Recent legislation in the USA means that investing in games studios is about to take off.
By Patrick Vuleta on November 28, 2013 at 11:21 am
Ever wanted to own a games studio? Now you can! Almost. And you can thank Obama.
In 2012, the Americans signed into law the JOBS Act, or Jumpstart Our Business Startups. Now, at the end of 2013, it’s almost operational. In a nutshell, it allows business to crowdfund their investment capital. This is as crazy as it sounds.
Well, not crazy—it’s widely supported by the tech sector. But it ramps Kickstarter up to eleven and will be one of the next big things for the games industry in 2014. (You read that here first—I checked.)
Games developers are poor
Building a games studio is hard work. Not only do you have the expenses of any new business (and sometimes more, with the hardware and software costs), but you also face the prospect of not being able to independently raise funds.
You don’t have a product. You have a publisher. You live from game to game, relying on a publisher to give you money to develop only what they approve.
Kickstarter helped break the pattern, a little. It gave developers an avenue to raise a bit of cash themselves for individual projects. However, Kickstarter still has its shortcomings. Unless you’re a celebrity intent on inflicting your latest clickfest human psyche experiment on everyone, you’ve a good chance of having the fundraiser fail.
And you’re still going from game to game. With development costs as they are, Kickstarter won’t give you all the funds needed to make a successful game, much less a successful studio.
JOBS relaxes investment rules
One way to escape this hand to mouth conundrum is to raise investment capital and upscale. However, options are restricted. Investment rules are strict, and limit small business investment to a small number of sophisticated investors. You can’t just take out an advertisement looking for investment capital, because rules prohibit advertising to unaccredited investors (which is anyone earning under $200,000 a year).
JOBS will relax the rules on who can invest, how many can invest, and where businesses can seek investment. Even as an unaccredited investor, you’ll be able to go to a website like crowdfunder.com (the Kickstarter equivalent for equity investments) and just buy a stake in a games studio.
This is sure to gain traction in the games industry. Unlike Kickstarter, there are no project goals. The studio is not beholden to use your money for any particular purpose. What you get in return—as with any investment, is the chance for a financial return. And perhaps extra information on how the studio’s latest game is coming along. Any sane business would jump at the chance to raise public funds in this way without the fun run rigmarole of the existing investment rules.
Understandably, there are concerns of fraud. Kickstarter already led to concerns that by relaxing the traditional publisher oversight, people will lose money on games that don’t go anywhere. The usual answer is that Kickstarter backers are not investors—they’re customers making a pre-order. If they do happen to receive a sucky game at the end, well it’s no different to those poor schmucks who pre-ordered Aliens: Colonial Marines.
That obviously changes with investment crowdfunding. You’re no longer giving money in exchange for a future product. You’re making an actual investment, with all the accompanying risk. You could lose money.
JOBS caps the amount of money you can invest each year to 5% of your annual income, limiting the potential loss. Still, concerns remain. Even sophisticated venture capitalists lose money on most start-ups they fund, and they apply a bit more rigour than the average Kickstarter backer. With few safeguards other than the yearly cap, anyone looking to invest in a games studio has to be prepared to lose money.
However, JOBS is rightly receiving almost universal praise for opening small business investment up to the hoi polloi, even down to the unwashed console-owning peasants. JOBS will allow independent studios to seek funding from sources other than publishers or Kickstarter’s hand to mouth donation drives.
This is a game changer for independent studios looking to raise funds. 98% of businesses that apply for venture capitalist investment are turned down. Right now, raising money is hard. Conversely, an estimated market of $300 billion is held by unaccredited investors in America alone. With established experience in making crowd funding work, the games industry is well positioned to take advantage of these opportunities.