A recent issue of GIGnews, posed the following reader survey: In terms of a game developer's success, what's more important: Creative vision or business smarts? Twenty-seven percent of respondents said creative vision, twenty percent said business smarts, and fifty-three percent found both equally important. What do those numbers mean? Perhaps creative people simply like to answer survey questions more than accountant types. Or, perhaps, as indicated by half the respondents, getting a game made and on the shelves takes both creative talent and money.

When it comes to money, while some games are self-funded (sitting on his or her own stack of cash or credit, the developer pays for the game development), the standard funding model for game developers has been the royalty advance model. In this funding model, a publisher and developer enter into a royalty agreement in which the game’s development is funded by advances on future royalties. Those advances are typically paid upon completion of certain milestones.

As the process of creating games has become increasingly film-like in complexity and cost, however, and as next generation game consoles continue to raise the quality of video and audio, a new funding model has begun to take hold. Based on film-style financing, this type of game development funding offers an alternative to the traditional royalty advance model.

Film-style finance
At the core of this funding model, there are three entities: a publisher, a developer, and a limited company formed solely for the development stage of a game’s life-cycle. Once the game is finished, the limited company ceases to exist.

At a very basic level, here is how it works: You’re Joe Developer, owner of Joe’s Games, and you need money to make your game, Joe II: Ultimate Joe. You create a separate limited purpose company, JG Productions, specifically for the development of this game. JG Productions contracts with the publisher to deliver the game, and contracts with the bank to fund the project. With the bank’s loan, JG Productions can then pay Joe’s Games to develop Ultimate Joe. When the game is finished, the publisher pays JG Productions the agreed upon amount and JG Productions pays back the bank.

Easy enough, right? But what if the product isn’t delivered? The bank just doesn’t get its money back? Well, no, it’s a bank and banks don’t like to be left holding the bag, so to speak. Before granting a loan, the bank will most likely require that JG Productions provide a completion bond. This is where completion guarantor, completion bonds, and companies like Wise Monkey enter the equation.

Completion bonds
If you watch much Court TV, or depending on your caliber of friends, you probably know something about bonds. For example, after an alleged criminal, we’ll call him Mack, is arrested, he appears in court where a judge sets bail at $10,000 USD. If Mack can pay that amount, he can stay out of jail until trial and, then, if he shows up for trial, he gets back his $10,000. But if Mack doesn’t have $10,000, he can either stay in jail or pay for a bail bond and have a bondsman pay the bail for him. In other words, Mack pays the bail bondsman some percentage of $10,000, let’s say six percent or $600, and the bail bondsman pays the court $10,000. If Mack shows up for trial, the bail bondsman gets his $10,000 back from the court, plus he’s made $600 off of Mack. But if Mack doesn’t show, the bail bondsman loses the $10,000. A risky business, certainly.

Not to equate game developers with alleged criminals, but the same basic bond principles apply. That is, in the Ultimate Joe scenario, the bank may grant the loan only if JG Productions "posts bail," as it were. In this instance, however, rather than a bail bondsman you have a completion guarantor issuing the bond. But, unlike the bail bondsman who might have only the assurances of a criminal defense lawyer that, sure, Mack will show for trial, a completion guarantor can utilize the services of specialist risk management consultants like Wise Monkey. This UK-based firm advises the completion guarantor on the particular risks of the games industry, the developer and product in question, and the likelihood that, sure, the game will be delivered on time and on budget. In short, the completion guarantor relies on the risk management consultant, and the banks rely on the completion guarantor.

A risk assessment "audit" for a completion bond comes during the pre-contract due diligence stage which covers two main aspects: 1) the developer’s processes and methodologies; and 2) the project itself. Both must be found suitable for bonding to be offered. The audit cost might be as low as $10,000 USD (₤7,000) for a single studio, single product audit, and the audit cost, which is paid for by the developer, is ultimately credited against the full bonding fee. In other words, if the bond costs $120,000 USD, the $10,000 USD the developer already paid for the audit is deducted from that total, leaving a bond balance of $110,000. The audit fee, Hopkins explains, protects Wise Monkey "against doing audits at no charge for clients who don’t seriously intend to progress to bond."

Revisiting the JG Productions example, the bank loan was obtained only after several hurdles had been cleared. First, Ultimate Joe was at the prototype stage, and a risk management consultant had assessed the risks associated with the developer, the game, and the industry, and assured the completion guarantor that this was a safe risk to take. The completion guarantor then indicated his willingness to issue a completion bond. The publisher agreed for the product to be funded this way, and the bank indicated its willingness to fund it subject to the completion bond. Finally, once the contracts were signed, the risk was on the completion guarantor, not the bank.

Assessing the risks
When assessing risks, consultants such as Wise Monkey look at a variety of factors: Is this an established developer with strong commercial foundations? Does the developer have a track record of delivery to specification, on schedule and on budget? Are there strong internal management skills? Or is this a studio where morale is shot to hell with a proven track record of delivering late?

Anyone could generate their own list of unsuitable projects simply by asking themselves, "would I lend my money to the people developing this project?" Nevertheless, there are some inherently unsuitable projects for this type of film-style, completion bond financing. One category, in particular, is games that depend on a major license. Because the bank relies on the publisher to pay for the game at the end of the process, if the publisher goes belly-up, the bank will want to sell the game to another publisher. With a licensed product situation, however, Hopkins says, "it has proved virtually impossible to get license holders to permit a transfer to another publisher without their agreement, so banks won’t lend money to those products."

Other unsuitables may include game development where there is heavy dependency on a single, key individual, or if the game is a time limited product with a tight schedule, like an Olympics or World Cup game with a late start.

Response from the industry
So, has the game industry gone for this type of financing? Hopkins says that’s a resounding affirmative. "Without exception," he says, "the developers think it is a no-brainer. They particularly like the way it ensures industry best-practice is applied, like enforcing proper designs, schedules and budgets before the project begins, but the bits they like best of all are the proper change control procedure and getting paid on time!"

Hopkins assures that banks are all for it as well as the completion guarantor and companies like Wise Monkey "look after the bit that really frightens them -- the delivery risk on the developer side." This, he says, leaves the bank with just the credit risk on the publisher side, and credit risk is a bank’s core skill.

Hopkins admits, however, that publishers are slightly more mixed in their views. While some remain to be convinced, others regard it as a valuable service that ensures they get their products at the right time and in the right shape. In short, he says, "film-style financing makes the publisher’s life immeasurably easier. It cuts out hassles right across the organization - from the advertising department (not having to try to re-juggle schedules) to the CFO not having to explain to analysts how their profits are lower due to missed shipments."