Keith Katz '03BUS
Co-founder, Execution Labs
Raising Seed Capital: When Social Entrepreneurs and Game Developers are Doppelgangers
As I spend more time with social entrepreneurs, I’ve drawn a parallel I never thought I’d make: social entrepreneurs and game developers share a host of similarities. In fact, there is one instance in which these two seemingly dissimilar groups bear a striking resemblance, and that is when they are raising seed capital.
I have invested in two dozen seed stage game studios since 2012, and have myself been on the founder’s side of the table, hat and pitch deck in hand. Pitching investors is, for most people, not a fun or easy experience. But, what’s become clear to me is that more often than not, game developers looking for their first rounds of equity funding are often ill-equipped for the task. The reasons they struggle with fundraising are the same reasons many social entrepreneurs I’ve encountered have trouble in this area. It’s not because they’re not smart or passionate. In fact, it’s these very attributes that often get in the way.
Andrea Turner Moffitt and Dara Kagan offer a great primer on early stage funding strategies. What I’m referencing is a preface to those best practices. As a company founder, it’s critical to dramatically shift how you think about your business prior to pitching investors. Before examining how to make this cognitive transition, it’s important to understand why this shift is needed. Most independent game developers, for example, naturally think about their studio’s output as “art.” This isn’t surprising when you consider that most studio founders don’t have formal business training; rather, they are highly skilled and ardent functional experts in game design, programming, animation, or other relevant disciplines. By the same token, social entrepreneurs are typically passionate, scrappy do-ers who have fashioned a local solution to a broader problem, or perhaps they are scientists or engineers who have–just maybe–cracked the code on a potential answer to a persistent technological or health concern. Unfortunately, when someone has spent so much time focused on one goal or one narrow specialty required to reach that goal, and when passion (or compassion) is the motivation at the core of a business, very capable founders often have trouble taking a step back and 1) viewing their business holistically, and 2) understanding the perspective and goals of the early stage equity investors on the other side of the table.
For a founder, this can lead to frustration. Whether you’re building the world’s most innovative gaming platform or you’re on the cusp of solving one of the UN’s sustainable development goals, it might feel like you should walk into your pitch meetings and shout “Hey, do you see what we’re building here? What are you waiting for? Write that check!” It’s especially tempting to feel this way if you’ve already solved the problem on a small scale. However, pitching seed investors means you need to wear a different hat: that of the CEO. You’re not just a programmer or just a scientist or just an operator anymore. You must understand all of those aspects of your business, and more. You don’t have to be a domain expert in all of them, but you can’t pitch your vision as a business until you can identify all of the critical components of your venture and how you–or someone on your team–will own them and scale them.
Why? Because passion and ideas are not the things that make early stage investors lose sleep. What causes trepidation among investors is the tremendous executional risk that early stage ventures face. Further, investors worry about issues of scale. Seed investors want to invest in ventures that can scale exponentially. No matter how passionate you are, or how important the problem is that you’re solving, or how promising your early results may look, if you’re not thinking about succeeding on a large scale, you may want to reconsider talking to most early stage investors. Their business models highly discount the value of linear successes.
There are a host of ways these common mental incongruences manifest themselves, ranging from suboptimal team construction and poor pitch deck design to questionable financial projections and uninformed term sheet negotiations. The good news is that, whether you’re starting a game studio or a plant-based meat company, you can avoid many mistakes by understanding your own limitations and biases and by understanding the business model of the investors you are pitching. Find some seasoned advisors, read blogs, read books. You’re fighting the good fight, and people want to help.