EGD News #34 — a16z and gaming

This newsletter was sent out on June 19th 2020. If you’re reading this and you aren’t a subscriber, you can sign up here.

Here’s some funding news. Epic just raised $750m at a $17bn valuation. And Stillfront Group raised $128m in a directed share issue. More acquisitions coming soon?

On to this weeks topics.

Andreessen Horowitz and gaming 🎮

Today I’m going to be talking about the venture capital firm Andreessen Horowitz, and how they have recently been getting very much involved in gaming. Founded in 2009 by Netscape founder Marc Andreessen and entrepreneur Ben Horowitz, Andreessen Horowitz has backed companies such as Skype, Airbnb, Lytro, GitHub, Ripple, Oculus VR, Buzzfeed, CryptoKitties, and many more. The firm, also known as a16z, has more than $12 billion in assets under management across multiple funds.

When we were raising the Series A round for Next Games, we visited a16z for a pitch meeting. We waited in their beautiful lobby, which felt like a library. What we heard is that it was constructed with the favorite books of Marc Andreessen. Between the bookcases, there were framed photos of nuclear detonations. Must be signaling the seeds of disruption?

Eventually, we couldn’t get a16z in our Series A round, but I continued to learn from a16z. I read The Hard Thing About Hard Things, written by founding partner Ben Horowitz when it came out in 2014.

Andrew Chen

I’ve been paying attention to Andrew Chen, now General Partner at a16z. He was one of the first people who were spreading knowledge on Twitter, a person who wasn’t in gaming but who was talking about topics that meant so much for thinking about growing a startup in gaming.

Through his career, Andrew has focused on online services and the growth of products from zero to massive businesses. He’s written hundreds of essays on these topics on his website. You can go back 15 years on different essays that Andrew has written on startups, metrics, entrepreneurship, games, etc. There’s a lot there, and it’s easily digestible.

a16z in gaming

When Jon Lai came to a16z from Tencent and Andrew Chen had joined as GP in 2018, a16z started focusing on gaming investments. As of writing this in mid-2020, a16z has invested in game startups such as Singularity 6, Forte, SandboxVR, Mainframe Industries, Improbable, Elodie Games, CodeCombat, and others.

In a recent interview with VentureBeat, Andrew said that he spends about half of his work on gaming.

Investment Thesis In Gaming

“There’s TikTok and Twitch, which are successful and continue to grow — but thinking about what’s next. Part of what we’ve talked about is how it intersects with games. One way to pick out the next social product is to see what young people are using?”

“If you’re a kid, you spend all your time playing with your friends in Roblox. You use it as a social network. You hang out with your friends there and talk with them. You build a persistent identity. You might play Roblox, Minecraft, and Fortnite for years before you’re allowed to have a ‘social network’ account. I’ve become interested in the idea that these multiplayer game experiences are the next social networks. That’s been a key part of my thesis.”

“The second part of the thesis: when I grew up, my mom would say, ‘You can be a doctor or an engineer. Pick one or the other.’ It’s incredible to me now that being a YouTuber or a game streamer is an actual profession. [These open up] a lot of new ways to create work in the economy.”

“[Gaming is] huge industry. And then just the talent level, the talent that’s spinning out of Riot Games, Valve, Blizzard. The fact that you can build a game startup – Riot showed that you could build a valuable game startup. Supercell showed that. It makes it very attractive to start a studio from scratch using VC dollars rather than publisher money. All of that unlocks a new generation of entrepreneurs, which we’re very excited to back.”

Games Are The New Social Network

There’s been lots of talk about the metaverse. If games like Minecraft, Roblox, and Fortnite are already some sort of metaverses, where players are in a social experience, moving seamlessly from one world to another. Andrew talks about a16z’s approach to investing when it comes to concepts that resemble a metaverse.

“I wanted to mention Singularity 6. They’re working on experimenting with building a virtual society. I think of it, there’s a lot of games right now, and a lot of metaverse aspirants, where their basis is in shooters. They’re competitive in nature. That’s why a lot of people are spending time with it. What’s cool, and we saw this with Animal Crossing this year in particular, is that there are many different kinds of non-competitive gameplay, social and cooperative gameplay, that people love. There are huge markets for it.”

The teams that he’s looking for: “We’ve wanted to spend our time primarily with folks that have built and shipped major products. We want to assemble not necessarily the largest portfolio of game studios, but we want to assemble the very best set of people who want to build big games. That’s been the focus.”

The best way to diligence the gaming founder-market fit: “It’s harder to get to know [founders] via Zoom. But one thing we did was a bunch of folks in our team played Teamfight Tactics with the other team, for hours and hours, as part of the getting-to-know-you process. That was a great way to get to know them. It’s been observed that if you’re calm under pressure while you play TFT or League or StarCraft or whatever, you’re probably pretty good at startups. I would bet that the two correlate.”

Gaming trends

Three gaming trends that Andrew Chen and a16z are interested in:

1. eSports “There are quite a few companies that we’ve admired from afar and not invested in, but they’re doing things in tools and platforms for esports. Player performance and that kind of thing. Those are interesting. We continue to follow them.”

2. Modding “We’re interested in how you create moddable games, and how you take these–they’re almost no-code developers. They’re very amateur software engineers who are building games under these platforms. How do you reward them? I’ve been very interested in that. We have a big investment in Roblox for that same reason.”

3. New demographics “This is a bit related to what I was saying about Animal Crossing. After battle royale took off, every single game needed battle royale. As you know, battle royale is such a niche thing. Only a certain type of person is going to be into it. If the goals of building the new metaverse-like social hangout, virtual spot, whatever you might call it–I think the basis of that may not be a shooter. It may be something that looks more like Animal Crossing at its core. You build up from there.”

Growth, player acquisition, and retention

On Tue 16th of June 2020, Slush organized a webinar with Andrew Chen and Thor Gunnarsson (CEO of Mainframe Industries) on User Acquisition in Cloud Gaming. Here are the relevant topics and highlights that came up.

Billions of people are watching video on Youtube, Tiktok, Instagram, and Snapchat

  • Games are the most dominant content for video. It already rivals television and is winning the battle.
  • Currently, producing and streaming gaming video is clunky, is version 1.0
  • Cloud gaming could unlock 2.0, products that automatically generate video, hence investment into Mainframe Industries
  • The video consumption explosion is similar to the mobile explosion in 2012. New big opportunity for gaming.

Cloud gaming video in detail

  • New tech will allow developers to engage and retain their players in new ways.
  • Machine learning generated hyperlinks inside the stream. Players could “jump” into the stream and start playing.
  • These hyperlinks could become highlights, stories, which could be shared in Tiktok and Instagram.

Gamers vs. spectators

  • Esports are similar to traditional sports; you play as a kid, then move to the spectator as you grow older.
  • There are already now more spectators for these massive games like LoL, Minecraft, than there are players.
  • The business focus is shifting towards the spectators.
  • Popular hangouts like Youtube and Twitch are so 1.0. Cloud gaming could again be a 2.0 breakthrough for this.

Mobile dev VS PC devs

  • Mobile is all about data. PC devs look to Discord and Twitch to grow.
  • Marrying the Triple-A building knowledge with data optimizing is interesting.
  • One of the reasons why a16z invested in Mainframe

At the end of the call, Timo Soininen from Small Giant Games commented that performance marketing would come to cloud gaming quite quickly, and the UA teams will rule the world. Performance marketing will spread to cloud gaming as well, and it’s why influencer marketing will be hard because you can’t use AI to pause campaigns and build hundreds of creative permutations.

We’ll see what happens.

Blog 📄

This week we published an article on Co-Founder Equity Splitting, and how you can evaluate the situation where you still have 100% to share between the founders.

Many founders have recently requested me for help with their equity split process. They are looking for either doing a fair split or an unequal one, based on contributions and risk-taking abilities. I decided to cover this topic in an article, and I also created a calculator for founders to use when they are splitting equity at the start.

Co-Founder Equity Split

Podcast 🎙

My book, titled Long Term Game – How to Build a Video Games Company, came out in March 2020. We’ve just released the audiobook version and you can find that on Audible and other major online audiobook stores. I want to share with you the first chapter of the book. Hope you enjoy this read from Keith O’Brien.

EGD Special: Long Term Game first chapter

Articles worth reading 📃

+ Interview with Marc Andreessen — This is probably one of the best interviews I’ve read in a while, on startups, on learning and on life. “One of the things I talk a lot about is this concept of ‘strong views weakly held’. I think in any business you do want to commit, you do want to act, you do want to bias towards action. Now, obviously, as you know, venture capitalists are on the opposite side of the spectrum from the hedge fund example since we have to wait like 10 years. We do end up much more committed to these things.”

+ Mastering TikTok Mobile Ads — Have you ever wanted an analysis of TikTok’s ad performance? This article takes a look at how UA can work on Tiktok, with a comparison to the ways that campaign optimization works on Facebook. The message is that “advertisers expecting to copy and paste their Facebook playbook onto TikTok and get Facebook-like results are in for a rude surprise.”

+ VC & founder sentiment survey — NFX surveyed founders and VCs in April and early June on the prospects of fundraising, remote work and hiring, during and after the Covid-19 pandemic. ”Do VCs judge remote startups any differently? Has hiring compensation in startups changed? Are Founders more worried now than they were 3 months ago?”

+ Founder as Victim, founder as god — Many have read Zero to One, but haven’t yet read the class notes from Blake Masters that the book is based. In Class 18 notes, Perer Thiel talks about founder traits and why founders are so different from other people. ”The dynamic might work like this. People start out being different. They are nurtured to develop their already somewhat extreme traits. Those traits become more important, and they learn to exaggerate them. Others perceive that inflated importance and exaggerate in turn. The founders thus end up being even more different than they were before. And we cycle and repeat.”

Quote I’ve been thinking about 💬

”One thing I’ve learned as an adult that I didn’t realize as a kid is how precisely you have to aim at a goal to hit it. If you choose to optimize something even slightly off to the side, you’ll sometimes achieve almost nothing toward your intended goal. For example, if you want to learn a lot, but the thing you choose to optimize is grades. Many people implicitly treat learning and getting good grades as identical, but they are surprisingly far apart.” — Paul Graham, on Twitter

Here’s some of our previous newsletters.