The gaming industry continues to see phenomenal growth – from console systems to social games. The 12 million subscribers of Blizzard’s World of Warcraft – once the giant of gaming – now seems small compared to the 80 million Farmville players. Farmville’s maker, Zynga was recently estimated to be worth $5 billion – a valuation that appears to bode well for investors and for startups. But are games good buys? Can gaming startups attract the investment they need?
Gaming industry consultant Nicholas Lovell recently wrote a post on the blog Gamasutra where he suggested “Four Reasons Why VCs Won’t Fund Game Companies.” Lovell’s arguments are as follows
1. VCs don’t invest in projects
Lovell contends that game developers are good at creating (and even at pitching) projects, but that VCs don’t necessarily care what makes a good project – in other words, what makes a good game. “Investors care about businesses; developers show them projects.”
2. Investors want to see a running business, not an idea
3. VCs want sustainable businesses
Lowell writes, “Traditional games developers are really difficult for any investor to fund. They look like quite late-stage businesses: they may have hundreds of staff, millions in turnover and a proven track record. But fundamentally, they are always just one deal away from bankruptcy. They look like startups from a risk perspective but are like late stage investments from a reward perspective.”
4. History sucks
The history of the gaming industry is full of failed businesses, and as such VCs find the investment there to be risky.
Arguably, investors’ opinions might be changing, particularly given the rapidly increasing popularity of social games. While traditional console games and MMORPGs require significant investment and substantial development time before a game is “live,” social games are, arguably, “lighter.” With the growth in virtual goods and virtual currency, even “free” social games, as Farmville and the like have demonstrated, can become vastly popular and very profitable.
