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How Game Development Companies Are Different (Part 1 - Funding)

When I tell people I work with game developers and publishers, I am often asked “what do you do for them?” Another way to think about this question might be “how are they different than other startups?”

For starters, they are capitalized differently. Like most traditional startups, most game studios don’t set out with a bunch of cash. Sure, some do (we all know that one producer who got a huge lump of cash from a successful first person shooter at his old studio and then set out on his or her own), but most don’t.

A regular startup might bootstrap until they have a minimum viable product, or even just a pitch-able one, then seek out additional funding through angel investment, VCs or otherwise. Most independent game studios are too financially risky for traditional angels and VCs to take much interest (publishers, hardware and middleware companies can be another story). For a lot of developers, this means bootstrapping all the way up to the release of the game.

But a game studio is still a business, and businesses still have expenses.

Like other startups, studio founders often fund their endeavors with cash from another job. Funding a game with money from a side job means the founder needs to ensure that their employment arrangement at their regular job does not prevent moonlighting. They also need to make sure that their new company – and not their employer – will own all the intellectual property for the game. Lots of employers will require creatives, designers and programmers to sign an invention assignment and a non-compete. Running afoul of these agreements could put the future of the new studio in jeopardy.

Unlike other startups, new studios often seek out more creative sources of money. Sometimes, they will go for traditional crowdfunding like Kickstarter or Indiegogo. Other times they will release an unfinished version of the product in order to get some money in the door (like a playable beta, Early Access, etc.). Other times, they will take pre-orders for the game and use the funds to finish development.

Getting money from crowdfunding is great, except that the backers are generally entitled to something in return. For example, if a gamedev promises t-shirts in three sizes as rewards at the $25 level, backers who gave $25 better be able to get a t-shirt in any of those sizes. This means additional costs for the fledgling studio. Even if the cost of printing and shipping those rewards exceeds the money they generate, the studio still has to follow through. Otherwise, there could be liability for false advertising.

Likewise, taking pre-orders comes with a similar false advertising risk (think of all the buzz around No Man’s Sky last year).

Selling an unfinished game has its own risks. Will the game be polished enough to attract real interest? Will players overlook certain unfinished details or a small scope of play? From the legal side, selling an early version of the game could impact potential future negotiations with publishers or distributors. If the game is so buggy it actually causes damage or security risks, there could be liability without an appropriate disclaimer.

In short, creativity comes with risk. Game studios should seek out specific service providers (like lawyers and consultants) who understand these risks and are able to help find the best solutions.

Author: Brandon J. Huffman