Funding challenges in the era of evidence-based investing

Yes, it’s been a particularly rough start to 2024, especially for studios seeking funding. Finishing out 2023, it felt like venture capital funds closed the faucets of years’ past, and publishers hit the pause button. Thankfully, the vibe at GDC was slightly more positive, with new deals being announced by both publishers and VC funds.

While the checkbooks are back out, there is a sneaky shift that’s been occurring over the past few years: The burden of proof that an audience exists for a game is falling more and more on the shoulders of the developer.

This need for evidence, or traction, is a whole layer developers need to worry about beyond just building a great prototype and putting a strong team together. This was very much echoed in the investor update article posted on this site prior to GDC.

The next logical question is, ‘What kind of evidence do I need to produce?’ Sadly, the answer is, ‘It depends.’ Several vectors to look at are the degree of social proof, the level of community engagement, and your funnel metrics.

Social Proof: This is all the stuff that shows others think what you are doing is interesting and worth paying attention to. This is often manifested via social media likes and follows, or trailer views, or even your number of wishlists. Newsletter subscriptions count, too. The more the better, of course. This can also cover stuff like juried festival selections, winning pitch competitions, or press preview coverage (eg, “the most exciting RPGs coming next year”-style articles).

Community Engagement: Going one level deeper than just liking a tweet, to what degree are you building an engaged community around your game?

This may be manifested via active Discord members, playtesters giving feedback, and streamers engaging with early builds of the game. For example, the average playtime of your demo or beta build is a critical data point to demonstrate that your core gameplay is engaging and sticky.

Funnel Metrics: Now we’re getting down to the nitty gritty of your user funnel, the process by which you make someone aware of your game, inspire them to evaluate the game, then wishlist/back/download/buy the game, and become a fan.

Funnel metrics look at the cost and efficiency of bringing someone down the funnel. Specific measures to look at could be the cost/effort to get a new wishlist, or the cost/effort to get a new Kickstarter backer, or the cost/effort to generate a new download of your mobile softlaunch build.

Each of these vectors for evidence and traction creation is a deep topic that merits much further exploration, but this starts to give you a sense of the things that the people with money like to see to de-risk their choice of who to give that money to.

In fact, conceptually, there is a sweet spot where you’ve generated enough evidence to de-risk the project (ie, validating the audience) and in so doing, you are creating buzz/FOMO around your opportunity. After that crossover point is the magical “deal zone.” Too soon, and you are still seen as too early, too risky, or just not having enough buzz yet.

If you are chasing venture funding, this is particularly tricky as you have different types of investors coming in at different phases of the company.

First and foremost, it is critical to remind developers that you should only be pursuing company equity-level funding options (ie, angels, VC funds, corporate/strategic funds) if you are primarily multiplayer GaaS + free-to-play, doing something truly ambitious that has the potential to scale exponentially into a billion dollars of value. All those doing cool PC/console single player premium games are best to stick to sources of project financing, like publishers, project funds, Kickstarter, etc.

The first investor is always you! At the very beginning, you have no evidence, so only you (and your co-founders) are willing to invest the time and resources to get the ball rolling. Once you’ve made some progress on the product, and the team, that’s probably enough to convince your friends and family (and fools) to invest into what you are doing.

With those funds, you can make further progress on the team and the product, and start to generate some of the traction that angels will want to see. Once angels invest, then you continue to build evidence in order to convince the VCs to invest.

That’s a somewhat oversimplified view of things, but in short, the cycle is about using the current investors’ money to generate the evidence required to convince the next (usually larger) investor to invest. It is an arduous and incremental process to fund your company.

Speed-to-evidence must be a business imperative for all studios seeking external funding. Just making progress on the game build is rarely enough to unlock funding in today’s highly competitive investment environment. The more traction you have, the closer you get into the deal-making zone.

If you are approaching that zone, and are eager to pitch your company to VCs and angels, the Games Capital Summit is an ideal opportunity for you later in May.

Hosted as a pre-event of the Nordic Game Conference, the Summit welcomes over 20 venture investors (eg, Makers Fund, Behold Ventures, Transcend Fund, Sisu Game Ventures, etc). Then we hand select only 12 companies to lock in the room and pitch/meet with those investors all afternoon on May 21t. The deadline to submit your application is Friday, April 26.

Full details and submission form via the official website.

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