Ouya, an Android-based console company that raised $8m on Kickstarter, is now reportedly seeking a quick sale amid money troubles. Here are some lessons from high-flying crowdfunded failures

Game on: what happens to video startups that make millions on Kickstarter?

Crowdfunding has been quite literally a game changer for many video technology startups and small companies, for which the prospect of millions in seed money might otherwise be unimaginable. Sites such as Kickstarter and Indigogo have given small video game developers the chance to compete with behemoths like Sony and Nintendo.



Since its launch in 2009, Kickstarter – the largest crowdfunding site - says it has helped 1,408 video game projects reach or surpass funding goals to the tune of some $115m. But while the fundraising often has been remarkable, the end game hasn’t always panned out.

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Ouya, a gaming company that grew from one of Kickstarter’s most successful projects, is reportedly in trouble. The startup, which makes an Android-based home video game console, raised more than $8m through Kickstarter in 2012, wildly surpassing its $950,000 goal. Ouya went on to raise an additional $15m in funding from venture investors. But late last month, Fortune revealed the company was desperately seeking a buyer after failing to restructure its debt. In a confidential email obtained by the magazine, Ouya CEO Julie Uhrman wrote that the company’s focus “is trying to recover as much investor capital as possible”.

From the start, critics panned Ouya’s product, claiming the console was poorly designed when early review units were released in April 2013. In a bid to stay afloat, the company recently secured venture debt estimated at more than $10m from TriplePoint Capital, which provides loans and leases to venture-backed companies, according to Fortune. Ouya declined to comment.

Ouya is not the only gaming company to run into trouble following a triumphant crowdfunding campaign. Code Hero, an educational video game that aimed to help students in grades K-12 write code, raised $170,000 on Kickstarter in 2012. Yet the company that makes the game, Primer Labs, is accused of using the money too quickly and failing to communicate with backers, who have taken to the Kickstarter comments section to threaten lawsuits. The Code Hero website is now offline and Primer Labs’ founder, Alex Peake, has admitted the project “ran out of money”.

Experts say the problem isn’t getting people excited about games – it’s that crowdfunding doesn’t always translate into a viable business.

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“When a game company can raise a huge chunk of money through crowdfunding, and isn’t required to provide a detailed long-term plan, and isn’t held accountable when they overspend or overschedule, well, let’s just say failure isn’t a big surprise to me,” says Rick Hall, production director at the Florida Interactive Entertainment Academy at the University of Central Florida.

In one sense, Ouya has been a victim of its own success. It raised a tremendous amount of money in the initial phase, but experts say it failed to take steps to ensure that the console would generate enough revenue to keep the rest of the business breaking even. Additionally, its success at crowdfunding showed bigger, more established companies that there was a market for a budget video game console – and that raised the competitive stakes.

“To work properly, the entrepreneur must have a hyperdeveloped sense of financial discipline,” Hall says. “They have to treat the money as if it’s their life’s savings, rather than something they got for free off the internet.”

Financial planning is key to the long term success of a project, says game developer Christian Allen. His company, Serellan, developed Takedown: Red Sabre, an old-school tactical shooter game, after a Kickstarter campaign that beat its $200,000 goal to raise $221,000 in March 2012.

Despite that initial success, Allen says the game is still widely viewed as a failure, in part due to technical issues at launch. Although he and his team fixed most of the glitches and released free content, Allen says they were unable to overcome the initial poor reviews. In hindsight, he says, the crowdfunding campaign taught him valuable lessons.

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“Backers should have a real budget for their project,” Allen says. “We ended up spending about 7% of our Kickstarter budget just on rewards, and another big chunk on taxes.”

Another kink, experts say, is that while crowdfunding offers a platform for exposure and easy funding, there’s no guarantee that the product will be well-designed.

“The real problem is that the product is not really tried out, as no experts in the relevant technology have tested the product and written reviews,” says Cameron Tousi, a managing partner at IP Law Leaders who specializes in technology and IP law. “The result is a certain amount of lemmings marching off the cliff together.”

Despite recent, high-profile blunders, the numbers do seem to be on the side of the developers. According to a recent study from the University of Pennsylvania Wharton School, more than 90% of design, technology and video game projects that had reached their Kickstarter goal still existed one to four years after their campaign. Of these businesses, 32% reported revenues of more than $100,000 a year.

“We’re very clear about the fact that there is always risk involved in backing a project,” says Luke Crane, games lead at Kickstarter. “But with the vast majority of projects, that risk turns out to have been worth taking.”

This is certainly the hope for the developers at Virtuix Omni, a virtual reality platform that looks a bit like a treadmill, allowing people to essentially walk and run within a game.

The Virtuix Omni Photograph: Virtuix

Without a developed product, Virtuix would have had difficulty raising money from seasoned investors, CEO Jan Goetgeluk says, so Kickstarter seemed like a good choice. The developers reached their $150,000 funding goal in the first three and a half hours, and ended up with a total of $1.1m, making it one of the top 10 biggest technology Kickstarter campaigns at the time. Since then, the company has raised $8m from other institutional and private investors.

The virtual treadmill has seen delays in shipping, but Goetgeluk says he hopes to ship around 4,000 units to his backers and preorder customers later this year.

A lot of products do well on Kickstarter because of their “cool factor”, says Goetgeluk, but if no problem is solved or need fulfilled, the novelty wears off quickly. The treadmill will solve a problem that has been around for decades, he claims.

“Virtual reality is about to take off,” Goetgeluk says. “Consumers will want to walk and run naturally in the virtual world instead of sitting down and pushing buttons on a gamepad or keyboard.”

The trick, experts say, is to realize that crowdfunding is just the beginning. And in a market as diverse and complex as gaming, every last detail has to be considered.

“Gamers have wild imaginations, and can make amazing games, but that’s simply not enough to sustain a business for the long term,” Hall says. “There is a machine that surrounds game development. It encompasses everything from publishing to R&D, packaging and sales, accounting, distribution, and long-term business planning. Unlike the movies, you cannot simply ‘build it, and they will come.’”

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Ultimately, making a video game is a complex artistic endeavor. With or without crowdfunding, the most successful games are still likely to be the ones made by experienced developers.

Feargus Urquhart, CEO of Obsidian Entertainment and an industry veteran, created Pillars of Eternity, a video game that raised more than $4m on Kickstarter in 2012. The game was released to much critical acclaim, with an impressive score of 90/100 on Metacritic, a site that aggregates reviews.

“We know all the stuff that needs to go in there,” Urquhart says. “That’s why people trusted that we could do this.”

Still, Urquhart encourages small companies to keep innovating, even if they fail.

“People are given this opportunity to try things they wouldn’t normally be able to try,” Urquhart says. “The side effect is failure but I don’t think that failure is bad – it keeps the industry moving forward.”