Ask Mary-Margaret:
Staying in the Black

Contents

Methods of Financing Profit Margins Funding Late Projects

"I'm talking to a publisher about funding and publishing my project, but are there other methods of financing I should consider for my project?" -Creatively Managing in Costa Mesa

I could write a book on this topic, but here are the basics. There are a lot of reasons to go with a typical "Development and Publication" deal over other forms of financing. In addition to bringing the money to the table and taking on virtually all of the financial risk, the publisher also provides manufacturing, marketing and sales, customer and technical support, and frequently QA resources. The typical "Dev and Pub" is milestone-based, where the publisher pays you based on the delivery and approval of a set number of features on a specific delivery date. On the negative side, you're constantly at risk of "cancellation for convenience" (I've never heard of a publisher not insisting on that clause in the contract), which means that any day of the week, the publisher can just kill the project and leave you scrambling for a new source of revenue. You'll also have to deal with change requests, which I believe are the major reason (along with poor initial scheduling) that projects run late. And, of course, the publisher keeps the lion's share of the profits!

But "Dev and Pub" deals aren't the only way to finance a project. Completion bond financing, which is traditionally what the film industry uses to finance movies, is an alternative, but only if you're an established developer with a good professional reputation and track record. In this form of financing, an insurance company "bonds" the production, guaranteeing the payments on delivery of milestones. The publisher pays the completion bond at the end of the production, plus interest and fees on the bond. The advantage of this, for the publisher, is not having to pay for the game until production is completed, and for the developer, there's the benefits of having a third party involved to help control change requests and guarantee timely payment.

Then there are even more speculative forms of financing. They basically fall into two categories: individual or "angel" investors, and institutional investors (also known as venture capitalists.) Something you may want to look for are company incubators, where an investment firm will provide office space, support services, and other perks in addition to initial financing. In general, though, these options are only available for financing entire companies, not individual projects.

In any case, you have to keep in mind that all of these folks are looking for a substantial return on investment. In particular, VC companies look to finance start-ups that plan to be acquired or go public, and they want a big return on their money within five or so years. You'll need to prove your profitability to them even after they agree to fund you, possibly on a weekly basis. Managing the money source (the publisher, investor, bonder, etc.) is probably a full-time job for someone in your group… don't assume you can run the project, the company, and investor relations all by yourself!

And don't be afraid to get professional help with this. A good business agent, lawyer, investment broker, or completion bond expert is incredibly valuable in these situations. Unless you're very, very experienced at deal-making, particularly deals that involve equity, I wouldn't set up a development deal or an investment deal without substantial professional help.

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Profit Margins