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Why IPO? Frontier's C.O.O. David Walsh discusses the background to Frontier's recent market listing
I’m writing in the 'aftermath’ of speaking to the games industry media at the ‘Develop’ conference in Brighton on 10th July 2013, the day Frontier announced plans to enable our shares to be traded on the London Stock Market – colloquially known as an IPO of the company.
It was interesting to note people’s views of this in conversation – a common question was ‘why?’ and 'does this mean being slavishly bound to our investors to the detriment of our business?'. To address these questions:
The games industry is changing, as it has done for the past 30 or more years. This is a golden age for game development – the rise of digital distribution via ‘app store’ eco-systems on all platforms presents such an unprecedentedly low barrier to anyone for developing and promoting a game, and the expansion of the gaming audience driven by smartphone and tablet adoption offers truly mass market audiences. Together, they present some incredible opportunities for game creators like Frontier.
screenshot from Elite: Dangerous
Frontier has a strong track record of innovation and quality, built over many years on a wide variety of types of games. We have a reasonable scale to our operations (over 230 people total in the UK and Canada), and our own tech and tools that work across platforms from high end PC gaming rigs to smartphones.
We believe that this position means there is a great future for Frontier, and we value the agility that has contributed significantly to getting us here. So now is exactly the right time to ‘power up’ our balance sheet and seize these opportunities.
The more we looked into an IPO, the more sense it made to use that route rather than debt or VC to access money if possible. The capital markets are designed to provide exactly what we want – funds to enhance our business and support the existing successful management team. We’d be backed to run the company as we have been doing (with some sensible, enhanced governance checks and balances), with the focus on long term value and short term delivery and agility that we wanted.
It also seems that the banks look more favorably on a listed company, and would give us a significant credit facility if we floated. Importantly for us, too, the value of share options that people at Frontier have been granted over the years would be realized, rewarding them for their huge contribution to the development of their company.
The London investment community have long memories and are well aware of the somewhat chequered track record of some game industry IPOs in the City over the last couple of decades. However, at Frontier we very much care about our local business communities and are big believers in doing as much as possible either in Britain or Nova Scotia. We therefore very much wanted to use London, although US investors might have placed a higher value on the business. And to its credit, the London market has proved to be open to backing what it views as good quality management teams with a good track record and a good plan.
One of our non-execs, Jonathan Milner, successfully floated his company Abcam on AIM and it now has a market capitalisation approaching £1Bn and is going strong, so we also felt AIM had the headroom for us to grow.
Investors are also aware of the hit driven nature of the industry. But by showing a plan based on a profitable, blue-chip track record, a healthy balance of publisher funded work (which doesn’t depend on assumed royalty revenues for viability), high-potential self-published IP plus a roadmap towards technology licensing to gear revenues beyond a 1:1 relationship to headcount, we were able to successfully make our case.
screenshot from LostWinds2: Winter of the Melodias on iOS
In terms of the point about slavish dedication to shareholders, actually our interests are directly aligned anyway - our focus remains as it always has been. One of our sayings at Frontier is that ‘we are only as good as our last game’, and we need to continue to do what we have been doing for almost 20 years – developing innovative, high-quality games and navigating an increasingly successful path through the ever-changing waters of this industry that inspires us. In that way we will satisfy our independent development spirit. And ultimately that achievement is what will make us commercially successful and deliver value to our stakeholders.
I deliberately use the term stakeholders, rather than shareholders, as we consider a wider group to be part of Frontier’s success:
Firstly, all the talented individuals at Frontier can focus on doing what they love - making games and the supporting technology that will make a real difference.
Also our Kickstarter backers for the Elite: Dangerous game are incredibly important to us. We continue to be delighted and humbled by their enthusiasm for and contribution to development effort. Without their support and validation of the audience for the game, we wouldn’t have had the confidence to continue investing funds significantly over and above the Kickstarter raise, Elite: Dangerous wouldn’t be happening and Frontier would be diminished because of it. The bottom line of the IPO is that they will get an even better game.
Frontier works with a number of really important commercial partners on the development, publishing and distribution aspects of our business. A strong, independent and successful Frontier can only be good news for them.
And finally our shareholders: as we deliver on our ambitions in the games industry, we hope the market recognizes our progress by increased valuation to reward those who chose to facilitate our progress with financial backing.
Rather than an end in itself, our listing is simply the next step in our continued evolution. None of the directors ‘cashed out’; none of us is looking to leave. We retained ownership of as much of the company as possible whilst raising the funds to help us move Frontier forward. We are all focused on delivering on our ambitions, and are looking forward to continuing to contribute fully to the games industry’s undoubtedly exciting future by fulfilling Frontier’s incredible potential.