The myth of overnight success

We know it's nonsense, so why do we fund studios as though we expect it?

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In a welcome break from the incessant drumbeat of layoffs and studio closures, the stratospheric success of Palworld is all anyone in the games industry seems to be talking about right now.

Predictably, the media is full of breathless takes on the game’s overnight success.

Pokémon with guns. Why didn’t we do this sooner?

Anyone who has worked in the industry for more than five minutes knows this is nonsense, of course.

In almost every field of human endeavor, what looks like overnight success is usually the culmination of years of experimentation, learning and iteration, building the foundations that make it infinitesimally more likely that you will one day capture lightning in a bottle.

This is as true in the games industry as anywhere else. In fact, the one unifying characteristic of almost¹ every breakout hit in recent memory is that it sits astride the corpses of its less-successful predecessors.²

In a fascinating blog post he published a few days before the release of Palworld, the founder of Pocket Pair wrote this:

If we, a company called Pocket Pair, were a group of professionals from the game industry, had raised funds and were in a cash-rich state, the game Palworld would not have been born in this world. Just because you have money doesn't mean you can make interesting games.

There is no better exemplar of this phenomenon than Lethal Company. Yes, it’s the work of a solo developer and it blew up overnight. But as industry scamp Ryan Rigney puts it in his excellent deep dive:

Lethal Company is not a fluke. It’s the product of a truly brilliant approach to social system design in games and a decade-long journey that saw its creator, known online as Zeekerss, release 19 games prior to Lethal Company.

What do hits like these and others like Baldur’s Gate 3, Hades and Elden Ring have in common?

They are all the culmination of years (and in some cases, decades) of work by their developers across multiple titles. Over time, successful studios like Larian, Supergiant and From Software have slowly but sure built sustainable competitive advantage.

In 7 Powers parlance (seriously, just buy the book already) these include:³

• Process Power:

  • Internal tools and technology that are custom built for the kind of games the studio makes

  • Institutional knowledge and culture

• Brand:

  • Audiences that understand, appreciate and anticipate the studio’s games, independent of the IP value of each individual title

  • The ability to attract top tier talent.

There are no shortcuts to developing these powers, and no amount of money can accelerate their acquisition (quite the opposite, in fact).

Simply put: these things take time.

And yet! Most of the game studio venture investments I’ve seen over recent years are predicated on some version of the following plan:

1. Raise $5M-$25M dollars (or more!).

2. Build a debut game and distribute it through existing channels.

3. Hope it works.

In the vast majority of cases, this is not going to end well.

What investors need

How are the venture investments that were made over the past few years in the absence of platform shift-driven hypergrowth⁴ doing? Matthew Ball’s new piece on the outlook for gaming in 2024 and beyond sums it up (emphasis mine):

A lack of sector experience and rush-for-sector exposure has led to bloated rounds that have made subsequent fundraising efforts difficult for startups, while also encouraging bloated cost structures at these same companies, and diluting already-scarce talent across many more (and statistically doomed) startups. Worse still, the abundance of funding did not produce new hits. There are some solid new studios and titles, but VCs are in the business of home runs, not doubles, and there just haven’t been any. Which makes sense: insurgent startups are hard to build in low-growth markets with stagnant sales charts. The result is a crash of funding.

I would rephrase this a little. In the absence of a meaningful distribution or go-to-market innovation, venture investments in content businesses have a low expected rate of return. There’s just too much content chasing existing audiences through established distribution channels.

We’re starting to see this play out. Many of the studios that first raised a few years ago went back out for funding last year, and the results were mostly not pretty. The lucky ones were able to put rounds together, but often on onerous terms. Their earliest investors can end up doing worse than the founders in these scenarios - in a down round, existing investors who don’t “pay-to-play” can end up having the value of their equity more or less wiped out.

The implications are clear: VCs are going to have to start acting a lot more like other investors and start caring a lot more about entry price than they did in the past.

If we want to achieve compelling returns, we should be writing smaller checks at lower valuations to compensate for the fact that we expect much slower growth. It also means funding non-obvious teams, not the usual ex-Riot and ex-Blizzard suspects. It may also be time to consider alternative funding models beyond straight equity, but that’s a discussion for another time.

What founders should do

Let’s assume that you, an insane person, still want to build a venture-backed game studio in 2024.

Here are the tenets I would follow:

1. Keep your team ridiculously small and insanely talented.

2. Be merciless with scope and take every shortcut you can. Yes, that includes asset store assets and generative AI.

3. Your first game doesn’t have to be your most polished or ambitious. Earn the right to make your magnum opus!

4. Assume your seed round is the last money you will ever raise from investors.

5. Take go-to-market as seriously as you take game design.

6. Distribution innovation pays better than content innovation, but no game sells without a powerful hook.

7. Pursue alternate sources of financing in parallel with venture investment. If you just want to make a game, publishers may be a better option (there are a lot of new ones!)

If this list makes you angry and/or depressed, you probably shouldn’t start a game company right now. If it fills you with ideas of new ways to win - you know where to find us.

1. Luca Galante, creator of Vampire Survivors, rather infuriatingly appears only to have entered the games industry in 2021. Still, the scope and scale of its success are on a different order of magnitude from the other games here.

2. Fast follows such as the initial versions of League of Legends and Fortnite can sidestep this by borrowing liberally from the games they are inspired by.

3. Successful live services game developers also benefit from network effects and switching costs.

4. As we have discussed ad nauseum around here, venture scale growth is much easier to achieve when a platform tailwind provides an influx of new users and revenue, as mobile did last decade.