Mobile gaming boomed amid the pandemic.
The industry generated $77.2 billion in revenue in the U.S. alone last year, according to data from SocialPeta. The result is a market expected to continue its growth in 2021 and beyond as more individuals turn to app stores to discover ways to learn, be entertained and connect with an online community.
For game and app developers, this momentum has also opened major opportunities to benefit from the financial windfall. But recreating the viral obsessions of products like Flappy Bird or Angry Birds probably isn’t in the roadmap, according to Pollen VC CEO and Co-founder Martin Macmillan.
The bad news is that developers can no longer rely on creating a viral hit to be profitable. But the good news is a shift in user dynamics that Macmillan said gave rise to so-called “hyper-casual gaming” that can be profitable through user payments and advertising revenues.
At the same time, the democratization of app stores from the likes of Google and Apple has also enabled anyone with development and coding knowledge — and a creative idea to execute — the chance to step into the market.
Speaking with PYMNTS, Macmillan explained why it’s time for business lending and financing to take a vertical-specific approach to the gaming market and lend the kind of support and expertise that developers need, and which traditional banks often lack.
Crafting Financial Literacy
Pollen VC targets the developer community with a funding solution that finances against receivables. For game and app creators, revenue generally comes from customer in-app purchases, while another key revenue stream can be found in the incoming B2B payments of advertisers.
Developers understand that driving revenue is key to financial success — and that customer acquisition is key to driving revenue. But as Macmillan explained, these professionals are typically focused on the creation of the game itself and can lack the financial expertise to optimize monetization and cash management.
“Developers are very much coming from a product design and gameplay standpoint,” he said. “These are, to start, relatively small companies, and the financial aspects are sometimes overlooked in the early days. You get a big work hire — CFOs or finance leads — way later in the company’s lifecycle than you would normally find.”
This is especially true considering it’s not always major corporations that initiate game or app development. Often, it’s an individual developer, or small group of developers, looking to bring their ideas to life.
Historically, this market has relied upon equity to secure funding. But Macmillan said there is an opportunity to optimize capital through debt in ways that traditional banks have been unable to address. What’s more, there is also a space for FinTechs to not only fill the debt financing gap, but to promote financial literacy within the industry through a variety of resources and tools.
An Inch Wide, A Mile Deep
Combining debt financing with financial literacy resources means developers can be connected to capital that fuels customer acquisition, empowering revenue cycles. Macmillan said helping these professionals understand when to turn to equity and when to turn to debt can help create viable, successful businesses.
Using receivables to lend against is also a strategic decision by Pollen VC. The FinTech secures read-only access to developers’ platforms to obtain insights into their receivables, which are owed by high-quality firms like Google or Facebook, as well as service providers targeting developers like AppLovin and Iron Source.
“They’re all very high credit quality, and most of these are publicly listed companies these days and operate on exactly the same kind of lending model in terms of us forensically investigating the impression data or the in-app purchase data to underpin our lending decision,” said Macmillan.
For the developer community, venture capital can be instrumental in getting an idea off the ground, especially in markets like the U.S. and U.K. In other geographies, VC funding is less available. Either way, these sources of capital aren’t always the most effective way to grow a business after a product has been launched.
And although receivables financing is nothing new, traditional banks and other lenders are often unable to understand the nuances of the game and app development world with their vertical-agnostic accounts receivable (AR) financing models.
In order to support a creative community that is driving significant market value, financiers need to empower developers with capital and tools that can address developers’ unique challenges.
“Bank AR financing initiatives are an inch deep and a mile wide,” said Macmillan. “We’ve created a lending product for our vertical, which is really an inch wide and a mile deep. We’ve got an empathetic understanding of the challenges faced by developers — this is an underserved market, and traditional financial services, like invoice finance and bank providers, don’t really understand this business.”