Rounding Up the Zombie Games

After the heady years of 2019–2022 where VCs abandoned their traditional “we don’t invest in content plays — games is a hits business” mantra, and lots of copycat, genre mashup and me too games got funded. Now, the hangover is in full swing.

Picture the scene…

Promising casual game raises $3M seed round in late 2020. Game launches and looks as though it has potential, thanks to a nice splurge of VC-funded UA, but soon finds it settles at a run-rate of $50–100k/mth which has been relatively stable over the last 18 months.

The UA costs and payback periods are prohibitive to pour real money into in order to scale the game and so the studio is reliant on loyal player base and low level UA to keep generating revenues each month.

Everyone feels trapped

Everyone has fallen out of love with the game. Costs have been trimmed to the point that the studio is at breakeven so not burning through money, but everyone feels trapped.

The founders feel trapped. Having secured external capital to pursue their vision, they feel beholden to their investors and feel a strong sense of obligation to deliver on their promises. Walking away isn’t an option; they have a duty of care to their VCs, co-founders, and team.

The team feel trapped. Many have probably left already, but always in gaming (and sometimes in life generally) there are those who don’t want to abandon the ship out of a strong sense of loyalty to the founders and the original vision.

VCs are exasperated. They made a bunch of bets on content plays, and now (with exceptions of course), quite a few of their portfolio companies fall into this bracket. Hopes of big exits seem like a distant memory. Hopes of raising their next fund is influenced by the success of earlier funds so there is a certain feeling of doom.

Rounding up the zombies

What if there was a willing home for such games that could offer everyone around the table some hope? I’m seeing renewed interest in studios and publishers seeking to acquire this type of game and roll them up into more of a portfolio play.

Let’s say a zombie game could be sold for 1–1.5x annual revenue (this will totally depend on stickiness of users, team required to maintain etc) — it could be more or less, don’t get hung up on the number for now.

Acquirer can acquire the title and add it into a wider portfolio. Benefits from

• consolidating live ops
• cross promo with other games
• reduction in external costs like finance/HR etc

Who wins?

The studio gets an exit of sorts. Whilst the studio itself is not sold, the founders get the proud moment of an “exit” at least of IP they created. They also get a cash injection into the studio and perhaps a renewed sense of vigor to roll the dice again and shore up all that knowledge and those lessons into something new. Of course costs to develop new games should be lower these days versus a few years ago given all the impact of AI in so many areas of gaming.

VCs get another bite at the cherry. If the purchase price is meaningful enough then this outcome could be analogous to raising another mini-round to create something new. No dilution is taken by studio or VC and it creates a better story for their LPs than simply flaming out and having to write down the investment.

The difference between selling the game and selling the studio is important. If the studio itself were to be acquired, the ticket size is likely not enough to be interesting to retain and motivate founders, and of course their VC investors will be reluctant to take the write down in their portfolio. So not a great outcome for anyone. But if the conditions are right and the narrative is right, then perhaps everyone comes out of the transaction feeling positive. Companies like Super Company have set themselves up to acquire this type of games, and there are others are also active in the market right now.

A New Lease of Life for Smaller Publishers?

I have long argued that third party games publishing is not a great business. All M&A was focused on self-published studios and the gaming conferences were full of tales of failed publishing deals and resentment. Most of this was due to a toxic cocktail of misalignment in incentive and control, naivety of founders and a lack of transparency/audit rights of the studios.

Could this be a new dawn for those smaller traditional publishers? Whilst they undoubtedly have the infrastructure to support and potentially grow some of these titles, it may offer a new strategic direction which may also be accretive to their own enterprise value. Investors typically place less value on assets where the IP is not owned (in otherwords merely published) for obvious reasons. If they were able to own the IP it could make a positive contribution to their own enterprise value and long term success.

Depending on the financial profile of the target games, a proportion of the acquisition cost could be debt financed as well. Given strong and predictable cash flows from loyal players without reliance on ongoing UA spend, smart lenders could get comfortable with a form of acquisition finance to reduce the financial outlay required upfront to purchase the title. The debt servicing and amortization could be paid for from ongoing cashflows derived from the game.

At the end of the day, studios and their investors need to be pragmatic and try to take some good from a tough situation. We lived through a crazy bull market for a few years which is well and truly over now. There will always be stories of green shoots (thankfully) and those who spin a narrative of hope (myself included). But your time is your most valuable asset. Don’t think you can sit it out until the market comes back and it will all be ok. Fundamental changes in the world of UA with IDFA, VC funding for content remaining tight, consolidation in the market of games that people actually play — all mean that the world is changing and the art form here is to be pragmatic about the here and now and try to “skate to where the puck is going” (as they say in Canada!).

PS when i use the term “zombie” game, in no way is this meant to be disrespectful to the founders and teams that have built them. I know how hard it is to build and ship games. The term “zombie” is meant more as a way of describing the trajectory of the game given current market conditions, high UA costs etc.

Read more about the Mobile Finance Collective here https://www.mobfin.co/ and reach out if you have any questions or would like to discuss in more detail.