To: Kris Graft, Christian Nutt, Mike Rose, Patrick Miller
Subject: Let's talk about equity crowdfunding
It was a small story we ran just before GDC that kind of flew under the radar, so you'd all be forgiven (minus Kris, who authored the thing) for missing that a game just got funded through equity crowdfunding.
That is to say, rather than through a Kickstarter model where backers simply receive rewards (or the game itself) for giving money, backers of Train Fever are actual investors. They're gambling that the game will be a success by investing in exchange for a cut.
This isn't quite legal everywhere yet, but regardless, could this be the next big thing in crowdfunding? When our crowds become actual investors, is there any going back to Kickstarter? Or is this something else entirely?
I'll start the conversation myself.
Frank Cifaldi, News Director
I'm choosing to ignore the actual legalities or logistics behind equity crowdfunding and just assume that these are solvable issues. Assuming that's the case, and that there is nothing holding developers back from going this route, I think that this could be the future of crowdfunding.
The problem with Kickstarter as I see it is that it is refusing to evolve. It keeps holding onto this notion that it is purely a funding platform, as opposed to a store, which is not how either its project creators or their funders are using it. Rather than embracing its strength as a sort of preorder platform, it changes its rules and its messaging to try and force people to use it as it was intended: as a way for creative projects to be funded.
The problem is, it won't go all the way with that concept. Venture capitalists don't fund games in order to get a free T-shirt and a digital soundtrack, they fund them on the gamble that they might make some money back.
I think if you open up crowdfunding to this kind of model, users will naturally embrace it. Imagine the incentives you can offer: the first $500k funded could see a higher return on investment than the next $500k, and so on, causing those who believe in the project to contribute early. Contributors could choose to invest in a game not because they personally want to play it, but because they're willing to gamble that you've got the right idea.
I know I'd invest in more games if I had this option, and I suspect I'm not alone. What do you guys think?
Patrick Miller, Editor, Game Developer Magazine
First off, I shudder to think about how many disclaimers we'd have to attach to Gamasutra articles. We'd practically be TechCrunch for games with all the conflicts of interest going on.
That said, this sounds fascinating. Certainly, consumers already have a strong investment in advocating for their own personal tastes (see: the neverending console wars) -- this just turns that emotional investment into an actual investment. I'm not looking forward to seeing message boards rage about games once consumers become investors, though; "entitled gamer" has nothing on "entitled investor." But despite all that, I like the idea of having a reason to throw money at developers whose work I respect and believe in -- even if I don't personally want to play the games they make. That is, ultimately, what stops me from funding most neat crowdfunding projects I see -- I know I'm never going to play most of the games I want to fund, and I don't have enough money to just hand it over anyway. If I could make a few bucks out of it, however, it sounds like a win-win situation. After we're done with the initial boom, the con men, and the people-who-made-games-20-years-ago phases are done, anyway.
I do wonder how this would change the average consumer's perspective about the business side of game development -- particularly in regards to the recent SimCity debacle, for example. Would John and Jane Gamer be more understanding about always-on DRM if they stood to personally gain from higher profits? How about more aggressive monetization design in free-to-play games? Would consumers become more anti-consumer when it's their money at stake instead of some monolithic faceless corporation? I think they might. Also, right now we think of Kickstarter as a kind of pre-order store; how many people are left to buy the game (and thus, turn a profit for the investors) once the most enthusiastic consumers have already sunk their money in (and presumably gotten a copy of the game, at the least, for their trouble)?
Anyway, once this is legal in the US, let's get some people to crowd-invest in our acapella Genesis game music cover album.
Christian Nutt, features director
I'm actually pretty satisfied with the model and the transaction I get out of sites like Kickstarter and IndieGoGo. I understand this: I'm paying a bit more for something than I would normally so I can ensure that something exists. There have been missteps along the way, but I think we're all savvier about this now, and can understand the situation and what we get out of it, and choose accordingly.
I'm still just as likely to back a deserving project if I can sign up to do so as I ever was: I just have a better idea of what "deserving" means, and what I really want for my money.
Moving on: Patrick's comment about "entitled investors" brings up an interesting point. Generally, investors do have some say in how a company is run -- think about shareholders meetings and company boards. This is proportional to their level of investment, of course. All the same, it's there. Certainly an angel would get some say. Is that going to happen with platforms like Gambitious? (A glance at the site's FAQ didn't yield any information that states or even implies this.)
That opens up some questions about what accountability really is in this brave new world of investing.
The funny thing is, I'd probably be more likely to invest in a game that I don't want to play than one I did -- and this may say as much about my taste as anything. I'm not backing Richard Garriott's latest project for a variety of reasons, but I'd consider investing in it, for example. I think it seems likely to work out for him.
In the end I don't know that these two models are exclusive of one another -- that they can't coexist. Even Gambitious offers "perks," just like Kickstarter does. Maybe it will stop, and take a more "serious" turn post-relaunch, but until then, I can see room for many different approaches.
Mike Rose, UK editor
Totally agree with everything Frank says - it's a gamechanger for video game crowdfunding, and the potential next big step for the entire concept. I've already made my thoughts about Kickstarter fatigue very clear in recent months, and one of the reasons I think people are getting bored of Kickstarter is besides getting a copy of a game when it's all over, there's not really much more to it. It's essentially the same as pre-ordering a game, but with the added risk that you might not actually get anything at the end.
Throwing real-money investments into the mix makes it all exciting again in my mind. I personally think I'm pretty good at telling which titles are going to do well, and which are going to be cack, so the idea that I can risk some cash and literally put my money where my mouth is is way more interesting than Kickstarter. Hopefully we'll see more of this sort of stuff popping up over the course of this year, as I'd quite like to see it in motion a few times over before I really go all in on the concept.
Kris Graft, editor-in-chief
Patrick, we are to stay silent about our Sega Genesis a capella band -- we're supposed to be in stealth mode. Anyway...
When I reported on Train Fever last month, I wondered if equity crowdfunding really would reshape the future of crowdfunding. We had known about Gambitious, and that equity crowdfunding is U.S.-bound, but to see Urban Games achieve such a substantial amount of money via equity crowdfunding seemed to be a major boon for the format. And it is.
But will it supplant or substantially displace the current Kickstarter-style model? After talking to a few successful crowdfunders at GDC, I have my doubts. If a game developer, for example, has a pitch that is good enough to hit a crowdfunding goal on Kickstarter, why would they choose a crowdfunding route in which they would have to continually share a percentage of revenues with investors? Many of the developers who are using Kickstarter are trying to get away from investment models that involve a second or third party leeching money away from them. As a creator and as a business, it'd be better to give away some copies of your game, some soundtracks and some t-shirts to your backers, as opposed to a cut of the sales.
Kickstarter's CEO said last year the company had no plans to pursue equity crowdfunding. He believes Kickstarter has been disruptive mainly because of the removal of that investment component -- basically that monetary investment taints the system. "Whatever!" I thought at first. Everyone wants a bit more coin, right? With equity crowdfunding, you get to not only support a game you like, but also get a bit of money back -- and because the proposition for investment is more financially attractive, people are more motivated to give money, and when people are more motivated to give money, we could see more successfully-funded projects. Excellent!
But when you talk to the people who have worked directly in a Kickstarter or non-equity crowdfunded campaign, there really is a sort of purity in their enthusiasm -- they're motivated not by pressure to get a solid return for investors, but by making something they love for the people who love what the creator is creating. There are no financial expectations on the part of either the creator or the funder, just the expectation that there will be a good product in the end (that's hard enough of a goal, right?).
I'm not trying to take away from what Urban Games accomplished, at all. I actually think Train Fever looks great and I'm glad it's funded. And it's important to note that the studio said it may have gone with the more straightforward Kickstarter route if Urban were based in the U.S. or UK, where Kickstarter is available.
I don't see any reason why they can't both coexist, but after gaining more context on equity crowdfunding, I think pledge-based crowdfunding will continue to be the dominant format, as long as something (i.e. an influx of disappointing projects) doesn't happen that totally shatters this lovely creative idealism that serves as the basis for Kickstarter-style crowdfunding.
Patrick: See you at a capella practice, 6:30 p.m. sharp. Remember, tonight is Chemical Plant Zone.
Firstly, it's not legal in the US. Europe is just as big, obviously (well, bigger), but still, it dramatically decreases the audience.
Secondly, as near as I can tell, the one successful project (Train Fever) started its funding campaign on Sept 1st, and finally raised the money on March 21st.
So it took almost 7 months to do so. Apparently companies can extend the deadline almost perpetually.
1) As I understand it, the main reason KS has not embraced "its strengths as a pre-order platform" is that any hint that it is trying to be a pre-order platform turns it into a retailer in the eyes of the taxmen and its "products" liable to VAT/sales tax. In the UK, this would mean that 20% of the funds raised would need to be siphoned off for the tax man. For this reason, KS is likely petrified to change its positioning to avoid this potentially business model killing scenario.
2) One of the interesting corollary effects of having a mass of gamer investors is that they are far more likely to become vocal advocates of the game as they stand to ultimately benefit from the success of the title. One problem this raises is that games review readers and Metacritic will face a tough time identifying those reviewers with a vested interest. Not everyone will declare their interests. The clever equity crowdfunded companies will harness the gamer investor marketing potential at least. Everyone else will despair...
I thought the main reason that they haven't embraced the preorder platform thing, and have in fact repeatedly reminded everyone that they are not interested in being one, is because they want to be a platform for supporting creators. A patronage platform, not a storefront. These two things speak to different sets of priorities and they don't want to be distracted by something that's not part of their core vision.
I think everything that makes Kickstarter work would be lost if they decided to reposition themselves as a retailer. People expect reliable outcomes when they make a purchase at a retailer, which is something Kickstarter already catches flak for despite constant reminders to supporters that this is not how Kickstarter works.
As someone active on the stock market, this whole concept is incredibly appealing. All legislations aside, if there'd be an easy way to make this available to US folks, it would explode in growth.
Sites like angel.co did it successfully for more traditional businesses, however with games it's a different ballgame, it becomes a per-project investment.
If you're a gamer and want to get into micro investments, you don't want to manage too much stuff, but have an easy interface and invest into projects you understand (games). Similar for angels who are gamers - there simply isn't an easy way right now, aside from becoming a publisher.
I believe that World of Mass Development operates on similar principles. Couple of months ago WMD's first game Project C.A.R.S. was successfully funded to the tune of 4 million euros.
I love Kickstarter, the can't evolve into an investment platform until the law in the US changes. Also the are having success so why change the formula now. So far I have not been paying extra for projects than I would at retail, I am just paying earlier. In some cases I am paying much less. I just got Wasteland2 and Torment Tides of Numenera for $45 much less than $59.99 each at retail. In other cases I am just happy to help creators make their dream product. The project is the reward and I think there will always be a place for that.
My indie Kickstarter is located here, more fun and profitable than dealing with a Bargain Bin publisher in the 90's already...
Sure, but unlike a retail pre-order you cannot get your money back after it has been accepted by a succesfully funded KS project so you may be getting a discount but you are also bearing 100% of the risk that you might get a terrible quality game or even nothing at all if it goes badly wrong...
What happens when one of these crowd funded games ends up going broke (bad fiscal management) before the product is released? Or the product is horrible, nowhere near as advertised?
If the company goes under the investors lose their money, same as with KS. At least they can probably use the loss to offset any capital gains realised elsewhere, unlike with KS. In addition, if the game is successful they might even get a return on their investment, also unlike KS.
I actually blogged about something similar not so long ago after researching about Kickstarters "business" model. I was appalled at how many people knowingly contributed to projects which didn't offer any return and weren't even guaranteed to come to fruition. My ultimate conclusion was to each his own, but it also got me thinking about whether an equity crowdfunding model was actually feasible. At the time I was convinced it would work and like any idealist was sure that there would be no cons to such a model, that is until I read the article above and realised some of the pitfalls this model would have. I feel the biggest potential draw back to equity crowdfunding would be a return to the established publisher-developer relationship because you will have people who are only interested in getting a return on their investment and nothing else (this is the selling point of equity crowdfunding after all). I am in no way opposed to this model however but I think that anyone looking to take this route to funding their games should think long and hard about how they'll pitch their projects and focus those pitches more around potential investors love for the media (with the cash pay out being a bonus for believing in their idea) and not around the monetary aspect.
We ran a "Funded by Gamers" membership buy-in a few years ago on the Frontier 1859 Community to see if we could raise seed funding this way. Raffle tickets were not considered gambling. Thus each tier membership investment had from 1-3 raffle tickets, and the Grand Prize was $50k.
Membership investment packages:
Boomtown Member $25.00
- 3 Raffle Tickets
- 1 Homestead Certificate (A virtual Land Claim) good for Native American or Emigrant Settler
- 1 "bonus item" such as a Tool, Weapon, Significant Other NPC, or Large Trunk.
Concord Coach Member $10.00
- 2 Raffle Tickets
- 1 "bonus item" such as a Tool, Weapon, or other Loot Table Item.
- 1 Suitcase
Results
80.7% opted for the Boomtown Membership, 8.8% for Concord, and 10.5% for Trail Buster.
As fun as it was to test this theory with the community, it required 480,000 people each purchasing a $25.00 membership in order to fund the project to Beta.
(frontier1859.com/forum)
I think this is a fantastic turn for the industry. The money has always come from players. The fewer middlemen are paying for mall based retail or press junkets, the better for developers and players and everybody else.
Does any one know which SEC regulation/code currently prohibits equity crowdfunding?
P.S. @PatrickMiller, "We'd practically be TechCrunch for games..." What's wrong with that? With the state of the industry as it I think we could use a little more guidance.
My (Gambitious) partners and I are in this because we deem crowdfunding the greatest thing to happen to indies since Shareware in the 90′s. We also believe that both the donation and equity based model can and should co-exist and that there are huge audiences for both. That's why we offer both models on our platform. We want innovation, we want both established and new indies such as Urban Games to be able to reach their audience and get the funding they need.
We do however fear a problem that is just developing: the inevitable backlash toward crowdfunding done by inexperienced teams often asking for way too little money to actually reach the market – thus the very common 2nd or 3rd ask. Or teams having little or no idea what finishing a game and reaching the marketing on their target platform really means. We truly believe that the equity based model is the answer to that problem. The equity model has a more rigorous submission process and "forces" the
developers to actually think through their proposition and present a well-thought out business plan to people who have been looking at game pitches and investment proposals for years. (our management team, advisory board and the investor types.)
We fear we will lose the opportunity for crowdfunding for games by the end of 2013 if we don’t offer something more professional and more discerning to give gamers and investor types a better chance to see something for their money.
There is more to the problem you describe then you think. There are and have been KSers that are not genuine in their nature.. Either being done by people that have under estimated their project or are taking advantage of said market. Its this abuse I fear most, once you get bit hard you tend to stay away. If such a market opened up where I can fund a project and get a return back on my investment I would hope the screening process would be better then KSers.
"Kickstarter's CEO said last year the company had no plans to pursue equity crowdfunding. He believes Kickstarter has been disruptive mainly because of the removal of that investment component -- basically that monetary investment taints the system."
Personally, I would agree with this statement. Only highly influential or wealthy people can afford to pitch in a significant portion of funding for an equity crowdfunded project, while expecting a significantly appreciable return on investment; just about anyone can afford to give someone $10 to help them buy equipment to get a community farm going, when they otherwise would receive no business, corporate, or government assistance for such a vital community service. (Or at least not without strings attached...)
"When you talk to the people who have worked directly in a Kickstarter or non-equity crowdfunded campaign, there really is a sort of purity in their enthusiasm -- they're motivated not by pressure to get a solid return for investors, but by making something they love for the people who love what the creator is creating. There are no financial expectations on the part of either the creator or the funder, just the expectation that there will be a good product in the end."
Succinctly stated! Crowdfunding is supposed to be about sparking a twinkle in other people's eyes, not sparking a twinkle in your own eyes, so to speak...
I'm glad to hear Kickstarter's CEO said that. While I assume most of us are capitalists at heart, there is something wonderful about helping and watching some one else's passion project grow.
Do you have a source for your quote? I would like to read it myself.
Secondly, as near as I can tell, the one successful project (Train Fever) started its funding campaign on Sept 1st, and finally raised the money on March 21st.
So it took almost 7 months to do so. Apparently companies can extend the deadline almost perpetually.
1) As I understand it, the main reason KS has not embraced "its strengths as a pre-order platform" is that any hint that it is trying to be a pre-order platform turns it into a retailer in the eyes of the taxmen and its "products" liable to VAT/sales tax. In the UK, this would mean that 20% of the funds raised would need to be siphoned off for the tax man. For this reason, KS is likely petrified to change its positioning to avoid this potentially business model killing scenario.
2) One of the interesting corollary effects of having a mass of gamer investors is that they are far more likely to become vocal advocates of the game as they stand to ultimately benefit from the success of the title. One problem this raises is that games review readers and Metacritic will face a tough time identifying those reviewers with a vested interest. Not everyone will declare their interests. The clever equity crowdfunded companies will harness the gamer investor marketing potential at least. Everyone else will despair...
I think everything that makes Kickstarter work would be lost if they decided to reposition themselves as a retailer. People expect reliable outcomes when they make a purchase at a retailer, which is something Kickstarter already catches flak for despite constant reminders to supporters that this is not how Kickstarter works.
Sites like angel.co did it successfully for more traditional businesses, however with games it's a different ballgame, it becomes a per-project investment.
If you're a gamer and want to get into micro investments, you don't want to manage too much stuff, but have an easy interface and invest into projects you understand (games). Similar for angels who are gamers - there simply isn't an easy way right now, aside from becoming a publisher.
My indie Kickstarter is located here, more fun and profitable than dealing with a Bargain Bin publisher in the 90's already...
http://www.kickstarter.com/projects/zenfar/brigands-and-barbarians-hd
Membership investment packages:
Boomtown Member $25.00
- 3 Raffle Tickets
- 1 Homestead Certificate (A virtual Land Claim) good for Native American or Emigrant Settler
- 1 "bonus item" such as a Tool, Weapon, Significant Other NPC, or Large Trunk.
Concord Coach Member $10.00
- 2 Raffle Tickets
- 1 "bonus item" such as a Tool, Weapon, or other Loot Table Item.
- 1 Suitcase
Trail Buster $5.00
-1 Raffle Ticket
-1 Tool or Weapon
-1 Backpack
Results
80.7% opted for the Boomtown Membership, 8.8% for Concord, and 10.5% for Trail Buster.
As fun as it was to test this theory with the community, it required 480,000 people each purchasing a $25.00 membership in order to fund the project to Beta.
(frontier1859.com/forum)
P.S. @PatrickMiller, "We'd practically be TechCrunch for games..." What's wrong with that? With the state of the industry as it I think we could use a little more guidance.
This might be the answer you are looking for, if not it might help you get started.
http://www.washingtonpost.com/business/on-small-business/crowdfund ing-delays-sec
-silence-spark-hostility-on-capitol-hill/2013/04/08/655715d2-a090-11e2- 9c03-6952
ff305f35_story.html
We do however fear a problem that is just developing: the inevitable backlash toward crowdfunding done by inexperienced teams often asking for way too little money to actually reach the market – thus the very common 2nd or 3rd ask. Or teams having little or no idea what finishing a game and reaching the marketing on their target platform really means. We truly believe that the equity based model is the answer to that problem. The equity model has a more rigorous submission process and "forces" the
developers to actually think through their proposition and present a well-thought out business plan to people who have been looking at game pitches and investment proposals for years. (our management team, advisory board and the investor types.)
We fear we will lose the opportunity for crowdfunding for games by the end of 2013 if we don’t offer something more professional and more discerning to give gamers and investor types a better chance to see something for their money.
Personally, I would agree with this statement. Only highly influential or wealthy people can afford to pitch in a significant portion of funding for an equity crowdfunded project, while expecting a significantly appreciable return on investment; just about anyone can afford to give someone $10 to help them buy equipment to get a community farm going, when they otherwise would receive no business, corporate, or government assistance for such a vital community service. (Or at least not without strings attached...)
"When you talk to the people who have worked directly in a Kickstarter or non-equity crowdfunded campaign, there really is a sort of purity in their enthusiasm -- they're motivated not by pressure to get a solid return for investors, but by making something they love for the people who love what the creator is creating. There are no financial expectations on the part of either the creator or the funder, just the expectation that there will be a good product in the end."
Succinctly stated! Crowdfunding is supposed to be about sparking a twinkle in other people's eyes, not sparking a twinkle in your own eyes, so to speak...
Do you have a source for your quote? I would like to read it myself.
Shareholder meeting.
SHAREHOLDER MEETING!
(Spoiler Alert: Crowdfunders don't get to attend shareholder meetings unless they own actual stock...)