We at Initial Capital work with many game companies, ranging from stealth mode yet-to-launch companies to global stars like Supercell. A common theme across all is that user acquisition costs are rising and “we need to figure out brand marketing at some point.” Most mobile games and apps companies are rightly focused on performance based user acquisition (UA) through a Life-time Value (LTV) and Cost-Per-Install (CPI) arbitrage and have a hard time wrapping their heads around how to think about brand oriented marketing in that context. However, as the market matures, getting to a more comprehensive model of marketing is critical for success. As mentioned in my previous post and my keynote at GMIC – I believe this to be a key competitive differentiator for aspiring winners in 2014.

Some background on brand in mobile / apps

John Riccitiello, former EA CEO, and a strong product marketing thinker and investor gave a great talk on the subject of brand marketing at the recent Gaming Insiders Summit – writeup here. His excellent insights are sometimes hard to tie back to a quantitative model of user acquisition and hence get bounced around more quant marketing departments. A good primer on reconciling creative and performance in marketing by Matt Kellie of Supercell is here. But even he doesn’t quite touch on brand.

I think about this a lot and my take on reconciling the subjects based on my cumulative learnings from Glu, Playfish, LOVEFiLM, EA as well as observing Supercell and other portfolio companies below. At EA in particular as EVP Digital including all central marketing I got to work with a really fun mix of super talented folks across both ends of the creative vs performance based spectrum in particular, and it was fun helping bring all elements together into one team and get to one approach.

Three important health warnings :

  1. Marketing is fundamentally an art as well as a science and the best outcomes will come from creatively minded people respecting the quant wonks and vice versa. We should try to proxy performance with metrics wherever possible but even the most quant minded folks need to acknowledge that not everything is measurable and we need to live with trusting creative instinct. Much like with making games, figuring out the brand-end of app marketing is all about star creative talent more than any formula. Executed correctly metrics will be a great guide for creative – but only that – not a formula.
  2. The lowest hanging fruit in app marketing will always be getting featured by the app stores (Apple / Google / Amazon) and a series of smart tests of spending mix of UA spend across Facebook, performance based ad networks like Chartboost and video based networks like Everyplay and AdColony. Broader brand marketing will be an important second step optimisation once you have product traction and your main task becomes fighting diminishing returns. I would not start with it – only keep it in the back of my mind as something I need to get to to maximise the potential of the title once the low hanging fruit is exhausted.
  3. Nothing I’m about to say should take precedence over making a great product. In F2P – games as a service in particular the experience is the brand – whatever you say or do about the game outside of the game will pale in significance over what real players say, share and feel. The job of brand marketing is to augment and share the truth of those experiences and feelings – not attempt to portray them as something they are not.

An analytical framework for “brand marketing”

Just because “brand” is abstract doesn’t mean it can’t be measured as part of a quant driven marketing approach. In fact almost everything in app marketing can be performance based. The trick is to internalise that attributing performance to “last click” only is a misleading view of what’s going on. Just because it isn’t easy to track something doesn’t mean it isn’t there. Somewhere in a consumer’s head there has been a process of “wow – what is that?” (I’ll call this “Awareness”) to “I love this / have to check it out” (I will call this “Interest”) to “give me the link to install” (I’ll call this “Conversion”) and a set of subsequent steps to ultimately become engaged and monetize. The impact of brand marketing can simplistically be modelled as impacting Awareness and Interest (which both drive more people into the conversion stage, as well as driving down CPI for the folks already there). Post install metrics are far less likely to be impacted to a meaningful degree. There is some potential for it to increase trust and thereby spending / LTV but I haven’t seen it personally and will ignore that effect here. (By the way Awareness, Interest and Conversion are just semantics – there are other words you can use, and specific measurements you could use for each, but the principles should remain the same.)

The way the vast majority of mobile app marketing is done today – by buying purely conversion oriented advertising – forces Awareness, Interest and Conversion to all occur in a single step for the consumer. It’s easiest to measure and it is the lowest hanging fruit approach, but will both limit your max growth and achieve it less efficiently. Performance based ad units excel at conversion but are not the best at creating either Awareness or spurring Interest. And the higher these two are, the cheaper the Conversion and the further out it pushes the saturation point where you can no longer acquire users profitably. After all people will only click on the link if they believe it is interesting. A picture illustrating the effect of more comprehensive marketing below. The CPI curve for any segment is lower with broader Awareness and Interest, making UA more profitable and pushing the point of saturation further out.

user acquisition vs comprehensive marketing

The reason media mix works is both because it addresses the above steps separately, and also because modern cognitive science suggests that the brain places a premium on the coherence of the information from multiple sources when making decisions. An interesting digression on the topic from Nobel laureate Daniel Kahneman here.

You can a/b test your way to the right creative and media mix it in the long term but it requires a leap of faith initially to try it out. Traditional marketers are more comfortable with leaps of faith than those used to pure performance based numbers. But the payoff for getting it right is huge.

Initially the optimal strategy will almost always be to buy normal performance based ads including video performance based ads which give a better view of the title. You should get the lowest hanging fruit that way. But over time to expand who you reach you need to be more sophisticated. The more core the audience that you are targeting or the more convincing you think they will need to try out your title, the more important it will be to get this right over time. Here is a suggested framework to get there.

1. Develop quantitative targets for your acquisition funnel in terms of Awareness, Interest and Conversion

Awareness: This is the finite universe of your addressable audience or potential players – for example the 240M or so active iOS or Android devices in the USA (Mary Meeker 2013) – clearly the market is global, but marketing is likely to evolve to be more regional. Casual / universal games likely need to target this entire population for awareness. More core / limited appeal games can probably break it down to a smaller addressable audience based on wants and needs. The awareness metric is fundamentally about what portion of this addressable audience is aware that your product exists through organic or paid means. Awareness should always use the addressable audience as the denominator – having a million people who are aware but will never be a valuable user for you is a waste of money. Tools to get there span from TV to online video, social marketing and PR. The traditional outcome metric is Nielsen. It will be interesting to see if a different metric will emerge for Awareness in mobile.

Interest : After hearing about your game the reaction among your potential players should be “yey, where do I get it!”. The tools to generate interest vs indifference are primarily finding a way to show gameplay in a way that evokes a reaction and differentiates the product, as well as using ratings / reviews / stars / accolades to substantiate the message. Finding a way to measure reaction to the imagery / videos beyond click through to actual “rating” is an important area of innovation. The traditional Nielsen metrics of Rating Among Aware (RAA) and Definite Purchase Intent (DPI) used in console are not applicable for F2P. Mobile will likely develop its own more precise rating metrics of what is a favorable rating polling after video adverts and equivalent. An interesting development in this direction is www.loopme.biz who have ad units allowing for consumer feedback for example.

Conversion : The portion of aware users that rate your game should now install it, become players and – down the road – ideally paying users. This toolset is well understood and amply supplied by companies like Grow Mobile, Fiksu, Fetch, Mobile App Tracking and others. The basic approach is to test tons of creative and channels, observe the outcome in terms of downstream behavior and then optimize the CPI / LTV arbitrage by channel and demographic.

acquisition funnel for mobile games

These target funnel metrics should be informed by baseline organic performance of the title and a sense of what the title is (step 2 below). In this example the assumed initial efficiency loss is 90%. This reflects the fact that any resources spent on making consumers aware that ultimately did not end up satisfying the target condition (here somewhat arbitrarily retention beyond D7) were not deployed efficiently.

Once the marketing campaign is live it is important not only to optimise each conversion step, but also to optimise away from top funnel investments toward audiences / channels that ultimately don’t convert toward a greater focus on those who will. The baseline metrics from beta and early performance marketing efforts should provide assumptions and also begin to refine the view of the target audience to mitigate efficiency loss. At the conversion end this is called ‘look-alike’ targeting – but it should extend to creative and awareness / rating efforts also. A zero efficiency loss is neither possible nor desirable in that a great product will generate awareness on its own, some of which will never convert.

It’s worth noting that there are still very real tracking issues associated with mapping the full funnel above, as well as significant targeting challenges outside of Facebook. This is an evolving space. The solution is a combination of finding creative ways to track the full conversion path for at least a statistically significant number of consumers, as well as being comfortable with econometric modelling where full tracking isn’t available. Initial Capital is actively participating in this space through our investment in app marketing analytics and a/b test provider swrve.

2. Establish a messaging platform – Develop how you portray the game based on the above view of target funnel metrics, respecting exactly what your game is and who it’s for. Develop the high resolution graphic assets, video assets, words you use and don’t use, personality etc based on a combination of intuition and testing. And figure out how to tailor this message and make it resonate with your player base so they will do the heavy lifting on awareness through distribution / sharing to friends for you both through product integration and outside of product on Facebook, Youtube etc. This is a fundamentally a different skill set to performance buys and needs to be as close to the product team as possible. A good example from the console world is Battlefield 4 with the differentiator “Only in Battlefield” based on unique game play features not available in main competitor Call of Duty: Ghosts.

In mobile this is just starting, but the advert below for Candy Crush Saga begins to show how this space is evolving

Genuine viral sharing of assets is still in its infancy on mobile. Solutions by Everyplay and Kamcord to share video clips are charting the path forward here. The holy grail of messaging is to show a tailored, evocative piece of content, endorsed and ideally generated by a friend, on a channel where you are likely to take action. This space will evolve quickly.

3. Establish a channel strategy and model for experimentation – given the metrics framework from point 1 above and the messaging platform from point 2, you can now figure out both 1/ what channels to try out for that creative and 2/ what relative budget allocations to attribute to them and continue to optimise and a/b test your way forward. Once you get some data you can begin to forecast how many impressions across different channels you need to establish the target funnel metrics from point 1, and you can begin to understand what building up to a certain scale will cost you. For example, you should uncover the correct relative level of investment and detailed execution of TV vs online video vs mobile video vs social campaigns and viral sharing features to get to the target Awareness in a similar way as to how you are currently optimising the conversion part between different performance based networks.

It’s critical here that you have a cross channel attribution model that allows you to attribute value not just to the “last click” to install, but rather also to all upstream activities targeting Awareness and Interest ahead of that. Given limitations in data – for example figuring out who saw a TV ad – only some aspects of this can be tested in the near-real time we all love so much. For others you have to be comfortable learning in weeks and months instead of days, and using inferred value through econometrics rather than direct attribution and sometimes testing across countries that tend to behave similarly (like Germany and Austria). But the benefits are huge. If you don’t already have a data scientist on the recruitment list for your marketing team you should probably start looking for one.

It’s worth re-iterating from point 1 that at all times the key is to focus on the folks who ultimately become valuable to you – the highly engaged folks and the spenders. The D7 target is just an illustration for simplicity. The less money you spend on folks who ultimately don’t contribute value in one way or another the better. But the upshot is that brand marketing can and will become a science as well as an art for mobile games. Brand marketing expertise will not determine if your title is successful initially or not, but it will play a critical role in transforming a success into a global lasting winner.

The road ahead

Up to now the fastest pace of innovation in mobile app user acquisition has happened in ‘last click’ performance advertising with mobile ad networks, both in inventory and tracking. The big innovations of 2013 were the rise of mobile video ad networks and most recently Facebook launching their well functioning mobile ad product. We will see more of these in the future, and likely also the rise of real-time-bidding (RTB) in purchasing these impressions.

Some of the biggest innovations in mobile marketing in 2014 will come from enhanced tracking and an increased use of broad marketing strategies. It is interesting that App Annie, one of the leading app store chart tracking services, just launched a basic mobile advertising analytics product in beta – another sign of things to come. Learning will take time and the companies which develop a profound understanding of media mix and their own funnel metrics will begin to build that sought after “publisher leverage” that will create and cement the position of global winners in the market. Count on some exciting years of learning ahead!

Do you have a different view of the direction of mobile marketing? If you do we’d love to hear from you. We think about this a lot – as you can probably tell.

Here are the slides from my keynote from the Global Mobile Internet Conference in San Francisco last week covering some industry trends, as well as pros and cons of different ways to fund games – publisher funding, seed investment, and strategic funding.


The upshot is that there is no right or wrong answer – everything is a tradeoff. Most importantly I always advise startups to treat fund raising as a recruitment exercise to help secure additional skills around you to help you build your company.

We at Initial Capital are obviously big fans of the venture model because we think it helps entrepreneurs build really big things without the restrictions other forms of funding bring. But we acknowledge there are circumstances where we are not the right partner.

Do you have different experiences or thoughts on sources of funding?

Supercell just officially announced their strategic investment of $1.5 billion from SoftBank and Gung Ho Entertainment. See the official blog post from Ilkka with a statement from Masayoshi Son, the SoftBank founder.

For us at Initial Capital, the announcement is bittersweet. We led the seed round back in 2010 together with our friends London Venture Partners, Lifeline Ventures and Jari Ovaskainen. We knew the Supercell team from their days at previous companies and were huge fans of their collective ability to craft incredible games. What excited us even more was their long term vision and desire to build a unique culture.


We have had a blast working with Ilkka and the crew for the past three years – from sparring sessions on product strategy and late night team building sessions to playing keys in the house band. As entrepreneurs, we are a little envious that we will now be backseat passengers as the company takes the next big step toward becoming the first truly global games company.

That said, we are very excited for the team and confident in their future with the expanded resources. We feel very fortunate to have been able to work with so many talented and thoughtful individuals in the company over the past three years. We are also hugely thankful for the incredible financial return on our investment to date as well as the promise of a greater upside still for our remaining share holding. Thank you Ilkka and team!

We also believe that today’s announcement heralds an exciting new direction for the emerging mobile and tablet games industry as a whole. Here are some of the things we expect :

  • Today’s announcement alongside the upcoming IPO of King, will create two financially strong, ambitious, globally minded companies. This will inevitably spur on others, increase the competition for talent and lead to accelerating industry growth.
  • The financial strength of the emerging leaders will also push up production values and marketing budgets further. Few mobile / tablet games will be made with combined production and marketing budgets below $1M in the future.
  • The global nature of the deal will create a competitive advantage out of global scale and managing player relationships regionally. As this model evolves and spreads to others in the market, it will usher in a new era where publishing scale re-emerges as a key source of enterprise value.
  • Mobile game marketing budgets will not only grow substantially but also evolve toward a more balanced approach between mainstream brand advertising and performance advertising, increasing the importance of brand marketing talent and high production assets in combination with the quantitative performance marketing skills.

We look forward to supporting Supercell as continued shareholders, as well as working with our other portfolio companies to navigate the exciting new waters of the industry over the coming years.

Meanwhile, thank you again to Ilkka and team and best of luck for the future. Just remember to celebrate with beer and not champagne. You have earned it.

By Kristian Segerstrale (originally a guest post on TechCrunch on 17 June 2013 – reposted here)

TechCrunch writer Kim-Mai Cutler and Benchmark Capital general partner Mitch Lasky recently wrote two insightful pieces on venture investment in games (here and here) – both expressing some degree of skepticism of venture capital models for funding game startups. I agree venture funding is not for every game startup, and certainly not every game startup makes for a great venture investment. However, I would argue the case for venture funding for games is today stronger than ever.

Here is why:

Why game startups are better off with venture investment than publisher funding

There are broadly speaking three models available for a game startup today: bootstrapping (including crowd-funding), publisher financing and venture financing. For those who can afford the risk and have cash readily available, bootstrapping always trumps the other two. It comes with maximum freedom, control and upside in a success case.

But the risks are very real and significant. Those unable to bootstrap because of the risks or ambitions of the project should in my view consider venture investment over publisher financing models.

Publishing as an idea for digital pure plays is simply turning out not to work very well. Many have tried it with very little to show for it. This is because the typical publisher value-add of financing, marketing, technology and distribution through retail channels doesn’t translate well to the digital world. It says something that not a single game in today’s iOS top-25 grossing has been “published” by a third party as far as I can tell. [UPDATE: Marvel War of Heroes, CSR Racing, Rage of Bahamut and Dragonvale are examples where a publisher model has worked in the past – even if it in most cases led to the studio being acquired ]

While developers continue to need financing, the rest of the “publishing services” have become obsolete in four key ways:

  • Publishers can’t compete with atomized marketing services by specialists: As the digital market has matured, player acquisition, telemetry, cross-promotion and other marketing services have become widely available as independent specialist services that compete on price and quality of the service. Companies like Swrve (one of our portfolio companies at Initial Capital), ChartboostHasOffersNanigansFlurry and a host of competitors are evolving their services at a blistering speed, requiring only a small set of increasingly available talent at the developer end. Doing it directly is not just cheaper and more flexible as the world changes, it also forces a more profound understanding of player flows and distribution challenges, which ultimately helps uncover product design insights.
  • Publisher channel access may accelerate your success, but will not define it: Much has been made out of the advantage that big game publishers have in terms of access to Apple or Google in terms of promotions. Clearly, being featured helps generate initial downloads. However that success is short-lived if you are unable to retain your audience and acquire users independently at a profitable cost of acquisition. Plus, you won’t be re-featured unless you generate the numbers. A game investor worth their salt will be able to make the right introductions here anyway. The incremental publisher value here is small.
  • Holding on to rights to extend IP has become critical to value creation: As Lasky emphasizes in his post, gaming even in the games-as-a-service world is inherently hits driven. For a game startup to become valuable over time, it needs to find ways of anchoring its success around building franchises. Ownership of intellectual property (IP) and all extension rights becomes important. Angry Birds-maker Rovio and Moshi Monsters-maker Mind Candy have shown that game originated IP is an increasingly viable base to build out a broader IP following with over 40 percent or revenue from each being attributed to non-game products. At the same time, the halo marketing effect from these non-gaming products can still contribute value to the core gaming product. Publishing deals are typically structured for the publisher to get hold of this.
  • Long term margins help you hold onto key talent: Perhaps most importantly, success in games has always been about key creative talent. The more cash a game startup is able to create, the more it can afford to invest in everything from the office to culture to individual, innovative compensation models for rockstar talent. Signing away a revenue share limits these options and ultimately is likely to encourage the best talent to leave.

Venture financing from a specialist fund that understands games should therefore be seen as a compelling alternative for game startups. It provides the financing value add, typically at far more flexible terms, without any of the restrictions to value creation that lower margins or complicated IP terms can create. And you could even get good folks around the table for advice how best to build for long term success and shareholder value. It should be no surprise that today’s most promising game companies including SupercellKingKabamRovio and Kixeye are all venture-funded.

What about the case for investors – does it still make sense to invest in games?

The digital pure play market growth has recently been characterized by the rapid rise and occasionally fall of new entrants. Zynga is cited as the key example by both Cutler and Lasky. A thoughtful article by Tadgh Kelly about “Peak Mobile” further highlights the cycles any individual platform tends to go through. In a world of few game acquirers and a troubled IPO market, does the venture model therefore need a re-think?

In my view and that of Initial Capital, which is an investor in SupercellBrainbowSupersolidSpace Ape Games and others, the case for continued investment is strong.

Even though some VCs are shying away from games, here are five reasons why I and Initial Capitalare doubling down on games:

  • A continued virtually unopposed growth opportunity in digital: The next generation consoles are doing a wonderful job at distracting the big publishers away from the fastest growing parts of the game industry. That clears the water for pure digital plays to gradually build up dominance with new IP on new hardware platforms. Activision Blizzard CEO Bobby Kotick’s recent dismissive remarks about mobile, and EA’s strategy of ANDs: consolesand PC and mobile and online (which dilutes their excellent talent across too many opportunities) are cases in point. The innovators’ dilemma confronting the big guys is creating continuing unopposed growth opportunity for new and established digital pure plays alike. That is giving new players time to build up the brand and marketing advantages that big publishers have held for years on what are rapidly becoming legacy platforms.
  • There are plenty of “blue water” opportunities on new platforms: Very few game play styles or categories on personal screens, like four- to seven-inch screens across mobile phones and tablets, feel mature at this point. Clash of Clans’ take on the tower defense genre, Candy Crush Saga’s interpretation of Match Three games and Hay Day’s way of approaching farm games are possibly the most mature examples out there. But who is making the category-defining racing game, the best first person shooter, sports game, real-time strategy, monster breeding or puzzle adventure game on these platforms? The console guys are hamstrung by their lack of focus.The starlets who already dominate one or two categories will have similar focus challenges due to successes to date. Seldom have there been such clearly profitable, well-defined opportunities for new startups to re-imagine these experiences for personal touch screens.
  • The opportunity has gone global: The traditional gaming “Galapagos Islands” of Japan, Korea and China have been overrun by the great global equalizers of Android and iOS. This creates unprecedented opportunities to go global. Supercell’s Clash of Clans is currently the #1 game on iPad in China and #11 in Japan. For Candy Crush, the same positions are #64 in China and #4 in Japan. This is not to belittle the differences in local tastes, marketing channels and in some cases app stores or distribution mechanisms. But the opportunity to reach the other half of the game industry that these countries represent has never been more tangible.
  • Unprecedented margins: Because of the margin structure and low headcount requirements of the industry, companies can become very profitable very quickly. Recent lessons from other companies that have grown too quickly are causing newer companies like Supercell to be more thoughtful. They are banking their profits, stabilizing their mid-double-digit operating margins and re-investing carefully into nurturing and expanding their talent base. This is also great news for top talent as it gets to increasingly share in the financial success both through company perks, private and public share sales and also dividends.
  • The M&A and IPO markets will be back. And there’s nothing wrong with dividends either: It will just take time. Large M&A deals in games are unlikely to be on the horizon. The traditional console folks are too busy fighting each other and do not have the resources to acquire an increasingly confident set of digital pure plays. The leading pure plays on the other hand are mostly focused on ensuring their own model scales before embarking on aggressive M&A. M&A is particularly hard an industry in the middle of a disruption where talent and inspiration are more important than scale. While Zynga’s troubles may have damaged the IPO prospects for the next 18 months or so, if the new generation of companies can show sustained profitability, they will be in an incredibly strong position to consider listing later. Some will undoubtedly choose to stay private and pay out dividends in the medium-run, which is fine from a venture investors perspective. But the option will be there.

The next few years for games will be choppy. But the fundamentals for gaming investments are stronger than ever. As Lasky says, you have to be building a game company and not just a game for venture funding to make sense. And for a venture fund to consider gaming investments, you need to understand the sector.

But neither of those mean that venture investments in games aren’t alive an well. In fact, the team at Initial Capital remain as bullish on the sector as we led the seed round into Supercell. We continue to seek out the very best, most inspired design and coding teams who want to define where games will go next and help them get started with capital, advice and structure.