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How Crowdfunding Will Kickstart Video Games in 2013+

January 4, 2013 0 Comments

Video GamesKickstarter.com is this decade’s YouTube. They are both revolutionary platforms for crowdsourcing talent.  Except, of course, stardom is YouTube currency, and Kickstarter helps to raise real cash for the physical production of tangible goods.

More importantly, the format of both YouTube and Kickstarter has jumpstarted creative thinking and innovation in their respective fields. Just this year, YouTube was the platform for featuring the new e-commerce model of the “Dollar Shave Club”, while Kickstarter helped to raise funding for 3D printing.

The JOBS Act will give crowdfunding some equity-based substance

Expect more radical changes over the next couple of years, when the Jumpstart Our Business Startups (JOBS Act) of 2012 is expected to go into effect, allowing investors to purchase up to $10,000 each of equity via “funding portals” (read: crowdfunding services).

Currently, the SEC prohibits unregistered crowdfunding, so Kickstarter.com and the like avoid penalty by allowing “investors” to receive gadgets in lieu of actual equity. The new JOBS Act regulations are poised to transform this industry, stimulating the emergence of new actual equity “funding portals” to compete with companies like Kickstarter.com.

In other words, you’ll be able to leave the gadget and take the cash in return for your investment. This is great news for any industry where companies require substantial investment for launch and also expect to make good but not IPO-centric profit (read my article on what I call “Modest Profit Start-ups” and why they do not entice VCs). It also means that the fields of software, mobile and gaming production are about to get very interesting.

Zynga’s IPO bombed… enter crowdfunding

Hopes were high for a successful IPO for Zynga, the mobile game developer, in late 2011, but the stock bombed in the first day of trading and the company’s shares have dropped to about a fifth of the initial asking price in the year since. Because of this, venture capitalists will be much more wary in investing in high overhead businesses like game and other digital content development.

Harder time securing financing is why the JOBS Act would be an excellent opportunity for companies that cannot entice VC’s with the promise of a huge return IPO. They are, however, attractive to long-term and small investors looking for a long-term stake in otherwise profitable ventures (again, they are the “Modest Profit Start-ups”).

I would note that Zynga, despite its low IPO, is doing well profit-wise.

Game Funding via Kickstarter to revitalize the indie genre

In the past, big video game companies that opted to raise money via Kickstarter in lieu of traditional publishing channels did so in return for small tokens, such as the first game. In most cases, they relied on their reputations to raise funds.

Obsidian Entertainment, for example, just raised $4 million in funding for Project Eternity; project backers receive a $25 discount. Brian Fargo’s Wasteland 2 raised $2.9 million; pledges of $165 receive a full first copy of the game, which is essentially twice what you’d pay at the store. However, if people were given the opportunity to purchase equity, they would more likely invest in lesser known game production companies.

Over the past few years, the video game industry has reached the level of maturity similar to the movie industry where artistic innovation has begun to take a backseat to commercial viability. By allowing creators to say no to their larger publishers, Kickstarter and now new regulations will infuse the industry with the creativity it has recently been wonting.

Personally, I’m waiting to see what Double Fine does next. It’s always had an indie twist, especially since its collaboration with Jack Black on Brutal Legend. So its next projects are sure to be interesting. I would also be curious to see what Obsidian does with a smaller budget than it is used to (typically, budgets are in the nine figures).

In either case, the new JOBS Act regulations are expected to revitalize the creativity and independent spirit of game development and usher in a new era of innovation.

Question for my techie/software developer readers: Have you considered crowdfunding for any larger-than-indie projects, and how would the availability of equity-based crowdfunding change or reinforce your current opinion on this?

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