Why it has become more difficult to raise investments in mobile game development in 2024 — Azur Games column

Dmitry Yaminsky

During the pandemic, the marginality of the mobile games market continued to grow ahead of trends. Then the market still remained attractive, despite a slight decrease in growth. It allowed you to get high margins or large x's when selling a share. But now the situation is not so clear. Everything has changed.

It would seem that the hyper—casual games market (hereinafter referred to as GC), contrary to the already familiar forecasts of his death, still accounts for a huge proportion of installations. In 2023, the segment accounted for 26% of downloads from all mobile games. That's just if a few years ago almost every project had a chance to take off, now there may not be a single hit for 1000 new games. Moreover, if you look at the distribution schedule of installations, then the lion's share belongs to old projects that have been developing and supported by publishers for years using a model close to GaAs. Yes, it is possible and necessary to work in this market — our GC direction received more than 2 billion installations last year alone. But it is also worth giving yourself a sober assessment of the profitability of this direction.

A similar situation is observed in the casual market — previously, it was possible to obtain financing for a prototype without metrics without much difficulty. The success rate among such projects was 1 in 10-15. Now it is rare when companies are ready to invest in projects without primary metrics. The exceptions are teams with an impressive background, but this does not negate the extremely high competition in the market.

All this means that it is almost impossible for a small young team to get a successful project. There are examples of success on the market, but to focus on them is to make a typical mistake of a survivor. The growth of the market has slowed down, the effectiveness of advertising has decreased, and marginality has become common, market-based.

From now on, to develop a successful casual project, it is imperative to put a team of several dozen people on the crutches, not forgetting the need for several attempts before you can release a project ready for scale.

Let's compare in more detail how the business has changed over the past few years in terms of costs and profitability. Let's consider both the GK direction and the business models of the casual and midcore directions, which have now become one of the priorities for our further development.

What has changed

Three to five years ago, GK games were at their peak and were often made by one or two people. One "bare" core mechanics with a relatively simple visual was enough to soar to the top and get a margin of more than 50%, taking into account the revs. At that time, almost no attention was paid to effects, production as such, trivia, UI, etc.

GK-Games Before and Now (Rise Up: Balloon Game and Merge Archers: Bow And Arrow)

Then all this gave rise to a huge wave of developers who became pioneers in this direction, who could succeed in business with relatively small investments. It was enough for them to spend 2-5 thousand dollars, most of which was compensated by the publisher, in order to get a project with a probability of 1 to 20, which potentially not only recouped the time spent, but could also increase the purchase turnover to several hundred thousand dollars per month.

If we are already talking about 2023-2024, then by this time the composition of the team at GC had undergone significant changes and began to look something like this:

• 1-2 programmers;
• game designer;
• Art manager;
• VFX specialist.

And this is the minimum composition, which is occupied by one prototype. In some cases, the size of a GK unit today can reach up to 10 people. At the same time, we remember that out of 20 projects, there may not be one that will shoot or at least pay back the invested funds. Therefore, it is necessary to increase the number of such units within one studio, which further reduces marginality.

In total, we often have studios with 3-4 such units that develop several projects in parallel and at the same time must maintain a high quality standard. Studios can also easily hire modellers, artists and level designers for individual positions. It is difficult to get to the top on one mechanic, you immediately need to work out the shell for core gameplay, work out monetization points, build a funnel of levels, polish effects and animations.

At the same time, many publishers also connect their specialists to work with partner studios. These are producers, game designers, marketers, analysts, sound designers, ASO and more.

As a result, the average cost of developing a project that has shown good metrics, taking into account all iterations, can easily exceed 20 thousand dollars, which, again, must be multiplied by the number of attempts required to release the next hit. We get a standard VC story when only one of dozens of projects can fire.

Marginality and costs

Now the most interesting thing is that the current average marginality from GK projects is about 10-15%. The composition of the team is usually as follows:

• one or two programmers;
• game designer;
• Art manager;
• VFX Specialist;
• probably the head of the studio.

The maintenance of such a team, taking into account the average salary and additional expenses, will cost about 30 thousand dollars per month, taking into account the salary of the developer and the publisher. At the same time, it should be understood that without a publisher, the content of the team increases many times, since you will have to hire marketers, lawyers, and so on, but we are not considering this option right now.

As a result, in order to achieve the payback of such a team:

• we need a project with a marketing spread of 500 thousand dollars per month and above with a margin of at least 15%;
• it is necessary to take into account the need for repeated investments to maintain the project in order to increase or maintain the current turnover;
• Reinvestment in the development of new projects is needed to maintain growth.

We also do not forget the funds invested earlier, because they are also deducted from the refund until the total profit reaches full 0, only after that we can already talk about some kind of profit.

It's not such a joyful picture of a successful entrepreneur anymore, right? In fact, all this turns out to be not a very high-margin story, comparable to the classic offline business. As a result, average investments in this area pay off in 1.5-2 years, after which they begin to bring market profits.

The development of a GK game now takes 2-4 months and all this time you also need to pay a salary. At the same time, even if you successfully reached the release and started purchasing, you cannot attract users for 500 thousand dollars from the first month. You will have to increase the spread gradually.

As a result, the approximate figures for a team with a bern of 30 thousand dollars after several months of development and a successful product with a margin of 15% may look something like this (as a profit distribution, let's take the 40 to 60 ratio common for hypercage):

That is, it will take a long time to reach at least zero, while it is not a fact that the first months of prototype development will not be wasted. Most likely, you will have to start all over again until you manage to create a working product.

Casual and midcore

Railroad Empire

Here mathematics turns out to be even more interesting and often depends on the project itself. But the most interesting part for those who invest in the project is the average chance of success of the project. On average, 1 out of 10 projects fires, which in 2-3 years ensures the payback of all investments in the remaining nine projects.

The cost of investing in the development of one casual project ranges from 500 thousand dollars (initial investment) to 2-3 million dollars (if the project has reached release). At one stage, it may become clear that the project could not find its market fit, which means that the invested funds multiplied by 0.

Now let's look at where the numbers come from, and what are the main stages in the development of casual / midcore. The required minimum:

1. Assemble the first team of 15-20 people (again, taking into account that the studio works with the publisher, and not independently).
2. To make the first prototype of the game within a year.
3. Collect the basic metrics (at this point, it is decided whether the development will continue or we will no longer see the initial investments).
4. If everything is good, the project has a perspective and the spend somehow pays off, we scale the team for comprehensive work on the project (by this point, the monthly burn of the studio will already be at least 70 thousand dollars).
5. The development of a full-fledged game in several iterations before a full-fledged release (it may take up to two more years).

That is, the marginality of a successful casual /midcore project should cover an average of 10-15 million dollars of unsuccessful investments. Of course, the success rate may differ, but the overall market picture is about the same. You also need to understand that the purchase of such projects is also growing gradually, so for some time, even with the purchase of more than 300 thousand dollars, the company will work at 0, reinvesting all funds in the development and expansion of spend marketing.

Let's sum up the numbers again, but now for a casual/midcore project for a team with a bern of 70 thousand dollars after a couple of years of product development, which still reached release. As a marginality, let's take a very real figure of 80%, taking into account organic matter, which can be 30% on a casual/ midcore basis. The studio's profit share is 50%.

There is another interesting point with midcore. In the last columns, you can see that the burn per team is increasing. Everyone's numbers are different, but the bottom line is that the team needs to be built up gradually, depending on spending. Sometimes it is necessary to overestimate the cost in order to keep up with growth, hence problems may arise that overlap with the hiring of additional specialists. But there is no point in recruiting a large team right away, it is too expensive with a high risk of closing the project.

Is it time to think about diversification?

Mobile game development, as well as the IT industry as a whole, has ceased to be a gold mine, where you can immediately fly in and make x's of profit in a growing market. Now it is not such a high-margin story, it is an adult industry for serious players with an integrated approach, accumulated expertise and low chances of success in the context of individual companies. And in order to work on it, it is desirable not only to be able to develop games, but also to love your job.

So why has the process of getting the first round of investments become more difficult now? Investors are primarily concerned about the return on investment. Global goals never change and therefore your studio should offer a market-based return on investment. That is why the volume of investments and transactions involving major players has become significantly smaller in recent years.

The founders of game studios should understand that their projects should bring similar profits to other industries. Offline business is traditionally considered something "not cool" for those who work in IT, but this is exactly until it shows a higher marginality.

Let's take a banal example — the restaurant business. For clarity, let's imagine the opening of a restaurant in the UAE — it's easier with taxes there, there are practically none, and it's easier to count. The budget for opening a good—level restaurant will be from 3 to 6 million dollars, the payback period will be from 2 to 4 years.

It is a common story when revenue is distributed as follows: 25% goes to products, 25% to staff, 25% to premises and 25% of revenue is net profit. This is, on average, because this business has a high seasonality.

Let's take the widespread revenue of 500 thousand dollars per month and get:

• products — 125 thousand dollars per month;
• staff — 100 thousand dollars per month;
• room — 150 thousand dollars per month;
• the net profit is 125 thousand dollars per month.

At the same time, the chance to make a catering place (or a store) so that it brings at least some profit is higher than making a profitable game. Yes, the restaurant business cannot scale at a similar level, but at the same time it is much more stable.

In mobile game development, the profitability of projects has decreased on average, and there are many times fewer successful launches. As a result, it is more difficult for young teams without accumulated expertise and observation, and large publishers and developers are forced to adjust and stop hoping for super profits at the moment.

The quality of the product and long-term operation come to the fore. Here, developers sometimes have to step on their throats in an attempt to make a "dream game" and focus on business. Sometimes teams completely lack the desire to operate the studio, and in this case it is ideal to enlist the help of a strategist who will provide all the infrastructure and will be able to help with the business component.

Everyone makes a choice for themselves, the main thing is always to remember — the market speaks the language of finance and with any investment you need to remember this first of all. This means that companies that not only know how to create games, but are also ready to understand all business aspects are gaining a foothold in the industry.