With investors battening the hatches and video-game developers shuttering their doors, times are turbulent for game makers. But even as the economy spins downward, some are seeing an opportunity to break away from the traditional funding model – and build more self-reliant game companies in the process.
When John Johnson left Relic Entertainment to form Smoking Gun Interactive, he and his cofounders wanted to do things a little differently. “Our goal is to produce intellectual property that we create and that we own,” Johnson explains from his Vancouver office.
Typically, the creation of a video game is funded by publishers, who either own the studio developing the game, or provide milestone payments to the independent developers contracted to make the game.
Under that model, publishers assume all the risk – whether the game gets made, whether it ships on time, whether it's a financial success – and as a result require developers to give up not just the majority of potential profits, but often also ownership of the intellectual property behind the title.
Rob Edgar, a manager with Union Entertainment, helps to connect video-game developers and publishers. He says the existing relationships, where publishers finance game developers, are unbalanced.
“Video game publishers aren't in the banking business,” he says over coffee in Vancouver's tony Yaletown district. If developers are able to assume some of the risk that publishers currently take on, like paying for the development of a game, Edgar believes studios will be able to negotiate better terms.
Game publishing you can bank on
With this in mind, some independent game developers are beginning to look for their own sources of funding. Smoking Gun was opened with investment from private sources – what is commonly referred to as angel investment. Johnson thinks there will be more studios and start-ups adopting different financial models, what Edgar calls “alternative financing.”
“I spent a lot of time with investors when we were looking for investment for Smoking Gun and there's a lot of interest,” Johnson says. “People … can see the profits and they're really interested in getting in there and sharing in it.”
“Publishers would love to see more independent developers be able to fund their own development,” says Paul Lee, a general partner at Vanedge Capital. “It's perfect if you're a publisher, because basically you just get paid for distribution.”
Vanedge is a ventures firm specifically set up to invest in video games. There is plenty of capital aching to make its way into the industry, Lee says, but it lack the proper guiding hand. Other experienced video-game executives have taken positions with notable venture-capital companies, with a eye to investing in game development. Lee references his colleagues Bing Gordon, formerly chief creative officer at EA, now at venture firm Kleiner Perkins, and Mitch Lasky, former CEO of Jamdat, which was acquired by EA, who is now at Benchmark Capital. None of these funds, Lee says, currently service Canada, let alone Vancouver, where there are about 50 independent game developers.
“There's a huge need for venture capital in the digital media space,” says Lee, on the phone from his Vancouver office. Most venture capitalists, he says, are either from the financial sector or are strong technologists who understand business trends.
But, Lee explains, an analyst could be right about both of those things and still lose money. This is because the video game industry, as an entertainment industry, is driven by blockbusters and hits. “The rising tide doesn't lift all boats in this business.”
The gathering storm
