Building a profitable gaming business

19/10/2022
Andrew Mcmillan (Johnston Carmichael)

by Andrew McMillan, Johnston Carmichael

WITH global video games and esports revenue totalling £215bn in 2021, five times the pre-pandemic global cinema revenue and projected to continue growing in the year ahead, there is an unprecedented opportunity for Scotland to compete in this global market. 

Our small country is punching above its weight, with the games development sector worth over £300m in Scotland, supporting 6400 jobs and comprising 11% of the UK’s developer headcount.

As well as being home to globally recognised brands like Rockstar and 4J Studios, and their household franchises Grand Theft Auto and Minecraft, we have a unique ecosystem, made up of award-winning academic institutions such as Abertay University, which is constantly rated within the top 10 game development institutions in the world.

We have fantastic business support agencies such as Scottish Enterprise, Scottish Edge and Code Base as well as a dedicated Scottish Games Network, creating a focal point for the community. Adding to this ecosystem, the first Scottish Games Week starts on Monday, which Johnston Carmichael is sponsoring.

As business advisers working with some of the country’s most exciting tech and gaming companies, we believe the focus for growth within the sector must be on supporting the development of profitable, sustainable, thriving businesses. 

However, despite unprecedented growth within the industry, gaming companies experience distinct challenges. Failure often occurs because the focus is solely on the creative process, building visually and mentally stimulating games, and creating IP, with less emphasis on commercial and business activities. 

Gaming companies need support to tackle the unique challenges they face so that Scotland’s gaming industry can keep up with other markets in America, Japan, China and Europe.

We are seeing a clear gap between industry and education that needs to be filled to give gaming companies a better chance at success. Many young and enthusiastic developers leave university with incredible technical skills but a lack of commercial and business acumen.

IBM’s Skills Academy is an example of how we could plug the skills gap. It’s a training and certification program designed to bridge the skills gap between academia and market industry. We need something similar in the Scottish tech ecosystem. This topic will be explored further during an education symposium in Edinburgh as part of Scottish Games Week.

At Johnston Carmichael we have identified four key areas where our gaming clients require support. These include acquiring and retaining talent, access to funding, growth and internationalisation, as well as financial governance and compliance.

One of the areas often overlooked by young business across all sectors, including the games sector, is cashflow. Cash is the lifeblood of every business and the focus for any games company needs to be on achieving a sustainable level of cash flow aligned to the respective stage of its commercial strategy. There are a variety of funding types and avenues available to companies, including angel and private equity investors, publishers and grant funding bodies and the most appropriate type depends on each company’s unique circumstances. It’s essential to get good advice when it comes to cash flow and not end up wasting time on approaches that could have a negative impact.

Ensuring product-market fit is another vital element of building a profitable business. It’s important to be pragmatic and diligent with the approach to market. At Johnston Carmichael our expert advisers always challenge a clients’ value proposition.  We understand the industry and we know it’s easy to get excited about an idea without knowing the size or specifics of the market. This is something we focus on from day one with our gaming clients.

Understanding financial governance and compliance is another consideration for any business and this is no different for the gaming industry.  There are valuable incentives out there like Video Game Tax Relief (VGTR) and R&D Tax Relief and engaging with an adviser who proactively assists in this area can help ensure a company receives the maximum relief to which it is entitled. Tax reliefs such as VGTR can help provide a significant source of finance for eligible companies which can be used for additional development budgets or provide the capital to hire staff. 

One of our clients, Stacking Chairs, is a Glasgow-based studio developing a new wave of bold story-first games for a modern adult audience. It’s targeting an opportunity driven by the growth of subscription streaming services. The founding team include BAFTA award winning developers from Scotland’s indie scene as well as two ex-Rockstar Games developers who were involved in the Grand Theft Auto and Red Dead Redemption franchises.

Because of its credentials and unique market offering, publishers and funders have been eager to speak to the studio about potential partnerships. As with all Johnston Carmichael clients, we see our relationship with Stacking Chairs as a long-term partnership and our work has involved assisting the company in refining its financial and commercial strategies, whilst highlighting associated tax or finance related considerations, with a view to providing the best platform to achieve its future growth aspirations.  

Growing a profitable gaming business won’t happen overnight. It’s a competitive industry and it is imperative that we create opportunities for game developers to learn business and commercial skills in addition to technical expertise. Academic institutions and industry need to better align to ensure this happens and advisers need to take a holistic approach, thinking about the long-term potential of a company, rather than short term returns.

Andrew McMillan is a Tax Director and lead for the Video Games Sector Team at Johnston Carmichael

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