A Meeting Of The Minds: Game Companies And The VCs That Fund Them

In 2009, a total of around $600.5 million was raised by game startups — that’s down 36% from the year previous, but is still a Lot Of Money. And venture capitalists remain bullish on the future of game funding.

How do you get a piece of that action? What’s it like to work with a venture capital firm? What do VCs look for in an investment?

The MIT Enterprise Forum’s New England Games SiG and the New England Venture Capital Association co-hosted an event last night titled “A Meeting Of The Minds: Game Companies And The VCs That Fund Them” to help answer those questions. Here’s my summary…

Who Led Last Night’s Discussion?

On the game company side…

  • Jim Crowley (CEO of Turbine)
  • Nabeel Hyatt (CEO of Conduit Labs)
  • Rob Seaver (CEO of Vivox)

On the VC side…

  • Alex Finkelstein (Spark Capital)
  • Dayna Grayson (North Bridge Venture Partners)
  • Austin Westerling (Charles River Ventures)

Wade Roush of Xconomy moderated the event.

Why Are VCs Interested In Games?

Traditionally, games has been considered a hit-driven business. VCs are not normally interested in hit-driven businesses. So, why are they interested in games?

According to the panel, their interest stems from two exciting trends:

  • Games –and game mechanics — are at the heart of what’s happening now in the economy, in the culture, online, everywhere
  • Differentiated distribution networks that bring customer acquisition costs down to nil

Those two trends, coupled with passionate and intellectually honest entrepreneurs, create opportunities for a successful sale or IPO, which is ultimately what VCs are after.

What Kind Of Games Are VCs Interested In?

PC and console games do not interest VCs. Based on what was said last night, they aren’t actually interested in any particular game genre, either.

Instead, they’re interested in (and have invested in)…

  • Gaming infrastructure – examples: Vivox (voice chat for games); LiveGamer (virtual goods); OfferPal (virtual currency monetization)
  • Games that solve meaningful problems – example: 8d World (teaches English language through gaming)
  • Those who can produce games quickly and cheaply, evaluate results, gain traction – example: OMGpop
  • Non-game applications that borrow game dynamics to create a more compelling experience – example: foursquare
  • Social games — which, Grayson noted, aren’t “social” as much as viral and reduce acquisition costs dramatically

What Do VCs Look For In A Business?

  • Intellectual honesty, passion, and realism
  • Have you identified a significant and under-served segment?
  • Do you have a strategy for serving this segment in a unique, compelling, and defensible way?
  • Do you have traction already? Have you started to build the product and acquire customers?
  • Is there a realistic chance for a significant exit through IPO or acquisition? “Significant” last night was defined as $100 million or more.

What Should Entrepreneurs Look For In VCs?

Find someone…

  • you’re personally compatible with
  • who understands your business
  • and has solid credentials and references

You’re going to be working very closely with this person for 5-7 years, so you need to be comfortable with them on a personal and professional level.

How To Attract & Work With VCs?

  • Understand they’re investing in a business, not a game
  • Don’t oversell; realistically explain the pros/cons of the business
  • Know your P&L, your roadmap & milestones, your cost structure
  • Do your research: Know the VC you’re selling to!
  • Iterate your presentation to make it stronger each time you present

More Insights

For more insights in 140 characters or less be sure to check out Twitter coverage of the event at hashtag #VCGameOn

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