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:

• 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.

• Pledge threshold – on most crowdfunding platforms you are required to reach your specified threshold of pledges and, if you do not, you may not be able to receive any of the funding. 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

Where can I find out more?

Feel free to contact Mark Phillips or Edward Lane for further information about crowdfunding.

Specialist Finance Providers / Velocity Capital

What is velocity capital?

This is a type of funding that allows mobile game studios that have games generating revenues to borrow against those revenues in order to utilise the revenues they have earned before they are paid out by the App Store.

How can velocity capital benefit your studio?<b></b>

Velocity capital is a cash flow tool which means you will only have to wait 7 days or less instead of 30 to 60 days to receive the revenues earned from your mobile game.

Certain providers also offer other services such as advice on a studio’s user acquisition strategy, which may be an additional benefit.

How does it work?

As the typical App Store payment terms are 30 to 60 days, velocity capital providers will verify the revenue data produced by a mobile game and pay out to the owner of that game within a shorter period (usually within 7 days). The payment usually takes the form of a loan. The game revenues, once paid out by the App Store, will be used to repay the loan and any interest or coupon element.

What are the key terms of the funding?

Typically, the velocity capital provider will often charge a fixed fee of around 5% (this rate may vary) of the revenues to be paid by the App Store.