Fundraising 101 for the Game Sector

Paul Heydon Managing Director, Avista Partners Who am I?

Paul Heydon ● Advisor and Investor based in London for over 13 years

● Managing Director Strong game sector experience, knowledge and relationships Avista Partners ● Advised on transactions in the game sector with a total value of over $1 billion advising many companies including:

● Shareholder in: Partner London Venture Partners

Agenda

● VC’s and games: summary ● Fastest growing game sector ● Why raise money ● Funding readiness ● How much to raise ● Types of potential investors ● How to raise the funding

3 © 2012 Avista Partners LLP Confidential and Proprietary, all rights reserved VC’s are investing where in games? ●Over $2.1bn raised in VC funds in 2011 globally Outsourcing PC/Console Game 0.5% 0.0% Hardware 3.5%

Mobile 11.6%

Game Technology 11.9%

Online 63.0% Payment/ Offer/ Analytics 9.2%

Source: Capital IQ, Company Filings, Brokers & Press 4 © 2012 Avista Partners LLP Confidential and Proprietary, all rights reserved ●$2.1bn...... wow!...... thats a lot of money ●How compare to previous years?

1,500.0

1,000.0

500.0

0.0 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

North America Europe Asia/ Pacific Source: Capital IQ, Company Filings,Source: Brokers Capital & PressIQ, Company Filings, Brokers & Press 6 © 2012 Avista Partners LLP Confidential and Proprietary, all rights reserved ●Why are VC’s investing so much now?

7 © 2012 Avista Partners LLP Confidential and Proprietary, all rights reserved Global Exits/IPO’s in Game Sector (USD$ millions) 20,000.0 18,000.0 $38.9bn value created for VC/PE 16,000.0 investors and/or founders since 1997; 14,000.0 47% of that was generated in 2011 12,000.0

10,000.0 This is 8,000.0 why!

6,000.0

4,000.0

2,000.0

0.0 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

North America Europe Asia/ Pacific

9 © 2012 Avista Partners LLP Confidential and Proprietary, all rights reserved ●Mobile! ●Ever heard of: ● Draw Something? ● Scaled to 10m+ DAU/ 35m+ MAU in 6 weeks ● Led to $183m acquisition of OMGPOP by Zynga. ● Deal went from 1st call to close in < 3 weeks

$30.0 CAGR 28.5%

$25.0

$20.0

$15.0 $11.7 $10.0

$5.0

$0.0 2012 2016

$31.9 bn total addressable market for Mobile Games by 2016

Source: Gartner, IDC, Magid, Flurry & Goldman Sachs research estimates from "Mobile Monetization: Does the shift in traffic pay?" by Goldman Sachs June 4, 2012 11 © 2012 Avista Partners LLP Confidential and Proprietary, all rights reserved #1 Activity on Mobile is Games!

The9 Mobile 24mas EA Mobile CMGE Gameloft Gungho HandyGames KongZhong G5 Entertainment Animoca Bigfish Mobile NHN Mobile Games Papaya Mobile Mobicle Itsmy Mominis Magmic Digital Chocolate Most Diverse This chart has 240+ companies with $8.4 bn+ in annual revenue

Herocraft

Synphonie

Bulkypix

Portfolio Diversity Glu Mobile

Voltage BoosterMedia Com2us Nijibox Ourpalm Sunstorm Interactive

Warner Bros. Gamevil

Magma Mobile Cyberagent Mobile

Ateam WillArk Tylted Nexon Mobile Dwango Sega Mobile Neon Play Capcom Mobile Storm8 Tencent Games Neowiz Mobile JNJ Mobile Kairosoft Backflip Studios LunagamesAstraware Vivid Games Tecmo Koei Mobile Square Enix Mobile Alawar Mobile Andamul Jakyl Tequila Mobile Outfit7 Big Blue Bubble IUGO Cobra Mobile MobilityWare Namco Bandai Mobile Playfirst Gloops Green Mobile Gumi Zynga Mobile Crescent Moon Polarbit Gogii Games Crooz Disney Mobile Games Fishlabs Game Insight Ludia Gameprom Droidhen Colorbox Optime AceSoftware Viral Pocket Gems Ubisoft Mobile SGN Mobile FDG Realnetworks Games Lima Sky TekunodoNimbleBit Pictosoft Game Circus Fluik XMG StudioBoyaa Deemedya Revo Solutions Flipside5 King Mobile Mutant Games Imangi Studios Mixi Ayopa Games Top Free Games Gameduell Mobile App Minis Illusion Labs Klab Rolocule Games Halfbrick0.9 Studios Full Fat Hexage Gamerizon Adways Nubee Zenimax Mobile Kamagames NcSoft MobileBooyah The Mobile GamerSkyvu Future Games of LondonTinyCo Craneball Studios MunkyFun Infinity Pocket Naturalmotion Madfinger Games Breaktime StudiosKieffer Bros.Capybara TouchtenCybird Drecom DistinctDev Crowdstar Vostu Mobile Appy EntertainmentiFree Studio Mountain0.6 Sheep Supercell Spacetime Studios On5 6 waves DragonplayMobile PearlinPalm Creative MobileChukong Netdragon Team17 Activision Mobile Kronos GamesCgmatic Patchwork Games Pixowl Mozat Rovio JCE Cave Mobile Haypi YedangOnline Mobile Perblue Shanda Mobile SimogoC4M Mika MobileFresh GamesRubicon AstepgameMachineZone Take Two Mobile Caesars Mobile Snappy Touch Bolt Creativemobcast The Playforge Tagplay Hoolai Game Rodeo Games Zacozaco Matt Rix0.1 Mediocre0.1 Games Halfbot Something Big Asobism Epic Mobile Tiger StylePerfect World Funzio Muse BionicGames Panda Gamania GamesA Thinking Happylatte Ape Company 100 Changyou Mobile Red Robot Labs Aspyr Media Game Oven Studios Viwawa Robot Invader Wemade Mobile Media.VisionUppercut Games Grey Area Kabam Mobile Bertheussen IT Happy Elements Mojang ZeptoLab CygamesCJ E&M Netmarble Mobile Phoenix Age Least Diverse Press HighlinePlay Aps GamesBuzz Monkey LuckyLabs CAVE Powerhead GamesGet Set GamesBest Cool Fun Games Spilt Milk StudiosNordcurrent Abzorba Games On-5 Cytech Spooky House Studios Playlithium 3 SprocketsGodzilab Silvertree MediaPunchbox Twiitch Casual to Hardcore Focus Casual Mokus Games Wooga Mobile Geisha Tokyo Entertainment Hardcore © 2012 Avista Partners LLP Confidential and Proprietary, all rights reserved 13 Game sector is Big

●VC’s want Big exits with Big returns within 5-10 years ●Game sector is Big ● $94bn total market cap for all public companies ● $2.1bn funds raised in 2011 ● $18bn+ total Exits/ IPO’s in 2011

●Sector is hot now thanks to Nexon ($6.3bn mkt cap), DeNA ($4bn mkt cap) & Gree ($4.4bn mkt cap)

600 Bigpoint

500 Astrum

400 Playfish Rare TT Games

300

SN Systems 200 Digital Bros Mental Images Gameloft Eidos Codemasters Bizarre Creations Scoreloop 100 Funcom Bigpoint PlayJam Criterion Mindscape Weka Entertainment 0 Jan/00 Jan/01 Jan/02 Jan/03 Jan/04 Jan/05 Jan/06 Jan/07 Jan/08 Jan/09 Jan/10 Jan/11 Total Value Creation: $5.3bn in Europe since 1997 Source: Capital IQ, Company Filings, Brokers & Press 15 © 2012 Avista Partners LLP Confidential and Proprietary, all rights reserved Why raise money?

●Buy a Ferrari

●to hire people/ management team ●to start a company ●to acquire a company ●to make a great game

●To build the most profitable game company ●To scale my company as fast as possible ●Want an investor whom can bring money and value add ●To disrupt the game sector with our new technology or games; change the world ●To build the best game publishing platform ●To be the biggest game company globally

●Think Very Big!

● Recruit best talent

● Accelerate growth with marketing campaigns & customer acquisition

● Build a diversified game portfolio and more content for current games

● Take some risks without worrying about cash flow constantly ●Bad uses:

● Pay off mortgage or debt

● Tired of low salary

● Build a cool game

Readiness to raise money Your company should have most if not all of the following:

Content Already developed one great game or more?

Diversified More than one game now or in your future pipeline? Portfolio

Financials Growing revenues? Profitable now or within 12 months? Cash flow positive now or within 12 months?

Management Mgmt team in place now or how soon? Strong track record?

Customers/ Signed deals with strategic customers or partners? How many strategic deals Partners in pipeline?

Business Is business model unique yet scalable? Model

Growing DAU, MAU, DARPAU, ARPU & ARPPU, Lifetime, Lifetime Value, Cohorts, Analytics K-factor? Diversified playing & paying user base amongst multiple countries 21 © 2012 Avista Partners LLP Confidential and Proprietary, all rights reserved Which Type of Investors ● Round size and purpose will determine potential investors to approach

●Seed (< €2m) - angel investors, strategic investors, govt. funding, crowdfunding sites, incubators and select VC’s

●Early Stage/ Series A (€2m- 10m) - VC’s & strategic investors

●Growth Stage/ Series B+ (> €10m) – VC’s(growth equity), private equity and strategic investors

Other considerations

● #1 focus should be growing your company ● Be realistic on size of your funding round ● Raise enough to execute your plan; not more ● Fast growing and profitable companies may also have option for current shareholder liquidity

Crowdfunding sites

● Key benefit: donation only so no equity dilution or interest cost

● Considerations:

●Donations come with zero value add

●Project funding only; not company funding

● Kickstarter – all or nothing. 8-10% fees. For Americans only now.

● Indiegogo – flexible/ fixed campaigns. 4-16% fees

Incubators ● Key benefit: small investment, mentorship and networking

● Considerations:

●Pick the right incubator which will give the best value add for you and your strategy

● Europe: Seedcamp, HackFwd, Startupbootcamp, Springboard and others

Angel Investors

● Network!; start with whom you know and their network direct & Linkedin

●Try friends, family, ex-colleagues, lawyers, etc.

●Dial for dollars

● Many countries have some angel networks that invest as a group or individuals

Government Funding ●Federal programs to invest in companies in technology or provide grants

●Regional programs to invest in local companies or provide grants or low interest loans or tax credits

●Benchmarks have been set in Finland with Tekes and in Quebec with Investissement Québec

●Time consuming to apply for and can be restrictive

Venture Capital Firms

● Look up the venture capital association for your country for a list of firms

● Also try European Venture Capital Association

● Some of the more active firms recently:

●Google Ventures – Rumble Entertainment, SCVNGR, ngmoco, Bionic Panda Games, Appyzoo, Pocket Change, Airy Labs, Kabam, Machinima & Zynga

●Intel Capital – Cloud Union, Xfire, Gaikai, SNSplus, Crowdstar, Kabam, Omek & Vostu

●Sequoia Capital – Unity Technologies, Humble Bundle, XY Brothers, Punchbox, Chukong & Pocket Gems

●Accel Partners – Supercell, Tiny Speck, raptr, Vostu & Dragonplay

●IDInvest Partners – Pretty Simple Games, Kobojo, Plumbee, Grand Cru, Mediastay, Ifeelgoods & Appsfire

●London Venture Partners – Supercell, Grey Area Labs, Applifier & PlayJam

● Speak to local firms in your country

● Also try EVCA

● Some of the more active firms recently :

●Providence Equity – Zenimax Media

●Insight Venture Partners – 6waves Lolapps, Spacetime Studios & Jagex

●Raine Group – Jagex

●North Bridge Growth Equity – Spil Games

●TA Associates – Bigpoint

●Summit Partners - Bigpoint

● Consider any firm which can bring value add including

●Publishers, Content/ IP Owners, Licensees/ Distribution Partners, Technology

● Share options can be used to secure content or publishing deals

● On zero cash deals then keep any stock options very low as an overall % of your cap table

Console Game Companies Mobile Online Game Game Companies Companies

Large Media Strategic Companies VC’s

Large Internet Retailers Companies

TV Hardware Broadcaster Companies s/ Telcos

14,000.0 Top 10 mkt cap = $68.6bn or 12,000.0 73.3% of value of all companies

10,000.0

8,000.0

6,000.0

4,000.0

2,000.0

0.0 Nintendo Co. Activision NetEase, Inc Nexon Co. Sega Sammy Gree, Inc. Electronic DeNA Co., NCSoft Namco Konami Corp. Ltd. Blizzard, Inc. Ltd. Holdings Inc. Arts Inc. Ltd. Bandai Holdings Inc. Note: USD$ millions and as at 14 August, 2012 Source: Capital IQ 32 © 2012 Avista Partners LLP Confidential and Proprietary, all rights reserved Fundraising for a game company

● Key issues are likely to be: ● Timing ● Pre-money Valuation ● Terms ● Management of the transaction process vis-à-vis ongoing business/commercial milestones ● Staff communication ● Choice of financial & legal advisors ● A successful outcome will be enhanced by ● Anticipation and consideration of major issues prior to start of process ● The creation of a disciplined and empowered fundraising team ● Proper use of advisors ● Independent Board Member with sector experience

● Raising money for game companies is as much an art as a science where relevant experience is invaluable

Very important

● Relevant transaction experience ● Relationship with potential investors ● Strong industry knowledge

34 34 © 2012 Avista Partners LLP Confidential and Proprietary, all rights reserved Typical Timetable for a VC round Proposed timetable Week of Task Responsibility 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 Write Info Memo due diligence (legal, financial and business) AP/L/AC drafting of Info Memo AP/MP interim review of Info Memo AP/MP/L finalise Info Memo AP/MP/L Investors review of list AP/MP contact investors AP Management presentations AP/MP drafting of presentation finalise presentation practise presentations Investor conversations AP/MP Conference calls investor presentations followup meetings at Clients office Deadline for term sheets Review of term sheets AP/MP Short list and select preferred investors to negotiate with AP/MP Select investors for syndicate AP/MP Finalise terms sheet AP/MP/L Investor Due diligence AP/MP/L/AC Finalise subcription & shareholders agreement AP/MP/L Finalise legal documents and complete transaction AP/MP/L Key: AP Avista Partners MP Client L Lawyers AC Accountants Plan for 6 months; can be longer or shorter depending on demand

●Leakage ●Loss of key team member(s) ●Delay in future pipeline ●Monthly financial projections/ milestones not being met during process ●Economic downturn Once term sheet is signed do not do anything that could potentially have a negative impact on the business until the deal closes. Focus on closing the deal!

● 5 pages max! ● Key sections: ● Business Description ● Background ● Management & Board Member Bios ● Products/Services ● Proprietary Technologies ● Market Opportunity ● Distribution Channels ● Competition ● Awards/ Recognition ● Financials ● Use of Proceeds 37 37 © 2012 Avista Partners LLP Confidential and Proprietary, all rights reserved

Management Presentation for a VC round

● Plan on 1 hour for an initial presentation including Q&A ● Key sections: ● Mission Statement ● Team ● Problem you are addressing & Your solution ● Demo of Product/Service ● Market Opportunity ● Business Model ● Proprietary Technology/ Advantage ● Competition ● Marketing Plan ● Metrics to date ● Key Financials ● Use of Proceeds ● Exit Strategy ● Leave 15 min at end for Q&A ● Discuss next steps 38 38 © 2012 Avista Partners LLP Confidential and Proprietary, all rights reserved

Financial Model

●Build from the bottom up; not top down ●Use reasonable assumptions ●Include historical financials and operating metrics for investors to benchmark against ●Key part is revenue build ● Customer acquisition funnel; how does yours work? ● Which customers will pay what amount ● How often will they pay ● Lifetime & lifetime value

● Everything is negotiable; >1 term sheet = more leverage for you ● Experienced advisors will make a difference here ● For seed round in Europe use documents from Seedsummit ● Timing is everything ● Push too hard for a term sheet too fast and investors will walk ● Push at right time and multiple term sheets will appear

The Term Sheet: Key terms ● Valuation/ Dilution: $$ being invested for X% ● Primary/ Secondary ● Liquidation Preference ● Voting rights ● Board ● Right of First Refusal and Co-Sale Right ● Stock Options – only allocate % needed until next round ● Exclusivity Period

Due Diligence for a VC round

● Transparency is key; failure to do so will ensure a failed deal ● Investor due diligence is to ensure: ● Everything that you have stated to date is true ● There are no surprises ● Key contracts are solid legally ● All IP is owned by the company ● Financial assumptions are realistic

Shareholders Agreement for a VC round

● Can be very long ● Work with a lawyer experienced in VC funding ● An extension of the term sheet ● Additional key sections ● Matters requiring consent ● Indemnity ● Management restrictive covenants ● Share option plan for current and future employees

Closing

● Push for closing ASAP after term sheet is signed ● Push the investors and their lawyer(s) ● Push your lawyer(s) ● Post closing: ● Then start executing on the plan you sold investors on ● Agree with investors on content and timing for press release; may be the most important news in the company history

Paul Heydon Managing Director Avista Partners

Email: [email protected] Web: www.avistapartners.com Twitter: @pheydon

Presentation is posted at: http://bit.ly/pheydon 45 45 Disclaimer

●This presentation was prepared by Avista Partners exclusively for the benefit and internal use of Recipient(s) in order to provide some thoughts on fundraising in the game sector. This presentation is incomplete without reference to, and should be viewed solely in conjunction with oral briefing provided by Avista Partners. The presentation is proprietary to Avista Partners and may not be used for any other purpose without the prior written consent of Avista Partners. ●The information in this presentation reflects prevailing conditions and our views as of this date, which are accordingly subject to change. In preparing this presentation, we have relied upon and assumed, without independent verification, the accuracy and completeness of all the information available from public sources or which was otherwise reviewed by us. Avista Partners LLP is authorised and regulated by the Financial Services Authority.