A deep dive into Canada’s micro climate for game investments

The organizers of MIGS 15 paid my way to Montreal. Our coverage remains objective.

MONTREAL — Canada has a unique place in the game industry. It has multiple hubs across several cities that have become strong in both traditional and new digital game development talent. But the nation is weaker than other centers of gaming when it comes to franchise ownership, marketing, and online gaming. The result is that it also has its own unique investment “micro climate” when it comes to funding for game startups.

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Canada, and in particular, Montreal, is home to the artistic and technical side of gaming. It has inspirational places like the Basilica Notre-Dame de Montreal and McGill University. But it has had few successes in terms of companies that have created and own their own gigantic blockbuster franchises. Investments in game startups are, theoretically, one of the things that could change that.

I moderated a session on funding for game startups at the Montreal International Game Summit (MIGS) this week. At the same event, the Entertainment Software Association of Canada announced that the country has 472 active game studios based on a 2015 survey, up 143 from 2013. These companies contribute $3 billion to the Canadian gross domestic product, counting both direct, indirect, and induced jobs (those created by the industry’s own business). That’s up 31 percent from 2013. The companies employ 20,400 full-time employees, up 24 percent from two years ago, said Jayson Hilchie, the president and chief executive of the ESAC.

Much of the growth in sheer numbers of studios comes from “micro studios,” or game companies that have four or fewer people. But 89 percent of the jobs are part of 24 large companies that have more than 100 employees each. We talked about the trends influencing game investments and predictions about the future with a panel that included Ringo Zhu, the director of business development at China Mobile Games Entertainment Group (CMGE) and an investor in Western game studios, who has set up shop in Toronto; Jason Della Rocca, the cofounder of indie game studio accelerator Execution Labs; JS Cournoyer, the cofounder of Real Ventures; and Marc Alloul, the cofounder of W2/W3 Investments.

Here’s an edited transcript of our panel.

Ringo Zhu: I’m from China Mobile Games Entertainment Group. We’re a major mobile publisher in China, with 1,200 people in mainland China, Taiwan, Hong Kong, Korea, and Japan. CMGE was also the first Chinese mobile game company listed on the NASDAQ. We’re actively looking for high quality mobile game titles to publish in China, as well as western studios to invest in.

Jason Della Rocca: I’m the co-founder of Execution Labs, based here in Montreal. We’re a seed fund and accelerator for game studios. We’ve been active for almost three years now, and we’ve invested in almost 20 game studios so far. In addition to providing funding, it’s also about support, mentorship, expertise, and connections to the larger industry. We like to say we give indies an unfair advantage to succeed in a very challenging marketplace. We’re actively recruiting now for our next cohort in the accelerator.

JS Cournoyer: I’m one of the co-founders of Real Ventures. We’re a seed fund based out of Montreal, with an office in Toronto as well. We were the original investor in Execution Labs. I’ve personally made investments in both game companies and technology companies that sell to game companies since 2001. We’ve made a few investments in gaming and in the VR space as well.

Marc Alloul: I’m a physicist, engineer, and entrepreneur. I was crazy enough to launch a mobile game company at the end of 1999, when virtually no market existed. I’ve seen the good, the bad, and the ugly through about 12 transactions in the games sector. I’m now a managing partner and founder of W2/W3 Investments. We’re actively involved with various [technology investments across Quebec].

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GamesBeat: Marc, why are you interested in investing in Canadian companies?

Alloul: In the last 10 or 15 years, I’ve realized that we’re fortunate to have some great talent in Canada. We have some of those developers in the room right now, including the makers of one of the most successful games in North America, Simpsons: Tapped Out.

I got involved in the space because I realized that Canadian developers needed help to be more adventurous and to be able to sustain their ambition. What that usually means is having access to resources and capital. That’s why we built W2/W3, to detect talent and help them accelerate their growth.

GamesBeat: Let’s have everyone take a crack at that. Why Canada?

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Cournoyer: I’ll talk about Montreal specifically. Because of the language, you have a great creative industry across all different types of media. We have a lot of great creatives, a lot of talent building all kinds of games here.

What has been missing in the past has been the platform that enables all these people who want to create games to build companies as well. Most of the gaming talent here has worked for the big studios. A few examples, like Ludia, have built their studios from scratch here, but most of the talent was around bigger players in the industry. That’s why we wanted to help Execution Labs start. The idea was to build a creative ecosystem in which these people could learn how to build companies around the games they wanted to create.

The next phase of the market – and again, Montreal and Toronto are well positioned here – is the combination of this great creative talent with artificial intelligence and machine learning that can apply to games. Games generate a lot of data. Analytics drive a lot of decisions. But they’re still ultimately human decisions. We’re firm believers that with a dramatic reduction in cost through machine learning will enable game companies to start automating decisions and create opportunities for investors like ourselves much earlier in their cycles.

Della Rocca: Everyone talks about the great talent that exists here. We’ve been fortunate to have a robust game industry in Montreal in particular, and more broadly Canada at large. To echo some of JS’s points, we invest here because we can see the difference that the work we do makes in terms of building a company into a sustainable business.

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When we invest, we invest with a five-year plan in mind. We don’t necessarily imagine that we’ll all become billionaires off the very first game, but we do want to put you on a path where that kind of success is possible. Building companies around those teams and enabling them to build games in a sustainable way over the long term—You’re able to have that momentum and credibility and community around your studio.

The talent is there. But we do have to provide the business side of things. And for those who are in Canada, it almost goes without saying that the level of government support – tax breaks, things like the Canadian Media Fund – provides an extra advantage. We can come in with some seed funding and leverage that to get three times or four times the amount in Canada Media Fund funding or tax breaks, which extends the run rate. In something like games, which is very risky, having that extra buffer helps tremendously.

Zhu: CMGE is headquartered in China, but I relocated to Toronto a few months ago to have a better reach to Canadian studios and game companies. I’ve been to Vancouver and Montreal as well. What I’ve found is that Canada has a very strong foundation in the gaming industry. In Vancouver, Electronic Arts is huge. They have one of the biggest studios in the world there. Ubisoft likewise has its big studios in Montreal and elsewhere. There’s an existing base of talent to create top quality mobile and PC and console games.

I’ve been in contact with many Canadian studios that have been doing work-for-hire for top-tier IP owners in the U.S. They’ve accumulated experience, talent, and funding that they could use to produce their own IP in the future. We have some very good options here as far as investment, licensing, and publishing.

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GamesBeat: Investment always happens in a certain climate. That determines what kinds of valuations are perceived and created. The climate now is very interesting for games in that some forces are going in its favor, but others are working against it.

In the first nine months of this year, a tech advisory firm called Digi Capital has been counting up the deals that have happened. Overall, deals in the industry are down 74 percent compared to a year ago. But last year was kind of a miraculous year, with $24 billion worth of exits in the industry. Even with the $5.9 billion acquisition of King by Activision, we may only get halfway there this year. Game investments in particular are down 35 percent.

We’re in some kind of transition, or something else is going on. How do you perceive this larger climate? Does it affect your thinking in any way about what to invest in?

Della Rocca: The game industry has always gone in cycles. Last year there were some very large individual transactions, some outliers. If you remove those, the numbers are slightly more in line. Mojang was purchased for $2 billion and so on. Investors collectively tend to experiment. They look at different opportunities and trends. They try a lot of stuff. They’re building diverse portfolios to see what may or may not stick. There are definitely waves of activity. VR is probably the current wave, whereas a year or two ago it was mobile studios. There is a lemming effect that happens, to an extent.

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At Execution Labs, we’re still very hungry and active. We’re constantly looking for good studios and good teams to invest in. On a more micro scale, we have a certain agility because we’re doing investments in a cycle, two times or so a year. We’re able to adjust and respond to the market in each batch. One cycle might be more mobile-focused. Another might be more Steam-focused, or more casual versus more core. That allows a certain agility in how we invest. We can respond to transitions in the marketplace.

Cournoyer: Another angle to look at is that the time people spend playing games falls into their entertainment bucket. It’s time they spend having fun. As platforms where people spend time grow – mobile was the last wave – you have great companies being built to ride that wave. They grow with the platform. The same thing happened with Facebook.

Right now we’re in a market where the mobile sector is maturing. It’s difficult for a tiny startup to go in and become really large in a mature market. You need a new platform. People talk about VR. I’m not sure VR is ready. I’ve tried most of the technology and I don’t think it’s ready for prime time yet. Maybe Slack is another one. People spend a lot of time on Slack. Maybe there’s a game that can be built on that platform. Messaging could be another one where there hasn’t been much gaming done. As a game developer I would look for that growing platform where people spend a lot of their time and look to build a game there.

For investors like ourselves, early stage investors, it’s hard for us to invest in game companies in a mature market. We’re not looking for 2X or 3X. We’re looking for 10X or 20X or 50X on our investment. It’s hard to see that in a market where only the top 10 or 20 games are worth that much and they’re all owned by the big studios.

Alloul: In reality, it is much more difficult to raise money to build game or entertainment companies. You have to develop a relationship with potential investors. Investors tend to work with people they know, that they’ve followed, that have some kind of past track record.

Investors also get excited by visions of a new field. That’s why we’re seeing so much investment in VR. We’re investing in VR, but not in content. We’ve invested in an analytic platform called Retinad, simply because we want to have our finger in the wind. We want to be able to understand what’s coming.

Investors are people like you and I. They want to be able to read the future. You need to develop a relationship with a concept that isn’t just “me too.” You need to come up with a new angle to differentiate yourself from what already exists. Building a company or building a product is one thing. Actually marketing and selling the product is the biggest challenge. How do you overcome the challenge of putting your product in front of users? We’ve talked a lot about user acquisition, techniques for engaging with viralities and so forth. But the challenge is how you get your product in front of potential buyers. Investors are very attentive to the strategies you’re putting into place to go to market.

GamesBeat: Ringo, you have a different perspective on the market from most of us. One of the bigger things in recent years was Asian companies investing in Western game companies. That trend still continues, but China has seen a lot of turmoil in the stock market this year. That seems to have affected the global investment picture. What’s your own perspective?

Zhu: Investment in the game industry has dropped a certain percentage, but from what I’ve seen and heard, Chinese companies and Asian companies are still trying to expand their investments in the western world. CMGE, with our investments in mainland China, Korea, and Taiwan—We’ve invested in game engine providers, game developers, instant messaging developers, and comics and animation creators. But we’re also trying to find opportunities in Canada and other parts of the western world.

We’re looking for studios with the capability to produce mobile games that can be successful in both Asia and the west. We’re not looking for games targeted at a specific country or region. A good game is always a good game. It can be successful anywhere.

When it comes to VR, we feel like it’s still in the early stage. We’ve seen a lot of conferences and meetings happening every month in China with people continually talking about VR and AR. But in addition to the hardware, we haven’t seen any content or game based on VR or AR developed in China. It’s still in an early stage. We’re waiting for a good time to get involved.

GamesBeat: When you take a lot of these things into account, what do you think is the most favorable sector within games?

Cournoyer: We’re seeing a big move toward machine learning in the IT space. People think of business analytics today as—I look at data. I put it in a way that I can see it. Then I make decisions based on that. The next level is to have the computer make the decision for you and tell you what should be done, operationalizing that into your business processes.

We see that happening in security companies, in IT companies. Facebook does it all the time. Some of the bigger game companies, the Kings of the world, have big machine learning teams. But these technologies are becoming much cheaper to use now with companies like H2O and LDB. The game studios that use machine learning to automate decisions in design and the operation of their games early in development, right from the get-go, will have a better shot at becoming successful.

GamesBeat: Are you talking about automating the targeting of users, for example?

Cournoyer: Automating at all levels. Not just for acquisition, but in the way you retain users, the engagement in the game, how you bring in the times you ask for someone to pay for something. Automating all of those processes from the beginning—Some big game studios will come into being, ones that don’t exist today, will be automated from the get-go. That’s one area we’re looking at.

GamesBeat: Does anybody else on this panel agree with that?

Alloul: I think what you’re saying is valuable, but it’s not always essential. The big move I see in the current market is people investing in big IP. You don’t have to spend as much on user acquisition to monetize those IP. We’ve seen a couple of very successful moves from conventional companies like Glu Mobile, which invested heavily in acquiring branded content from big stars like Kim Kardashian. (I am involved in a company called Complex Games that licensed intellectual property from Games Workshop. We know that model well).

I’m involved in a company called Icejam that’s trying to approach the market differently, modifying the behavior of the player and engaging it into a more viral component. You force them to interact more with other variables. We call it playable data. I believe that virality and engagement will substitute themselves for things like just buying users. It’ll make a big difference in the community. That’s why investors are looking more at platforms that will facilitate those moves, as opposed to simply investing in a content play that will be faced with the same old mechanisms for user acquisition.

A larger topic is how entertainment has moved from single group usage to wide usage. I’m sure will speak about that more later.

Della Rocca: We’re looking at games that have the potential to move or originate in the eSports context. Related to that is Twitch and all the impact YouTube streamers and celebrities have had. It takes a different mindset as far as how you market a game, develop community, and think about how a game is going to reach your audience. You have to design it in a way that’s not just fun to play, but fun to watch someone play.

I don’t have current statistics, but we’re getting to a point where some games are more watched than they are actually played. That spectator activity is what drives the success of those games. Designing games in that context is an interesting challenge, and we’re certainly keeping an eye on it.

GamesBeat: How would a startup approach esports? Some of the biggest successes in esports now are the biggest brands from the biggest companies, like Call of Duty.

Della Rocca: Like almost every sector—All the big ones started as small ones. On the esports side, it’s very community-driven. If you look at ESL and the other leagues, they do have the farm leagues, the amateur leagues, where it’s players that brings the games forward. If there’s enough of a community around a game, they can use the tools and sites to form leagues and so on. The community can drive interest until something gets enough momentum.

If you’re a startup and you’re designing your game in a very intentional manner to drive that kind of interest and engagement, you do have the possibility for it to come up grass roots. We were recently doing research on this topic. You can’t come in at the top level. You can’t buy your way into being a competitive game. It has to come from the ground up. That’s feasible for a startup.

Alloul: You have a very good example of a startup that’s not really a startup anymore, the developers of Vainglory. They created a presence and a niche in competitive multiplayer, and then created their own league afterward.

It has to be noticed that this company was heavily funded, but that goes back to the question of how you attract the capital investment to tackle a new challenge. It goes back to my initial point about building relationships, building a track record, and gaining a reputation. That’s what they did.

Zhu: esports is a very hot topic. China has become the largest mobile game market in the world, passing the U.S. and Japan already. esports are getting hotter there as well.

The core thing for esports, to me, is still the game itself. Back in 2014, CMGE launched the first mobile FPS game in China, which was very successful. It’s called Crisis Action. The DAU figure is around 5 million, and it generated $8 million in just five days after launch. This year we’re organizing clubs, professional teams, and working with live broadcasting and streaming partners to build up the ecosystem around it.

We also have plans to release our own MOBA title in China, which is going to be very different from games like Vainglory or Call of Champions. It’s meant to be much easier to play on a mobile phone – better UI, better UX, and better compatibility with more than just high-end mobile phones. We want to be able to reach mid-tier and low-end phones. That’s an important factor.

GamesBeat: How many people in the room are raising money for a game company? Not as many as I would have thought. I’m curious about what advice you’d have for people about different sources of capital these days. A lot of the money used to come from successful developers or publishers or first parties. Now we have all kinds of sources – angels, venture capitalists, crowdfunding. We have strategic investors like Intel, Oculus, and Samsung. There are overseas investors. What advice would you have for people trying to navigate those options?

Della Rocca: It’s highly dependent on what you’re trying to achieve. For me, the first question you have to ask yourself is, are you just building a game, or are you building a company? If your mindset is just about the game, that’s one path of funding. You apply to the Canadian Media Fund. You go pursue Kickstarter or Fig. You talk to publishers to get project-based financing, advance against royalties, that kind of thing. That’s one path of financing.

The other pathway is building a company. You’re building a long-term business. You have co-founders and you’re thinking about the vision for the studio and so on. That’s a different pathway of investment and options for funding. That’s where you talk to friends and family or chase angel investors or look at institutional venture capitalists or places like Execution Labs, accelerators, that are much more studio- and business-based. That opens the door for strategic investments and so on. There are certainly some types of investors that dabble on both sides of that.

Often, when you talk to game developers, they don’t really know what they’re trying to do. They know they need money, because they have put food on the table and pay bills and buy equipment. But they haven’t thought about questions like, “Am I building a business? Who might be my potential investors and partners for that? Or am I just trying to make a game?” There’s a whole separate workshop on those two pathways. But that’s the initial advice I give when someone comes to see me.

Cournoyer: If you are building a company, the game itself, the creative aspects of the game, that’s less important than what the game enables you to build. In today’s market the community aspect is important. You have a sustainable advantage. You have something that you’re building where, as you add players, the value of your product or platform increases. It’s important to think about the game as a means to an end, as opposed to an end in itself.

Alloul: As an investor, what I’m going to look at as well is how committed you are to a project, if it’s a company that you want to build, a lifetime business, instead of just one game. What’s important that you show the people surrounding you that you’re deeply committed to your project. You’ve invested money of your own. You’ve been participating in the launch of your company. The commitment of you and your partners to the company is a strong signal to the people watching you from outside.

One observation I’ve had as a manager at Execution Labs—I’ve met a couple of companies that were applying from inside the program, and I asked them questions like, “What do you intend to do afterward?” One answer I got was, “We’ll get more money from CMF and launch a second game.” As an investor, that’s a strong signal that you’re not looking at building a company. Taking government money is an advantage in Canada, but it can also be something that will stop you from going fully into action and really committing to your company. Be careful of the easy money that comes from a government loan. That can be a signal that you’re not really committed to launching your company.

GamesBeat: What else can a company do to make itself more investor-ready?

Alloul: Most people underestimate the impact that—The material that you have to produce shouldn’t cross the line of sitting in front of GS, sitting in front of a potential bank—It’s the readiness of the material you have to produce. Some people say, “Eh, I’ll deal with that later, I’ll hire an accountant.” That will cost you a lot. You’ll have one week to produce this material and you’re not ready. That lack of preparation can cost you 20 or 30 percent of your valuation, if you aren’t simply rejected outright.

That’s one reason why I founded a company called Budgeto that isn’t focused on games. It’s a budget tool that helps entrepreneurs create an online budgeting model in a couple of hours, so they can be ready to talk in front of a bank.

Della Rocca: It’s a whole day-long workshop to prep for this kind of stuff. Doing the due diligence, or what we call a day room, and having that day room ready to go in terms of all your budgets and forecasts and key documents and contracts and so on. We often do a due diligence type of presentation, and it’s extensive. A lot of developers don’t tie the knots on all their legal elements. They don’t have contracts with their employees. They don’t have their minute books ready.

One of the most important things is the chain of IP. You want to make sure that if you’re using your buddies and freelancers and other indies pitching in, they’ve signed proper contracts and signed their IP over to the project and the company. Even if they’re doing it for free, they have to formally sign over the IP. If you’re talking to a publisher or investor or bank and you have all these loose relationships with people pitching in, that’s a massive red flag.

There’s a whole bunch of other stuff related to how a company’s structured, the partnerships between the co-founders, that may prevent or make it complicated for investors to come in. Again, there’s probably too much detail to get into here, but all comes back to the notion of being investable. It’s one thing to say, “I need money and what I’m doing is cool.” There are situations where the things you’re doing actively thwart the ability of people to give you money, because you don’t know any better or you haven’t talked to the right lawyers or accountants and stuff. Getting that kind of professional help really does facilitate things if you’re chasing investment. It’s super critical to be investable.

Another one, just on the planning side, it’s amazing how many studios pitch to us and—They’re very focused on how awesome their gameplay is, or their art. They’re developers, so they’re very passionate about what they do. But they haven’t thought through the market potential. They haven’t fully articulated what their audience is, where it is, how they’ll find it, and how they’ll beat their competitors to get those users to buy their game.

Often they don’t even do forecasts on what they think the upward potential is. They come to us and say they need, whatever, a million-dollar budget. Okay, how many units do you think you’ll sell? We’ll have a conversation and realize that maybe they won’t even make $1.2 million. The math just doesn’t work. Of course a lot of that is speculation. You can’t guarantee how many units you’ll move. But if you’re not estimating or even thinking about what the potential is, it just doesn’t make sense. Why should an investor take that risk?

Cournoyer: Another way to look at it is, instead of looking at yourself as a game studio, look at yourself as a startup. There are reams of information about how to position yourself as a startup and get in front of investors. Thousands of blogs you can read. A lot of information is out there. Look at your project as a startup and do an investor pitch that’s built the way a startup would build one. That’s a good way to look at it.

Zhu: I agree with what Jason’s saying. At CMGE We provide different options in terms of investment, whether it’s strategic investment or project funding. But our preference goes toward strategic, active investment on top of a publishing deal. If we sign a publishing deal for a game title, that’ll be a very good test of a studio’s capability. We can see the market reaction to the game in terms of revenue, userbase, and KPIs.

Alloul: As an investor we know that the data you’re going to present will not be perfectly accurate. What we’re going to look at is the methodology of thinking behind your data. You need to be prepared with a worst-case scenario, a base scenario, an optimistic scenario. Back up your data. What’s your burn rate for 12 months? How are you going to ramp up?

If you’re calculating a tax credit here in Canada, it has to be properly documented. If you’re thinking the tax credit comes in the year when you apply, that’s one of the most common mistakes people make. “We only need $500K because we’ll get a $250K tax credit.” No, because you won’t get the credit for 18 months.

Whether you apply to raise a debt of $25,000, liquid investing of $50,000, early stage investing of $250,000, or in our case we invest $2-5 million, the due diligence will be the same process. You’ll be asked for the same documentation along the way. Maybe less at an early stage, but it’ll be the same packaging. The earlier you’re ready, the better your chances.

We’re asking more and more from entrepreneurs. It used to be that you just had to be a passionate, creative game developer. Now you have to understand legal and financial issues. It’s tough to be an entrepreneur.

Question: Along the lines of machine learning and algorithmic game creation, at the end of the day we’re making cultural content. In Canada, we’re making something that exports our view of what the world is like in the form of a game. I’m concerned that when game companies are entirely viewed as startups, we miss something essential in how we value that quality. Can you respond to the notion of how much you attribute to the creative value of a game in your overall valuation?

Della Rocca: The reality is, despite the fact that we’ve been talking a lot about spreadsheets and due diligence and legal issues and so on, I will not touch a game that isn’t interesting, creative, innovative, that features some kind of meaningful design. I’m not looking for Candy Crush clones because we think the spreadsheet comes out nicely.

From Execution Labs’ perspective, we’re looking for developers who are talented and passionate, who believe in what they’re doing as a medium. They’re creating something with some kind of meaning or innovation, but doing that in the context of commercial intent. They’re building this with an audience in mind. They’re going to deliver it to that audience and make money. Whether or not they eventually make money, at least they have the intent. That’s the goal.

At the same time, there are other venues and elements and platforms in the game industry where if you just want to be a starving artist punk rocker, you have the opportunities to create and express yourself in the same way that music or dance or film—Not all of it is encapsulated in an investable industry. It’s an art form. In the sense that you’re trying to build a business and take other people’s money to grow that business, it has to be done in the context of commercial intent. But we do so with games that have some kind of meaning or vision.

Cournoyer: If you look at very successful startups, they’re created by entrepreneurs who are passionate about what they’re doing. They’re passionate about a problem they’re experiencing and they want to solve, or they’re passionate about this new thing they invented. They use a company as a way to take that innovation or the solution to that problem to the world.

If you make a parallel to the game industry, you start with a game you want to build. That game is the creative piece. It’s the art. But the mechanics and the process by which you will build that business around that game, that’s where I see machine learning being applied. Not in the emotion you want to convey with the game, because that’s where it starts. It starts with the emotion you want players to feel when they’re playing. But then it’s in how you’ll take this initial vision and have it evolve so it becomes a sustainable, financially successful long-term business.

Zhu: The cultural element can a very broad topic. A specific cultural orientation can be a pro or a con. But my opinion is that good game or a movie or anything else can be taken worldwide. I’ve seen lots of games in test-build form from Canada and the U.S. and Europe. Some developers don’t produce games for money. They make games for themselves. And our preference, unfortunately, isn’t to publish that kind of game. We go for profit.

Question: I’d like to understand what your goals are when you invest in startups, and video game companies specifically. What’s your ideal exit? What kind of return would you like on your investment, and in what time period? What’s your goal?

Della Rocca: Understanding that as an entrepreneur is part of the process of knowing who it is you’re pitching to. It’s the start of that bartering process. The reality is that the answer is different for everyone. A seed stage investor is looking for a different type of return from an angel investor, who’s looking for something personal to get behind. They want to lend their knowledge as well as earn a return. A later-stage growth VC is writing very big checks and the ROI is very different. You’ll get different answers from each of us and every investor you talk to.

Oftentimes the more strategic the investor, the less pressure there is on the economic side. They’re investing in you because they see you plugging in a talent or IP. They see some value in you that’s not purely economic. They may want you to make money as well, but it’s more about these other things. That will change depending on who the strategic investor is, though. The more banker side, it’s literally, “I give you money, and in five years you give that money back, plus some more.” It’s quite a broad range of demands.

Generally speaking, if possible, you want to tend toward the more strategic side of the spectrum. That often means you’re getting something of non-economic value as well. Let’s say it’s a publisher. You’re getting access to marketing as well. You’re not just getting a check to fund your development.

We’re almost a pre-seed investor. We’re investing at a very early stage. We’re investing, as I mentioned, on a longer-term horizon. We want you to be making games and building momentum on a longer-term basis. If there’s an exit possible, where Microsoft comes in and buys you like the next Mojang, that’s great, because we do take an equity percentage. But we also have a trigger that asks you to buy back the shares from us if you’ve been profitable and have cash on hand. If you’re doing well as a company, but Microsoft isn’t coming to buy you for $2 billion, that allows us to exit at a fair market valuation.

In that sense, while we’re working with studios to help them become as successful as possible, some might be more on that “get bought for $2 billion” path, and some others might not want to ever reach that. But we’re able to have a diversity of exits or dividends and so on. The economics of a pure VC are much different.

Cournoyer: We typically take a 10 or 15 percent ownership stake in the companies we invest in. We look to invest in projects where, assuming everything goes well, in a positive outcome, we as a fund make $15 to $20 million. You’re looking at a couple hundred million per exit, is the target we go for.

Alloul: W Investment was initially a fund investing in early stage companies. At that level you’d better already have $15 or $20 million in your pocket before you start to play. Statistically speaking, we looked at the results we had and came to the conclusion that you’re going to lose some or win some. You’re hoping that the exit brings you 20, 30, 50 times your investment.

We modified that thinking, which is why we created W2 and W3 Investments. We sacrificed the multiple we’re looking for against some risk tolerance. That’s why we now invest only in companies that have existing revenue and profitability, that are cash-flow positive or about to be. Because we’re investing a greater amount — $2-5 million – we’re not dreaming of 20. We’re happy if we do five, three, six, whatever it is. It’s more important for us to not lose our money, as opposed to dreaming of making 50 times our money.

The big difference is that in some cases, the investors are investing someone else’s money. That’s why, to Jason’s point, you have to understand who you’re sitting down with. Are you talking to investors from the government, institutional investors, banks? In our case this is a private fund, which means we have no limited partners. This is our own money. That’s why we’re very cautious.

Question: Early on you mentioned you invested in Retinad. That seems like a riskier action than what you’re talking about there.

Alloul: That’s a good point. The investment in Retinad is a lot less money than we normally do. We’ll do maybe one deal a year, two deals a year, that are more because we know the entrepreneurs, and so we’ll do something outside our normal focus. It’s a very small amount in that case.

Question: Do you believe that it’s hard and fast rule that mobile developers need to keep creating more content post-launch to maintain retention for their games? Or do you think that games still have the ability to sell themselves as a self-contained package? Is there ever a boundary where those design decisions are more or less acceptable in the eyes of an investor?

Della Rocca: To me, additional content is about retention and engagement of your existing players. You do enough content to acquire users and get them involved in your product, but then at some point your retention will drop dramatically if you don’t have any new content for them. Unless it’s more of a multiplayer game, like Clash of Clans, where just playing against other players is what brings people back to the game.

Cournoyer: I don’t know if you’re asking that question more in the context of paid or freemium games, but to echo Jason’s point, you need to do whatever is necessary to retain and engage your users. In certain games that’s adding content. In other games that’s not as necessary.

On the mobile side the bigger challenge is user acquisition to begin with. Creating new content can also be part of the acquisition process, but the bigger problem is developers who think they can make their awesome little game, put it on the app stores, charge a buck or two, and players will come to them. That just doesn’t happen anymore, or only in very rare cases.

In building a game as a service you have to be thinking about the user funnel of acquisition, retention, engagement, conversion, and so on. You have to be engaging with players that have deep pockets for user acquisition – publishers, strategic investors, or if the metrics look really good, VCs who may still come in. If you’re not building the game with that mind, you’re almost dead in the water these days.

Zhu: Additional content is very important to keep up retention and acquire new users. From our experience, we always want a developer to do fast iteration right after the launch of a game. They need to add new content constantly.

Della Rocca: If the game is not doing well, of course – if players are not coming back to the game, if they’re not being retained by what the game is fundamentally — adding new content is probably not going to result in success. You need to go back and look at the data and understand why players are dropping off before you just make content because it gives you the opportunity to make noise.

If the game is fundamentally working, then yes, adding new content to keep those players engaged over the longer term is usually a good strategy. But if the game isn’t working to begin with, you have other problems to solve before you start making new levels.