Discover more from The GameMakers Letter
Game Studio Fundraising for Dummies | LILA Games Raises $10M Series A
BITKRAFT, Galaxy Interactive, and LILA legal counsel talk to me about Seed vs. Series A, Mistakes, Lessons & Key Takeaways
“Get me the fuck off this email thread!” Hans yelled into the phone.
“Is this the offer you’re taking? Did you communicate your process? Did you take this to your board? What are you doing?”
“Oh whoops, my bad,” I said.
Guess what? Series A, for us, was nothing like the initial Seed round of fundraising. We encountered several issues throughout our Series A process that surprised me. Adding to the confusion was the completely contradictory advice we would get from investors, advisors, and friends.
What are the issues you should be aware of? How should you interact and communicate with existing investors? How should you structure the valuation of your Series A? How should you conduct your Series A “process,” and what were the mistakes I made that you can learn from?
Catch the retrospective discussion where I asked two of our investors from BITKRAFT and Galaxy Interactive and our lead legal counsel to pull no punches about the mistakes I made.
Jasper Brand, Principal at BITKRAFT
Michael Fan, Partner at Galaxy Interactive
Hans Kim, Partner at Mayfield Venture Law
LILA Games $10M Series A
In the end, it all worked out. We recently announced our $10M Series A financing by our dream cast of partners.
Both BITKRAFT, the lead from our Seed round, and Galaxy Interactive participated again.
And we were joined by new institutional investors, Sequoia Capital and KRAFTON (the makers of PUBG).
Even further, we got a murderers’ row of game industry badasses as new angels in the round:
Ryan Wyatt, former Head of YouTube Gaming and now CEO of Polygon Technologies
Thomas Vu, former Head of Creative at Riot and Executive Producer on everyone’s favorite Netflix TV show Arcane
Tanay Tayal, co-founder and CEO at Moonfrog Labs
I spent very little time on the fundraising process in terms of preparation and learning the specific details on how to optimize fundraising.
However, CEOs need to manage their responsibility for keeping a company capitalized much more seriously.
I previously wrote a post on How to Be A Great Games Company CEO in which “Funding” was voted by Game Company CEOs as the second most critical priority of a Games CEO:
My recommendation for other game company CEOs would be to take the fundraising process more seriously and invest more time in preparation. While I’m happy that I spent a fraction of the time that my game industry peers likely spent, I also realize that things could have easily not worked out as well.
Please learn from my mistakes. Despite my outcome, a great game company CEO should ensure their company gets the funding they need.
Below I include many interesting points mentioned during the panel discussion. I agree with many of the points raised, but not all. Further, I attribute many of the points, but I may not have in some cases. Watch the video for full context!
There’s more capital available than ever before.
Venture funding shifting to a founder favorable market and less a VC favorable market.
Capital no longer the key differentiator for VCs
Jasper believes while public market valuations have decreased but multiples on future revenues have stayed somewhat consistent in games. He suggests, for market corrections, you generally see impact for dry powder for venture dollars after 2-3 years. Jasper believes early stage we will continue to see valuations at elevated levels.
Michael is seeing pricing stabilizing a bit compared to 2021 especially after early deaths of “Powerpoint bets”. He believes prices/valuations will go down over the next 12-18 months.
Michael suggests for founders to not pay attention to the macro market because he believes good founders will get funding regardless of the market environment. “Don’t care.”
What is a Series A?
Hans suggests that the “Series A” has shifted up, what we now call the Series Seed used to be the old Series A. Series A used to indicate product market fit and traction. In today’s market, Series A is more about how much you raise somewhere between $10M - $20M for 25% of the company.
For Michael he suggests Seed means “you have something to tell” and that Series A “you have something to show” to investors. For Galaxy, Seed means focusing on the team, “what is the vision?”, and they ask if they believe in the team. For Series A, the team needs to show something like infrastructure, live services, first/vertical slice, etc.
Models of Opportunity:
There are several models of opportunity to invest in. For example, a bet on emerging markets (teams or the consumer market), or on teams that split out from proven AAA game studios like Bliizzard or Riot.
India growth in 2009 was 40% and in 2020 it’s 80%, last year had 40 unicorns up from 10 unicorns year before that. Entertainment funding in India up 10X compared to last 7-9 years. Market in India still evolving and there have only been one or two game companies with Dream 11 and Mobile Premiere League, that are not traditional game studios yet.
Michael sees one issue Blizzard/Riot split out founders will have to manage is that they may be used to having a lot of resources at their disposal. He believes there’s a big misconception that success at big publisher will make you a successful entrepreneur. Being a founder at a startup requires more non-game related work. Having said that, Michael ultimately just cares whether the team can ship.
Michael sees opportunity to leverage talent from China who now have a lot of great game development expertise and helping them penetrate into international markets.
Jasper sees a lot of opportunity in Latin America.
Hans suggests that the old Silicon Valley model of being local has gone away. Game talent and ecosystems are now developing globally like in China, Korea, and increasingly India and around the world.
Ideal Startup Profile:
Jasper looks for entrepreneurs who are incredibly hungry, want to change the status quo, have a sense of speed, and have an ability to be self-reflective to address their weaknesses. Some of what he looks for depends on the type of game and definitely looks for a track record in building games.
Michael looks for entrepreneurs who are organized, focused, and consistent. He believes it dramatically increases chance of success. He also looks for the actual contribution of founders in the games they have worked on. Did they really contribute to shipping or not? For the game idea, he looks for category creators. From a technical standpoint, he looks for whether the team can actually build it or not. What are the plans, costs, unit economy, etc.
Determining Fundraising Target:
Michael’s recommendation is to think about specific objectives and what you want to do like a product manager. He sees risk in raising too much money because of feature creep. He believes that teams have a risk of filling a game with features to fit the budget. He stresses that VC funding is a very expensive way to access capital and warns about dilution.
Hans agrees that running a company frugally and being scrappy can be a formula for success. However, he also suggests understanding the trajectory of the opportunity you’re going for. Entrepreneurs should not let money get in the way of going after a big opportunity and not scaling appropriately.
Should Valuation be Set Pre-Money or Post-Money:
Hans suggests that post-money valuation makes no sense to him. It’s investor friendly but screws founders. If you’re worth $20M and you raise $10M your post-money is $30M. But in this scenario if you raise $15M than your pre-money is lower which makes no sense.
Hans suggests there’s a lot of confusion in the market right now and he believes this is partly due to the Y-Combinator SAFEs. They switched their SAFE from pre-money to post-money and due to their influence many VCs have now copied them.
Mistakes to Avoid:
Michael suggests that VCs think in terms of greed and fear. After an investor sends a check, fear kicks in. Hence, he believes communication is really important. Entrepreneurs should make sure to have good communication.
Jasper mentions that one nuance in communication has to do with the level of communication with leads vs. minority investors. And especially if investors are on a board or not. So there may be high levels of communication from founders to leads and board members but not at the same level with mionority investors.
I also believe that the point Jasper makes above cuts both ways. Investors will also pay more attention to the companies that they have a bigger stake in and are leads in vs. those companies in which they are participating with less ownership stakes.
Michael recommends to be very specific with investor asks for help. Don’t just say “we need help recruiting.” Instead, look at Michael’s LinkedIn and ask for specific intros.
Michael suggests raising money based on runway minus five months because that’s usually the amount of time it takes to close. There is one portfolio company of theirs that did their fundraising very well. They took two weeks to go through their entire meeting list and then about a month to close. However, they took two months preparing for that process.
The fundraising process breaks down into three parts: 1. preparation period (getting materials and investor meetings lined up), 2. meetings and pitching, and 3. closing (e.g., term sheets, long form, etc.)
Michael suggests that this above process should be very formalized. The fundraising date (meetings and pitching) should have a specific date and the list of investors to speak to should all be pre-setup. Don’t add random people to talk to afterwards. The funding amount, target price, and range should all be figured out. If target is not met, there should be pre-planned scenarios. Everything should be very mechanical.
Michael also mentioned this whole preparation part is the part that I completely skipped. lol.
Jasper suggests that every subsequent investment gets increasingly harder. So preparation becomes increasingly important.
Some Closing Thoughts
What Did I Do Right?
I raised more money against some investors and advisors' advice. As a management team, you need to make the right decisions for your company. Your investors have a stake in your success, but ultimately you need to make the decisions for your company.
We have been in a stable interest rate and steady growth public markets environment for 10+ years. We may not be in that kind of environment anymore. Further, we saw sudden and dramatic inflationary impacts on employee compensation and some dysfunctional employee hiring and retention dynamics given our current macro environment.
The volatility that we're seeing now was not a risk I was willing to take.
The Lucretius problem from Antifragile by Nassim Nicholas Taleb:
The fool believes that the tallest mountain in the world will be equal to the tallest one he has observed.
I recently had a conversation with Brett Nowak regarding scenario analysis of risk to your company. One of the scenarios worthy of evaluation as a CEO is access to capital. I did not want to take an extensive macro or geopolitical risk for LILA Games. Fuck that.
We have a long-term strategy in which I have massive conviction. We are also massively challenged against this. We invest and deploy capital against an emerging market developer ecosystem that is likely too early. In this scenario, I believe capital matters if we want to focus on the long-term. We're not even entirely sure if $10M will be enough, given all of the technical and design challenges we face.
As much as I hate dilution, I hate to lose 1,000X more.
It's easy to forget the #1 rule for all startups: Cash is King. No capital means game over. The importance of capital is especially true in a high volatility macro environment. Access to capital in this context creates antifragility.
There is a notion that money will always be available to great entrepreneurs. That may be true for great fundraisers. I'm not one of those. I do, however, know how to assess risk, and this is one I was not willing to take.
Many Silicon Valley talking heads talk about CEOs as being great capital allocators. These CEOs focus on doing a great job of distributing resources in their companies. For what we are doing, I view the focus of my job differently. As much as I respect the capital allocation function, I'm more focused on something I call risk de-allocation. As a startup CEO, I'm ultimately concerned about how we reduce critical risks. How do I characterize and focus on the most significant risks for the company?
Hence, I'm more a risk de-allocator than a capital allocator.
Overcoming Hopelessness and Despair
Somewhat lost in the panel discussion was the actual hopelessness and despair we faced during some parts of the fundraising process. There was a time things looked bleak, and we didn't know how we would raise the money.
Unlike some of Hans' other clients and more similar to some friends of mine who can "snap their fingers" and raise money, we were more challenged. To be clear, we weren't challenged like the real entrepreneurs who had to pitch 100+ investors. However, there was a time when it did not look like we were going to make it.
When all hope seemed lost, we didn't lose hope. And for those entrepreneurs out there now, I would recommend you not lose hope too soon either.
If you ever meet my co-founder Paul Leydon, you can ask him about the night of our long walk back from dinner. He'll know what you're talking about.
Paul: "It's not happening is it? How are we gonna raise this money?"
JK: "I don't know. Doesn't look good. But fuck those guys. I have no idea how we're gonna do it, but I'm telling you we're gonna raise 10. Not 2, not 7. It's gonna be 10. I'm gonna manifest it, and you can count on it."
In the end, we raised exactly $10M.
Don't lose hope.