PvX CEO Joe delves into how gaming companies can choose the right type of financing at every stage — from raw ideas to predictable scale.
May 29, 2025 - 6 min read
Generally, among consumer tech startups, we observe that companies tend to overemphasize equity funding throughout their lifecycle without fully understanding the trade-offs. While equity is an incredible financing instrument, a company can generate significantly more shareholder value by optimizing its capital sources as its business evolves. Let’s break down when other financing options might make more sense, and how we should think about capital optimization at each stage.
Every gaming company—or consumer app business— grows through several distinct phases. At each phase, the financial needs and the optimal type of financing change. Before we dive in, let’s define what “optimal” means for this analysis.
In our view, capital should be primarily optimized towards two variables: cost, and risk. You want the cheapest cost of capital which carries as little risk to the company in a downside scenario. In this framing, a very low-cost debt instrument with a highly restrictive covenant package (high risk in a downside case) may be significantly worse off than a higher-yielding preferred equity note that comes with little to no downside protection (low risk in a downside case).
In the beginning, a company is just an idea. You might have an experienced team, a promising concept, or a vision for an innovative set of features, but everything is uncertain. At this stage, equity is squarely the right financing instrument. Why?
Equity investors are partners who share both the upside and the downside with the Company. These investors understand the risk of the unknown and are willing to bet on the team’s potential, even when the outcome is entirely unpredictable. This makes equity the best option during the seed or pre-seed phase, when what you’re building and, hence, its risk and upside are still generally unknown.
Phase 0 Capital Optimization Function:
As the business evolves, it moves along the spectrum from the unknown to the knowable. In this next phase, companies have generally built some version of the product and have begun testing the waters. You might spend modest amounts on acquiring users, iterating based on their feedback, tweaking game loops, and refining incentives to create disproportionate value.
Here, some things become clearer. You start to see early signals of what works and what doesn’t, and you may have a better sense of whether you are building something worth working on. But, there’s still significant uncertainty about what the terminal outcomes will look like. How successful will the Company be? Will the offering scale? How will competitors react? At this point, equity remains the right financing instrument. You’re still in a high-risk zone that is highly unpredictable, and so the flexibility and shared risk of equity funding are invaluable.
Phase 1 Capital Optimization Function:
Eventually, as the company matures, it moves toward predictability. Now you have a more polished product, and more importantly, consumer appetite is validated by real revenue. You are spending larger amounts on marketing with real conviction because you have confidence you will recoup your spends. You have started to identify early user behaviors that signal high LTV and can roughly predict whether or not your monthly ad spends will recoup based on early user signals. At this point, the volatility in your return on ad spend tightens, and you develop a clearer picture of how your product performs. If you keep optimizing your product based on user feedback your LTV continues to improve, and this in turn encourages you to spend more. The game gains traction, the returns from user acquisition become more consistent. At this stage, the growth you’re funding is no longer speculative—it’s measurable and predictable.
Traditionally, companies in Phase Two have relied exclusively on growth equity—raising Series B, C, ++ rounds—to fund user acquisition. But giving up equity to finance predictable returns is unnecessarily expensive. Equity comes with a cost, but you often don’t feel it because it is only realized at the time you exit. While it feels like “free money” in the short term, the real cost of equity for successful startups is well over 30%. Over time, companies that fund predictable growth with equity end up giving away a massive share of their business which is why you often see founders of very large and successful businesses often holding less than 5-10% of their own Company.
Traditional debt might seem like a viable alternative, but it’s often inaccessible for companies earning atleast $30-40 million in revenue (many large banks won't even consider lending to firms with sub $100mm annual revenue). Banks and large credit funds tend to focus on bigger, more established companies closer to public markets. This leaves smaller private companies reliant on mezzanine funds or specialized credit providers—options that are often still quite expensive (15-20%++ APR) and carry significant amounts of downside risk.
The biggest problem with traditional debt is timing risk. Most debt products have fixed repayment schedules. When you’re investing in user cohorts, you know that you’ll recoup the investment, but the timing of those returns can fluctuate. Factors like shifts in acquisition channels or product performance can delay cash flows. Traditional debt offers no flexibility here—miss a payment, and you’re in default, putting your entire company at risk. Most lenders are also unwilling to take risk directly on your user acquisition performance. You will have to pay them back (plus interest) regardless of how your UA actually performs. Finally most lenders will issue you a loan with EBITDA based covenants. This means that you have to maintain a specific level of EBITDA to avoid default. This makes no sense for companies with reliable return on ad spend that want to scale marketing. Why would you take on debt to scale UA if your lender effectively stops you from doing so? These factors make traditional debt a poor fit for funding growth in gaming and consumer app companies with reliable RoAS curves.
Cohort financing bridges the gap. It’s relevant not just for private companies but also for public companies or mature businesses. While it may not always be the absolute cheapest form of capital, its unique structure— taking risk on, and being secured solely by the new cohorts being funded—and offers several critical advantages:
Ok, so debt is too risky, and equity is too expensive, no problem, let’s use the cash on the balance sheet or the company’s ongoing retained earnings. What founders sometimes fail to consider is that their balance sheet cash / retained earnings are equity. There is absolutely no reason why a company should not apply an equity cost of capital to the cash that it has or is generating. If your goal is to grow equity value, that cash should be deployed in ways that carry equity risk and generate equity upside (i.e. Phase 0 or Phase 1 type bets).
This principle is especially relevant for mature companies. Even if they don’t have much room for growth in marketing spend, leveraging their marketing spend with cohort financing can free up cash for initiatives that drive equity value—investments that create long-term upside.
At PvX, we’ve designed our financing solutions to empower gaming companies to scale intelligently. Cohort financing isn’t just about providing capital—it’s about being a true partner, sharing the risk and rewards of growth while giving founders the tools they need to thrive.
Whether you’re a startup navigating the unknown, a growing company scaling predictably, or a mature business looking to optimize capital, cohort financing offers a smarter, more aligned way forward.
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