It helps to show the chain of command and the critical responsibility hierarchy that will get the project done.
Concentrate On The Costs
While assumptions can be made on how many units you plan to sell based on the size of your target market and your distribution plan, estimating what it will take to get the project done is that part of the financials that tend to get a lot of scrutiny. If the numbers are too low, they will be considered unrealistic. If the numbers are too high, the project will have a much higher break-even rate (when the retail price minus marketing, distribution and manufacturing costs surpass the initial investment).
The hard part about estimating the cash flow for any new media business is that there is often a development period during which there will be no real inflow of income and a lot of outflow of cash for start-up expenses. I recommend concentrating on determining what the costs will be as accurately and as detailed as you can. For the financial section you will need to track these expenditures month by month for the duration of the project. Most gaming projects are averaging an 18 month production cycle. The questions you should answer include: Will you be leasing office space in the third month? Will you need to hire programmers (how many and what month will the start expecting a paycheck)? Will you keep them on as employees or will you let them go after a few months as freelancers? Will you use live action? How much are unknown actors charging these days?
You may or may not have a lot of overhead, but don’t forget to anticipate that if you are bringing in a crew of programmers and designers, you’ll probably need an office or a studio in which to house them. Even if you plan to have everyone meet at your house for staff meetings and work together via email, you’ll want to be frank about that in your business plan and explain to your investor how that will work and what the benefits are (huge cost savings and reduced staff costs since everyone will remain freelance, etc.) These cost estimates will be based on the project schedule and launch date, cross-checked with budgets of similar productions (find that data in your research).
The most sensitive and disputable element in your plan are your financials. The “numbers” are also usually the one thing that creative business people are most intimidated by.
Making “reasonably sound” projections is the goal. We all know that game titles live and die by the number of units sold. However, the variables that dictate how hot a game sells are subject to a lot of intangibles – trends, platform penetration, gaming type (shoot em ups vs. puzzle-based strategy), PC vs. console sales, hardware prices, etc.
The easiest way to create reasonable financials is to create scenarios of what the world might be as the product is being developed and launched. You can calculate your financials based on three scenarios: worst case scenario (which could assume that costs are very high and that sales are initially slow); middle case scenario (which is based on your best guess estimates); and best case scenario (which assumes you can deliver the project under budget, under schedule and with strong sales or distribution). Consider various market trend scenarios: Are sales of PC games on the rise versus console games? Did the launch of the Nintendo 64 boost game unit sales? Are they forecasting a slow Christmas season? Creating scenario financials shows investors that you have considered all the possible outcomes and are prepared.
After sitting through countless investor meetings, I’ve come to realize that at the end of the day packaging is everything. I have seen many business plans so horribly packaged that there was little chance for the project to be taken seriously.
Create a plan that’s easy to read. Include diagrams, character and environment sketches (in color if you can), gaming schematics and so on. Of course, it goes without saying that a well laid out, organized (make sure you include a table of contents and page numbers), and bound (spiral always seems to work best) document is critical.
Most plans I’ve written have ranged between 60 and 200 pages (including financial documents). You may be able to introduce the project to a potential investor with an abbreviated version of the plan that includes only the Executive Summary, the Financials, the Game’s Storyline, Project Schedule & Budget and the Production Team Bios which often is no more than 20 pages.
A Final Word
Writing business plans, regardless of the type of project, is a challenge. The type of detail that an entrepreneur is required to document can be aggravating. I often recommend that you get outside counsel while writing your plan even if you are going to do the writing yourself. Solicit the help of an accountant, a lawyer or an executive who works in the gaming industry to review the plan drafts. The insight that an objective, experienced industry professional can give you will save you a lot of stress when you start to present your plan to outsiders. And be open to criticism and comment. If readers don’t understand why you estimated your potential market at a particular size, don’t assume they’re dumb. Know that they have identified an area that needs more clarification or data to support your assumptions.