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Why & which game companies get invested or acquired
Eric GoldbergManaging Director, Crossover Technologies
17 February 2016
Investment & acquisition triggers
• Need Business FOMO (Fear Of Missing Out) Put money to work
• “Don’t call us, we’ll call you”• Opportunity aligned with timing• Invitation to a fire sale• A champion (from a founder with a controlling stake on down)
Great Expectations->Reality
• Investments and sales happen as a result of great initial optimism for both investor / buyer and game company
• Once the investor / buyer decides their interest is serious, the analysis shifts to a ‘downside risk’ scenario
• A disconnect occurs when only the investor / buyer recognizes this 180-degree shift in perspective
• Supporting this shift by directly and pragmatically addressing the ‘glass half empty’ can win or lose a deal for the game company
• Standard compromises include valuation for investment and earnout for acquisition
Investment Realities (macro)
• The games sector is out of fashion with the institutional venture firms investing at >$3MM-$5MM (not to mention Series B)
• The upside is capped: game companies with enterprise values >$500MM command in the 1.5-2x vicinity for trade sales
• The Western institutional VCs with games investment experience are almost all on the sidelines for 2016
• The strategics have stepped up to replace institutional venture backing of game companies and, with the Asian wave cresting 2015-16, have exceeded peak institutional venture investment
Investment Realities (micro)
• Europe has a cadre of first-round venture investors that have games experience and are making multiple game investments
• Tens of exits in the 8- to low 9-figure range are possible for game studios, which fully supports <$5MM growth investments
• Once a game studio delivers a Top-Grossing title, a next round is sufficiently “de-risked” to open up financing options
• In the eight-figure range, back-end, service, tools, and analytics plays reward <$5MM investments (but with fewer total exits)
Ingredients
• Great team• Greenfield opportunity• Blue-ish ocean• Unfair competitive advantage
For extra bonus points: sustainable unfair competitive advantage• Great game (great game line)• Sector, game genre or territory• Infrequently technology
M&A large…
• Buy vs. build• Acquire a studio or back-end capacity• Enter a new line of game business, more often as a defensive
move• Buy an established product line that’s achieved a sustainable
revenue plateau or with material prospects to increase• To excite or placate Mr. Market (i.e., move the stock price, either
upwards or in hopes of arresting a momentum-driven decline)
…and M&A small
• Buy vs. build – especially in a more favorable geography (whether cheaper or with talent not readily available to HQ)
• Acquire a studio or back-end capacity• Enter a new line of game business, often complementary and
usually as a growth strategy• Stay competitive in a rapidly consolidating market – or, to a
lesser extent, “punch above weight”
“That deal”
As in, “I want one of those deals!”Investments• Usually $5MM-$7MM, perhaps with only a PowerPoint• Team coming together, often with excellent provenances – but
have not worked together as an independent unitAcquisition• The stars align: buyer is new entrant into field, pay up front for
success in Next Big (Game) Thing, conviction play “It’s better to be lucky and to be good”
Valuation (investment)
• In most cases, should allow for company insiders (not just founders) to retain 50% after next financing (e.g., Series B)
• Greater variable is whether to invest in first place• Driven by exit prospects
Later stage: low multiples relative to other sectors at big numbers Earlier stage: sky may not be the limit, but cirrus clouds can be
• [For strategics] Price sensitivity drops with ‘first look’ or distribution rights
Valuation (buy)
• Buyers emphasize lower base price in return for earnout• Venture investors a minus for most buyers, as price disconnect
(and possibility of misalignment between VCs and company)• Buy vs. build vs. rent• Greatest value for great team at lower end, sustained
performance across multiple titles at higher end• Sharp divide in re games at or approaching a revenue peak
Big Game Hunting
The good news• [For M&A] The games industry is in a consolidation phase• Europe has a game superangel and first-round VC ecosystem
that’s superior to both the NA and Asian counterpartsThe not-so-good news• [For investment] The games industry is in a consolidation phase• It’s long odds against except when:
• you’ve carved out a successful niche; but chiefly when• buyers or investors come looking for you
