Ask Mary-Margaret: Staying in the Black

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Ask Mary-Margaret: Staying in the Black
By Mary-Margaret Ipser and Ellen Guon Beeman
Gamasutra
May 22, 2000
URL: http://www.gamasutra.com/features/20000522/askmm_01.htm

"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.

What kind of profit margins do game developers expect? Can a small company really be profitable? -Wannabe Profitable in Portland

Yes and no. If you're talking straight "Dev and Pub" deals, well, I've never seen a developer be genuinely and comfortably profitable on just that kind of game deals. Usually they are pretty much living from milestone to milestone, without much money in the company war chest in case of problems. But it doesn't have to be that way. One development studio that I really respect does "Dev and Pubs" as well as business-to-business web and multimedia projects to offset the risks of each type of work, and has investment money as well. I think they've come up with the best way of achieving stability that I've ever seen.

The reality is that most dedicated game studios don't make a substantial profit until they've been purchased by a larger company. Not many games actually "earn out" and pay royalties or make a profit within their publisher-funded milestone payments, which is why acquisition is usually the ultimate goal of a small developer.

Another goal of a small developer is to be independently funded, so they can do their own original titles without the oversight of a publisher's external producer. Once a developer has enough of a track record to get investment funding, or has built up a war chest from previous projects, they can take on the risks of building speculative projects and the commensurately greater rewards. I have heard of developers being very successful by completing a project entirely and then selling the distribution rights either to a single worldwide publisher or individually to smaller publishers around the world, using a distribution broker.

In any case, if you're a small developer, you really do have to plan for the worst. Most games that go into design or production phase get cancelled before they're even published. You have to be ready to survive that kind of downturn.

Paul Kohler, one of the best business agents in the game industry, believes that a developer can't really achieve financial stability until they have at least three simultaneous projects in development. I agree with Paul on this… it's very hard to maintain stability if you're a small studio with only one or two projects.

"I'm concerned about what'll happen to my development studio's finances if our "Dev and Pub" project runs late. How do developers with schedule overruns continue to fund their projects?" -Bean Counting in Boston

I hate to say it, but this situation isn't uncommon for most publishers and developers. In an ideal world, you can feel like you can be honest with your publisher, explain how the overrun occurred, and see if they'll be reasonable and increase your budget. Be prepared for some fast talking, though, and I'd have a LOT of documentation on hand to support your claims, particularly if the reason for the cost overrun was due to a lot of undocumented change orders (requests for modifications in the product) from the publisher. If that's the case, and the producer was the reason for the change orders, he or she may not really be your best ally in this situation. You may need to go above that person to someone with more authority, who wasn't directly responsible for the changes. A business agent is invaluable in these kinds of negotiations.

A technique that works sometimes is the developer trading royalty points for cash. But the publisher will be hesitant to do this, since it takes away from the developer's long-term incentive to make a profitable product. It's worth trying, though.

Your most likely solution will be to get the publisher to scale back their expectations. You'll deliver less of a product for the same budget. This is almost always what happens in this situation.

Obviously, none of these solutions are going to be easy to implement. The easiest way to deal with this problem is not to get into budgetary trouble in the first place. The main thing to make sure is that your initial budget and schedule are accurate from the start. I also recommend structuring your project schedule with priorities and "wish lists" so that you know where to cut when the time comes. One of our industry friends refers to this as "drawing the dotted lines"! Get the critical work done early in the schedule, and add the extra evil minions and their unique special effects weapons last.

My suggestions for avoiding this situation…

Don't accept bad deals, ever. If you don't have enough money to do the project at the beginning, it's not going to get better later.
Make sure your schedule has adequate room for minor publisher revisions, and contingency money for when things go wrong (and they will.)
Be very wary of change requests. Don't do major change requests without formal renegotiation with the publisher. If the changes are undocumented, you'll have an uphill battle later to prove that the change requests were the reason for the schedule overrun. You basically can't over-document something like this! This is another reason why I'm a big fan of completion bonding, because it requires formal review and the bonding company's approval for change requests that will increase the budget.
Work with competent, ethical people and stable publishing companies if at all possible.
Write the contract as though the wonderful, talented, incredibly competent producer you've known for years is about to quit and be replaced by the Antichrist. It's a sad fact of this business that producers change jobs, and you need to prepare for that. A good contract is your only protection against a bad producer.

Ellen likes to say that "Ideas are easy, production is hard." I'm going to change that to "Ideas are easy, production is hard, and balancing the finances of a development studio is really, really hard!" It can be done, but it isn't easy.

Mary Margaret Ipser is one of the leading recruiters in the game business, with successful placements ranging from entry level to Vice Presidents, and is the founder of Mary-Margaret.Com.

Ellen Guon Beeman designed and/or produced over thirty titles for top game companies including Microsoft and Electronic Arts, prior to joining Mary-Margaret.Com as a recruiter.

Got a game industry-related question for "Ask Mary-Margaret"? Send it to AskMMC@Mary-Margaret.Com!