Why game creators must learn fresh finance tricks.

IF THE statistics and the hype are anything to go by, Scotland's games industry should be bulging with as much cash as its leading lights are bulging with market-leading ideas.

The country is home to a highly creative community of developers, employing more than 500 people and generating £20 million in annual turnover.

Companies such as Visual Science, Real Time Worlds, Denki and Rockstar North have developed top-selling titles in their Scottish studios - most notably the Grand Theft Auto franchises, Harry Potter: Quidditch World Cup and the controversial smash hit State of Emergency.

According to research commissioned by the University of Abertay and the Department of Trade and Industry, the world market for video games, computer games and interactive entertainment hardware and software should grow from $20 billion (£11.3bn) in 2002 to $30bn in 2007. Grand Theft Auto alone has sold more than 35 million copies with worldwide sales approaching $2bn.

Pioneering Scottish university courses in games development and production at Abertay, home of the International Centre for Computer Games and Virtual Entertainment, are full to bursting.

So why is this pioneering community struggling for the kind of funding support befitting such a budding industry?

Jeff Meek, managing partner of Edinburgh-based McCabes, an accountancy firm with a specialism in the entertainment software sector, believes some of the fledgling companies underpinning the sector still simply do not know where to source funds. He says many do not take advantage of research and development tax benefits or grants.

"There are still some funds out there, but it is challenging," Meek says. "Like any sector, funders are not keen on early stage work and are looking for people with track records to deliver. Venture capitalist firms invest in people and the management team, so if the game doesn't work out they have nothing to sell. This can be a risky scenario and a number of Scottish games companies are finding it difficult to raise money for their projects."

As was the case a decade ago in the IT industry as a whole in Scotland, private finance companies have a nervy reluctance to invest in what they perceive as a high-risk punt.

The only company so far to show any kind of support financially is Edinburgh-based investment bank Noble Group. Over two years ago, Noble's Tim Gatland set up the £2.5m Fund4Games fund, aimed at managing projects from initial concept to publisher.

He says the Scottish computer games industry presents opportunities but he complains that the industry is still too fragmented and lacks project management experience.

Scotland has about 12 established digital media companies and about 12 start-ups.

Every one is still considered a designer or developer, rather than a money-spinning publisher. And despite being recognised as the creative engines, developers wield little power.

Unlike conventional funds, Fund4Games focuses on projects rather than companies. It has so far taken four games to market and has another five in the pipeline.

Putting aside the meagreness of the pot of private funding available, Meek says there is a powerful case for more public-sector financing.

The Scotsman understands that Scottish Enterprise is set to announce plans to guarantee some of its £45m co-investment fund will be directed to creative industries. The fund normally provides £10,000 to £500,000 chunks to companies.

Meek says: "Research and development cash from the government can be of great help. We recently claimed back £1m for a client, and this can be a great source of funding.

"But a major problem is that many games companies just don't think they qualify because they don't think their work counts as research and development and therefore don't apply.

"We need to help these firms get their claims in."

Meek sits on the board of the Screen Industries Summit Group, which represents the interests of the film, television, animation and the games sectors in Scotland. His involvement covers a range of areas from lobbying on the redistribution of production by the BBC to the regions to what assistance the Scottish Executive can provide to the creative sector in Scotland.

"There is a cross-over between games and film, for example. Tomb Raider was a game that became a movie, so there is scope to broaden this issue - but in both industries, funding remains tough."

Meek's view is echoed by Scottish Screen chief executive Ken Hay, who says he is planning a radical overhaul of traditionally film and television organisation. Hay has made no secret of his support for the games industry, as he has watched UK sales for computer games rocket higher than those for film audiences.

"It's a booming market," he says, citing the success enjoyed by the Lord of the Rings and Harry Potter games. "The games companies are looking for creative ideas and scripts."

Meek says the task of converting computer games developers into businesspeople should not be underestimated.

In his experience, the staff of games firms are usually "rocket scientists and computer boffins who work in their own worlds". Bringing in a commercial focus can often be seen as selling their souls.

"In many cases, the developers are creating their own intellectual property and this is where the cash remains.

"Low-cost operating countries - eastern Europe and Vietnam - might do it cheaper, but if we can preserve the intellectual property and ideas in Scotland, then the country will continue to be a source of excellence."

One of Meek's latest projects was advising Real Time Worlds, the Dundee-based games development studio, in raising £1.05m from the Helsinki-based CIM

Meek says: "It's not all doom and gloom. There are lots of exciting developments in the games and technology sector. But it's vital we make sure we take advantages of all types of funding, explore all types of partnerships and focus on keeping our intellectual property in Scotland.

"That's the name of the game."

SHARON WARD The Scotsman- Mon 24th October 2005