Online gaming is a hot but tricky business. There is simply no way to make sure a new release will become a blockbuster and successful titles are few and far between.
Assessing the value of a budding gaming firm is even harder. But now, a veteran investor offers some useful guidelines.
With little financial yardsticks to follow (earnings or sales, for example), the track record of the founding team would be the most important indicator to gauge the potential of a startup.
“If some of the team members come from big players like NetEase and they have developed some great hits before, then the valuation would be higher,” Good Games founder Mai Tao writes in 21st Century Business Herald.
However, even in online games, which cover a broad spectrum including PC games, browser games and mobile games, successful experience can hardly be transplanted from one specific field to another. Interpreting a track record is far from straightforward.
Sales and marketing ability is crucial, too, as product ideas need to be turned into income to keep the company going.
If the key person comes from the technology side, the success rate tends to be low. You need someone who knows how to run a business to be at the helm, according to Mai.
Sales channel is another thing. Has the firm found a distributor? Are the distribution terms fair? These will all affect the value of the company.
Mai has concrete numbers for reference.
In the angel capital phase, which normally involves a company that has little more than a business idea or some early-stage product prototype, the “reasonable pricing for a startup online game developer would be between 5 million yuan [US$802,000] and 20 million yuan”, Mai says.
The first round of financing is stage when the founders start to look for external financing after they have used their seed money to demonstrate that their business concept is viable and an end-product is largely taking shape. “Now, investors should be able to see clearly how the game is played and what the graphics are like. A prospective startup could be worth 30 million yuan to 90 million yuan at this stage.”
With the low success rate in the industry, investors ought to be extremely careful if their target company asks for anything more than 1 billion yuan.
Mai cites the example of handset maker Xiaomi, which turned to be a big success, but was valued at no more than 2 billion yuan during its early days.
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