Sent on May 6th, 2022.
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Here are six lessons I’ve learned from investing in 25 companies in the past three years.
Improve the odds
It was June 2011. I had just shut down my first startup after it failed to raise a new round of funding. I wanted to take a job in local startups in Helsinki. I had three options: Rovio, Blaast and Supercell. Rovio was snowballing with the success of Angry Birds; it was my number one choice at the time. Blaast was a VC-backed startup building a cloud-based 2G mobile platform that offered hundreds of apps for low-end mobile phones. And then there was Supercell, working on Gunshine, their Facebook game.
I ranked Rovio and Blaast above Supercell in my job hunt and was sad that I only got an offer from Supercell.
It’s hard to pick winners. I was lucky to get that offer from Supercell.
Blaast shut down a few years later, but both Rovio and Supercell were in the position to capture the mobile games industry and become the winner.
Supercell launched many new games, each with original IP, and kept making billions in revenue every year. Rovio created Angry Birds and countless sequels and was slow to transition to free-to-play.
If you compare Rovio’s 2017 $1 billion IPO to Supercell’s valuation of $10.2 billion, when Tencent acquired a majority of Supercell in 2016, Supercell was a 10X success compared to Rovio.
I didn’t know in 2011 that Supercell would be 10X to Rovio. Why not?
To increase the odds of knowing how to pick winners, I’ve been asking myself questions like:
What did the startup do in their first six months from the first investment round?
- Supercell: hired a team of capable people.
- Next Games: hired a team of capable people.
- The same goes for my investment portfolio companies: they all focused on bringing “the right people on the bus before they “really” started driving the bus.” (Jim Collins, Good to Great)
What did they do in 6 to 12 months from the first investment?
- Supercell: pivot from Facebook to mobile and soft launch several mobile titles.
- Next Games: sign The Walking Dead IP and start development on the first Walking Dead game.
- My portfolio companies: soft launch games to understand where they stand.
Since there haven’t been any meaningful exits from my investment portfolio, I’ll ask:
What are the characteristics of the companies that we’re able to raise another round?
The team has been hired, and all the relevant seats on the bus have been filled.
One or the other has happened on the product:
- The game has been soft-launched or put into the market, and there is evidence that it is working.
- Or, the team has pivoted to a better idea that is more attractive (for investors) than the previous idea. I.e., Pivoting from web2 to web3 games.
I believe these two aspects: the team and making the right product decisions.
These will increase the odds of a new funding round happening in 12 months. If the company doesn’t know how to build the team, or they don’t have a clear roadmap for the product, this company can’t get a place in my investment portfolio.
Investment portfolio diversification
When I started investing in 2019, I was sure that I never wanted to invest outside of mobile game studios. That was the area I knew well. I trusted the mobile ecosystem, with CAC < LTV being the most trustworthy analysis and free-to-play being the superior business model.
In 2022, I’ve understood the value of diversification, especially when it comes to timing and participating in new industry tailwinds, like the metaverse, Web3, streaming of games, and gaming content.
But I won’t neglect my team and product analysis, which I discussed in the previous lesson. The characteristics of the product will change, time to maturity will differ, and new learnings need to be included. But the team will stay the same: the seats on the bus need to be filled with the right people.
Always back the founder(s)
Having made 25 early-stage investments, I can tell you that great ideas are everywhere, but excellent execution is scarce. Let me elaborate on what an idea looks like in the hands of great executors.
The team knows that an idea needs validation. The best founders work to validate an idea as soon as possible. In free-to-play, they go for the most accurate testing, where they soft launch a game to look at the retention and monetization KPIs. In web3, they start by building the community, steadily building up the hype, and providing a playable to that community to gather their feedback.
All that matters for a studio is to operate games that can be profitable. That’s why the great executors are obsessed with velocity. How quickly can they get to a game that they know can be profitable?
But what if you are building a big game that will take years to launch? The founders are still obsessed with velocity, and they want to keep on moving to make the big game less uncertain.
What have I learned from the founders who are in trouble? The worst combination for a founding team is “not proven executors and not having work experience in the particular niche they are going after.”
Focusing on what I know
I’ve stayed away from B2B gaming startups, web3 gaming land projects, eSports, and premium games. It’s not that I don’t believe that you can build great businesses in these niches.
My motivation has been to stay very close to the area I know: game studios. That’s where I can add value to the founders the most, and a focus on becoming a better games studio investor.
When I look at my anti-portfolio of companies that I could have invested in that have become winners (raised several rounds or had an exit), it’s all companies where I didn’t have relevant work experience. I missed out because of my principles, and I’m not that overwhelmed with sadness because I’ve sticked to my principles.
First of all, I don’t think that valuations matter that much. I’m not after a bargain; I’m after the best founders, and that’s when the price doesn’t matter.
When I look at the 25 investments I’ve made, the ones with the highest valuations have been the most impressive in making progress in a six-month timeframe after raising.
The benefits of overcapitalizing a company are fantastic. Twenty-four months of runway gives more breathing room for the founders to afford a pivot. As I said, ideas are easy, but excellent execution is scarce. A long runway will allow the founders to use that superb execution on many ideas.
Investing in friends
This final one is curious, but I believe it is essential for startup investing.
Since 2019, I’ve had the privilege of investing in most of the new gaming startups in Finland. It’s great to back all my ex-colleagues and friends from the Finnish games industry.
When deciding to invest, I’ll already know much more about the founder, as I’ve seen them operate and what they are like as human beings. This insight is something I could never gather through a process of reference checks when the round is about to close.
It’s also a relationship-building exercise. I have an existing relationship with the person, and when they become founders, I can deepen that relationship by going on an adventure with them.
Get my book, “Long Term Game: How to build a video games company” from Amazon. Available on Kindle, audiobook and paperback. Check it out!
Adam Jaffe — What it takes to succeed in gaming
In this week’s podcast episode, I have Adam Jaffe on the show. Adam is the founder and CEO of Mega Studio, a gaming outfit based out of Barcelona, Spain.
Adam has a broad scope of knowledge from the gaming space, having worked at companies like Playtika, Moon Active, Jam City, and Social Point, before founding Mega Studio.
In this discussion, we talk about advising startups, how to build games that make money, and what unconventional solutions should game developers apply to create success in gaming.
Listen to the full episode by going here.
If you missed out on these
- Building Crypto Raiders
- Removing uncertainty
- Helping founders build
- Building a game studio from scratch
- Confront the brutal facts
- Founder dilution
- Game devs going Web3
- and more
Articles worth reading
+ How Beatstar survived 24 killed prototypes in five years — “We pivoted hard into strategy because we saw a big audience who was being underserved – namely the most competitive players looking for deeper, more social, dynamic experiences. We knew we could cater for them, because they were a lot like us.”
+ Misunderstanding “earning” in web3 — “When we talk about the “financial return” in web3 games, we are really talking about being given tokens. These tokens are created (“minted”) out of thin air either before we play or as a direct result of play. The part where things get distorted is where people talk about them as if they are money. Tokens, especially game tokens, are currently not money. They simply have no value outside of the game(s) they are intertwined with. This is important because in order to turn them into money, we have to sell them to someone else.”
+ How to Help Your Employees Value Equity — “One of the benefits of working for a startup is the opportunity to earn equity and share in the upside of the value you create every day. In a successful outcome, employees can earn a life-changing amount of money. However, our natural tendency to discount future gains often means employees will prefer a slightly higher salary to a significantly larger ESOP grant.”
Quote that I’ve been thinking about
“Ignore the past and you will lose an eye. Live in the past and you will lose both.”
— Friedrich Nietzsche
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