3 questions to smart minds
Photo: M. Reul | iVentureCapital

Investments in Game Companies and the Monetization of Online Games

For this 3 questions to M. Reul

Photo: M. Reul | iVentureCapital
30. Janu­ary 2013

The range of online games is growing steadily. At the same time, the games indus­try is inter­na­tio­nal and reaches gamers world­wide. Inves­tors should be fami­liar with the inno­­va­­tion-driven indus­try if they want to get into finan­cing. The poten­tial reve­nue streams are as varied as the risks. It’s all about the free-to-play model, inter­na­tio­nal compe­ti­tion, and working with young start­ups. In addi­tion, the ques­tion is what the return on invest­ment models in the games indus­try look like.

For this 3 ques­ti­ons to Co-Foun­der and CEO of iVen­tu­re­Ca­pi­tal, a venture capi­ta­list specia­li­zed in the games indus­try based in Hamburg, Germany

1. How do online games finance them­sel­ves these days? Are there regio­nal diffe­ren­ces here (USA and Europe)?

There are seve­ral proven models for mone­tiz­ing online games that are used around the world today. One is a “subscrip­tion” model, which means that play­ers sign up for a subscrip­tion and pay a fixed monthly fee to the game provi­der. The advan­tage for the game opera­tor is plan­ning secu­rity through long-term subscrip­ti­ons. In the past, this model was very successful, but today it is only the opti­mal solu­tion for a few online games. Another model is “pay-per-down­load”, where the player pays in advance, but without knowing whether he likes the game. Much more successful today is the “free-to-play model”. A large portion of play­ers no longer want to sign up for a long-term subscrip­tion or pay a large amount up front, but rather test the game first. If you like it, you can improve your own game expe­ri­ence in free-to-play games by buying new items (for exam­ple, equip­ment for your own space­ship). These “micro­tran­sac­tions” range from a few cents to virtual premium items that can cost seve­ral figu­res in euros. Good reve­nues can be made from these small tran­sac­tions, as the number of play­ers of popu­lar online games can reach into the millions.

It is clear to every game deve­lo­per that successful titles in the future will not be able to avoid at least the core prin­ci­ples of this mone­tiza­tion model. Europe, and Germany in parti­cu­lar, is taking a pionee­ring role. German game compa­nies were early adop­ters of the free-to-play model and have a know­ledge advan­tage over inter­na­tio­nal provi­ders in terms of what works and what does­n’t. In 2012, we obser­ved that the market for online games is more fier­cely contes­ted than ever due to the market entry of inter­na­tio­nal competitors.

Play­ers today have a huge choice and can choose from a variety of games in almost any genre (for exam­ple, farm simu­la­ti­ons). Last year, this heral­ded a conso­li­da­tion phase. Large provi­ders of free-to-play games have had to lay off employees and discon­ti­nue game titles. Howe­ver, this is not due to the free-to-play busi­ness model, which conti­nues to func­tion excel­lently, but is due to incre­asing compe­ti­tive pres­sure. Incre­asing compe­ti­tive pres­sure makes it ever more important to find and occupy niches. Farb­flut Enter­tain­ment does this very successfully, for exam­ple, with the free-to-play online games “Penner­game” and “Jail­birds”. These game titles strike a chord with gamers with their soci­ally criti­cal approach and are charac­te­ri­zed by above-average player loyalty. The upco­ming update of Penner­game to version 2.0 will bring a lot of impro­ve­ments and will convince new fans of the game. Mobi­le­Bits has also alre­ady achie­ved over one million down­loads with the title “Soul­Craft”, solely through viral effects. We see great poten­tial for the future here.

2. How many game deve­lo­pers and games compa­nies have you alre­ady inves­ted in with iVen­tu­re­Ca­pi­tal? What kind of support can start-ups and game compa­nies expect from iVentureCapital?

Our exten­sive search for new invest­ments in the games indus­try has given us a wealth of expe­ri­ence in VC and games invest­ments. In 2012, iVen­tu­re­Ca­pi­tal exami­ned over 300 games compa­nies, compre­hen­si­vely evalua­ted 60 compa­nies, and inves­ted in seven compa­nies with up to seven-figure sums each. There were certainly more “good ideas” than the seven we ulti­m­ately inves­ted in. Unfort­u­na­tely, many young entre­pre­neurs tend to be tech­no­lo­gi­cally playful without conside­ring econo­mic aspects. Ther­e­fore, we place parti­cu­lar empha­sis on having a mature busi­ness model with either a clear stra­tegy for mone­tiza­tion or a willing­ness to work it out toge­ther. A good idea and a viable busi­ness model alone are also not enough: we require an excel­lent and commit­ted team, a proto­type with demons­tra­ble quality and initial succes­ses (KPIs), as well as a reali­stic plan to reach break-even within two to three years.

We offer not only finan­cing, but also expe­ri­ence in buil­ding successful (Inter­net) busi­nesses. Young games start-ups in parti­cu­lar need to focus on imple­men­ting the core of an idea. A clear stra­tegy for mone­tiza­tion ther­e­fore recei­ves less atten­tion than neces­sary in some cases. Our support in various areas such as reach gene­ra­tion, conver­sion & reten­tion of play­ers, marke­ting and mone­tiza­tion of games, joint presence at events, SEO and SEM, billing or even admi­nis­tra­tive support such as recrui­ting and accoun­ting is ther­e­fore gladly accepted. — Synergy effects with other port­fo­lio compa­nies are also speci­fi­cally promo­ted. For exam­ple, at our next port­fo­lio meeting, the topic of “mone­tiza­tion” will be discus­sed in depth and cons­truc­tive approa­ches will be sought. All game deve­lo­pers in our port­fo­lio bene­fit from the coope­ra­tion with the Perfor­mance Games Network ‘Traf­fic­Cap­tain’, which we foun­ded and which supports user gene­ra­tion. We have not yet comple­ted an exit. I think game deve­lo­pers quickly realize that we act more as entre­pre­neurs and less as clas­sic investors.

3. What are the typi­cal risk factors to watch out for?

The games indus­try is one of the most inno­va­tive indus­tries of all. At the same time, the indus­try is home to many nerds and free spirits. These are also needed to deve­lop new exci­ting game ideas, but carry the risk that the corre­spon­ding funding is not conside­red enough. To mini­mize this risk and help them succeed, we support games start­ups with their stra­te­gies and busi­ness models. 

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