SOMETHING YOU MAY NOT ALREADY KNOW
Among other things, Hall has taken a unique approach to encouraging angel investors to invest in video games. He puts together panels of up to ten (10) investors who listen to pitches from up to ten (10) entrepreneurs. This approach helps avoid investors being distracted, as they are at less focused events, by competing proposals from companies from outside the video games industry that have business models with which the investors are much more familiar.
Q: This is Rob Hassett with www.tellmesomethingidontalreadyknow.com. Today I’m going to be interviewing Hall Martin, who is the director of the game funding forum in Austin, Texas. Hall, I understand you got in to the gaming industry in Austin, Texas and you realized that there was a problem raising money in the industry.
A: Well recently in the last four or five years, I’ve been watching the gaming industry grow, especially in Austin. We’re now the third largest gaming community in the country for development, but have seen just very little attraction to investors for the gaming community for various reasons.
Q: And you decided to try to do something about that, didn’t you?
A: That’s right. Well I noticed that gaming deals would come to our Angel network, the Central Texas Angel Network, but they would never really get traction, not even in to the follow up phase. And I found that Angel investors just had a hard time understanding the business models and the technology, and the space in general for gaming communities, and so I put together a funding form that’s dedicated just to gamers, and it’s only gaming companies that come and pitch. And I find investors who are interested in funding the title as opposed to the studio, more the movie model of investing. I find those people. We bring them out and have them sit on the panel and listen to the deals that these gamers would pitch. And it created a little bit more of an even playing field, because now they’re comparing one gamer against another as compared to comparing a gamer against a life-science company or a software product or a consumer product company.
Q: I imagine one of the problems is the prospective investors are not themselves gamers.
A: Most are not. Most have family members or know people that use the games, buy the games. And so they see it a lot, but they’re not immersed in it themselves, and that gives us another issue for bringing investors in to the gaming world is that they’re not that familiar with it from outside of the investment world.
Q: So how many of these programs have you staged so far?
A: Well so far one, but it went so well we’re about to stage another one in Dallas, and then a month later we’re going to be staging one in Atlanta. And then we got calls from Boston and Seattle to stage them there. So we’re seeing a circuit around the U.S. starting to form where there’s a strong contingent of gaming companies to bring this funding forum, because it doesn’t appear anybody else is doing this right now so it’s quite an opportunity.
Q: We really appreciate your helping us here in Atlanta. You’re going to be staging this forum in conjunction with our SIEGE Conference scheduled for October 7 thru 9, 2011. The Forum will take place on October 6. More info is available at http://www.siegecon.net/SIEGE2011/ .
A: That’s right, yeah. We’re looking forward to coming to Atlanta. We’ve gotten some very good deals signing up so far to pitch, and investors who are also interested. So the elements are there in the community; it’s just a matter of pulling them together I believe.
Q: About how many people are you going to expect to have on the panel?
A: We always look for ten analysts and ten entrepreneurs pitching, and we can have more panelists, but the ten entrepreneurs is really the limit because it takes about three hours to go through ten pitches, where each one gets ten minutes to pitch and a five minute Q&A, and that’s about as much as most investors can take. And in addition to the investors on the panel, I sometimes put industry experts, people who can help ask the more detailed questions about the technology or about the market or about the strategy. Because even with investors who are interested in the space, it’s a very fast moving space. Things happen or change very quickly in this world, which is another reason why it’s been a challenge for investors to get their arms around it, because if you’re code base is more than 18 months old, you’re pretty well out of date, and that’s just too fast for the investors to keep up.
Q: Now the Angels that are going to be on the panel, will most of them actually not have invested in games before and not necessarily be that familiar with games?
A: Some have and some have not. Some are new. Like they say, it’s an interesting phase when you look at it from a distance because you see how much activity is going on and how many people are involved. You know there’s good opportunities in there and so it does attract new investors from time to time who want to kind of be a part of that but don’t know quite where to begin.
Q: Is there any charge for the investors to be involved?
A: Oh, no. There’s no charge for the investors to participate. All we ask the investors and the panelists to do is if an entrepreneur asks for feedback on their presentation that they give them a good evaluation or a meaningful evaluation about what they can do to improve. So we ask them to give feedback and that’s about it. We’re mostly looking for people that are interested in writing checks, and so those who are interested and find a deal, they’ve got quite a bit of work in front of them doing their own due diligence before they write the checks, so we feel like that’s enough to do.
Q: Understood. And now with respect to entrepreneurs , there is a screening process as I understand it.
A: That’s right. Anybody can send in an application and send us their one page exec summary, but if we choose it to be one of the ten finalists, we have them sign up in a package called AngelSoft. That’s the standard packet that all Angel groups use and it’s a good way to capture all the information about a deal in to a one page exec summary. And also having the deal with AngelSoft does a lot for us in that we can then later syndicate that deal on to formal Angel groups if we can find a lead investor and get some investor traction . Whenever I send something to a formal Angel group, the first question they ask me is is there any interest in this deal; is there any lead investor in it? If the answer is yes, well then it goes to their short list and it goes through very quickly. So that’s kind of the function this serves is finding the lead investor, getting the pitch ready, and getting some traction behind it with the investment community.
Q: One thing you mentioned to me was that certain game models are more interesting to investors right now, or more likely to do well in the market. At least for entrepreneurs, they should be focused on certain areas, and one of them you mentioned to me was Facebook.
A: That’s right. Where you deploy a game changes very rapidly. Four years ago, you deployed a game on the Sony console or the X-Box. And then two years ago, they were deploying games on the mobile phone, and they still do all of that. But if you’re looking at the cutting edge business model, or go to market strategy, today they deploy it on social networks, in particular Facebook. That’s where games are being deployed today. And that’s another reason why investors have a little bit of a challenge with this space.
Q: Now on Facebook, how is the money made? I mean normally they don’t sell the games. There’s nothing paid for the games on Facebook, or did I miss that? From the ones I’ve seen there was no charge.
A: Well typically there is the premium model. What’s on Facebook is what brings people in to the game, and then there’s an upsell or a sell of virtual goods or avatars or what have you that come later. So the deployment on Facebook is the channel in to the market or in to the product line, and once you’re inside, if you find engagement with that, later there’s an opportunity to charge the user for that interaction . So you’re right, most of them are free on Facebook, and it’s true of many games they’re free whether on the PC or on the mobile phone, or even on Facebook. The initial entry is at no charge, and then once you’re inside, there’s an upsell.
Q: I know that one of the popular games on Facebook … I don’t know if it’s still popular, I imagine it is … is Texas Hold’em, the poker game. And as I recall, you get a certain small number of chips to start the play each day, but you can pay for more if you want. I guess that’s the way to make some money on it.
A: Yeah, that’s another upsell opportunity is to give people a little bit to get themselves going, but if they want to play more or play at higher dollar stakes then they have to start paying for that, and so it’s a way of starting them off easy but then moving up the curve if that’s what the user wants to do.
Q: Now what about the iPhone? Is that sort of passé now or is that still a very big opportunity for games?
A: I think it’s still an opportunity for games. I think there’s still quite a bit coming out on it. The question is that there’s so many games on the iPhone. If you go to iTunes and look, there’s hundreds or thousands, or by now tens of thousands, of games out there. So how do you stand out is the big issue? How do you get traction with the segment in the market place to get people using your game?
Q: Exactly. As I recall on the iPhone, at least the games I’ve seen that are popular, they charge about $0.99 for a copy of the game to download it.
A: That’s right. Yeah, $0.99 seems to be the magic number in the iPhone world, and then other games have other ways of monetizing it as far as selling avatars or selling chips like in Texas Hold’em, selling or being able to buy points in order to be able to play at higher levels in games. You get a different experience. These are all things that people use to try to monetize their games.
Q: Hall, you know in Georgia we have an income tax credit for anyone who spends at least $500,000 producing a game, and it’s 20% if you don’t put in a logo for the State of Georgia, and 30% if you will put a logo in your game relating to the State of Georgia.
A: I see.
Q: Now I don’t know if these games would run that much money. Do you have any idea what the general cost would be of a game for Facebook?
A: They’re probably a little bit less than that. The most common request for funding I get is someone who has put a little bit of their own time in to it, six months or a year, and have built the basics of the game, but it’s just not quite there. So the most common request I get is a 150 to 250K raise in order to complete the product and get it in to the market place with marketing. You can spend your time on the software and get it pretty far along, but eventually, you have to invest the dollars to get the marketing going and really move it in to the space. And the sweet spot is about 150 to 250K to get that done. So if you were to monetize all the efforts that go in to it, you could probably do a very substantial game for three to four hundred thousand dollars at this point. And so $500,000, you could have a very nice game if you were able to put that much money in to it, of course.
Q: So we need to try to get the legislature to drop that requirement, that threshold, a little bit or a lot.
A: Well the interesting thing is that as business models evolve and business processes become more efficient, it costs less to start up a company. Back in the 90s, people used to stand up and ask for $5,000,000 in Angels groups because they wanted to start a web company. Well back then you had to go buy the computers and pay American salaries and code in HTML, and it was just very expensive to start something back then. You had to build your own server farms in those times. In the post-2000 era, those same people were standing up and asking for $500,000 because that’s what it costs to use bandwidth on demand and you are now outsourcing your product development, and the cost of starting a software company or web site have dropped dramatically, and that continues to devolve downwards. What was $500,000 2, 3, 4 and 5, is now probably about 300, $250,000 to do the same thing because you’re able to get things at a much lower price, server farms and hosting systems, and you don’t buy computers anymore, you just lease them. And therefore, it’s cheaper to start a company. So I think it is a moving target as it devolves downward.
Q: Hall, you mentioned to me, and you sort of alluded to it just now, but you mentioned to me on Friday when we talked earlier, that the entrepreneurs should develop a prototype of their game, or at least a working model of their game, before they even come to the program, before they even seek investors.
A: That’s right. Investors in this base are going to expect the entrepreneur to put their own time and effort in to creating the product. It may not be final or complete or the full vision, but it’s working, it’s doing things, it’s able to show the experience and potentially monetize it a little bit. And then they expect family and friends’ money to be used to do a little bit of marketing to try and get it out there. And then Angel money is really for acceleration. So those who stand to pitch in our funding panels, typically more than half of them have a product and a little bit of revenue and they stand a real good chance of getting follow up meetings and investments. And three or four guys are very close to coming out with something, but they don’t have revenue but sometimes they get interest, and those who have just a PowerPoint slide and nothing developed really don’t get any interest at all. You really have to show up something beyond just an idea, and a working product is really the next step after the idea, and then revenue is the next step after that. And my recommendation is to have all three when you show up to an investor. And it doesn’t have to be the final software and it doesn’t have to be great revenue, but to show that some people will pay for it and will be happy with it is a tremendous check mark to have on your list when you go to an investor.
Q: Understood. And you know you had explained to me, and you had alluded to it earlier today, how the revenue model works for investors in this space, and it’s different from what we normally see. It’s not that they would own part of the company. They’re going to get a percentage of the gross you mentioned as the normal model.
A: There’s an evolution of the Angel model where Angels traditionally put money in and take a piece of equity, so when that company’s sold in the three to five year time frame out, well then they get their money back. Well if you look at it over the last ten years, that three to five year payback has really turned in to more like an eight to ten year payback, given the way the economy and the markets have gone. So some investors would like to have their money back a little bit faster, and so they’ve come up with what’s called revenue based funding that works very well in the gaming industry. And in this scenario an entrepreneur takes an infusion of cash and the investor takes a percent of revenue, typically one to five per cent, in years two, three and four. It doesn’t come right away, but there’s a time when it starts, and then you share the revenues with the investor, and then the investor gets paid back a lot faster. And quite often that works well in the gaming industry because people are more funding the titles than the studio or the company, and there’s no intention of selling off a studio ever, and so the idea is you’re just going to sell off the title. Well that sits better with the revenue-based funding model because we’re all aligned, both the investor and the entrepreneur on trying to grow the revenues of that title itself. So revenue-based funding is a new trend that fits very well with the gaming model.
Q: That’s one to five per cent of the revenue you said in years two, three and four?
A: Typically yes, and it’s either capped on the maximum amount of return or on the duration of it. And if you cap both of them then it’s just a straight loan, but if you cap one but leave the other open, then it starts to look a little bit more like equity where there’s a bit of a risk reward in there for the investor. And so I’ve seen models on all three where it’s just a straight loan, and then some where you just get money from two to six, years two, three, four, five, and six. And then there’s some that just say you’ll get money up to this percent and it’s over. And therefore it’s a little bit more of a risk reward in that case and it looks more like equity in that. But in any event, you’re getting the money back faster because it’s starting sooner and you’re not waiting for the final exit. And in many gaming deals there really is no exit. There’s no selling the studio; there’s no selling the title. It’s just simply a revenue generator. So revenue-based funding is the new model. There’s even a group called the Revenue Capital Association that’s come out that people are joining to learn more about how this model works.
Q: If someone is interested in participating in the program on October 6, what should they do?
A: I’d be glad for them to contact me. I’m actually taking the applications and running the screening process and will actually be at the event to run it. So the best way is to have them contact me. My e-mail is mailto:director@txenetworks.com. Just send me an e-mail. If you’re an entrepreneur, I’m looking for your executive summary. If you’re an investor, I’m looking for your interests; what have you invested in before? What might be a good fit here to make sure this is going to be a good experience for the investor as well. But we’re looking for both. We’ve got quite a few people already signing up as entrepreneurs, and the panel is shaping up very nicely. We also look for some industry experts and we’ve got several people already signed up for that as well, but we’d love to have more.
Q: Well, that sounds great Hall. And what is your web site if people want to learn more about what you’re doing?
A: It’s www.txenetworks.com. And there’s a tab there called “Funding Forums” and you can click on that and read more about what the funding forum process is all about . And we’re basically a web-based portal that promotes networking, mentoring and funding of startup and early stage companies with an emphasis on the funding side. Whenever we survey our readership, the number one thing that comes up is funding. And so we wanted to focus on that by doing open funding forums to try to draw more people in to it, and get more entrepreneurs experience. And the nice thing about a funding forum is that if you’re an entrepreneur but you’re not ready to pitch, well you just come in the back and you get to watch, so it’s a great place for mentorship as well. You get to see other people pitch and you get to see how they pitch, and you can learn a lot through that experience to see if you’re ready for doing that on the next round.
Q: Hall, thanks a lot for speaking with me today and thanks for helping us here in Atlanta to try to find a way to get funding for the video game industry. It has been a pleasure talking to you.
A: Thanks so much for having me, and I’m looking forward to seeing you in Atlanta on October 6.