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Equity crowdfunding: When your players become  actual  investors

Equity crowdfunding: When your players become actual investors Exclusive

April 9, 2013 | By Frank Cifaldi




From: Frank Cifaldi

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.


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