Note: This article is now out of date (an update has been scheduled)
A large number of people ask which is the best method of funding entertainment software development. As is so often the case all the possibilities are equally valid and only you can actually decide which is best for your project/company. The following is an overview of the pros and cons of each method of funding.
Budget or full price.
If you are talking about doing a budget game then your only option is to self fund. Budget publishers almost never pay up front development fees. If you are looking at full price then there are several options open to you.
Self funding
Entertainment software cost a lot to develop. If you have the money (and the guts to risk it) then the rewards can be much greater if you fund development yourself. If your product really is good then publishers will queue up to sign it and the financial returns will be greater because you took all the risk. Of course if the game isn’t great then you may end up with a finished product that no one will sign or may be forced to accept a lower financial return in order to try and recoup your investment.
Publisher funding
If you can’t (or wont) fund it yourself then publisher funding is an option but only if you have a proven industry track record. Why is experience so important? Risk reduction. Developing games isn’t easy. More specifically finishing the final 10% of a game is very very tough. One of the publisher’s main concerns is to reduce the risk of project failure and they do this by sticking with teams that have proven industry experience. That doesn’t mean there are no new teams in the industry but those teams are made up of people who have gained the necessary experience at an existing developer/publisher before setting out on their own.
If you and your team have the necessary experience, have a good demo and a good presentation in place there is a chance that a publisher may sign up your game. Negotiating such a deal typically takes from 3 months to a year.
The pros of publisher funding are that they take the financial risk. The cons are that they will almost certainly want to own your game and maybe even take part of your company in return for the cash. They will also take the lions share of the profits, typically somewhere in the region of 75-80%. The funding will most likely depend on you meeting agreed milestones and failure to do so may result in them cancelling the project or withholding payment and your company going bankrupt.
Venture Capital funding
Very difficult to come by following the melt down in tech/internet stocks, VC funding is investment into your company. In return for an equity stake in your company they will provide agreed funding for your project.
The pros are that you have agreed funding up front (or possibly just funding to get to an agreed demo stage). This allows you to keep greater creative control of the game and get a better deal when you sign with a publisher. The cons are that it is even more time consuming to get VC funding agreed than publisher funding. They will almost certainly take a large slice of the company, may retain the rights to kick you out of your company if things go wrong, will require you to pay them interest (so you have to borrow more money from them to pay back to them as interest), you have to pay their legal fees and a host of other possible restrictions and conditions.
The important point to note with VC funding is that they are investing in your company, rather than a single game. They will want to see a well defined business plan for steady growth beyond your first project and a clear exit point for themselves. Typically they would seek for a developer to float on the stock market or sell the company within 5 years so that they can take their profit on the deal.
- In either of the last two cases you will need a really good demo and a fair amount of paperwork before you even start talking to them. You will need (or must have someone in your team that has) industry experience and in the case of VCs will need to show proven company/management skills. You will need to fund the development of the demo and the preparation of paper work because you wont even be able to start talking to a publisher or VC without them. Once these items are complete you will then need to survive and keep working for anything from three months to whenever while they decide.
Completion Bond funding
This is the funding model used in the film industry, which a number of publishers have been investigating as a possible method of funding entertainment software development. It allows the publisher to defer their financial risk, the developer to secure funding for a project and the CB company to make a profit via a return on investment plus an agreed amount when the game is completed.
A publisher interested in an entertainment software title will sign a deal stating that they will publish or distribute the product on completion. With this guarantee that the product will get to market the developer secures a completion bond which will allow them to fund the development to completion. In some cases the deal give the CB finance company the rights (or obligation) to take over the project if it does not meet required deadlines in order to ensure it is completed. On completion the publisher pays the CB company back their investment, plus an agreed profit.
The pros are that the publisher has no financial exposure until the project is completed, the developer has a secure source of funding and the CB company gets a guaranteed return on their investment. Of course all of this is subject to the projects being successfully completed. The cons are that it is very difficult and time consuming to secure CB funding. The funding model is also rather inflexible, which can have a serious (negative) impact on development if design or technology changes become necessary during development. Unlike the film industry the entertainment software industry is still in a state of rapid technology development. This makes even the best planned project subject to alteration, which in turn requires a very flexible and quick reacting funding model.
