ALPHA | OPINION //COMMENT: BUSINESS The (financial) wisdom of crowds by Nick Gibson, Games Investor Consulting
while equity crowdfunding – not yet legal in the USA – provides both shares and potential dividends. Some debt and equity funders even provide the same sort of in-kind benefits as donation platforms. However, what is disadvantageous to the funders is fantastically beneficial to the project owners; or at least for those roughly 50 per cent of Kickstarter projects that successfully meet their funding targets. Developers that can access funding at minimal cost (basically eight-to-ten per cent platform and payment costs, plus the fulfilment cost of the rewards), do not need to cede any ownership of the company, control of the IP, sequel or merchandising rights, and maintain total artistic and production integrity. In fact there is little by way of legal obligation besides ‘good faith’ to actually complete the project or fulfil any of the promised rewards. Funders typically have no rights to audit the use of funds to ensure the funds aren’t going towards other projects or, worse, straight into individuals’ pockets.
Six-to-Start’s jogging- based iOS game Zombies, Run! is a Kickstarter- funded success story
THE HYPERBOLE around Kickstarter has been extensive, even by games industry standards, with statements along the lines of, ‘the future of games finance’ and ‘the solution to developers’ poor access to finance’ being made, often by hopeful and expectant indies. This month I want to explore the potential
opportunities and pitfalls of crowdfunding. Is it really the answer publishers’ and VCs’
aversion to funding indie games? Few would disagree that, for over a decade, the traditional publisher advance-based project funding model for indie developers has been broken. The advent of direct-to- consumer games platforms over the same period has reduced average project budgets and empowered indie developers to take more direct control over their commercial fortunes. But a funding gap still remains. The paucity of intermediaries offering
material distribution advances for finished games, let alone fund games development, has forced developers to self-finance or seek VC finance to get their games to market. As the industry core of large triple-A publisher and indie developers has been steadily joined by legions of new cash-strapped micro-developers, the funding gap, although less deep, is now significantly wider.
ONE-OF-A-CROWD Into this vacuum steps a plethora of solutions assisted by the social graph and powered by individual interest. Kickstarter may have grabbed all the crowdfunding headlines in 2012, but it is actually one of many hundreds of different similar platforms. They range from P2P lending services – for example
10 | JULY 2012
Funding Circle – to equity funding – such as Crowdcube – and donation funding models like Kickstarter’s. There are at least six games industry-specific crowdfunding platforms, most eclipsed by Kickstarter, whose momentum in many ways is virally self-perpetuating. More coverage means more potential donors, means more successfully financed projects which leads to more coverage and so on.
Few would disagree that, for over a
decade, the traditional publisher advance-based project funding model for indie developers has been broken.
What’s interesting about Kickstarter’s
success is that its donation model is arguably the least advantageous to funders, essentially being a glorified, highly risky pre-order system. The rewards tend to be limited (most often
by the provision of a copy of the game) with no money-back guarantee like a regular retail pre-order. Even the bigger rewards for more generous donations tend to have a high perceived value but very low actual cost (perhaps a name added to the credits). In contrast, debt crowdfunding provides
interest income and, in some cases, even some security over the company’s assets
CROWDFUNDING, RUN! Unfortunately a financial system that is open to abuse is going to be abused; it is simply a matter of time. By the start of May 2012, Kickstarter had seen over $20 million raised for 857 games projects. A tiny handful have already been suspected of being fraudulent and closed down before they could conclude their funding window. Many projects have been funded, developed and released to great commercial success, such as Six To Start’s Zombies, Run! jogging gamification title. However, it is inevitable that not all
projects will make it to market. I believe it will take just one high profile or budget failure or case of fraud to plant seeds of doubt in funders’ minds as to the wisdom of their donations. Crowdfunding is not the future of games financing; it is a future and likely to remain a relatively niche one at that. It is dwarfed by the $1-billion-to-$1.5-billion invested in private games companies each year by VCs and is of completely inconsequential size next to the multiple billions spent by publishers per annum. It will supplant neither. However, the role it is fulfilling for small games companies is undoubtedly a critical one, and my hope is that the inevitable future failures will simply result in the use of more accountable or rewarding crowdfunding practices, rather than the dissipation of a highly promising, valuable and democratic movement.
Nick Gibson is a director at Games Investor Consulting, providing research, strategy consulting and corporate finance services to the games, media and finance industries.
www.gamesinvestor.com
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