Patrick Chung on Games Venture Capital

These are rough notes from an Edinburgh Entrepreneurship Club/Edinburgh-Stanford Link lunch event. Patrick Chung is a partner with NEA (New Enterprise Associates), focused on internet technology, including video games.

Video games trends

A summary of his current trends in video games:

Nothing terribly unexpected there. But he made some interesting points on venture capital and funding.

When to consider venture capital

At the outset of a venture, consider venture capital only when you really need it. He used the example of Loopt. The two young founders needed the approval of major US mobile carrier networks. They simply would not have got in “through the door” of those organisations without the backing of a major venture capitalist.

In most cases, find angel investors (individuals with private money to invest) to get started. Specifically angel investors that don’t make too many demands. Those demands both go against the spirit of angel investing (the woman in the pub writing a cash cheque on the back of a good idea and little else), and can make it far harder to progress once the enterprise grows (i.e. selling part of it to venture capitalists).

The valuation of a “typical” Silicon Valley consumer internet enterprise will change over its development:

If users are growing rapidly, valuations can also grow rapidly.

Why are these changing valuations important? An enterprise still at the first (starting) stage, will probably need to sell half the business to a venture capitalist in return for funding. The further one is down the valuation chain, the more bargaining power an entrepreneur will have. The advice is simple: Don’t sell right at the start unless you really need to.

Location and culture

Geographical location is particularly important for early-stage enterprises, or when the people involved have little experience: The venture capitalist will want/need to be involved day-to-day, almost hour-to-hour. That’s a problem if there is a 9-hour time difference: A crisis in London at 10:00 is likely to stop someone in Silicon Valley getting a good night’s sleep. (Games are somewhat easier, because developers tend to work very long hours…)

Later-stage enterprises can be managed more effectively from the other side of the world. Realtime Worlds (Dundee, Scotland based) is a good example. The business was already established with 100+ employees, including some of the people involved in the original creation of franchises like Grand Theft Auto.

Culture is also important: All venture capitalists are not the same. For example, some will invest based on the people involved in an enterprise. Others will look more at the idea.

Funding application stages – what’s expected

Patrick highlighted a series of stages in the pitching/evaluation process:

  1. You – what are you trying to do, how, how dedicated are you to that aim? They look for problems to be solved – “painkillers, not vitamins”.
  2. Market and returns.
  3. Uniqueness of solution.
  4. Competition and team.
  5. How much money is required, and how will it be spent? Avoid running out of money: Ask for more than you think you need – perhaps twice as much. If you run out of money before completing an initial product, you won’t have any bargaining power when trying to raise more.
Tim Howgego, 6th September 2007. Related topics: Edinburgh, Venture Capital, Video Games. Comment »

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