We talk to startups and investors, you get the value.
Investments in video games are expensive and risky. No one can say for sure whether a game will generate profit or not, even if it's made by prominent professionals. However, with the help of predictive modelling, you can reduce the risk of failure and measure marketing effectiveness with more than 90% accuracy. Such tools are a part of Mail.Ru Game Ventures (MRGV) ecosystem and ‘smart money’. They increase your chances of success by helping to save time and money. Maria Kochmola, Investment Director of MRGV, told Startup Jedi how a gaming company can attract initial funding, what the difference between MRGV and classic venture capital is and which mistakes gaming developers make most often.
We talk to startups and investors, you get the value.
MRGV is a strategic investment division of MY.GAMES (international gaming brand named Mail.ru Group). It was founded in April 2017 and has already invested in 24 gaming startups. 70% of its portfolio is owned by the developers from CIS countries. Most of them are from Russia, four studios are based in Belarus and there are also some companies from Finland, Estonia and Germany.
The terms and conditions of the investment are determined case by case and depend on the stage of the development process, time before a planned release date, current revenue, geography and burn rate (speed of spending money). A studio from the Russian region has a much lower burn rate than a team from San Francisco, therefore they need less money for the development. However, it is still better to pay more for an experienced team with a promising project sometimes. In 2020 MRGV is focusing on deals with gaming studios from the USA, EU and UK.
We divide investments for development and marketing support. The budget for game promotion is several times higher than the development budget so it is important to find the right funding scheme to meet the interests of both parties.
Our strategy doesn’t have a strict deadline for exits. There’s no rush and we are ready to work with companies until certain results are achieved. On the other hand, we have expectations of payback period and revenue growth. We hope that in 2–3 years the startup will reach a turnover of 1 million dollars and self-sufficiency. If it hasn’t happened yet for a given period of time but we see the potential, we are ready to continue financing the company.
We don’t require a sophisticated exit strategy and don’t plan to buy a small share, capitalize and sell it at a higher price either. Our scenario is different: we invest in early-stage projects and provide the company with the resources to grow and succeed. And then we’d rather consolidate it with MY.GAMES than sell it.
We mainly focus on game companies that have already launched their products but still require budget and/or expertise for global scale. We are also interested in game studios at their early stages of development with ready-made MVP. We have over 15 years of experience working in game development and operation so we understand well how to assist companies to grow. We consider primarily mobile companies but we also have PC and console developers in our portfolio. Additionally, we pay attention to ‘near-game’ projects, platforms, cloud and streaming services.
One of our investments is a young company which had only a prototype and six months to go until soft launch. They were working on the project in a new genre of interactive storytelling. We saw the potential in the founders and in the chosen direction. Then the niche was actively growing and wasn’t filled with competitors back then. Our plans coincided with the developers’ vision. Although the risk was relatively serious, we decided to carry out such an investment experiment. This strategy is not typical for investors, especially in the gaming sector.
Interactive storytelling (text quests and visual novel games) is a form of digital entertainment in which the player determines the plot. Each scenario depends on the user’s choice. His/her answers define the future of the story. Besides, the same method was used in interactive episodes of the series “Black Mirror” on Netflix.
We are ready to collaborate with founders whose projects are in the prototype phase in case they have an innovative approach in selecting a genre, technology or product ideas. For example, when a developer transfers successful gaming mechanics to mobile platforms that have already proven their validity on other platforms. However in highly competitive niches we first look at the metrics.
Our pipeline consists mostly of the companies that we managed to find by ourselves. We explain to the founders why it is better to accelerate growth through investment when the company is financially stable. The fundamental mistake of startups is to start searching for money when they need it desperately. This is a dangerous strategy: investors consider such startups to be a high-risk asset. Therefore it will be difficult for founders to drive a smart bargain and get a high valuation of the company.
And, conversely, a startup has a much better chance to conduct a deal on more favorable conditions when it operates strategically, has no urgent need for money and no intense pressure. In this case, money is needed not for survival but to accelerate growth and scale. Those who grow faster are most likely to be the first entrants who capture the market and become more successful.
Game developers apply to our fund not only for money but also for the expertise. They seek marketing support and networking as well as crave a partnership with a big, strategic company as a necessary basis for growth.
Each MRGV portfolio studio has access to all MY.GAMES resources: marketing expertise, financial leverage, game design and strategic support. As for marketing, it’s be hard for developers to raise a few million dollars a month to promote a mobile project, whereas we can provide such funds.
We finance marketing on favourable terms, help to buy traffic and establish expertise inside the companies. We train marketers, instruct them how to purchase traffic, provide tools and teach to test hypotheses. We help to find creative solutions, optimize accounts in AppStore and Google Play.
Our analysts make predictions about future outcomes on the basis of the users’ first steps in the game. This allows you to scale your games quickly from the launch. As a result, to make a decision you don’t have to wait for the traffic to pay off. Even on the first days after the purchase of traffic we present with accuracy above 90% what will happen in six months. If our predictive models show that the studio has payback potential, the resources for its growth are not limited. By the way, the term “potential” is not something abstract at the level of intuition or impressions. It is an economic forecast confirmed by figures, tests and analytics. Choosing the right marketing strategy mobile games can scale up very quickly.
MY.GAMES has an editorial team of game developers with many years of experience in different gaming genres. They evaluate plans, recommend what can be improved in games, how to prioritize and analyze the features, what is relevant in the market, and how to distinguish from the competitors.
We also solve many HR issues: we help to find specialists from junior to senior, help to conduct interviews and form motivational packages for employees.
Though we are from Russia, our interests are global, as are the ambitions of portfolio companies. There are no limits to gaming business, because games are a product for the whole world.
Despite the general availability of capital, the investment market of the video game industry in Russia is very young. There are only a handful of funds and strategists, like MY.GAMES, who professionally invest in video games. Classic venture capital firms and funds are apprehensive about gaming projects as they lack the necessary expertise to assess risks and potential. While the studios, in their turn, prefer to work with the individuals who share the spirit of game development and understand this business. I am sure that the main MRGV’s advantage is that we ourselves are from this video game environment and continue to create and develop hit titles.
Foreign companies are also interested in working with MRGV. I haven’t encountered any negative attitude to investments from Russia, though some Russian investors may be treated with caution at times. But we are not among them. We are not just a fund, but a global public company, whose shares are traded on the London Stock Exchange. We publish our reports on a regular basis. Our enterprise is as transparent and open as possible. Our games — Warface, Hustle Castle, War Robots — have a multimillion audience and are well-known in the world.
Belarus has many highly qualified specialists in the IT sphere, including gaming industry. For example, there are many successful gaming companies in Minsk such as Wargaming, SayGames, Playgendary, Melsoft Games, Vizor, Belka Games and others. What’s more, after the issue of Decree №8 in 2017 the IT boom began in the country. In particular, many gaming companies became residents of the HTP. One of the studios we are now negotiating with has even moved from Russia to Minsk to join the HTP and work in its jurisdiction. Belarus is currently one of the most attractive regions for the development of the IT sphere in terms of business conditions and tax burden.
In July 2018, we publicly announced the deal with the Belarusian company SWAG MASHA. For 2020 we have more Belarusian partners, but we don’t disclose details yet. We prefer to announce deals when companies achieve the results. When our partners release their games, we will definitely tell you about them.
Nowadays a studio has a possibility of investments even in such a narrow market as game development. There are capital funds that finance either console or PC projects, while others invest solely in casual mobile games. At the same time, you can also find ‘omnivorous’ funds with multiple investment capabilities.
In general, investors pay more attention to cloud gaming services, mobile and console games. Among the world market trends, consolidation is gaining momentum. This means that behind successful titles there are most often big players from business intelligence who provide their smaller partners with budget, technology and expertise. Therefore indie developers are finding it increasingly difficult to compete.
One more market trend in the gaming industry is competition for content. A number of platforms have their own gaming stores and they are all searching for content producers. So this is a good time for game developers.
The segment of mobile gaming continues growing. It has already occupied more than 50% of the market, and its share is constantly increasing.
1. Coding matters but remember that you are doing business first of all
The main criteria we look at are how well the business model is designed, whether the team has core competencies and understanding how business works. Apparently, product is a major part of the game industry; it should be entertaining and high-quality. But let’s not forget about its marketing and distribution channels, as well as technical infrastructure, legal and financial management of a startup itself. The main goal of any company is to make money. That’s why it is very harmful to business when a team shifts its focus on game development, forgetting about the rest.
2. Add technology if you really need it
Sometimes studios use such technologies as blockchain, VR, and AI in their games. However they often do that not for the benefit of the players or business metrics. Developers add technologies simply to make their products more attractive to investors. Iш this case both our company and most other funds will be very skeptical about such projects.
3. Have a focus
Developer companies occasionally work on 5–10 titles at once. Nevertheless it’s better to show an investor one promising and elaborated MVP than a lot but of bad quality.
Similarly there are cases when founders are involved in more than one business. It’s a bad sign, because the founder will not pay due attention to your common business. What’s more he/she may share internal knowledge development with a third-party project.
Single product companies may also lack focusing. The founders often don’t have a coherent strategy and ask investors what to do next. As a rule, we don’t work with such companies either because a founder and a management team are responsible for strategy development and business vision.
4. Conduct A/B testing
Hypothesis testing is vital for all games. Almost any creative solution can be digitized and tested for its impact on the project’s budget and profit. It is worth testing as many hypotheses as possible, but you have to understand why you are doing it and what exactly you want to test.