What to do with the investment boom in the game?

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Game Industry Offers it surpassed a peerless $ 71 billion in the first nine months of 2021, according to a report from the investment bank Drake Star Partner. More than 844 deals were announced and closed in the period as the lockdowns made it clear that gaming was one of the industries that was not only still functioning but thriving during the pandemic.

And with Roblox yesterday announcing 28% booking growth in the third quarter, it’s clear that growth opportunities continue even as comparisons get tough with last year’s financials. To explore the impact on gaming investments, we have assembled a panel of experts at ours GamesBeat Summit Next online event.

Kevin Chou has had great success as the founder of Kabam, Gen.G, Rally, Forte and SuperLayer. We convinced him to moderate the conversation with Jay Chi, founding partner of Makers Fund; Nick Tuosto, chief executive officer and co-founder of Griffin Gaming Partners (and Liontree); and Amy Wu, partner of Lightspeed Venture Partners.

Chou said we are seeing “massive levels of investment in the gaming industry” and something that in his 15 years of gaming industry means it’s a great time to be an entrepreneur, publisher, or gaming partner.

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Wu leads investment in games, cryptocurrencies and early stage consumer growth. Who has worked both as an operator and as an investor in games, covering both Asia and the West. He started in the console market and invested through Makers Fund for five years, with a focus on early stage and Series A (first institutional round) companies. Its reach is global in mature and emerging markets.

Above: Clockwise: Kevin Chou of SuperLayer, Jay Chi of Makers Fund, Amy Wu of Lightspeed Venture Partners and Nick Tuosto of Griffin Gaming Partners.

Image credit: GamesBeat

And Tuosto has advised on acquisitions through Liontree and investments in games through Griffin Gaming Partners. The first thing worth noting is that we have game-specific funds, which are relatively new, as well as huge tier-one funds like Lightspeed who are dedicating partners to play the game, Tuosto said.

Above: Blockchain and NFT investments are doing strong in games.

Image credit: Drake Star Partners

Who said that gaming grew a lot during COVID, but it is also becoming part of mass culture as a popular entertainment medium.

“We’re actually growing as an industry,” Chi said. “As you know, 15, 20 years ago, we were still a bit hidden, whereas today I think we are at the forefront and at the center of a lot more activities, especially around the younger generation. So this really came out from an investment standpoint. It’s a very conducive environment for fundraising and fundraising now for independent founders and creators. “

The industry now has dedicated gaming funds and the biggest investment names have entered the market. Five years ago, we saw funding every month or every two months. But now deals happen on a weekly basis or multiple times a week (as GamesBeat readers know), Chi said.

“Speed ​​is at an all-time high in our industry,” said Chi. “What does this mean in the long run? We will see the effect of this in the next two or four years. “

Who said more innovation, more value creation, and more disruptions are happening. But one of the challenges is that hiring is a major challenge, depending on the market you’re in. It’s nearly impossible to hire engineers in Los Angeles, he said, and China has its talent crunch, too, although the Chinese market has been impacted by government restrictions, such as playing time limits for minors.

The biggest investors and buyers of games of 2021.

Above: 2021’s largest game buyers and investors.

Image credit: Drake Star Partners

This means that many hiring businesses have moved to emerging markets, such as Eastern Europe or other regions.

Tuosto said: “It’s an extraordinary moment in time, when you take a step back and think about what the market is like. There is this flow of capital and there has probably never been a better time to be a capital-raising gaming entrepreneur. There are so many sources of capital on constructive terms with value-added partners, lining up to compete for the opportunity to partner with you. “

We’re seeing a lot of foam and Tuosto said he’s not sure the pendulum swung too much in that direction. Newcomers like Roblox have a larger market cap than Electronic Arts, and Unity is trading at 40 times its revenues. Studios have a high demand for software and infrastructure that they need to use to make games and getting an exit is easier.

Some companies are streamlining deals that never made sense before, with single-product companies with falling revenues selling for “astronomical multiples” of revenue, Tuosto said. While it’s an “incredibly encouraging time,” he said shoppers need to be very disciplined in terms of the ratings they pay. He noted that the explosive growth of blockchain games like Axie Infinity is attracting new audiences.

M&A in Q3 2021 in games.

Above: M&A in Q3 2021 in games.

Image credit: Drake Star Partners

Chou asked Wu what he thought about the intersection of cryptocurrencies, NFTs and games. Wu said this space went from zero to 100 in about two months, as Axie Infinity went from tens of thousands of dollars in revenue per month to $ 15 million per day. It has scaled up to two million daily active users and introduced a diverse crowd of gamers to the “play to earn” game. They are earning a lot like gold farmers have done in other games, but on an unprecedented scale. “

“It’s a pretty incredible pace,” he said. “This shows the Web 3 paradigm and decentralization can do.”

The success has captured the imagination of independent studios and game publishers. Wu said we are seeing a huge influx of capital at the intersection of blockchain and games. Publishers have gone from skepticism to action. Hundreds of companies are now looking to make blockchain games, and many of them are “crypto-native” game companies run by cryptocurrency enthusiasts without much experience creating games, he said.

These companies are developers’ direct relationships with their communities on the web, Discord or Twitter, without the middlemen of the app stores. “Native game” teams are also entering the space, some via big game publishers, Wu said. Those teams have not yet realized that Web 3 and the community mindset are critical to success.

Chou noted that Sky Mavis’ Axie Infinity worked for a few years before finding success. Wu said the game has a bad reputation for weak gameplay, but what many others have missed is that it has always had a high retention rate.

“There is something engaging in the community that has led them to play together, and word of mouth has spread about making money which was 10 times the minimum wage in the Philippines and a community of streamers,” Wu said.

Wu said the lessons are that it starts with building an authentic community. He noticed very little overlap between authentic hardcore gaming and Web 3 authenticity. Gaming companies need to learn to create both. Businesses also need to learn “tokenomics” or understand the design of the game economy in the blockchain space that really works in the long run. And the aspect of the game to earn has to be balanced with the fun part of the game, he said.

Tuosto said that a large franchise or brand has not yet entered blockchain games. But based on talks with Forte, one of Griffin’s investments, many conversations are ongoing. It’s just that many of the big brands have a lot to lose and therefore need to be careful as they move into the space where regulators can intercede. Businesses must set up compliance for money transmission.

“It requires a new kind of specialization where you leverage the assets of both cryptocurrencies and games,” Tuosto said. “When that match is done, it will be absolutely transformative.”

Chou asked Chi if too much money was coming into the gaming market.

Billions of dollars are flowing into gaming startups.

Above: Billions of dollars are flowing into gaming startups.

Image credit: Drake Star Partners

“I’m thinking about where it will go,” particularly with the valuation hikes for companies, Chi said.

“There’s been a bit of inflation,” Chi said. “Maker invests early on. Once you move on to Round C and Round D, the ratings have increased dramatically. I think it will have to increase, because there is no turning back. There is certainly more momentum and tailwind behind the game. Will valuations double or triple over the next five years? “

Wu said it’s a great time to be a game founder as so much capital is available now. The pace of capital inflows has outstripped outflows, which is why valuations are on the rise, he said. Wu believes you need to take a portfolio approach with studies as it is difficult to predict what will take off. Investors should understand that many of these studies will not play a successful game. It has seen many boom-bust cycles in games, and many investors and new teams have not experienced them.

For game startups raising funds, Tuosto said entrepreneurs should make VCs work for them. If someone has a lot of options, they should make sure a VC is earning a seat at the table.

“Everyone around that table should add value,” Tuosto said.

Who said that all funds have their personalities, and the best VC will be the one who has chemistry with the entrepreneur. And he said entrepreneurs should seek investor references. And Wu agreed.

“It’s about personal relationships,” Wu said.

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