How to fund your Game Development businessPublished on 26th April 2019 2019-04-26T12:07:53+00:00 - Last update on 1st April 2020 2020-04-01T13:02:32+00:00
The UK has more than 2,000 companies whose business is creating games. Gaming has now been recognised as so important to the UK economy that it even has a special tax concession, Video Games Tax Relief (VGTR), for qualifying games businesses.
New technology like VR / AR, e-sports and Artificial Intelligence is opening up even more possibilities - it seems as though the only limits are your imagination - and your ability to secure the funding you need.
“There’s money to be made in building the next big game - but you can’t expect to do it all yourself - or do it on an ordinary laptop. Things have moved on. It can be a big budget business, and you need to find the finance to complete.”
Make no mistake - the costs can be substantial. Of course, a simple Android or iOS game can be created by a single person with a basic laptop, and the only cost will be the time involved. But, at the other end of the market, a full production multi-console and PC game to the highest production values could take a team of developers and artists a decade to take from concept to shipping. Their skills and time will cost tens of millions of pounds.
Conventional funding is suited for conventional businesses – where products are sold and income comes in almost from the day they open their doors. The games industry is very different because you need innovative solutions that can help you get through months, or even years, of development time.
It means that getting expert help is essential if you are to secure the funding you need.
“Here’s a tip - make the right alliances. Getting expertise on your side can be a big asset for your business.”
What are the funding requirements you need to answer?
You will most likely plan your first titles to have a development time of only a few months.
You need funding to keep you afloat and pay staff and suppliers until your first title is ready to ship. But your games business will generate no income until your game find players, plus you will need to pay for publicity, marketing and distribution.
Fortunately, there are solutions for all these costs. At Rangewell, we have found that the key to successfully funding your start-up is by identifying the right type of funding for each purpose.
“It's no good just trying to borrow money. You need the right kind of finance for each funding need you want to cover. It means paying less at the end of the day.”
The cost of setting up a new games creation business
Starting a new games business is never easy. Raising finance for any start-up is a challenge - lenders prefer to lend to businesses which are established and can demonstrate their profitability with a year or two of profitable accounts.
However, there are lenders who will help start-ups. You need to call on your own resources to reduce the amount of external finance you need and to demonstrate your own commitment - to have ‘skin in the game’.
You will also need a carefully thought-out business plan, which will show how your business will generate profits.
As a start-up, you will also need to provide security for lending. Secured loans are ‘secured’ because the lender will require security in case you cannot pay the loan back. This could be your home, or other business assets that you may have. The advantage of this type of loan is that it can be used to borrow large sums of money, of £250,000 or more, over long periods - having 10 or more years to repay is common.
These may be appropriate for many of the large costs you will encounter in the early stages of establishing and setting up your business - but you may need to to look at the costs you face in more detail.
“If you try and do things on the cheap, players will see it in the games. They don’t like bad graphics or bodged coding.”
Funding your premises
Your team will need somewhere to work. You will need space for each developer, and you may also want meeting spaces. A tech hub may be able to provide a suitable environment - but even a serviced office or studio suite will require an upfront payment. Your own office complex might provide a more attractive creative environment, but you will have overheads like utilities and business rates to budget for.
Renting may be unavoidable in the early days. However, renting premises restricts what you can do with your space, means ongoing costs and puts your business at risk of rent increases. In the longer term, buying premises with a Commercial Mortgage could be a sound investment. If you already own your premises, a Commercial Mortgage might also be a cost-effective way to raise funds to use elsewhere in your business.
“Yes, you can code from your bedroom. No, you can’t run a business like that. You need a proper studio to provide a professional working environment.”
You will need high-powered, purpose-built workstations with multiple monitors as a minimum, together with a range of software.
Asset Finance - Hire Purchase and Leasing - can help make the equipment you need affordable. Asset Finance works by using the equipment, or ‘asset’, the security for the loan. This means that if you were unable to repay, the lender would take it back, reducing their risk and the cost of finance to you.
There are several types of Asset Funding. Hire Purchase lets you spread the cost of buying with arrangements that last between 6 and 60 months. You pay a deposit plus fixed monthly instalments for the agreed term, after which the assets become yours.
Finance and Operating Leases work like rental agreements and let you spread the cost of equipment with no upfront payment - just a monthly fee. You simply return your kit to the finance house at the end of the lease, leaving you free to update to the latest technology. This may be particularly appropriate when the pace of technological change is rapid and the latest spec machines are essential.
“It’s worth paying extra for the best kit, because your competitor is going to be using it - and if he is getting the titles out of the door faster as a result, he is going to be the winner, not you.”
You will still need funding while your new business develops its first titles. The big funding challenge of the Game Development business is the long period between having a great idea and having revenue coming in because of it.
Good people - and you don’t want any other kind - can be expensive, especially when their skills are in demand. While you may be able to recruit a passionate and dedicated team of like-minded gamers who can help turn your dream into a reality, people with the skills you need will never come cheap.
On top of salaries, rent and equipment, you will need working capital. You may not need to buy in anything until you are ready to ship, but the costs of simply running your business, from utility bills to business rates, will all need to be covered.
Working Capital Finance is a type of short-term lending designed to keep your cash flow positive, and intended to be paid off in the short-term - i.e, when you have shipped and the money starts coming in.
“Never underestimate the amount of time it takes to build a really good game. A few seconds of screen time can take a week to set up. And you’ll have hours of game time to prepare.”
Getting the answers for your gaming business
At Rangewell, we work with many businesses in the game sector and we understand the challenges - and the solutions.
We know the lenders who are most likely to help with a commercial loan and even with start-up finance - and we know that there are other solutions to consider too.
One of these is grant funding. The UK Games Fund offers grant funding to the sector, and also offers access to expertise, work areas, management and networks. The Skills Investment Fund is a match funding scheme for employers in the industry to help develop training in games and other creative sectors.
With grant funding, government funds usually needs to be matched with commercial funds. At Rangewell we can help you find the lenders who can help you raise the funds you need to demonstrate the viability of your business, which will in turn allow you to access further funding from the government.
“Grant funding is free money - but you still have to work hard to secure it. Rangewell can help with that.”
You might also consider Equity and Mezzanine Funding. These options can be the answer you need to build a state of the art studio, or funding a major production that may cost several million pounds, and which may be beyond the scope of many commercial lenders.
Equity funding could provide the scale of funding you need and works by selling a share in your business, which also means sharing all future profits with your investors. It may be feasible once you have established your reputation within the industry by producing some successful titles but may compromise your control of the business and your creative decision making.
With Mezzanine Finance, a lender will provide the investment, secured on the future of your business. They will offer a high level of funding, but you will need to repay the debt and interest charges. If you fail to repay, they will have the right to take an agreed proportion of equity interest in the company.
Funding designed for your games business
At Rangewell, we work with businesses throughout the gaming sector, and know that every business has its own needs when it comes to finance for gaming. This means that we can call on several years of expertise with games developers, and of finding the financial solutions designed around them.
We know the lenders who can offer the most competitive rates for the sector. Whether you have a straightforward finance need, or require a complicated ‘Jigsaw’ funding plan made up of a combination of products, we can work with you to find the answers.
Call us now to get our experts working for you and the future of your gaming business.
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