Financing for app and game developers isn’t fit for purpose

Olya Caliujnaia Co-founder and CEO, Sanlo

4th October 2022 • 3min read

There’s a lot of positivity, creativity and excitement within game developer communities. People are flocking to games for entertainment and there have never been more tools to create them.

The number of apps downloaded is expected to climb from over 100bn in 2021 to 200bn in 2025, with mobile game player numbers soaring past 3bn in 2022. The Covid pandemic played a pretty big part in this huge uptake.

However, developers are facing uphill battles to fund the development of their projects and to profitably acquire players. The established routes of financing - publisher financing, venture capital (VC) investment, and bank loans - come with massive downsides, like reduced creative and financial control and diluted equity ownership. They create barriers to entry rather than levelling the playing field because they restrict developers’ means of completely owning their own products.

Publisher deals: losing a slice of the revenue pie in exchange for expertise

The most common option is to partner with a game publisher. While publishers have market knowledge and a grounding in developing and distributing games, developers taking this route might have to put up with them participating in creative and business decision-making. This can come at the expense of the developer’s own product roadmap or creative vision, so can be a frustrating experience for developers with a strong vision to execute.

Securing a publishing deal with revenue sharing is similar to equity financing in some ways. Typically, you can leverage publisher resources, relationships and support with user acquisition, monetisation and design, but they might take a large slice of the revenue pie and demand input into the building, managing and scaling of the game. Deals can take a lot of time and legal effort to set up and close, too.

Revenue sharing structures are also disadvantageous to the developer during publishing processes. App stores take the first cut of profits, and the publisher takes the next cut (if working with other partners, like an IP holder, they take a cut here too), so the developer is the last person in line for revenue.

App stores take the first cut of profits, and the publisher takes the next cut... so the developer is the last person in line for revenue.

Part of the reason for turning to publishers in the first place is that acquiring players is much more expensive than in previous years. Apple’s App Tracking Transparency (ATT) privacy policy is a contributing factor here. Introduced in April 2021, it has noticeably reduced the efficacy of advertisement targeting across channels that developers could traditionally rely on for user acquisition.

VC investment: equity in exchange for capital

VC investment, which as we know is slowing down because of the macroeconomic climate, is another well-known financing channel for developers, but it results in lost equity and diluted ownership. The current market puts pressure on start-ups’ valuations and metrics, which means developers must give away more equity or take on more expensive bridge rounds.

When developers choose equity financing, investors will provide initial capital for their game or app. Although monthly payments don’t have to be made, developers must be prepared to give an equity investor a percentage of direct ownership in their company. There are VC firms that understand the practicalities and business of making games, and these can be incredibly helpful in the developer’s journey as they share their knowledge, guidance and resources.

Despite this, VC funding takes time, with lengthy periods of pitching, negotiations and agreements for urgently needed funding. Once a VC has been convinced to invest, the economic benefits that a game or an app generates are diminished for the founders as a percentage of company ownership is given to the investor in exchange for capital. Investors will then maintain that equity forever, or until they decide to sell it.

Bank loans: gaming is a poorly-understood sector

Lastly, developers can turn to banks. They usually offer cookie-cutter financial products that are industry-agnostic and unsuited to game and app development. Bank offerings are not based on underwriting on app and gaming-specific metrics and put emphasis on historical financial performance, meaning not all developers qualify in the first place. Game developers, who can have younger companies with limited financial track records, may struggle to secure financing and have to rely on personal guarantees and use their personal credit as proof of worthiness.

And as the business of games and revenues are frequently volatile, developers can end up being disadvantaged in deals with banks since a company must repay a precise fixed amount in a precise period of time, regardless of what’s happening to the business. These traditional bank loans will often have associated costs, usually based on interest rates, and in some cases charge additional fees too. All of this can have serious implications for managing cash flows, and therefore the ability to weather the tough times.

Alternative financing routes for developers

In gaming, publishing and VC have been established and well-understood models to fund gaming businesses for decades. However, there are now alternative routes of financing that can be essential for developers' survival and success in a market where financial backing often comes with strings attached or reduced creative control. Channels for business fundraising like revenue-based financing have become more widely known in recent years. We’ve seen this kind of financing being offered and in demand in other verticals, like SaaS (Capchase, for example) and e-commerce merchants (Clear Co and Shopify Capital).

There are now alternative routes of financing that can be essential for developers' survival and success.

But many of these options weren’t explicitly created with game developers in mind. Step forward developer-friendly, non-dilutive financing. As the description suggests, the non-dilutive offering ensures that developers don’t lose financial or creative equity in their projects, guaranteeing decision-making independence and business ownership. The business of gaming is complex and fun: developers need to build engaging and entertaining experiences that retain players, but also create healthy in-game economies to continuously attract new players. This is why giving up any creative control is so dangerous.

With substantial data visibility and insights, alternative financing routes are sustainable, aligning with the incentives of both developers looking for financing and the capital looking to provide it. Funding must be moulded to developers’ designs and visions, intelligently selecting appropriate investments for specific parts of projects. By doing so, developers can scale and grow their games and apps, boost user acquisition and ensure their launches have as few glitches as possible. Not only will this make success more likely, but projects will be more rounded and have greater longevity, with those same developers having higher chances of being able to create sequels or entirely new games.

My unfiltered opinion

For too long, developers have been caught between a rock and a hard place when it comes to investment, and it’s been incredibly difficult to find alternatives that are designed specifically for them. In order for the game and app ecosystem to flourish and reach its immense potential, we must look beyond the damaging status quo of VCs, publishers and bank loans.