Investment Options in Mobile Gaming & Tech

How to find investors? Especially in gaming/mobile gaming, which are much more challenging industries than they used to be 1-2 years ago?

I saw a lot of articles/discussions about a deck having “x” or “y” slides with “z” font numbers that could be presented during “a” minutes. I thought it could be useful for some people.

From my personal experience (I was working with gaming startups and investors quite a lot, was connecting startups with investors, investors with startups, and was an Angel investor in a few investments), those pieces of advice are useful but they miss the main point. I thought it could be useful for some people/startups, not only from the gaming space (although by my experience I am focusing on that industry).

Potential and risk

It seems to me that investors (at early stage) consciously or unconsciously are looking at 2 main factors:

• potential
• potential risk

To simplify, you could imagine a matrix of four potential areas:

• high risk – high potential
• low risk – low potential
• high potential – low risk
• low potential – high risk

High risk – high potential

This area is dominated by VCs. In gaming Specialized VCs are especially active here (VCs that put focus on gaming or sometimes make just gaming investments as they have strong knowledge about the industry, strong networking in the industry) or specialized Angels from the industry (i.e., founders who did an exit and are investing in the industry, people with strong industry experience that have access to bigger funds).

This group is looking for exceptional returns, so it is investing in something that is quite unique, and has a chance to create a totally unique experience (i.e., a known genre for a new audience or a mashup of genres). So, finally, the investments from that pool usually sound like this:

• “Unique puzzle experience that combines X with Y…”
• “Unique RPG experience that connects X with Y” etc.
• “Full Strategy experience that resonates with a wide audience ‘X’ and ‘Y’”

The idea is to focus on something that can earn tens of millions or even hundreds of millions USD per year. That is why here investments are relatively high as well (I mean as for SEED stage).

Of course, the risk in such approaches is very high, so investments from that bucket (to decrease that risk) are done mostly among industry veterans, people with strong experience from leading companies (i.e., someone who was Head of Product at Playtika creates a company with the previous Head of Marketing at Huuuge Games and Head of Monetisation of King). Once you do not have strong experience from well known gaming companies it is hard to enter this quarter.

One of reasons why investments of general VCs in gaming is at much lower level than it used to be (and very high % of that investment was in that quarter) is the fact that:

• this part is strongly correlated with investment sentiment (so improving data from gaming market should increase that investment in next quarters)
• many VCs moved out from B2C gaming (still being present in B2B gametech
• some of them focus on supporting gaming companies from their current portfolio (ie. for bridge rounds etc.).

Low risk – low potential

In that bucket, you can see two main groups:

• Angels
• Publishers

Angels

The group that is active in that bucket are Angels. Angels invest at a very early stage in people they know. Those Angels are not necessarily from the industry. They invest in people they know, people they believe in. Of course, investing at an early stage is very risky in general.

The reason I added it to this bucket is that here we have much smaller investments (than in bucket 1) in teams that can create really good experiences at better efficiency/lower cost/with much longer runway vs in the first bucket (teams that do not have nice offices, don’t go to expensive conferences, can work 14 hrs a day to achieve specific result).

Again, here we are talking about doing good, sometimes niche products that will not be the next Archero, Royal Match or Frozen City, although they can still be very profitable (at much smaller scale than in bucket 1).

Publishers

The 2nd group that is very active here are publishers. Of course publisher is not really an investor as it cares mostly only about specific project (less about a company as the whole), although it is very important part of financing in gaming.

Publishers focus here less on knowing the team, more on early metrics of the projects, initial experience of MVP. Avoiding in many cases categories that are very competitive, expensive to test/grow (i.e., RPG or Strategy).

The model is pretty simple here: you look at average metrics in the specific types of games and comparing it with early metrics of the project and early CPIs of the project you assess its potential – i.e., good games in Merge can have 45% D2 retention so once you have D2 35-40% at MVP stage, then it is really good signal for this project). As the guidance data from experience, previous projects, market is used (ie. retention data based on Google Play data for MMORPG)

Source: MMORPG Genre Report

At the attached chart, you’ll find ranges for Day 2 retention rates (where the install day is considered Day 1)

Low risk – high potential

In general, this is the best place to be. Everyone wants to be there. Of course, “easier said than done…” Often we are still talking about much lower potential than in bucket 1. It is just the ratio of potential to risk that can be really good.

I see the following groups in that bucket (with different types of deals):

• Publishers
• Specialized VCs
• General VCs
• Angels/Private Equity

Publishers

From my experience, publishers (rather those ones that think more long-term) generally try to enter that area trying one of the following types of discussions:

• As an extension of the previous bucket, but instead of just taking the MVP at an early stage, working with a developer “pro bono publico” for some time (i.e., for some exclusivity rights) until the project is much more mature and where its potential can be seen much better (either to kill it or invest much more than in bucket 2).
• Adding some additional layers of verification where there is some possibility to get to know deeper the teams (i.e., accelerators that could be done by a combination of publishers and investors, contests).
• Focusing on teams that deliver high quality projects in general (even paying some minimum guarantees for that)
• Focusing on projects that have not just early metrics but much deeper, economy-related metrics (ie. D30 retention, ARPPU, buyer conversion % etc.), where the publisher is getting more of a credit line for a developer (to scale Growth/UA activities).

General VCs

This bucket is becoming more and more common among conservative investors, especially among those investors who did a lot of investments in 2020 and 2021. Because of market sentiment (not necessarily because of the conditions of the investments), a lot of their investments are now worth much less than they were 2-3 years ago.

They need extremely good deals or to wait for market sentiment towards gaming to improve in order to make their LPs less worried about their money. Especially since a lot of funds have much lower money availability than they advertise externally. I mean, they gather money from LPs’ commitments gradually over many years, so now they sometimes have problems gathering promised commitments (especially after some deals that have much lower valuations now than at the moment the investment was done). For that reason, I see more and more VCs focusing more on the risk aspect than on the potential aspect (especially once they have exhausted a major share of their fund and are getting prepared for raising the next fund).

As access to capital is pretty low now (especially in mobile gaming), there are a lot of VCs looking for extremely good deals. So they sit on their money waiting for deals that either don’t exist or happen very rarely (and as those VCs are not part of the industry, they have a pretty low chance of observing such deals, so finally they haven’t had any investments in gaming for the last 2-3 years).

Additionally some of those VCs moved towards deals at later stage where specific minimum revenue is required, financial metrics play important role (so it is easier to asses potential and risk).

Specialized VCs

In some ways, it is an extension of the first bucket. In this case, we are talking about decreasing potential risk by one of the following methods:

• A specialized VC (sometimes doing it with a specialized angels) partners in the deal with someone that has more money/resources than them (i.e., specialized VCs/specialized angels doing a deal together with a general VC) so that they can do more (smaller) deals.
• A specialized VC at the moment of the deal has a pretty good idea/promise/or even agreement about who could be an investor at the next round (of course at a higher valuation) once specific milestones are achieved.

Angels, Specialized Angels, Private Equity

Here we are talking more about private equity and angels with bigger pockets (remembering that here deal values/investments are higher than in bucket 2). They leverage much higher flexibility in deal structure than VCs, and a much simpler approach towards due diligence, etc. Most often cases:

• Lower requirements for % of shares – i.e., the company does not need a lot of money to finalize the topic, so it does not want to sell 15-20% (as is often the case with VCs), so it prefers to sell 5% at a lower valuation than 15% at a higher valuation.
• Faster due diligence – a deal with a VC will have a higher valuation, but it can take a long time to finalize, so a company prefers to do it much faster (even with a lower valuation).
• More flexibility of investment options (i.e., instead of a $1M investment, $400k as an investment and $600k as a credit line at very good conditions or maybe just good credit line insted of investment).

High risk – low potential

No investor likes to be in this bucket, so no one goes there consciously. In my opinion, in gaming/mobile gaming, this bucket is taken by projects that are:

• copies of games that people know very well (ie. see revenue of Survivor io and games that were heavily copying it)

• done by teams that do not understand the complexity of the topic they are building (e.g., a team of 3 people who are building a game similar to Clash of Clans).
• built for very, very niche audiences or audiences that are extremely hard to find and acquire.

Additional view

Of course, this is just my subjective view on the investment market, where many things have been simplified. Here is my last advice for teams looking for investment:

General

• Spend some time trying to understand the potential and risks of your project.
• Focus on those investors that have a similar approach towards risk and potential as you/your team. (Gathering information about an investor’s previous investments will give you a lot of information about them.)
• Focus on those investors who really invest in the industry (you can check Dealroom and other sources to see if they have had any investments in the last 12-24 months.)
• Create business plan for your project. It is not that many investors will pay very high attention to it (at this stage “you can say what you like on paper.”), although such exercise will force you to count how much money you need. It is important to ask for enough money to get to the point you have some significant milestone (so you are in good position to make another investment round), although not too much (as giving away high % of shares at very early stage will block you from further development).

Risk

• Use your investment deck to show investors that the risk of investing in your project is lower than they might perceive. (This could include information about your team’s experience, whether those people have worked together in the past, and how you can do some things faster and cheaper than the market.) Again, whether we like it or not, many investors focus more on decreasing the risk than on maximizing the potential.
• Add information about potential risks to your deck. This may seem counterintuitive, but based on my discussions with investors, I believe that they fear “unknown unknowns” much more than “known unknowns.” Adding information about such risks gives you the ability to explain how you are going to deal with them.
• Try to understand investors’ fears. Some of them may not be articulated directly.
• Show your passion and persistence. One of the biggest fears of investors is that founders will abandon a project at some point (e.g., after facing obstacles or problems with the project or once their life changes).
• Be prepared to talk about optimistic, pessimistic, and realistic scenarios for your project.

Potential

• Include real potential in your project. Adding information that the mobile gaming market is a $93 billion USD market does not tell investors much about the potential of your project. What is a realistic market share that you can take? What is a realistic audience that can be your target? Strong information about this not only gives investors a good understanding of the potential, but it also decreases the perceived risk of the project (because it shows that you know what you are talking about).
• Show why you are better at capturing that potential than others in the market.
• Find the way to show/summarize potential of your project in the way it could be told in very short time (i.e sentence that describes the project and shows its uniqueness).