Game Dev Tip #5: Strategy Is Best When Times Are Good

Several years ago, I gave a talk at a game conference in Berlin about creating enterprise value and acquisition.  I had a young studio CEO come up to me afterwards and thank me because he realized during my talk that he hadn’t been attuned to his primary duty as CEO.  His studio had had some amazing successes with three #1 charting hits on the Appstore and no shortage of revenue.  But he also recognized that he had not been building the enterprise value of his company by employing a differentiation strategy, hiring capable middle management, engaging in partnerships with companies that may buy them down the line or building an organization large enough to maximize the value of all the lucrative IP his studio had developed.  You could see in his eyes that he was energized with revelation and alive with possibility.  He was like a man with renewed purpose and focus.  Experiences like this are why I love my job and I believe in my company’s mission to help studio CEOs increase value.

The video game industry is a difficult industry for a company to survive in and nearly impossible to thrive in.  It is volatile and often appears unpredictable.  We all know that the difference between winners and losers in our industry is stark.  Almost all studios start as a commodity: an undifferentiated group of people with butts in seats making a game.  If you are the CEO, your job is to employ strategy to take a studio from a commodity with little intrinsic value to a branded profit generating machine of great value. 

The point I make in this article is that the time for a studio to engage in strategy is counterintuitively when you have money in the bank or when things are otherwise going well for your studio, not when things are on the brink.  Oddly, this is also the time that I find CEOs and Founders are least likely to reach out to engage firms like ours about strategy or acquisition planning.  Why?  Because things appear to be going so well that they feel they do not need to do anything differently and they become complacent with their work or good fortune.  But the best time to formally review a studio’s strategy is exactly when it is succeeding or when it has stability and money in the bank.  This is because through their hard work and good fortune these Founders have earned the luxury of deliberately sharpening their studio’s strategy when so many other studios cannot afford it.  And by employing strategy when things are going well, they can drive their enterprise value further upwards to the next level of achievement.

At our strategy and advisory firm, Strategic Alternatives, we get a lot of inbound inquiries from game development CEOs who unfortunately are undergoing an existential crisis.  That is, they usually have just lost a paying project and have one or two months of runway left before they will have to let their employees go and declare bankruptcy.  I guess it isn’t surprising that such an existential crisis leads CEOs and Founders to seek help wherever it may be available.  When they reach out to us for help, it is for one of two things.  1) they hope to discuss a strategy to save themselves or 2) they hope to get acquired by someone.

But it is both sad and ironic that the point at which many game studio CEOs finally recognize their studio’s need for strategy is the point at which strategy can least be chosen or executed.  They waited too long and took past success for granted.  Let’s face it, when your company is about to stop being a going concern, the only thing you can do is hustle for any short-term gig to keep the lights on and make payroll. You must call in favors and make fifty phone calls and send a hundred emails hoping for a life preserver to get thrown to you.  In such a situation, you don’t have the luxury of choice or options which are the basic building blocks of strategy.

It is a similar story with acquisition, it is sad to say.  If one brings up the word “acquisition” when your future as a studio looks bleak, you will not be able to get what we call a “premium exit”.  A premium exit implies that the seller is doing well as a going concern and does not need a buyer and that the acquisition is strategic to the buyer.  No, when you are this close to bankruptcy, the only hope of an acquisition is what is known as an “acquihire”.  Basically, the buyer takes over your company’s employment contracts and maybe tosses the company’s shareholders a pittance for the privilege.  Make no mistake, there is no premium paid, there is no glory, there is no real upside enjoyed by shareholders who have risked and worked so hard to make a go of things.  The buyer views the purchase as an opportunistic pick-up and usually has little to no tolerance for negotiation of terms.  Therefore, such deals close very quickly – simplicity with little need for negotiation – the seller is basically dictated the terms by the buyer.  It’s a fire sale.

The primary job of the CEO of a game studio is to grow the enterprise value of the studio for shareholders.  Enterprise growth in many industries may be a smooth incline of incremental revenue growth but not in the game industry. In the game industry, enterprise growth is more like a staircase – it jumps up significantly with every successful game release or with stepwise improvement in the revenue and profitability of your live-service game(s).  As the CEO, it is your primary job to set a strategy and execute it to differentiate your studio when you can afford to do so.  Once you have differentiated your studio and grown your company’s enterprise value, you will know because legitimate buyers will approach you about acquiring you.  And when you talk to them, expressing that you do not need someone to buy you, they will stay around to talk some more. They’ll seem even more interested in you when you aren’t for sale because they don’t want to buy you as an opportunistic pick-up; they don’t want to buy you for parts.  No, they want to buy you because you are important to their own company’s strategy.  They want the whole of you because of the capabilities you uniquely offer their company.  They want to pay you and your shareholders a premium for that privilege.  Congratulations, you are no longer a commodity studio.  This is when you know that you are being courted for a premium exit.  This outcome is what we work on with our clients – growing enterprise value over time and the eventual negotiation of premium exits for Founders and Shareholders.  CEOs, please don’t wait till it’s too late to re-evaluate your strategy and take your company to the next level.  When things are good in your business or at least there is enough revenue coming into your studio, that’s the time you can afford strategy and when you need strategy the most.

Game Dev Tip #4: Don’t Pitch Alone, Pitch As A Team!

As the end of 2018 approaches, I think ahead to my conference calendar in the first half of the next year.  Events such as CES, DICE, GDC, E3…and many conferences abroad are annual traditions for business people in the video game industry.  Most game studio CEOs attend several shows a year to meet with publishing executives and pitch the games they want to make. These days, even if you have the means and intention to self-publish your game, chances are you still attend these conferences to meet with companies who might pay you for the rights to publish the game in some other territory or perhaps you are pitching for an investment.  Game Dev CEOs always find themselves pitching.  Too often this finds you all alone in a room with a handful of people from another company showing a demo and explaining the game you are making or intend to make.  This is the core of my advice in this article:  Don’t pitch alone! Pitch as a team!

A common but tired refrain we hear about VC firms as they consider investments into tech startups is that they are betting on a team more than an idea.  An idea that sounds good on paper may turn out to be deeply flawed.  But a strong team trumps the quality of the idea because it has the wherewithal to figure out a path to success regardless.  This is no different in our parallel universe of games.  Publishers and investors in the game industry don’t want to buy one guy with a PowerPoint deck and a demo.  No.  What Buyers really want to buy is a story of a great team with a dream.  Sure, what you are selling must make sense – that’s a prerequisite – the idea must have resonance and the numbers must work out on paper.  But beyond those basics, the way you sell your idea matters and can be the reason you get an offer versus not.

I spent over a decade in Business Development for a leading publisher, I used to do the gauntlet every conference of holding endless pitch meetings in my hotel suite with all manner of developers both famous and unheard of.  It was typical to be forced to sit through forty pitches in a five-day period.  Often towards the end, I would start to feel like some political prisoner cruelly confined to a room against his will.  (One GDC I laughed out loud at the irony of finding myself in the Marriott Marquis in a suite with a single window that overlooked Alcatraz, the infamous island prison, as a constant reminder of my prisoner status).  Through those years doing the job, I remember one developer CEO who always met me and pitched me alone – no leads, no partners.  Even though he claimed to operate a studio with 20 or more employees.  Even though he was not himself the Creative Lead or the Engineering Lead or the Art Lead he would give me his pitch every year and field questions on each of these topics.  As much as I came to like this CEO, I never gave that developer a deal.  It wasn’t because the pitches were bad, quite the contrary, I felt this studio’s pitches were mostly original and possibly even commercially viable. There seemed to be talent behind the pitches.  But as I reflect upon it, subconsciously, I was never compelled to act on his pitches largely because I never met anyone else associated with his studio.  I always found myself wondering who the other people were behind this pitch – were they competent, did they have passion for the idea, what kind of dynamic did they have between them? 

I know you may be thinking, “well, why didn’t he just visit the studio to find out?”  But consider that a business development guy or publisher-side executive has no time to just whimsically fly off and visit a studio anytime they are curious about a pitch.  Most of the time, you have that one chance to make an impression and sell your game. If you are pitching a publisher, you are in a heated competition against rival studios with rival ideas – it is incumbent on you, the developer, to put your best foot forward all the time, every time. You must assume there will be no second chance to make a better impression. 

Why is it important to assemble your leads together in a room to make a pitch?  What do publisher executives look for?  Let’s unpack what I wrote earlier:  What Buyers really want to buy is a story of a great team with a dream.  Corporate buyers are shoppers.  And like all shoppers, they really want to buy.  They don’t like to go out and come home empty handed, they want to come home with amazing opportunities to excite the folks back home.  But they can’t just buy an idea, because you can’t sell an idea back at headquarters to your colleagues.  No.  You must give the buyer a compelling story so that they can sell your story back at the office to the others who collectively make decisions. 

I’ve said it and I’ve heard other biz dev people say it many times, “I’d rather invest in a great team with a good idea than in an ok team with a great idea.” Making a video game today (with rare exception Eric Barone or Jonathan Blow) is a collective endeavor.  The story you present has to be a story about your team: who they are; where they come from; what are their individual and collective superpowers and how good a team you are.  The story must wrap around the game idea – why does this team feel so passionate about MAKING THIS GAME compared to any other game.  The buyers will watch each member of the team during the pitch.  Publishers take mental notes on the strengths and weaknesses of the individuals on the team.  They will look to see if any of the leads seem particularly talented.   They will take notes on how each member interacts with the other members of the team looking for a positive vibe and the presence of balance and creative conflict. They will look for the weak link.  They will look for individuals who seem checked out or don’t contribute sufficiently to questions in their domain.  They will compare the game idea being pitched against the background and skills of the team – do you know how to build a game like this or do you seem to have the skills and will to figure it out?  You see the buyers don’t want to hear just another game idea – they want to see the group passion to make that game.  A game idea is a dream that is collectively imagined by a team who is willing to fight to make that game. 

Publisher executives and investors look for all these subtle signals when a team is placed before them and all this data goes into the decision-making process.  Reading the paragraph above, you can see that when a team presents their pitch it will produce so many more data points for the publisher executives than a meeting with a CEO alone.  It’s no wonder that any CEO entering a pitch meeting by themselves will find it impossible to provide as much data and instill as much confidence as a team pitching the same game together. 

CEOs and Founders ask me what to do if the team does not all present very well.  Usually they mean that one or two of the leads may be introverted or shy or even misanthropes.  These are not usually big problems, your people can be coached, they can practice, they can be given roles during the pitch, explanations of their super powers can be made to provide context for the quieter members of your team.  The introverted highly-skilled lead is not so difficult to find in the game industry and we are all used to running across them.  In most cases, I lean toward including them in pitch meetings rather than excluding them if you expect their contribution to the game at hand will be high.  In some cases, however, members of a team don’t get along well, or the weaknesses of a lead will be so glaring as to be impossible to mask.  In those cases, you have a much bigger problem in your studio than just selling a pitch.  You probably fundamentally need to change personnel and reconsider your leads before you go out and sell.

There is one final and very important reason I want Game Dev CEOs to pitch with their teams and not by themselves: the necessity of gathering feedback.  Just as the publisher is taking notes on you, it is just as important for you to take notes on the publisher during the meeting.  When you are all alone, there are no other eyes and ears who can read reactions in the room to what is being pitched.  When you are alone, you’ll be busy just talking the entire time.  You won’t be taking many mental notes and the ones you take may not be completely accurate. No one can discuss it with you after the meeting is over.  No one can help you sharpen your delivery or give you clues on how best to follow up.  Who were all the people in the room, how did they interact with each other, when did they get excited, when did they express concern?  These are all signals the publisher provides you that are easy to miss when you give a pitch all by yourself.  It is critical to have someone in the room with you so that afterwards you can compare notes on how the pitch went and how to tune the pitch better for future meetings. 

I recognize that sometimes it just isn’t possible to bring others with you to a pitch meeting.  Travelling as a group can be cost prohibitive or production fires are raging back at the office and demand attention.  However, if you really want to improve your studio’s chances at getting a deal whether that is publishing or investment or something else, you should make it a best practice to pitch as a team whenever possible.  Remember, it is hard to sell one guy with a PowerPoint idea when everyone wants to buy a team with a dream.

Tip #2 Game Dev CEOs: Always Be Doing BizDev

If the job of running a game studio were limited to the task of making a video game, that would be merely challenging.  But if you are the CEO/Founder of a small game studio right now, then you already know that it’s only a part of your job.  Depending on your size and level of success you probably wear so many hats on a given day that it is dizzying.  You are the facilities manager, the administrative head, the IT guy, and chief fire-fighter of every conceivable HR crisis and to top it all off you are the main external face of the company.  You are also the Biz-Dev person.

If you have a larger, more established studio then hopefully you have done yourself and your company the favor of building out a capable administrative staff (e.g. CFO, COO, Administrative Assistant, HR specialist) to take a lot of those day-to-day issues off you.  You may have built out an entire IT department.  And you may even have hired a full-time Business Development person, so you don’t have to do it.  Good for you! 

The bad news is that all the game buyers out there still won’t want to sign a deal if they don’t get to know you and feel good about you first.  You are the CEO.  And if you are the CEO, the truth is that you will never escape the need for publishers and investors to have a personal relationship with you.  So, like it or not, you are still going to be doing BizDev. Embrace it. Get good at it.

One of the things I try to communicate to independent developers I work with is the need to Always Be Doing BizDev.  Here is why.  The biggest existential threat to any independent studio is a gap between funded projects (except the relatively few studios out there making a profit off royalties from previous games – you know who you are).  A “Gap” is the period between the end of one project to make a game and the beginning of the next project.  Gaps are the real studio killers.  They are the asteroids headed to your planet to wreak havoc.  And like asteroids, some are known and expected to hit you, and some come out of nowhere threatening to take you out suddenly. 

All of this means that some gaps you can and must plan for and some gaps you can’t.  Typically, it can take 6 months to a year to find a new project to fill an upcoming gap.  This includes building a pitch and demo, pitching to potential buyers, and negotiating contracts.  Sure, it can happen faster but usually it doesn’t.  So, if you are a year out from an expected project ending, you need to be starting the process of finding the funding for your next project right about now.  So much for the events you can plan for.

But here is the rub, how do you mitigate the risk of the unexpected gap event?  For example, when a publisher cancels your project suddenly without notice.  There are a couple of things you can do but primarily it means that you will have to be doing BizDev even when you have no expected availability in the future! 

It should be best practice for a studio to constantly be meeting with publishers and other buyers pitching new games and discussing opportunities.  Even if your current project is early in production and top secret and you have no foreseeable availability, that should not stop you and your team from hitting the big conferences or visiting publishers to pitch a new game, participate in an RFP or talk about that port project. The old-timers who have been doing this a long time either know this or have gotten complacent about pitching when times are good.  I remind them that they are doing BizDev now to secure the existence of the company in the case of catastrophe.  It’s important that they don’t get lazy about it.  The push back I get from less experienced developers is what I call the fear of a good problem:  what if a publisher loves my pitch so much and I can’t sign it because my studio is working on another project?  My response is usually “multiple people want to pay me to make games for them – that’s a tough problem to have isn’t it?” 

You are always doing BizDev because you either expect an end coming up soon or because you need a plan B in case of disaster.  The best time to discuss a deal is when the other party wants to fund a game but you don’t need to sign one.  That is open season for you to negotiate – could you own the IP this time?  Could you charge a higher man-month rate or get more backend than on your last project?  For once, you are not the desperate negotiator, you can afford to play it cool.  Enjoy how that feels.  Because if the deal they offer is rich enough for you, who knows, maybe you decide you can scale your studio to take on a second team at least enough to accommodate a prototype?  Or hire another team to prototype with you.  Or maybe you just tell the publisher that you no longer have capacity and that you would be open to start the new project a little later when you can field a prototype team.

Basically, an abundance of opportunity is a manageable problem.  It shouldn’t really be called a problem because it presents you with strategic choices.  And developing opportunities through BizDev and making strategic decisions to grow the value of your company is really what the CEO/Founder role needs to be about – pulling yourself up out of the weeds of fixing the team’s PCs, restocking the company refrigerator, and talking your artist down from their latest meltdown.  Your company will be better and more resilient because you are always doing BizDev.