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Title III Investments: What Are They?

Red Thomas Posted:
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Where to Start

If you invest what you would have given through a crowdfunding campaign anyway, then you’re not going to lose through these investments.  If it’s disposable, you can’t lose and you might end up making a little on it.  My concern is that people are going to think of these campaigns as an investment and feel like they’re contributing to their retirement through it.  I’m about to describe how I approached an investment, but before I do I just wanted to take another shot at reminding you that these are really risky and you should not be trying to make money at this unless you really know what you’re doing and can afford 15-20 projects at once.

Since Crowfall recently led off with a Title III raise on MicroVenture’s portal and it’s a project that I like a lot, I’ll use my researching them as the example.  I’ll kind of go into some of the things I thought about as I looked the opportunity over and give you a rough idea of how I was assessing the opportunity.  I should note that it’s a project I’ve been following since before their original Kickstarter project, so there’s something to be said for long-term observation, as well.

The first step was just perusing the offer on the MicroVentures website.  I was initially concerned because I didn’t see what my exit was supposed to be.  If you look at other projects, they describe either the max amount of return you should expect on acquisition, or how conversion to common stock would work after going private.

Crowfall didn’t have that out front, and it concerned me at first glance.  I originally thought that the Series 3 Preferred Stock was different from stock sold in previous raises, but once I realized they were treating all stock the same, it began to make more sense.  Equity from the Title III raise seems like it’ll work like equity from previous raises in their offering.  I then had to ask first and foremost, what were my chances of getting my money back, and how would it occur?

Crowfall should have good revenue generation once the game is live.

I covered earlier the ways that might happen.  Though there is another, but it just doesn’t seem realistic enough in this case to bother getting into.  Of the three I covered, dividends wouldn’t ever make sense and are probably out.  Going IPO is possible, but really unlikely.  That leaves acquisition, which is a fairly common exit in the video game industry.  On top of that, with three other rounds of raising under their belt and other investors who’ll want a return on their investments, there’ll be some push to capitalize at some point.  That means my exit strategy exists and is something feasible, if the project can get there.

The next question was if the company was healthy or not.  A bit of searching online didn’t reveal any massive layoffs, large numbers of people quitting, or turn-over of any critical individuals, which would be red flags.  Also, there’s nothing in the development schedule that struck me as abnormal for a game like this, and particularly for one striking for new ground like they are.  Icing on the cake were the consecutive annual raises that went over $2 million mentioned in their Form C.  There was a third raise that broke $600k, but looking at the date suggests they had to break it off early to do the Title III raise.

A healthy company with a valid exit opportunity, the only two things left are risk and reward.  They’re fairly synonymous, since the one is a big driver of the other.  Less risk means you’re more likely to get your reward, but also means the there’ll be less of it.  Crowfall covers a lot of their risks in their Form C, and all worth spending some time thinking about.  For me, it all came down to a couple main questions, though.

It’s a good company led by experienced guys with a good track record, so my concern was more whether they have a market and how well their business model would capitalize on it if it did.  Their business model isn’t any different from what’s been hugely successful in several other efforts, so if it’ll work won’t be as big an issue as when it’ll work.  At this point, it’s less research and more just how I feel about the project.

I think their development model and pace, combined with the game’s architecture suggests that they’ll be in a good position to “go live,” if that term even means anything anymore, in another year or so.  I really like their dying worlds concept and I think it’s going to give the game a real set of legs for long-term growth and tremendous flexibility.  I also think it perfectly offers that little something for everyone, from the most blood-thirsty PvPer to those less adventurous.  That checks the potential for market growth box very boldly.

Cautiously Concluded

When I looked at Crowfall’s offering on the MicroVenture website, I felt it was a fairly safe move, though probably not with the big cash-out most folks would expect from a normal angel investment.  Besides, I’d been planning on throwing some more money their way in any case.  This is a project that I like and want to support.  The equity I’m getting out of it is just an added benefit.

I invested in Crowfall, but much of it was money I’d planned to support the project with already.

There’s no doubt that Title III investments offer some real advantages to startups looking to introduce new games to the market.  Though, the inability to advertise it or build a campaign around the raise like you would otherwise kind of makes me wonder how useful it’ll be.  Perhaps in conjunction with a Kickstarter campaign, but time will have to sort out what companies can get away with.

My largest concern is for the investors, though.  I’m particularly worried that folks will put more into these sorts of campaigns than they would have gifted through a non-equity backed crowdfunding effort.  I don’t think it’s a good idea to approach these investments like an investment, but more like a gift.  You shouldn’t be doing this to generate income, and certainly not as a retirement fund, unless you have experience and the funds to be really diversified.

That’s why I’ll bookend this article by cautioning you once again to be incredibly careful about how you approach these investments.  You won’t get any money out for at least a year, and going as many as ten before seeing a return isn’t uncommon.  It’s only slightly less common than not getting anything back at all, so also make sure you get advice from someone with experience and who you can trust.  If you go into it with money you were going to gift anyway, it’s a much better method of supporting a project.  Just be careful!

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Red Thomas

A veteran of the US Army, raging geek, and avid gamer, Red Thomas is that cool uncle all the kids in the family like to spend their summers with. Red lives in San Antonio with his wife where he runs his company and works with the city government to promote geek culture.