We wrote a piece recently for UKIE about growing and funding a studio and thought we would share it more widely here:
What do I need to build a successful business?
A strong game studio is built on strategy, execution, a good team and the right kind of funding. It’s great to dream big, but it needs to be backed up with a plan, and a way to execute it. Setting milestones, targets and hiring plans (if needs be) are a good start. Then think about your revenue aspirations and what costs need to go in to the business to get there. This last point ultimately means funding, which can be a mix of debt and equity.
How do I grow if I don’t have big investors?
There’s no doubt that to grow a studio significantly, you need funding. Some can self fund, others require VC funding and then there is the middle group, which need some funding from angels, friends, family etc. Not every studio needs a large amount, it depends how big your plans are. It all starts with a solid business plan, financial model, targets and strategy. Undoubtedly right now is not ideal timing for fund raising, but that’s no reason not to try. But a common misconception is that equity funding is always the answer, even though there are other options available.
What are the different types of finance available?
Most companies, especially outside the games world have a mix of finance and a healthy capital structure. There’s no doubt that part of your business should be funded with equity and other parts that should be financed by debt. Equity investors put money in to your studio in exchange for a share of your business, whereas debt is money lent to a business in exchange for a fee, to be repaid at a point in time in the future.
How do I know if debt or equity is right for my studio?
Equity is more appropriate for technology build, creative, development, systems and operational overheads. These are the things that have big potential future values and are perceived to be risky but it’s hard to predict and time, so equity investors are prepared to take a long term view on your vision and want to back you to deliver. They know the risks and recognise their investment could go to zero.
Debt is more appropriate for short term projects where the visibility on money spent and money coming back is good. A loan is made to a company, in exchange for an interest fee, which rewards the finance provider for giving you their money. It can last anywhere from 1 month to 5 years, although it’s worth knowing the differences as the longer term loans can be hard to repay without revenues.
Why would I think about a loan?
A loan is perfect for when you are due revenues or another form of money and need to bridge a cashflow gap but just need funding for a few months. Or when you know the unit economics of what the money is going to be spent on ie. the payback period will be relatively quick (namely user acquisition), and you need the money to fund it.
When would it be a good idea to take a loan?
There are many answers to this, but in the games world, UA is the best example. Once your game has launched, your studio will test its marketing channels, seeking that magical point where users generate more in revenues than it cost you to acquire them. At that point you should open the UA taps and spend more. This is where debt makes huge sense. Why? The revenues are predictable, the payback period is relatively short and why give away equity in your whole company when it can be funded with a loan for 3-6 months at a time? Other times when it makes sense is when you want early access to your VGTR and digital revenues.
How do I get in touch and find out more?
Please feel free to reach out to us directly at email@example.com, you can also find us on twitter @justadd_sugar.
Sugar provides finance to the games industry to help studios manage cashflow and scale up quickly.