As we have seen over and over, it is incredibly hard to achieve success with a game. And let me get this off my chest first: I, too, don’t have a secret recipe. But from my experience both as the founder of games companies and an investor in the field, I have identified a number of key factors that I believe to significantly influence the path to success. I constantly talk to other game studio founders and rigorously analyze game data from our own and external games. This combination has revealed critical missteps that are often made, starting as early as a company’s founding.
It’s remarkable to see how similar errors recur, despite the diverse nature of studios and their founders. Let’s dive into these common pitfalls and how to avoid them.
What are we talking about?
Before we jump into this hot mess, I need to define the type of gaming studios we’re referring to – we’re not talking about AAA games here. At Phoenix, we specifically target studios that align with our network and whose full potential we can unlock post-acquisition. We concentrate on small to medium-sized studios that have launched games, generate recurring revenue, and operate profitably. We’re open to any country of origin, platform, or genre. The critical criterion is the Free-to-Play (F2P) model, as our technology can significantly enhance performance in this area.
Each year, we interact with 400 to 500 studios, engaging deeply with 50 to 60. We exchange data to ensure they meet our criteria. If they meet these criteria, we then evaluate the potential impact of our technology – and by extension, decide if we want to make an offer for the studio.
In our research and discussions with founders, certain issues consistently emerge, affecting corporate governance, product management, and negotiations with potential buyers. Let’s explore these issues in detail:
1. UA: Accelerator, Not Lifesaver
A common misconception I often encounter is: Ah, just ramp up UA (user acquisition) for our games, and all will be well. This is far from true. As market saturation climbs, the cost per user (CPI) increases, but lifetime value (LTV) doesn’t necessarily keep pace. UA is an accelerator for successful titles, not a miracle cure. Early successes in UA are often overvalued and don’t scale linearly. Just because you’ve successfully acquired 50 users at a profit doesn’t guarantee you can scale that up to profitably acquire 500,000 users. Effective budget planning and a strategic approach to UA are essential, along with a good balance between acquiring new users and retaining existing ones to optimize LTV.
2. Overly Optimistic Interpretation of Soft Launch Metrics
A common trend among founders during the soft launch phase is to view their metrics too optimistically. I understand, the gaming market is fiercely competitive, and the chances of major success are relatively slim, so founders need a positive outlook to stay motivated. But it is crucial to maintain a realistic perspective on the data, both for internal assessment and when engaging with potential investors. My advice is to adopt an approach that’s highly iterative, data-driven, and enriched with user feedback. This strategy aids in realistically evaluating a game’s scalability and success potential.
3. MASTERING ONE GENRE DOESN’T EQUAL MASTERING ALL
Successful F2P studios often focus on a specific type of game. I believe that it is a mistake for studios to spread themselves too thin across genres. There are two common scenarios: A studio abandons a genre after a failed game instead of leveraging their experience to improve, or a studio shifts genres after a hit, assuming the same success will follow. In reality, studios that specialize in a particular genre or focus on a specific audience, diving deep and building on their learnings, tend to be more successful.
4. The Pitfall of False Role Models
The belief that what worked for Studio X will work for us too is surprisingly prevalent. It’s astonishing how often I hear founders say, “We’re emulating Clash Royale’s strategy” Merely reading the breakdown of Clash Royale by our friends at Deconstructor of Fun isn’t enough to develop your own standout strategy in game development and live operations, nor will it catapult you into the ranks of gaming giants like Supercell. While drawing inspiration is acceptable, understanding your own game and audience is essential to build your own success story based on hard data and soft feedback. Imitating successful models without considering your game’s unique characteristics can lead you astray.
5. The Next Game: Balancing Focus
To stay afloat, a studio can’t merely rely on past successes. Eventually, you’ll need to innovate, and this is where costly mistakes can happen — mistakes that can potentially sink your company. A common blunder is biting off more than you can chew, like developing not just one, but two new games at once, thinking you have the right timing and resources. This is a classic example of overreaching.
As a founder, another pitfall is getting too wrapped up in expanding capabilities and supporting projects, while neglecting the management side of things. You can’t do it all, so it’s critical to ensure that key managerial roles are filled by competent people. Otherwise, your studio’s structure may begin to weaken.
Before deciding on your next game project, consider these key questions:
- Do you truly understand your target audience?
- Are you well-versed in the genre and its mechanics?
- Is there an existing successful model to follow, or a gap in the market you can fill?
- Have you tested the game with more than 1,000 users to gather feedback?
- Can you leverage any of your studio’s existing assets, such as intellectual properties or specific expertise, to build on previous successes?
One key question is how to split focus between new and existing initiatives, especially regarding resource and investment allocation. This situation resembles the notorious ‘hamster wheel of death’ that developers often face. When sales dip, you’re compelled to revamp the game to prevent it from vanishing overnight. Simultaneously, you’re scouting for the next project that’ll keep the lights on in 12 months. Striking this balance is tricky, and there’s a real risk of oversteering in either direction. There’s no universal answer that suits every studio. However, discussing this with founders is incredibly insightful, revealing their perceptions and strategies for managing the conflict between old and new, and their approach to resource management. A red flag emerges when they fail to recognize this conflict, something I’ve noticed quite frequently.
6. Planning for the Worst-Case Scenario
The gaming industry is dynamic and unpredictable. Many founders struggle by failing to adapt to market changes or by not having a plan for failure. Risk management, including preparation for worst-case scenarios, should be an integral part of any business strategy. This means being able to make tough decisions when necessary. Understandably, halting a project that has already made significant progress is difficult. However, facing the possibility of shutting down the entire studio due to a lack of a worst-case strategy and delayed response is even more catastrophic.
7. Navigating Investor Relations and Shareholder Challenges in Game Studios
It’s common for studios to attract investors during times of high valuation, but they often later face investor dissatisfaction, creating a complex dynamic. Investors are in it for financial returns, not always driven by a passion for gaming or respect for founders. When outcomes don’t align with expectations, conflicts of interest are almost inevitable.
A recurring challenge is dealing with former founders who are no longer active but still hold substantial stakes in the studio. Picture a studio, a decade into its journey, with 40% owned by those who’ve moved on but were part of the initial founding team. Unraveling this is no easy feat. For a buyer, structuring a deal that aligns interests and motivates the current team, especially when a significant equity share doesn’t reach your target recipients, is highly complex. Crafting a structure and model that works for everyone involved is a substantial challenge.
It’s prudent to avoid situations where individuals with significant shares no longer contribute, especially during the early stages of venture capital funding. Such scenarios can make studios far less attractive to investors. It’s crucial to continuously reassess shareholder roles and actively seek solutions if someone wants out. The aim is to ensure that those actively contributing to and driving the studio’s progress hold significant shares, as opposed to passive or former founders. This strategy not only eases the process in the event of a sale but also streamlines everyday operations.
In the world of game development, the path to success is full of challenges, and the specter of failure is always looming. There’s no sure formula for success. Every studio needs to navigate its unique journey, considering a myriad of factors to build a resilient, financially robust enterprise. Key to this is understanding basic KPIs and the subtleties of user acquisition, setting realistic goals throughout the game development process, focusing on specific genres, and drawing inspiration from successful models without merely copying them. Juggling the development of new endeavors while keeping existing ones afloat is crucial for lasting success. Founders need to stay nimble, adapt swiftly to market shifts, and prepare for contingencies. The road may be tough, but with strategic thinking and an eye for common traps, game studios can flourish and make their mark in the dynamic world of gaming.