Written by Joakim Achrén and sent on January 27th, 2023.

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Last week, legendary Silicon Valley VC firm Lightspeed Venture Partners announced that it’s stepping into gaming with three people focusing on gaming.

This is fantastic news! Getting more VCs to join gaming is excellent news. As Lightspeed enters the market, and if all goes well, it’s most likely going to be lots more companies getting funded annually. More entrepreneurs get backed, and more attempts to build lasting companies.

In this piece, I want to discuss VCs entering gaming and how they can succeed.

What is success for a VC?

Here are the basics of venture capital: The goal is to return the invested money to the investors, the limited partners and to create a profit on top of that. Let’s expand on what can cause this kind of success.

Is the VC seeing all the possible deals? Optimally, an investor wants to get wind of all the deals and take meetings with all the founders they want. The “seeing” part of investing is crucial: if the VC doesn’t know of a deal, how can they invest in the first place?

Is the VC good at picking the right companies to invest in? You might have limited “seeing,” but you could still pick a diamond in the rough. Another way to be great at picking is to have lots of “seeing” and you are painstakingly diligent on your bets. You could invest in 20 companies a year but you focus on doing only the best ones, like eight or ten.

I think that picking is crucial in the early stage. Picking in gaming is a specialized job; gaming operators turned investors can do better than general tech VCs looking at gaming.

I love this quote from Gigi Levy-Weiss, from NFX, who was on my podcast some time ago, on evaluating a games company for investment.

The first thing is having that nose that can smell whether something has derived creative flair. Everybody that’s in movies knows how to do this for movies, and everybody in music knows how to do that for music, and everybody that’s good in investing in games needs to have that [for games].

The second thing is being able to detect already for early KPIs; what’s happening in the game? Meaning that “Yeah, for generalist VC, you need a lot of numbers, you need the revenues to analyze, but often a more educated person in the games industry can see this a lot earlier.

And the third thing is to better analyze whether the character of the people you’re interviewing is in line with a pattern recognition of what’s successful in early-stage games companies.

— Gigi Levy-Weiss episode

Let’s say the VC is great at picking, but do they have access? A VC might see all the deals, talk to all the founders, and know which ones to pick for an investment, but they might not become an investor in that company even if they wanted. The most sought-after deals will have VCs lined up and competing to invest, and the founder can only fit so many investors into a round.

Being a big fund helps: you can send an offer as a term sheet to lead a round. If the offer is accepted, you will get to invest whatever happens, guaranteeing “access,” and you usually get the most significant stake in the company.

On the flip side, being a big fund doesn’t help: only one investor gets to lead, and other leads will need to find other deals to lead if they want the biggest stage. Or they can keep pushing. If their offer is turned down, the VC can come back with a bigger offer. “Those guys offered a $12 million valuation. We can do $15m.”

Many lead VCs in gaming create competition. In previous years, valuations of pre-seed rounds have gone up significantly. In 2019, a ten million valuation would have felt like too much. In 2022, it would have been too low. If you look at this chart from Carta on gaming valuations, things have gone up and to the right.

What are the big fund basics? You lead deals because you want lots of ownership in the companies you invest in, preferably double-digit %. There are other dynamics in play as well. During tough times like 2023, big funds might need to help their portfolio companies by giving them bridge financing. At the same time, the VC must have the discipline to let go of failing companies and learn from failure.

How should founders pick who to raise from?

As I said earlier, as bigger funds have shown up to gaming, the competition has driven up valuations. Good for founders, right? Many founders would pick the $15m valuation over a $10 valuation, whoever brings the best deal. At the end of the day, many founders want to, and they should raise with the best terms.

But there’s more to consider.

After the deal, the company becomes a part of the VCs portfolio. Helping companies to grow is a crucial skill that many VCs are still developing. It will become an even more significant aspect of getting access in the future as founders become more sophisticated at choosing their investors.

One of the ways I hope founders will become more intelligent at picking VCs is to choose the right person they want to work with. “I want to raise and work with Jane Smith,” not “I want to raise from Whatever Ventures.” It matters a lot that there are VCs who are previous executives or founders from gaming.

Last year I talked with Managing Partner Andrew Sheppard from Transcend Fund about his transition to VC from being an exec at Kabam.

What’s cool about being an investor is you’re seeking out companies that are looking to grow. And so being able to, at arm’s length, bring that background, that experience to support people on their own journey. That has turned out to be, in the abstract, what I feel like I can add the most value to the industry today.

Andrew Sheppard

Final words

What is good for the industry? It’s new companies getting started, funded, and making better games for players. I believe that providing help to founders is critical to the VC’s success.

Things will stay rough throughout 2023. But I don’t think gaming has lost its potential, although I feel that the strongest will survive the test in the next 12 to 24 months. As we journey onward, companies and VCs will need to prove their talent. That journey should be about learning, executing, understanding, and executing some more.

(Photo by KUSHAGRA DHALL on Unsplash)