Structuring for success — Part 1 of 3
How mobile app and gaming studios can optimize operationally regardless of location
Over the last eight years we have funded app and gaming studios based all over the world and got to know a lot of founders. Outside the traditional hubs in North America and Western Europe, huge epicenters of development talent have evolved in Eastern Europe, Latin America, and Asia. The emergence of the app stores and the ability for small studios to self-publish games and apps massively democratized the entire ecosystem. It really doesn’t matter where you are physically located, you’re able to play on a global stage.
But it really matters where you’re domiciled and how you establish your company to make sure you’re able to take full advantage of the opportunity and set your studio up for success. In this three part blog series, we’re going to be sharing first hand experiences we’ve had working with founders who’ve figured out how to optimize for operational success regardless of where the team is located. We’re focused on providing a high level blueprint for others who are looking to learn from these experiences based on best practices we’ve observed.
There’s a lot to cover here, so we’re going to split this into three posts.
- Domicile, banking and tax
- Access to capital, and operating UA/monetization effectively
- Blueprint for success
Where and how you structure your business is super important and ideally you want to get this right from the get-go rather than have to try to unpick it later. For app and game studios, we’re concerned with both 1) where the publishing entity is located (i.e. the country where the app store account is registered and also faces ad networks) and 2) where the development takes place, for example if there is a physical office.
Some of the best global development talent and user acquisition talent is found outside of the main tech ecosystems of North America and Western Europe. In no particular order (nor is this an exhaustive list), countries like Ukraine, Turkey, Vietnam, Russia, Belarus, Brazil, Pakistan, Argentina, and others have become hotbeds of mobile app and gaming success in recent years.
Yet sometimes their domestic business climate makes it difficult to establish and build a company which can be successful on a global scale and ultimately become an attractive M&A target. The main reasons that studios can be restricted by their domestic environment typically relate to a number of factors.
Tax regimes for early-stage companies vary wildly across the globe. Sometimes companies face an unfriendly tax regime which does not foster a climate of IP creation and growth. Typically taxes on profits are high and there are few incentives to start and grow IP based businesses.
When a studio starts to become successful, taxes on profits can start to become material so founders and investors need to plan accordingly. Founders should consider effective tax rates, both for profits and for their own personal tax rates should a liquidity event happen in the future from their company being sold.
In creative industries like gaming, governments are waking up to the value of having studios established in their countries and building tech/creative hubs based on modern infrastructure and a more favorable tax environment. Often this includes a programme of tax credits which can be used to lower costs to create new IP — where schemes include match funding investment, tax credits, loans, etc.
Notable examples of this are:
- Canada which has a long established and generous scheme of tax credits for gaming companies
- Finland which has a well established match funding scheme for early stage tech companies
- The UK with its VGTR tax credits scheme
- And more recently Turkey — inspired by the success of some early M&A success of gaming studios offers incentives to keep studios domiciled in the country, which is also helpful for foreign inflows of USD into its banking system
Studios need to weigh up the short term pros vs long term cons of some of these incentives. For the most part they are incredibly helpful, and provide a much needed boost to early stage start-ups, but it makes sense to keep tabs on whether the gains in the short term could be outweighed later down the track, for example in an M&A transaction.
IP ownership and protection
Registering and protecting intellectual property is a key long-term value driver for a gaming or app studio. It is at the core of value creation of a studio, and has to be registered and ideally protected internationally. Countries with a lax stance on IP protection are unlikely to be viewed in a positive light when it comes to the global M&A stage, whereas IP created and owned in a jurisdiction that has transparent registration are easier to enforce where breaches have occurred. A jurisdiction with a well understood IP regime makes it more appealing for potential acquirers to execute transactions in.
When establishing an overseas entity, the ability to open and operate bank accounts capable of receiving inbound international payments, and being able to make sometimes substantial payments overseas is critical, yet often a real pain point.
Whilst banks are rightly on red alert for compliance and anti money-laundering (AML) checks, a studio needs to have confidence that its payments can be reliably sent and received. Traditional banks may be harder to engage in terms of getting accounts set up, but it’s worth persevering as their cost structure is typically much lower.
The alternative is to use Electronic Money Institutions (EMIs), such as Wise or Revolut, also for domestic alternatives, Finductive (Malta) or Unlimint (Cyprus). EMIs are not banks as they are not licensed to take deposits, but normally have good technology that makes it simple to send and receive money, conduct low cost FX transfers, and interface with other systems via APIs, making them a popular choice for startups.
The downside is their fees to move money around are much higher and they do not pay interest, which in a rising interest rate environment can start to hurt. These higher costs and lack of interest paid can materially impact ROI on ad spend and eat into profitability, so it’s important to factor them into your calculations.
EMIs also have strong AML and compliance checks but are often more startup friendly than banks. A good workaround here is to have local representation on the ground in the shape of lawyers or formation agents who will have more of a personal relationship with the banks. It may make sense to establish an EMI account in the first instance and work with your agents on the ground to establish accounts with an established bank, giving you some optionality in case of any payments issues.
Having a studio in a country which has a volatile domestic currency can make life very difficult when operating in international markets. As pretty much all user acquisition and ad monetization pricing is priced in USD, currency fluctuations can make UA calculations extremely difficult. Companies often choose to anchor their core monetization and spend on user acquisition to a stable currency, normally USD, in order to insulate away from currency fluctuations.
When studio running costs such as salaries and office costs are due to be paid, funds can be converted and paid at the prevailing FX rate, giving the studio insulation from domestic currency fluctuations.
As additional reading on this topic you may enjoy our recent post, Why European game studios are switching to USD.
So these are some of the key topics to think about when establishing your entity. In the next post we’ll look at some of the aspects around raising capital and dig deeper into more gritty operational details of running user acquisition and ad monetization. Finally in the third post we’ll offer up our best practice operating blueprint for success.
Make sure you don’t miss out on the next post where we will cover raising capital and dive into more operational issues around user acquisition and monetization. If you want to be the first to know, make sure you’re subscribed to our email or LinkedIn newsletter.
This article was originally posted on pollen.vc/blog.