Two of our favorite topics for posts lately have been about video games and venture capital funding cycles. In this post we are going to combine those two.

Lately we have taken to pointing out regularly (including in those links above) the hard reality that venture funding is in the downward sloping phase of its business cycle. There is still a lot of venture capital money sloshing around out there (at least for now), but valuation and deal terms have become less favorable, and funding decisions are taking much longer. We have been working on another post that looks at some of the ugly tactics that some venture investors are putting in place. That post may never see the light of day, but suffice it to say that we are starting to see a repeat of practices not seen since the early 2000’s, and no one seems to be talking about being ‘founder friendly’ the way they did a few years ago.

One market where this is painfully clear is games. In the early years of mobile app stores, there was a wave of venture investing in mobile and web games. A few big success like Rovio’s Angry Birds and Supercell’s Clash of Clans raised expectations for a massive new market opportunity. However, over time the ease of entering the market created a glut with hundreds of thousands of new apps going live. Fast forward a few years to today. There are still many new games coming online (something like 100+ a day), and the app stores have become saturated. Most titles enjoy very briefs windows of opportunity. A few break through and become hits, but most titles fade very quickly. At this stage, it is now almost impossible to raise venture funding for a game. Distribution is dominated by a handful of larger companies, and even they are highly dependent on balancing investments in existing titles against the need to find the next ‘hit’.

One of the curses of the gaming business is that so many people like to create games. There are many developers who build games in their free time, or as small side projects. Viewed from an economic standpoint, this is not rational as the odds of success are diminishingly small, but the enjoyment or passion is still there for many. (And let’s not get started on the related subject of labor practices of some of the largest developers.) Nonetheless there is still a very large market for games. Something like 2 billion people will play a mobile game at least once this year. And it does not take ‘much’ to get a share of them to convert to being paying customers.

The reality most small developers face (and some large ones too) is that it has become very expensive to market games and acquire customers. How does a new title stand out and attract customers? Some get lucky – being featured in one of the app stores or magically catching on virally. Everyone else has to spend money on marketing – SEO, online ads, Facebook ads, ads in other games, etc.

So  the dilemma has become how do small developers fund a marketing campaign?

At this point, there are no easy answers. Traditional venture funding is generally not an option. There are a small handful of VCs who may consider investing in a game, but for the most part they want to see traction before investing, but that traction is not possible without funding. A Catch-22. And what investment there is tends to come with some very tough terms. We spoke with a few executives at larger gaming companies who do some venture seeding, and even they admitted that the terms they provide (i.e. massive founder dilution) are almost punitive.

The good news is that there are some new models for investing being tested out there. In our next post, we will take a look at some of those.