Intellectual Property is King in the Gaming Space

Today in the Globe & Mail, Blaine Kyllo wrote about the changing landscape in the video-game industry and how the current economy may change the way games are financed in the future.

Traditionally, the entire game development process is underwritten by publishers (e.g. Electronic Arts) who either own the studio developing the game or provide milestone payments to the independent developers contracted to make the game. Under that model, publishers assume all the risk and as a result require game developers to give up the majority of potential profits and ownership of the intellectual property behind the title.

With investors battening the hatches and video-game developers shuttering their doors, times are turbulent for game makers. But even as the economy spins downward, some are seeing an opportunity to break away from the traditional funding model – and build more self-reliant game companies in the process.

When John Johnson left Relic Entertainment to form Smoking Gun Interactive, he and his cofounders wanted to do things a little differently. “Our goal is to produce intellectual property that we create and that we own,” Johnson explains from his Vancouver office.

This desire to own intellectual property combined with game studios closing shop and an estimated 800 game developers looking for their next opportunity could result in the perfect storm for change in the space. And Paul Lee and his newly formed VanEdge Capital figure they have what it takes to weather this storm.

The global economic downturn marks the perfect time to start a venture capital firm, says Glenn Entis, who works with Lee in Vanedge’s Vancouver head office. He shudders at the thought of starting the company two years ago, when money was easy to come by and investors could dig themselves in deep. Money may not be easy to find today, he admits, but the slowdown has created a “once in a lifetime opportunity.”

Lee explains that the valuations of companies are attractive right now because there aren’t as many venture funds chasing deals. “The hardest time to raise money is usually the best time to invest,” Lee says. Vanedge is still looking for investors, but have established $2-million (U.S.) minimum to participate in its fund. “We’re looking to build a top-tier, global fund headquartered in Vancouver. What Vancouver needs, and we deserve to have, is a top-tier global fund.”

Keep in mind that Lee isn’t interested in funding the development of individual titles – “We’re financing companies with the expectation that we’re going to sell them to other companies or have them go public.” The value of a title, he says, is not the individual game, but the IP underlying it. “It’s the second game and third game, the sequels where you start to make money.”