Rod Mathers is a partner with Henderson Loggie’s corporate finance team.

It is an exciting time if you are in the gaming industry and looking to raise finance for growth. Here we explore the options available at each stage of development from start-up through to an established business.

Start-up funding

Raising finance for a start-up is never easy and very often involves an element of ‘bootstrapping’ or ‘sweat equity’. This means founding and building a company from personal resources, operating revenues and hard work! Availability of debt funding from banks is limited, unless you are able to offer some kind of security, and attracting equity investment at this stage can often mean having to give away too much of the equity in your business. So, what are the other options?

The gaming industry is currently enjoying a range of support from the public sector. The Scottish Parliament recently (31 March 2015) issued a report titled ’The economic impact of the film, TV and video games industries’. The report, by the Economy, Energy and Tourism committee, made a number of recommendations for Creative Scotland to implement, including leading the “coordination of the industry, academia and public bodies to establish a national strategy which will deliver a sustainable Scottish games industry”.

Tangible support for start-up gaming companies is available following the UK Government’s pledge of £8m of funding to the industry in this year’s budget. £4m is available through the revival of the Prototype Fund which can provide support in the form of grants, but also through access to expertise, work areas, management and networks. Another £4m is being made available through the Skills Investment Fund, a match funding scheme for training in games and other creative sectors.

Early stage funding

In a recent survey conducted by TIGA, the trade body representing the games industry, found that the two most popular sources of funding for gaming companies other than grant funding were from publishers or clients and from the business angel network.

Gaming companies have an advantage over other types of company in that very often trade partners can provide funding in return for development contracts and ownership rights. This can either be in the form of royalty advances to cover project costs, or paid on a milestone basis as a percentage of net revenue. This was by far the most popular source of funding for gaming companies.

The business angel network is very active and is well suited to the gaming industry. In addition to making a healthy return, angel investors are looking to have some fun with their money. In a recent survey by the UK Business Angels Association, the gaming industry had the highest percentage of respondents expecting a return of greater than 20% from their investment.

If you are a gaming company, you should be aware of two tax rebate schemes which, although not providing up front funding for business, can provide a very helpful source of cash following submission of your annual accounts. If you can demonstrate technological advancement, you may qualify for R&D tax credits. Profitable companies can deduct 230% of eligible costs thus reducing their tax bill, and loss making companies can claim a tax rebate of up to 33.25% of qualifying expenditure. Eligible costs include staff, sub-contractors and consumables. You should, however, be aware of the impact of receiving other grant support on R&D tax claims. Similar benefits are offered by Games Tax Relief which was introduced this year and is applicable to games development companies involved in the production of a culturally British game.

Established businesses

If you are an established business, there are two particular funds worth considering. Firstly, the Scottish Loan Fund was established by the Scottish Investment Bank to provide mezzanine loans of between £250,000 and £5,000,000 to businesses with turnover greater than £1 million. This funding is a bridge between equity and debt and is repayable over a period of between three and five years. The Scottish Loan Fund receives a return on its investment through a combination of interest (at a rate well above bank funding), redemption premium and sometimes taking a warrant, which is a share of the business on a future exit.

Secondly, the Business Growth Fund provides equity funding of between £2 million and £10 million for a minority equity share in the business for growth activities including capital investment, acquisitions, working capital or overseas investment. In addition, there are a number of private equity funds active in, and with a strong focus on, the gaming industry.

In conclusion, there is no shortage of funding and other support for gaming companies, the trick is how to access them effectively.