video games

10 years of Games in the City: lessons from a savvy games investor

May 2006

Whilst my company, Games Investor Consulting, has existed for only three years, I, myself, recently celebrated reaching 10 years of working in and around the games industry. The other seven years were spent at technology investment bank Durlacher where I handled all things games and most things internet-related. I would like to think that this has afforded me a relatively unique perspective on the interaction between the financial community and games industry, and I would like to use this month’s column to make some observations on the last decade of this interaction and to attempt to disabuse you of one popular misconception in particular: that, “the City doesn’t get the games industry”.

It is one of the most common refrains I hear when members of the games industry talk about the City and the wider financial community. It is occasionally uttered as an unconvincing form of defence by games company representatives after they have failed to raise money or float but, remarkably, is also presented to us by people with little or no experience of working with the investment community.

I would go so far as to suggest that the City actually understands considerably more about the games industry than the games industry thinks and a hell of a lot more than games industry knows about the City. And, unfortunately, what the City knows is that listed games companies in the UK during the last decade have, to put it bluntly, made for disastrous investments.

Since the start of 1996, fifteen companies that derive some or all of their sales from games have been listed on either the LSE or its junior market, AIM. Of these, four companies have gone bust (Argonaut, Rage, Pure Entertainment and Inner Workings), another four have exited the games sector having tried but, ultimately, failed to create sustainable businesses within it (Akaei, Digital Animations, Bits and Zoo Digital) and three have been sold following serious trading underperformance, profit warnings and share price collapses (Eidos, Warthog and Gremlin). Of the four that remain, two are, at the time of writing, at or near their all-time share price lows (Kuju and Empire) following poor trading performances and, indeed, one of these, Empire, is currently negotiating its sale. That leaves just two companies (SCi and Game Group) who could be considered as stock market successes although their ascents have hardly been smooth.

A great number of investors have lost all or appreciably all of their money investing in listed games companies. In fact, just under £203m was invested in the 11 companies that have disappeared whilst, from that group, the total consideration (i.e. sale value) for those that have been sold has amounted to less than half that. Canny investors could have made substantial gains by trading in and out of these stocks at the right time but as a sector overall, games has fared spectacularly badly.

The purpose of making these points is not to suggest that all listed games investments are to be avoided. I am simply explaining why games investment opportunities are more often than not viewed with scepticism by the City. Far from not understanding the games industry, many investors understand it too well. As such, for those companies contemplating either a listing or private equity investment, I would suggest a few golden rules should be observed:
Learn how the public/private equity markets work. Understand the expectations incumbent upon you as investees. Understand the aims of your investors.

Keep your investors informed. Sudden bad news can often result in adverse knee-jerk shareholder reactions out of proportion to the severity of the news.

Manage expectations conservatively. A common mistake by games companies is to present the market and investors with their best-case forecasts. Always aim to outperform market expectations by being conservative with forecasts.

Always tell the truth. Do not lie to investors and do not attempt to obfuscate the truth about your business. Small lies will lose you valuable investor allies, major lies will invite legal action.

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