Why Hiro are bullish on UK and EU game dev funding after helping The Chinese Room and Bulkhead go independent

VC firm Hiro Capital has unveiled a brand new advisory division. Hiro Advisory was established 18 months ago and is helmed by founding partners Spike Laurie, who is a partner at the VC, and industry veteran Mike McGarvey, who has worked at Eidos (as president, CEO and COO), early streaming firm OnLive, and QA giant Testronic over his 30-plus-year career.

Part of the reason that Hiro opted to launch this new advisory arm is the state of the market; as McGarvey sees it, we have now moved on through the business cycle from consolidation to fragmentation – layoffs, closures and strategy changes mean that there are a lot of people out in the market now that might require business guidance as they try to navigate the ever-changing waters of the games industry.

“We’re starting to see a bunch of great talent starting to leave these larger corporations and form new studios,” McGarvey explains. “It’s an opportune time for us as advisors.”

Hiro Advisory has already helped facilitate The Chinese Room and Bulkhead Interactive’s move to independence from Tencent-owned Sumo Group and Tencent, respectively. The former was in the process of being sold to another unnamed company before someone in the industry looped Laurie in to tell him the studio was “in a bit of a pickle and needed some help”.

“We could see what a really good outcome for The Chinese Room would look like,” Laurie explains. “That’s working with management, [studio director] Ed Daly, and the team there, and saying that we should get them out of Sumo and they should be an independent business again. That’s an incredible outcome and protects the team from what happened in the industry last year.”

For Bulkhead, McGarvey says that the company’s move to independence came due to the changing priorities of Tencent. Like many Chinese companies, the tech and entertainment giant went on a spending spree post-COVID. Bulkhead ended up being too small in some regards compared to the other game companies in Tencent’s stable, including the studio’s parent company, Splash Damage.

“All of a sudden, they’re not getting enough focus, support, and all the other things that they need as a smaller developer,” McGarvey explains. “That shifting strategy with Tencent particularly provided some opportunities for us to come in and ask how we can help both them and Bulkhead create a new structure that works.”

With both The Chinese Room and Bulkhead, part of the narrative was that these were British-founded companies coming back under British control. Laurie and McGarvey say that while the UK and Europe create great games thanks to world-class talent, most of this region’s studios are owned by companies from other parts of the world.

“There are always good custodians and bad custodians of game studios,” Laurie says. “When Hiro Capital was founded [in 2019], the thinking was that Europe and the UK create incredible intellectual property. We’re highly creative and highly technical. But what happens is American or Chinese companies come along, acquire a company, publish their game and take the rights? Wouldn’t it be great if that IP could grow to a much bigger scale in the UK or Europe, where the talent is? There are always great homes for studios all over the world, but I think it is important that the UK and Europe retain games intellectual property and grow it to the right size before it’s sold off or given off to a big corporation or a big publisher.”

For companies eying up the games business, Hiro says that Europe is the most popular location in the world right now. This is largely due to the aforementioned expertise, as well as lower costs compared to North America, and restrictions on Chinese investment in the United States.

“A lot of the regulatory stuff for Asian companies in North America is prohibiting them from transacting, Europe is the only market outside of Asia they have to access for M&A and investment now in the games space”

“A lot of the regulatory stuff for Asian companies in North America is prohibiting them from transacting,” McGarvey explains. “Europe is the only market they have to access for M&A and investment now in the games space, outside of Asia.”

After a few fallow years for mergers, acquisitions and funding, there are now some companies on the scene looking to make some purchases. “There’s a lot of private equity money,” McGarvey says. “There are a few new companies that have been set up over the last 12 months – or are being set up – that have some industry veterans backed by private equity. We will see a new wave of companies that haven’t been in the market enter with a plan to aggregate IP and studios, and leverage the management expertise that private equity firms partner with to create a mid-market publishing business. There are a few of those emerging now.

The team considers the current funding landscape for studios somewhat hostile. A few years ago, they say, things were “heavily skewed” in favour of games studios, as indicated by the kinds of funding that some developers were securing at the time. Now, however, it’s flipped. “It’s a buyer’s market now,” says Laurie.

In this new landscape, then, what do developers need to do to secure funding? Sometimes, it might involve changing the focus of their business. “There must be something unique about genre expertise, IP, technology,” McGarvey explains. “There needs to be something for an investor or publisher to want to spend opportunity cost money to invest in that developer.

“We’ve done a good job with our partners in trying to dissect what their business’ strengths and weaknesses are, and help them position themselves. It might require a slight pivot from what they did before to maximise the opportunity to raise capital. It’s just about finding the right partner, which has been tougher in the market without a doubt. We’re optimistic that that is turning for sure.”

Laurie adds: “There are still lots of people who want to fund great games.”

Such people have been harder to find in recent years, as the investors that flocked to the sector during the COVID era have retreated, but the Hiro Advisory team is optimistic about the next 12 months – though they admit that it’s not entirely smooth sailing for developers just yet.

“There will be some highly sophisticated buyers in the market who want to own high-quality assets. Many publishers are now coming back and want to back great games.”

“The future is really bright,” Laurie says. “There’s this moment where studios are being expected to do more with less, but all the great tools that have been created will allow that to happen. There will be some highly sophisticated buyers in the market who want to own high-quality assets. Many publishers are now coming back and want to back great games. We’re going to see a lean period where everyone’s tightening the belt and budgets are coming down, and then they’ll start to open up again. We’re going to see lots of really great talent teams secure the sort of funding that they need to make games.”

McGarvey adds: “You’re probably going to see more short-term initial prototyping, ‘walk before you run’ development publishing deals. The days of securing $25 million and then hoping to hit the milestones are something in the past. There’s just a tighter overall management of either funders or publishers in development deals these days, because execution is so important right now.”

Laurie concludes: “Also, much earlier validation. What can developers show about what they want to create that really demonstrates that the audience is there for what they want to do. That’s hard because the onus is on the game studio to do that much earlier in the process, but that is the world we live in.”