Crowdfunding

What is crowdfunding?

Crowdfunding refers to the process of raising finance from the public typically through an online platform that will charge a commission based on the amount raised. Almost all types of crowdfunding involve the creator of a project (or the company seeking the finance) creating an online “campaign” page on the chosen platform which sets out details including a description of their project or business, how funds will be used, timing of when products (such as a game) will be completed and background on the individuals behind the project.
 

What are the main types of crowdfunding?

There are currently broadly three types of crowdfunding (albeit see also Initial Coin Offerings below):

  • Donation-based crowdfunding (e.g. Kickstarter, indiegogo) – this is the most popular form of crowdfunding where the individual providing the finance to the creator of a project is technically donating its money to the project by way of a gift.  No contract is formed between the project creator and the project “backer”. However, it has become almost standard for projects to offer rewards to their backers such that despite the legal position, the platforms generally offer a pre-order system where the backers only provide finance in the expectation of receiving their reward. For games studios, the rewards typically range from a downloadable version of the game itself to DLC, exclusive art books, posters or other physical merchandise to the chance for a backer to have something they submit incorporated into the game in some way (e.g. having an NPC named after them).
  • Equity crowdfunding (e.g. Crowdcube, Seedrs) – in this form of crowdfunding, a company seeking to raise finance offers shares in itself to potential investors at a set price. This arrangement involves a much greater degree of formality and paperwork for all involved including investment agreements between the company and its investors, disclosure of business plans and budgets and long-form terms and conditions between all parties including the platform. Compared to donation-based crowdfunding, the audience is typically much more focussed on the financial development of the company and the chances of a sale of its shares to a third party at a higher valuation within a number of years.
  • Debt crowdfunding (e.g. Funding Circle) – debt crowdfunding is similar to equity crowdfunding because the people providing the finance are looking for a return on their investment. In this case, as a loan, the company would be required to pay interest out to the investor over a defined period before repaying the loan at the end.

It is also worth mentioning Fig, which is a US based crowdfunding platform that focuses solely on video games. Fig combines rewards based crowdfunding with equity crowdfunding. Rather than investing in the studio, backers invest in a Fig entity and receive Fig shares that relate to a particular game title. The Fig entity then pays distributions based on Fig's right to the title's sales receipts under its licence agreement with the studio.
 

How can crowdfunding help your studio and what are the main considerations?

Crowdfunding poses particular issues to think about including the following:

  • Organisation and planning – despite the informal looking nature of many platforms and campaigns, the reality is that the most successful fundraisings are achieved by the companies that invest the most time and energy planning and implementing their crowdfunding campaign and product.  Many companies now plan their campaigns six months in advance and for a games company having something more than concept art or a design document is frequently required.
  • Marketing – as a crowdfunding campaign relies on its exposure to an audience that needs to be brought to the webpage, an effective marketing strategy should form a critical part of the planning process. Discovery of the campaign through the online platform will invariably be limited so many companies now invest money advertising their campaign on relevant sites and affiliate links.
  • Public nature – the online and open nature of the platforms means that although a successful fundraising can bring in positive publicity and attention, the details of a negative fundraising will be forever freely accessible on the internet. This “public trial” of your business or game idea raises the stakes of any fundraising campaign which can add, not insignificantly, to the stress of a crowdfunding process.
  • Managing your backers – whichever type of platform you use, any backer of your project will become a stakeholder in your project. It is therefore important not to underestimate the importance of managing the relationship with your stakeholders both during the campaign and after.
  • Is your game suitable? – certain games lend themselves more easily than others to crowdfunding. For example, a game that is based on established IP (e.g. a previously successful game, a film or a stage play) that has an existing fan base.
     

Current trends in crowdfunding

Is crowdfunding for games in decline?
Despite still being a popular method of fundraising, it seems that crowdfunding has been experiencing a decline in the games industry. Just over $9.4m was pledged on Kickstarter in the first half of 2017, which is less than half of the $19.98m raised during the same period in 2015. While there have been some huge fundraising successes on Kickstarter and other similar platforms during this time, there has also been a number of high-profile cases of games reaching their crowdfunding targets and subsequently either being cancelled or delayed. For this reason the trust and confidence of would-be backers has taken a knock and it may be wise to consider whether you are likely to hit your investment target using this fundraising method.

Initial coin offerings
In 2017 certain studios have successfully raised funding for their game through ‘initial coin offerings’ (ICOs). These are made possible by blockchain technologies such as Bitcoin (sometimes referred to as ‘cryptocurrencies’). For the uninitiatedthese are essentially public, peer-to-peer ledgers in which every transaction is stored on the ledger. As the ledger is hosted the world over by those who use it, rather than on one central server, it is very difficult to dispute ownership evidenced by the ledger.  

An ICO is a scheme to raise funds for a project via a contract written onto a blockchain ledger. The way it works is that investors send cryptocurrency to the contract address, and in exchange the contract automatically generates and sends ‘tokens’ back to the investor’s address. The tokens usually function as a form of currency which can be used within the project (e.g. for in-game payments), the idea being that if the project becomes popular, there will be a higher demand for the tokens and their value will rise accordingly.  

The appeal for those seeking investment is clear, as ICOs can be set up with relatively little formality and have in some cases raised significant amounts from speculative investors, who are themselves able to invest with few barriers to entry. However, this form of crowdfunding is largely unregulated in most countries, and it is unclear how ICOs will be impacted by regulation. Depending on how they are structured, ICOs may well already fall foul of the UK’s financial services and securities regulations, and we expect to hear more on this topic from the Financial Conduct Authority sooner rather than later.
 

Where can I find out more?

Feel free to contact Charles Leveque, Alan Moss or Mark Phillips for further information about crowdfunding.

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