Over the past several years, Xsolla explored the intersection of the developer and investment communities to better understand why game creators have been historically underserved from a venture capital standpoint.
In this post, we’ll highlight several of the discoveries we made and explain how they — along with Xsolla’s mission of helping to ensure the best games get made, get seen and get played — led to the creation of Xsolla Funding Club, a practical funding resource available to video game developers at no cost.
The video game industry depends on innovative people and their projects to generate value. As such, it’s a creative industry wherein developers produce video games as a form of commercial art. Who then finances their commercial art? Historically, publishers fulfilled the role of patron by financing individual video game projects. However, VCs and funds also filled that position but with varying degrees of success.
The initial group of investors who entered the video game industry came from technology and sought to make equity-based deals (direct investments in companies) since it worked with the startups of their industry. While some VCs and funds found success because they had invested in a gaming company with well-known IP, the majority of investors and their developer counterparts were not as fortunate. These video game investment failures left a poor taste in the mouth of the investment community, which in turn left many developers underfunded from a venture capital standpoint. With no other funding sources readily available, developers once again returned to working with publishers.
As time went on, however, technology advanced and new means of self-financing individual projects — such as crowdfunding, pre-orders, and founder’s packs — made developers more independent. By putting game creators back in the driver’s seat, these alternative means of funding disrupted traditional developer-publisher relationships and opened a door for investors to re-enter the video game industry. Now, we see investors modifying their behavior and backing individual video game projects instead of companies, setting up game creators and investors for greater success in the gaming industry.
So, Xsolla learned that the equity-based financial approach that venture capitalists and funds apply to other industries does not translate successfully to the video game industry. Our time spent with both the developer and investment communities makes us believe that project-based finance helps developers secure funding and generates value in the gaming industry.
At the moment, fewer than 100 investors have made at least two deals in the industry,¹ which is a fraction of the more than 100,000 investors in operation across all industries today in North America and Europe.² Due to this relatively small number, gaming investors are actually more willing to share information amongst each other because doing so creates the opportunity for co-investments, which in turn reduces individual risk. By reducing individual risk, investors are more likely to fund video game projects, providing developers with the necessary funds to create their games and generate the value that drives the industry.
However, since the industry is so large and the pool of investors so small, it’s difficult for these two groups to connect. The more Xsolla learned about this challenge, the more we realized there was an alternative way of supporting developers by facilitating additional co-investment opportunities. This realization coincided with the fact that our first venture firm could not help as many developers as we wanted to because of its specialized focus.
In summary, Xsolla discovered that project-based financing and co-investment opportunities give developers the greatest shot at securing funding for their individual video game projects. These insights, along with Xsolla’s core mission, led to the founding of Xsolla Funding Club.
Xsolla Funding Club is a matchmaking service that connects video game developers with investors so they can receive funding to create, launch, and market their game. It helps developers reach these goals by letting them easily apply for funding consideration online. In turn, Xsolla Funding Club lets its network of investors match with talented developers, fund their games, and share in the profits of the fast-growing $152B global video game industry.³ By offering investors and developers this practical resource at no cost, Xsolla gives back to an industry that has given it so much and furthers its role as the video game business engine that helps gaming companies improve operations and sell more globally.
Xsolla Funding Club had been in soft launch since PAX East 2019 and moved out of the beta phase at gamescom 2019, with nearly 30 investors. If you’re a developer in search of funding, consider submitting an application today.