What VC firms like The Games Fund are looking for in studios right now

Getting a game or studio funded now is incredibly difficult. Though new studios are popping up left and right, many developers are reporting that publishers and investors are either closing their wallets or only offering money if they can receive an outlandishly large return. The brutal tide of layoffs has also shifted the supply/demand dynamics between the two parties—those who control the investment can be picky because they have an abundance of great prospective studios to shop from.

That's an observation made by The Games Fund co-founder and managing partner Ilia Eremeev, who we caught up with at DICE 2024. He and his fellow co-founder and managing partner Maria Kochmola were discussing their view of the investing landscape. He noted they're in a unique position to still invest, because the fund has already raised capital that's in need of a home.

But what kinds of games does The Games Fund think can deliver its return on investment? Is the firm just interested in another mythical live-service unicorn that can print money forever and make everyone billionaires?

I mean, maybe. We all would like that. But for Eremeev and Kochmola, who cut their teeth at MY.GAMES before setting out on their own, there's money to be made by being on the ground floor of new studios. But while they're eager to share the wealth, they want developers to know that efficiency and franchise potential are what they see as the keys to long-term profits.

Related:Our Industry Needs a Change

The Games Fund is looking for regular releases and franchise development

Eremeev and Kochmola explained that when they're looking at funding a studio, they are interested in strong projects but expect to see a return on investment as the company grows over a long period of time. "When we invest $1 million, you would expect the company to reach over $100 million valuation at some point," Eremeev said. He sees a world where investing $1 million in a studio and only seeing a return of $5 million in revenue would be acceptable—but that studio would hopefully go on to earn $10 million, $30 million, and so on with its next games.

The Games Fund is currently eyeing games with budgets ranging from $5 million to $15 million. These "double A" games have "the most chance to survive," and fit within The Games Fund's relatively smaller scope, the pair said.

About half of The Games Fund's capital is currently allocated toward free-to-play mobile games, with the remaining going toward PC, console, and cross-platform titles. Kochmola explained that for premium games in the latter group, the Fund is looking to back games with a strong intellectual property "that can be utilized for a long time."

Eremeev said many of their colleagues in venture capital funding "don't understand" the financial pacing of premium game companies, preferring to support free-to-play titles with predictable revenue streams. "Premium game companies have spikes in revenue [followed by] declines," he observed. "Public companies don't like that."

The Games Fund's solution, he said, is to press prospective studio founders on whether they can build multiple lines of game production and have games released on a more regular schedule. Instead of focusing on just one game at a time, he hopes a prospective fundee would be able to dedicate resources to one game while spinning up development on another, then quickly bring resources from the first game to the latter project as the first one heads out the door, etc. etc.

That model does require a company to have what one might call a "team-and-a-half" on hand, which introduces its own level of risk in operations. But the hope is that if a company is more regularly delivering launch-driven sales spikes, its revenue can become consistent and draw additional returns and investment as time goes on.

Ghost Ship Games' Deep Rock Galactic franchise is one that appealed to the two fund managers—that studio released the successful co-op shooter Deep Rock Galactic in 2020, and then published Deep Rock Galactic Survivors this year in partnership with Funday Games.

The games industry is still a good investment

Kochmola guesses that investors will take renewed interest in the video game industry early next year, and that the conditions are currently strong for "early stage" companies. Eremeev did his best to explain how the "interconnected" investment market has led to this withdrawal, and that while the post-COVID economic downturn and inflation have factored into it, the withdrawal of web3 (blockchain) investors from the market (because most of the investments from those firms did not pay off) had the partial side effect of downplaying investor enthusiasm in video games.

"As soon as we see more M&As, more IPOs, more successful IPOs, and more big late stage deal, it will gradually affect early stage financing," he observed. In essence, because investors are always looking over each other's shoulders to understand the market, they'll be waiting for someone else to make the big jump before diving back in.

It's to The Games Fund's credit that they want to be the ones making the jump—Eremeev said his team is looking for "underdogs and founders that have been overlooked by other investors." But while he and Kochmola are looking for tomorrow's breakout game developer, they are still working in a funding system that prioritizes safety over innovation.

But for now, they—and other like-minded funders—do seem to recognize the value of good old-fashioned premium game development and have resources for developers on pitching projects and producing budgets. And hopefully the seeds they plant now will breed success for many developers in the years ahead.