Early Investing

Video Games Make Billions – and You Can Finally Invest in Them

Video Games Make Billions – and You Can Finally Invest in Them
By Andy Gordon
Date April 29, 2020
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Crowdfunding just got more profitable and vastly more interesting.

Last week, Republic acquired Fig. Republic is a premier startup investment platform. Fig is the world’s leading video game publisher. They’ve joined forces to give everyday investors the chance to back the next video game of their favorite developers.

There’s nothing more exciting than investing in something you love as a customer. And if that “something” entertains you, your friends and your family, even better. But when that “something” grows in popularity and puts more money into your pocket – year after year after year – that’s the best part.

Can investing in video games do all that? You bet.

Fig opened the door to this kind of investing five years ago. The 40 games it has funded since then have generated revenue share cash payouts to investors totaling $6.4 million. And now Republic wants to fling that door wide open.

I’m not surprised the model works as well as it does. It uses the classic crowdfunding dynamic of customers becoming investors and investors becoming customers.

Fig (and now Republic) leans into this dynamic. Gamers (and investors) can explore the vast array of games under development. And then, if they so wish, they can invest in something they love. The money they invest helps those customers get the games they love. And the revenue share makes sure investors see a good return.

The more people who buy the game, the greater the return for investors. To top it off, investors also get great perks from developers.

Everybody wins – including developers. Game developers get to access a huge pool of capital they didn’t have access to before. And as they onboard investors, they collect preorders from the very same people. So their crowdfunding campaigns double as marketing campaigns.

This is Fig’s model. And it works great. The previous model, where big corporate players chose which games were worthy of their backing, doesn’t work nearly as well.

Republic wants to bring Fig’s model to the next level. It’s a great fit. Republic will leverage its crowdfunding expertise and user-friendly investing platform to further popularize these revenue-sharing deals. Offering a larger pool of capital and a bigger universe of investors should draw many more developers onto Fig’s platform.

Investors will be the biggest winners in this deal. They get an entirely new way to invest. Instead of making money from their shares rising in value, they get a percentage of the revenue the company pulls in. It’s an income play. Investors are asked to buy a piece of the licensing agreement between Fig and developers. If the game makes money, investors share in the revenue. Pretty simple.

And it’s very different from taking an equity stake and waiting for a liquidity event via a buyout or an IPO. Here are the three biggest differences…

  1. The wait to get paid is shorter. It takes roughly one to two years for developers to build their games and then launch sales. Investors get their first payment from a piece of those sales six months later. They’re pocketing hard cash years before they would from owning the early shares of a startup – where buyouts usually happen two to five years following a seed raise and IPOs take place anywhere from four to 11 years after the seed round.
  1. Risk and reward are smaller. Fig says that 72% of its raises have returned at least some money back to investors. Chuck Pettid at Republic (who I respect a lot) told me these deals should ideally return at least 3X. Fig’s highest return to date is 565%, or 6.65X. A 3X return is much bigger than what investors can get from public stock markets (even ones with bullish growth). But it’s significantly lower than the 10X that most venture capitalists expect from early-stage startups. The financial rewards for video games may be smaller than startups, but so is the risk. The majority of early-stage companies never realize a liquidity event. Investors make nothing. But 72% of video games (so far) generate a positive return. That makes it a far less risky investment.
  1. Profits are open-ended. Most revenue-sharing game deals aren’t capped. As long as the game continues to make sales, investors continue getting paid. And video games can have a long shelf life. League of Legends celebrated its 10-year anniversary last fall. And Blizzard’s World of Warcraft is going strong in its 15th year. Getting your original stake back and then making money year after year after year has no equivalent in equity investing.

The online video gaming industry is expected to hit $79 billion globally by 2025. Games are getting bigger and attracting much larger user bases.

Increased accessibility is driving this trend. Games are becoming available on several platforms at once. That’s a big improvement from when games were played exclusively on PCs, consoles or mobile devices. Fortnite’s 250 million player base stems from its ubiquitous presence on every platform.

The gaming industry is fast becoming a dominant force in the entertainment industry. Revenues for blockbuster hits now reach and exceed those of movies. Red Dead Redemption 2 grossed $725 million in its opening weekend. Only one Hollywood movie has grossed more in its opening weekend (Avengers: Endgame with $1.2 billion).

Republic wants to crowdfund about a dozen games over the next 12 months. It currently lists six game-related raises on its platform: Intellivision’s new Amico game console, Marauder by Small Impact Games, Frozen Flame by Dreamside Interactive, Arcanium by Supercombo, Unexplored 2 by Ludomotion and Hearo.Live by PiQPiQ.

If you’re interested or just plain curious, you can check them out by clicking here. And if you’re looking to capture returns sooner as opposed to later, check out the Amico’s campaign by clicking here. Its first revenue share disbursement should take place around January 2021.

If you’re a player, this is a great way to invest in “what you know.” But even if you’re not (like me), it’s a great way to diversify your startup portfolio with investments that offer a very different risk-reward profile.

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