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EGD News #103 — Your financial safety in startups

EGD News #103 — Your financial safety in startups

When I went into startups in 2005, I was employed as a programmer and getting a monthly salary of about 3,000 euros.

I didn’t have many capabilities to save up for rainy days, but I always felt that losing my financial safety was a gamble worth taking. I wanted to do a startup so badly that I could take the risk. The worst that could happen was bankruptcy, and I could at any point start doing programming work again.

Six years later, when my first startup had failed, I had 60,000 euros in bank loans that I needed to repay. On two occasions, I had personally backed two bank loans for the company, which now fell on my lap to take care of.

Would I issue personal guarantees if I relived my first startup? With my risk tolerance, which most likely stems from my willingness to do my own thing, the answer would be yes.

When starting Next Games in 2013, I did not fear financial ruin, and I had more options. When you get to that point where the company is scaling, and investors want in more than you want investors, you can start thinking about de-risk things.

Raise salaries

I recently did a poll on LinkedIn to ask about founder salaries, from founders or people who’d previously been founders.

As a founder, you should think about founder salaries in stages. I would instead align the wages with the funding stage that you are in. Looking at revenues is also possible, but usually, you want to pour all the income back into marketing and not balloon the budget with high salaries unless you can afford it.

Here are the stages.

A. No salary before fundraising. Use up your savings, or don’t quit the job before signing an investor term sheet.

B. Light salary from pre-seed and seed. Something that keeps you alive, but nothing extra.

C. Average salary for Series A. A comfortable salary, but still nothing extra.

D. High revenue growth stage. Here you have the confidence that a “competitive market” salary won’t kill the company.

A preferable option is to do a secondary round at the D stage so that salaries don’t become the one and only compensation model.

Secondary rounds

Once the company is becoming an enormous force of nature, and more and more investors want in, the founders have the option to sell a tiny portion of their shares to these investors.

In a recent interview, Zapier founder Wade Foster talked about secondaries.

“I think it’s a smart thing to say, like, Hey, I’m in a position where I can set myself up, set my family up, and not have to worry too much. It is helpful to your business. Because then you can take bigger bets, take bigger swings, not worrying too much about how that’s going to blow back on your personal situation.”

Secondary rounds are one of the ways to reduce fear. A bunch of companies in gaming have done this. Supercell’s final funding round in early 2013, where investments funds Atomico and Index participated, was a secondary round where the founders and early employees got to sell shares.

After a secondary, the founders can get a house, pay loans. But what’s more important is that they can diversify their stakes.

Start diversifying

When you are a startup founder, all your risk is tied to one company. If that fails, you lose it all. After a secondary sale of shares, founders should think about starting angel investing. It’s the best way to place your eggs in several baskets.

Founders can get started by trying out equity crowdfunding. I began with Republic in 2018 when I did my first ever angel investment, which was $1,000.

There’s also plenty of angel syndicates out there. Join one and start doing checks of $2,500 to $5,000.

If a friend or ex-colleague is doing a startup, participate in their seed round with a few thousand. You’ll regret not participating when they become the next Small Giant Games, Moon Active, or Playrix.

When you participate in startup investing, you get to share your knowledge and elevate the risk aversion of these founders on their financial safety.

(Photo by Issy Bailey on Unsplash)

🎙Ask Me Anything #5

This is my fifth Ask Me Anything podcast episode, where I answer people’s questions related to game studios, fundraising, and all other entrepreneurship-related stuff. I will be recording another episode quite soon, so please submit your questions by filling out this form.

The questions I cover in this one are:

  • With good retention numbers, how much can we raise?
  • How can a hyper-casual studio attract investors?
  • What is the best way to test prototypes of mobile games?
  • With a game in soft launch, how can we determine the company’s value for an acquisition?

Listen to the full episode by going here.

📃 Articles worth reading

How to build an investor lead list — “For a successful fundraise, you need to know to whom you’re talking before you get introduced. There are over 300 VC firms focused on seed stage, not to mention an infinite number of angel investors you might approach to participate in a funding round. Multiply that by the handful of meetings to get to a yes—or, more likely, a no, and you can essentially pitch investors ad infinitum without raising any money. Avoid this by building a robust lead list that is specifically tailored to your company.”

Weekly consumer spend on mobile games increases 35% in Q3 2021 — “Mobile games account for 66 per cent of every $1 spent across iOS and Google Play worldwide in Q3 2021. On iOS, consumer spending on games reached $13 billion, a 10 per cent increase year-over-year. Likewise, consumer spending increased 10 per cent year-over-year on Google Play, reaching $9 billion.”

Cryptocurrency, NFTs and pay-to-earn: the new world or a gigantic Ponzi scam? — “Players value their avatars in video games as a form of self-expression, in the same way that the clothes we wear, the music we listen to and the cars we drive (or refuse to own) are a form of self-expression. The permanence of the blockchain is another tool in the idea of creating value. NFTs may have value – I am still unclear about this.

💬 Quote that I’ve been thinking about

“The most exciting phrase to hear in science, the one that heralds new discoveries, is not ‘Eureka!’ but ‘That’s funny…'”

— Isaac Asimov


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I hope you have a great weekend!

Joakim