Games don't need venture capitalism
or: give Pokemon guns, not term sheets
disclosure: we work with VC-backed game devs, including on funding strategy
corrections: prior drafts included 2 factual errors regarding the steam CCU record and team size. this article by Pocket Pair was referenced for information on Palworld development
Argument tl;dr: making a successful indie game is not particularly funding constrained apart from perhaps a seed / series A equivalent. A different, often bigger problem is go-to-market (GTM), which the games industry calls ‘publishing’. Rather than relying on VCs who primarily offer “thought leadership” here, game devs are better off looking to publishers (who can write checks) and direct-to-consumer methods like crowdfunding and early access.
As of this writing, the hallowed club of games with 1million+ concurrent Steam users was just joined by Palworld, a Pokemon-meets-Ark survival / base building game featuring heavily armed sheep. There’s a lot to be (and being) said about this remarkable game, but we’ll focus on one topic for this discussion: the funding model of the developer, Pocket Pair.
Pocket Pair is a Japanese studio founded in 2015. They’ve released a few games, notably the survival builder Craftopia (which Palworld heavily borrows from). With around 50 employees and over 4 million Palworld copies sold so far in its launch weekend at a box price of $30, Pocket Pair’s success is hard earned after a harrowing 3 year development process (the developer article linked at top shares some remarkable details). It should be noted as well that Palworld isn’t a fully released product - what those millions of players have purchased is an Early Access version, with all the bugs and incomplete features that entails.
It might surprise those unfamiliar with games that Pocket Pair isn’t VC backed, a trait shared by many successful indie devs. To name a few other huge titles made with no VC money - Innersloth (Among Us), Larian (Baldur’s Gate 3), Zeekerss (solo dev of Lethal Company). It’s common for new software companies to seek out venture capital funding to fund development and growth, and VC attention has increasingly turned to games as the industry takes over mainstream entertainment - see the founding of Griffin Gaming Partners in 2019, or more recently a16z‘s 2022 games fund.
But it’s unclear whether VCs have a particular knack for finding and backing the best studios, nor is it evident that VCs are a compelling partner for game developers. Consider:
Gaming is a creative industry. Like other creative businesses, apart from the top end blockbusters, a war chest isn’t prerequisite to success the way a venture-backed SaaS might outscale its competitors by running investor-funded losses, leading to entire burgeoning industries with negative unit economics on impressive userbases. You aren’t going to outspend your competitors to victory in games, not when competition is a 21 year old solo dev (Zeekerss) and thousands like him.
Apart from actually building the damn thing, the overwhelmingly most difficult part of making a successful game is publishing - marketing, distribution, all that stuff devs commonly hope will be taken care of by word of mouth from making an incredible product. This of course takes money, but also knowledge of how to spend it, backed by deep relationships at the right channels. VCs can (sometimes plausibly) claim to have this, but game publishers themselves are often active investors who will invest in a studio in addition to supporting distribution and promotion.
Of course, publisher partnerships aren’t always available for studios, particularly very early stage ones that don’t yet have a game to show. This was the case for Pocket Pair, which sought publisher backing early on but found no takers. Even so, as consumer products games have access to a thriving ecosystem of direct-to-consumer fundraising approaches that functionally serve as seed rounds. Products can pull in multiple millions in backing, comfortably enough to substitute a seed or even series A (though at this point, crowdfunding should probably not be a first option). Further, crowdfunding has the massive advantage of giving up zero equity. Running a crowdfunding campaign admittedly presents its own challenges that some teams may be less equipped to meet versus hitting up VCs, so traditional seed rounds retain some appeal for US-based studios of veteran devs in particular.
When the game is further along, say around time for a Series A, Early Access releases offer studios the ability to raise funds with advance sales while further building direct relationships with players to inform development. Obsession with customer needs is a common mantra for startups, and early access can be an incredible way to iterate - Supergiant Games did this to amazing success with Hades, for example, and there’s Palworld itself! Since early access requires having a product to sell, this can be insufficient in cases of poor product market fit or when the funds will be used to build a new game. While disappointing, the former case provides useful information on the trajectory of the game while leaving the door open to future sales with improvement, and the latter is often a situation similar to a seed round with the considerations detailed above.
Game dev talent is globally distributed outside Silicon Valley, and more broadly the English-speaking world, in a way that high tech is not. Pocket Pair is Japanese, and East Asia is heavily represented among the largest game developers and publishers (to name a few - Tencent, Netease, Mihoyo, Nintendo, Playstation). While VC funding is increasingly available for non-US startups (particularly in crypto/web3, which we won’t get into here), publishers who don’t require a trip to Menlo Park or LA are even more accessible - plus they’re in Menlo and LA too!
So VCs are seeing Gaming Eating the World, even got in on some big early successes like Zynga, and they’re now trying to establish themselves as critical partners to aspiring game devs. Fortunately for those devs, however, there are some other options which address all the needs VCs cover and then some.