How to value a game company ?

The money valve !

A. VALUATION METHODS

1rst method : DCF / Discounted Cash Flows.

2nd method : Comparables, using multipliers.

  • The most used metric is Ebitda (quasi net income), an excellent proxy for cash generation. Multiplier is between x10 to x20.
  • Sales & gross profits are used for businesses at growth stage, especially those with a negative-ebitda but that are highly innovative, invest a lot to conquer market shares and delay the “path to profitability” to a later stage. For sales, multiplier is usually x1 to x4 and for Gross Profits (gross profit=sales-production costs), it is logically between sales & ebitda multipliers. If company is not publicly traded but has a monopoly or a known % of market share, you can estimate their gross revenues.

3rd method : Comparables, by historic of transactions in the same sector.

4rth method : Market capitalisation.

CDPR Market Cap

Other methods

  • Valuation based on expected return : For early stages startups or when market fit is not proven, valuation can be more difficult. For example VCs can valuate a startup based on expected returns of their initial investment (they invest 10M and expect x3 in 3 years, so if things go according to play they will valuate the company at 30M 3y after).
  • Valuation of assets : For startups with a handful of rare talents that could get a $1M salary at google, you can addup the costs of getting such talents together, even when the first line of code has not been written. Sleeping IPs (eg that don’t generate money right now) or patents can have also a good value.
  • Book value : this is a purely an accounting method that doesn’t really pain an accurate picture of a company’s true value

B. FACTORS IMPACTING PRICE

What are the factors that increase the price ?

  • First of all, if a company is targeted for acquisition, there’s a~30% acquisition premium to nudge shareholders into selling. This premium will vary based on agressiveness of acquisition.
  • Tangible or intangible assets. In the tech world, it can be a back catalog of IPs, patents etc.
  • Unfair advantage : strong barrier of entry (aka « walled garden »), a monopoly, a strong brand premium pricing strategy and high operational margin (like Apple)
  • A strong culture of innovation, a solid and reputable management team
  • A big addressable market that is growing
  • For indie studios : no game BUT a splendid number of wishlists is a good signal as it will convert under various thumb rules.
  • Boiling M&A market or overall market growth, like today for game industry, increase multipliers (though it can be heterogenous depending on geographic zone, US multipliers are significantly higher than EUR)
  • The way the buyer is financed and the way the deal is structured (with earn-out, partial payment in buyer’s shares etc.)
Bullish market increase multipliers

Conversely, those factors decrease the price

  • Lots of paid revenues (=unsustainable business model)
  • Negative signals : excessive debt, low margin, high volatility of revenues, etc.
  • Dependancy on a few revenue streams or key people (even if they can be temporarily locked with earn-out clauses)
  • A niche or shrinking market
  • For indie studios : company with less than a handful of millions of net income (eg the overwhelming majority of indies) are considered small and will bring the multipliers down.

C. EXAMPLES

A. Valve : 2nd method

  • Not publicly traded
  • MIB level secretive
  • Valve’s ebitda is unknown, but PC market gross income is around $35Bn, Valve has 75% of that market. Say it generates around 25% of those revenues as platform fee (fee is 30% but let’s haircut to 25% to account for F2P transactions that don’t use steam wallet), that’s about $6.5Bn revenues. Considering it only has a few hundreds of staff, operational margin is likely extremely high. Let’s say a fat 35% of operational margin. With a 35% operational margin that would lean $2.3Bn of net revenues. An acceptable proxy for valuation would x10 to x20 ebitda, which would give us a valuation between $23Bn to $46Bn. Steam walled garden and a load of unfair monopolistic advantages might easily bring the valuation in the 35–40Bn$ range, and a 30% acquisition premium would gives us to a potential acquisition cost of ~$45-50Bn for Valve.
Here’s what would happen if you knew Valve Ebitda

B. Your indie studio : 1rst method

  • Not publicly traded
  • Sales can be estimated with BI tools (appannie, etc.), thumb rules (boxleiter method & abacus for console sales) or by directly getting the sales data.
  • Let’s take a small indie studio “IndieLife” of 10 people, based in France, who manage to crank a reasonably successful indie game every 2/3 years. It’s a quality team of former AAA professional that build modest IPs and a catalog that grows over time. They are self-published and after 3 titles, on year 6, they are approached by a publisher who wants to buy them.
“IndieLife”, a studio of people living the indie life — Simplified model
  • 1rst method and a 5 years ROI from buyer’s perspective gives us a valuation of around 2.4M€. With a 30% acquisition premium it’s a 3M€ price, fairly consistent with a 2x multiplier on gross revenues (1.977M€) and a x10 multiplier on net income with a slight decrease due to volatility of revenues.

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Video Game finance and economics

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Stéphane

Stéphane

Video Game finance and economics

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