1 year of YetiZen—what I have learned from running a gaming accelerator
June 21, 2012
Philosophy 5: Are you running a Game factory or a game franchise business—decide early
I have come across a surprising number of investors who tell me that games are like movies, a hit based business. Every game developer is trying to figure out the winning formula and its too risky because—just like we do not know which movie will be loved by the masses we do not know which game will catch on. I’d like to say to all entrepreneurs that any investor who tells you this has at worst no experience with gaming investments and is wasting your time, stop your losses and exit that conversation. At best the investor saying this has got burned on poor investments in game companies that were unaware of what they really were trying to be—a game factory or a game franchise. Again, if you have options stop your losses and exit that conversation as the education period for you on such an investor will take forever.
However, you cannot control which investors you come across but you should become clear who you are early and pick and choose the best investors, employees, and strategic partners accordingly.
Here is a simple non-gaming example to clarify what I mean by a factory versus a franchise business (inspired by the glass of water I am currently enjoying )*. Imagine you set up a drinking glass manufacturing factory that is coming out with a new line of purple water drinking glasses. You go to a branding firm with your product. The branding firm is very excited, they want to own all rights to the purple glass and create the purple drinking glass brand into a worldwide lifestyle choice highlighting fun, glamor, royalty and all things awesome. The branding firm is betting on your purple glasses being the best thing since…well Pepsi and Nicki Minaj.
Now consider the differences in the two businesses. You, the manufacturer are developing a product but also underlying processes that allow both the development of purple glasses and other similar products you may want to create later. So even if the purple glasses fail the innate processes and assets you have created in being a factory are of value to future business endeavors. Your branding firm on the other hand is betting on the success of your purple glasses. If your purple glasses fail the investment they made in promotion through celebrity endorsements, advertising etc are wasted since they were betting on a franchise (though how anything with Nicki Minaj is a waste is beyond the understanding of my non-business mind).
Now lets get back to games—in the past games were primarily franchise businesses. Game companies spent years developing games based on bets on which game franchises would succeed. Since the growth of self-publishing in 2007 with the opening of the Facebook platform, the game business has evolved away from the franchise only IP business of the past to include the game factory model. The majority of today’s successes game industry successes particularly in mobile and social are game factory businesses like Zynga, DeNA and GREE. While there are still examples of game franchise businesses such as Angry Birds by Rovio these are few and far in between and for good reason.
Game factory businesses are a lot more predictable, less risky, less expensive, and take a shorter time than game franchise plays—Angry Birds was the fifty second game of Rovio and involved mortgaging the CEO’s grandparents home. You know of Rovio since it succeeded but we do not know all the game companies who running a similar strategy failed (or how many grandparents, parents, and founders ultimately did loose their homes).
As is the nature of all factories game factories, such businesses have their various winning competitive elements down to a science. An example of competitive elements of social game companies is their scientific customer acquisition and monetization playbooks. Once a company wins with that strategy future companies need to find other areas of innovation and winning while at the same time not being myopic and loosing the learning of earlier companies. It is for this reason that when we are doing due diligence for companies for the accelerator program we look for companies who are either clearly a game factory business, open to coaching on elements of the game factory business or are a franchise business with a plan (as opposed to just a prayer) for how they will grow the franchise.
I will write more about both models and YetiZen’s accelerator investment hypothesis in the future.
Looking forward to your thoughts on these 5 philosophies that I believe should be the building blocks of all gaming startups.
*Please note this example has been super simplified from the real glass manufacturing and branding logistics and value chain to explain the two models.