Development Plan

The development plan describes how you envision your company's evolution over the next few years. In traditional businesses, the development plan usually covers five years; for a game studio, it is very hard to make predictions more than two to three years in the future with any credibility, so a two-year plan will usually be sufficient.

Research and Development

Explain your company's technological strategy. Will you develop in-house engines, license technology developed elsewhere, or take advantage of industry standards such as Macromedia Flash? Do you plan on using technology as your competitive advantage? If so, will that competitive advantage lie in visual quality, character behavior, or faster development? If not, where will you put the emphasis: art, design, or writing?

An aggressive but sound research and development plan is a high-risk, high-reward strategy. While success might bring enormous profits, there is always the chance that you will find yourself, years into a new engine's development, with technology that fails to bring the expected competitive advantage. Therefore, such a strategy will attract venture capitalists, but scare loan officers away.

Growth Targets

Is your goal to keep your company small and easily manageable, or do you want to turn it into an industry powerhouse? Do you want to concentrate on a single platform or develop for all major consoles at the same time? Do you want to become your own publisher? Handle your own distribution? Exclusively online, or in retail stores as well? Or do you intend to take the intellectual property you develop for your games and turn it into a TV, comic book, and merchandising franchise?

Again, an aggressive growth strategy is attractive to equity investors, but perceived as risky by lenders.

Risk Management

The best business plans demonstrate knowledge of the common sources of failures in the industry, and explain how the company will maximize its odds of defeating them. For example:

• Many experienced game developers leave the industry because they can make more money and work shorter hours elsewhere. How will you retain your key staff?

• A small number of hit games earn enormous profits, while most projects lose money. How will you minimize your financial risk?

• The industry suffers from a high employee turnover rate, especially in active areas like California and Texas. How will you keep your teams intact throughout long projects?

• As the industry grows ever more concentrated, the number of potential publishers for your games shrinks every year. How will you get your games to market?

• The average AAA game budget reaches millions of dollars. How will you minimize your costs and still have a chance to compete for consumers?

Convincing answers to these questions will show that you are ready to face the challenges of the marketplace.

Also note that local circumstances might influence your vulnerability to these risks, or even spawn others. Study your state or country's tax code (especially the provisions on tax incentives for R&D and investment in technological ventures) and job market thoroughly.

Case Study 2.2.2: Creative Risk Management

Nothing impresses investors quite as much as a proactive, original approach to minimizing the risk of failure. Here are a few examples of strategies that can increase your odds of success:

• Send employees to teach at local colleges and universities, where they can recruit the best students.

• Participate in work-study programs.

• Implement a profit-sharing plan; this retains key employees more effectively than stock options, because few game companies ever make it to the stock market.

• Pool resources and/or trade services with other companies to eliminate the costs associated with the hiring/layoff cycle.

• Enforce a strict upper limit to the duration of the work week to maintain morale and avoid employee exhaustion.

• Establish strong relationships with the local mainstream and business press to gain notoriety in the financial market and attract quality employees.

• Mix and match project types and durations to generate regular cash flow.

• Involve employees in every project, if only for a couple of weeks, to create a sense of unity.