I am seriously considering starting a videogame studio once my main port co finishes with a big transition event.
Have done a ton of consumer, but have always wanted to make videogames since I was kid. So thinking of taking a year off and giving it a shot. Now that I have real capital + a track record, I think it would be easier to build a good team. I don't have kids yet either, so it seems like this is going to be the perfect time to do this.
Qs for you folks:
-What are normal EBITDA + net income margins like for game dev studios?
-What numbers have you seen before as far as speed to hit $100m+ in revenue and initial equity in? Looking for recent examples of full fledged game developers, not mobile games.
-What are the best learning resources to rip through to get a good grip on the industry?
-What is the market like for secondaries in these companies? Viable to sell some equity along the way as they hit major milestones?
For context, I am looking for #s for LMM/MM size companies. I have obviously flipped through public comps and all the old classic stories. Those aren't really applicable the same way though!
Hey man - will take a stab at some high level information since I know you contribute so much to this community. I don't think you have a good grasp of how these games developers work so I'm not sure what you mean by the old classic stories.
It used to be back in the 000s and such that game developers everywhere would get a contract for $Xmm + % of success above certain $ amount to develop a game on behalf of the publisher. This was the most common arrangement until a lot of developers started developing their own IP at what was an increasing rate for this industry. Financing for these was often from larger media and entertainment companies who wanted option value into buying IP later on, from more debt-like terms I don't know the specifics of but weren't straight equity stakes, etc.
You could probably just call a bank that does gaming to ask about this if it interests you. Anyways, nowadays there are fewer independent game developers because the economics to being a developer are much more large scale. You need to hire a much bigger team to have a competitive game because of the amount of art and technology required to compete in the 2020s. It just takes way more capital to develop a game these days and timelines are much expanded. It's even harder to startup and so barriers to entry are so high.
So often you are seeing first time studios done by past game directors who have successfully made their own games. Sometimes you see a writer make a studio but I think most of those that happened in the last 4-5 years fizzled out, but to me it's an open question whether the game director or writer is the true key man.
Nowadays you essentially have two options for financing: the traditional financing route or venture capital. The issue with financing a game company from venture capital is that the terms are you have to have a mobile game. Mobile is where all the money is. You're going to have a very hard time launching a first time game studio without hiring a successful game developer without also having a mobile cash cow.
I'm not sure it makes sense to ask about the secondaries market and speed to reach $100mm+ for this type of business because the revenue is chunky. I would think of it more similar to drug development.
If I were you I'd start chatting with game directors at larger studios who have successful track records and writers of strong franchises that fit the type of game you want to make. But you're for sure not going to get anywhere without a game developer; that's basically the CEO of making a game. I'd also maybe buy a primer on the games industry or some of the books on the industry. Blood Sweat and Pixels was pretty good and you can research from there.
Drug development is a great way to think about video game development (as well as movie financing).
Post above is very informative. The economics of AAA titles are not as lucrative anymore without scale, which is why you see a lot of titles now with DLCs, microtransactions, live service type shit to scrounge for ARPU.
The epiphany I've had is that the economics are far more attractive in the unsexy, pay to win mobile gaming space. Dev costs are low enough that shorter lifecycles for each title don't matter as much, sales/marketing/distribution costs are far lower, and really a lot of these guys have dev teams in low cost places like India because they're not trying to make the next Halo or whatever.
Have a primer for this somewhere, will PM you if I can dig it up.
Would love to read that primer if you can share.
I am a product manager at a venture backed mobile gaming studio so hopefully I can be helpful. I generally agree with the previous poster and would just add that if you asked head game designers / exec producers / VPs of product those questions, they would find them strange because there are 100 other questions they would ask first. Anyway I'll try to answer your questions and will add my 2c. This is from a mobile perspective so if you are interested more in a AAA-style of game development not as applicable, but hopefully I can dissuade you from going that direction
Long write up, let me know if any more questions
Coming from someone that works in the gaming industry, a lot of indie studios spend years working on a game with little revenue, taking a year off is so little time. If you have the money and can pull together a top team that's a different story, most indie devs I know don't have that kind of capital.
I'm not too sure about the numbers, but it's a hard business. Google and Amazon have failed miserably and spectacularly in gaming because their gaming management was horrible. It's not likely you would be able to convince Drew Karpyshyn or Joe Staten to come and work for you but there are tons of senior devs looking for their next big thing, especially considering the sad state AAA gaming is in now.
Metrics such as the ones you are asking about really depend on the type of games you want to make. Making free-to-play + microtransactions games could command a higher valuation because of recurring revenue but that market is so oversaturated. Look up 1047 games, their game Splitgate was super hyped a few years ago but fizzled out. Making some open-world RPG like Greedfall takes years and years of development time and needs to be a hit in order to break even.
If you have the capital and can raise the funds, I would suggest buying out multiple small indie studios and building a publishing company instead. The people that make their own successful video game studios usually have years and years of experience in senior-level development roles. I'm talking about people with decades of experience, people like Vince Zampella, who founded Respawn after being fired from Infinity Ward, where he was CEO. These guys were in gaming in the 90s, when there was so much more skin in the game but the landscape of the industry was so different, in those days some of the biggest hits were made on tiny budgets, and in just a few years with small teams. The paths these guys took just don't exist anymore.
I think with your background and lack of operational experience in gaming, rolling up studios and being the owner of a publishing company that owns these studios under an umbrella could be a better option. Strauss Zelnick, CEO of Take-Two is a Harvard MBA/JD and has never even played his own company's games.
Most AAA games these days have budgets in the hundreds of millions, and have recently stretched into the billions. Keep that in mind when you think about the scale of the games you want to make. Also, it takes a long time to make a game now. Most studios starting a new game this year probably won't see their projects finished by the end of the decade.
As others said, reconsider the no mobile games approach. These games can be simple and quick to develop, stuff like temple run, those games you see in those shitty TikTok ads are pretty simple, and you could start off with something like that and then expand (or acquire some indie mobile devs)
Other things to consider to help you scale quicker
I would highly recommend the latest Acquired podcast with Benchmark's Mitch Lasky (GP at Benchmark and former exec at Activision). It is great stuff. In some ways, the industry shift to live gaming and cross-platform optimization / cloud gaming does create opportunity for indie developers. But would agree with the above that mobile gaming is easily the most lucrative from a LTV to CAC perspective.
So many great replies, I will reply shortly! Have been knocked out all week hopped up on oxy due to a surgery and want to provide good replies! Thank you all for taking the time.
I've refined my plan and essentially plan on doing the following:
-Find a technically strong cofounder and a creative director
-Put up the first ~$3m
-Test 3 high level concepts on kickstarter and aim to generate as much preorder revenue as possible. Test ~$50,000 in ad spend per concept.
-Winning concept with the most preorder sales wins and gets developed. The $ above go into some initial work on fleshing this concept out and driving more preorder sales. Ideally can generate enough traction to raise $.
This sounds crazy but I've done it a few times before in consumer across 3 different spaces. That was back when I was ~20 or so too, now I am 30 with much more experience.
Sounds wild mate, good luck. Indie titles have been killing it the last couple of years.
Interesting, seems like 3m is quite a lot of initial investment for a game and in general, is this out of pocket or money raised, and how to go about accumulating this?
It would come from me personally. I own a few consumer brands and have sold some before.
I actually have an idea for you, I'll PM you, we should connect before you do this
https://maplemedia.io/apps/
What’s the point of this link
It's a fund that both acquires and develops games and other non-gaming apps. Takes a highly mobile oriented focus where there are more predictable cycles. It's essentially a model for what this guy wants to build
This is such an interesting subvertical. Would this space be quite niche or outside of the realm of pe investing?
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