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On to this week’s news.
M&A panel discussion 🎮
This week, GameMakers had a panel discussion on M&A (mergers and acquisitions). Joseph Kim was moderating, and the panelists where Saad Choudri from Miniclip, Michael Metzger from Drake Star Partners, and Jeff Cohen from Stephens, Inc.
My biggest takeaways are below. You can watch the panel here.
Question: What has driven the recent M&A activity in the games industry?
Saad: Many publicly traded companies are doing well at the moment. They’re trading at high multiples. We’ve reached maturity in mobile. We’re seeing “forever franchises,” games that will stay on top forever. Big players want to pick up as many assets as possible, not to get left behind. [They’ve realized that the] simplest way to grow is through M&A. Also, many founders and VC are looking for liquidity events.
Michael: Some companies have grown only through M&A, like Embracer, who were tiny three years ago, but have executed a successful M&A strategy.
Jeff: Businesses that are at economies of scale are looking to do M&A. Mobile has been in hyper-growth, and there’s been lots of whitespace for small companies to grow. Now, CPIs have gone up to the point that consolidation is happening, and big players are getting bigger.
Saad: I see it as a Peloton. You have a pack of leading companies. To keep up with the leading pack, you need to do acquisitions.
Question: Why has Zynga gotten better in M&A?
Michael: Zynga has now focused on later-stage co’s with $100m+ revenue per single title. Risks are much lower. They’re also attracting the right talent, and they integrate the companies well.
Jeff: [Zynga] weren’t the highest bidder for Peak, but the founder chose to go with them because he wanted Zynga equity, and he wanted to be part of the Zynga family.
Saad: [Zynga is now buying] mature businesses. Any major acquirer right now would prefer a decentralized model, because it means that you can let these companies [operate independently] and give them growth targets.
Michael: [Zynga’s] earn-out model works because gaming entrepreneurs always think the next game is going to be amazing. And that’s fine for the acquirer.
Question: Who are the buyers in the market? Who are the targets, any speculations?
Michael: Playtika is gearing up for an IPO, and they are diversifying out of the social casino space through acquisitions like Seriously and Wooga.
Saad: There’s plenty of targets left in the market. It’s just a case of does it fit with your product strategy? And where you want to go as a business, because you don’t want to buy everyone. It needs to fit.
Jeff: [For a public company], how big would the acquisition need to be interesting for the market? If you’re talking about [Glu Mobile], they’re probably going to look to buy something in $50m to $100m in revenue, and that’s somewhat meaningful to them. If you’re Zynga, you need something bigger. For EA or Activision, you need something even bigger.
Question: Short-term and long-term predictions for M&A in gaming?
Michael: [After COVID highs], revenues will taper off. That’s why I expect a lot of deals happening towards Q4. A lot of the public companies want to add meaningful acquisitions to their financials.
Saad: I think there’s plenty of opportunity in terms of the companies that are still growing and could become huge companies with the right support. That’s why I think the mobile gaming space is still so interesting.
Jeff: Investors in the broader market are starting to focus on games. This trend of entertainment is becoming more interactive; more social games are becoming platforms. I think a lot of mainstream investors are taking note of those trends. Epic being the poster child.
Joseph: “[To summarize], all of the low hanging fruit has gone in terms of the decentralized, ready-to-go targets. But if you’re willing to operate [globally], and to roll up your sleeves and help these studios that are on the cusp of hitting scale, get to scale, then there are lots of opportunities.”
Creative and data-driven game development 🎮
Gigi Levy-Weiss in an interesting investor. He used to be the CEO of an online gaming company in Israel, then turned investor. His portfolio includes companies like Playtika, Moon Active, Plarium, and Space Ape Games. Today, Gigi is a managing partner at NFX, which is an accelerator and venture funding firm based in Silicon Valley.
NFX is a unique firm since their investment thesis is formed around a concept of network effects, which, in simplified terms, means that each new user in a product will add value to the other users of the product.
Managing partner James Currier points out that there are only four defensibilities left for companies against the competition in the digital age. These are:
- Scale. People order everything from Amazon because they have everything.
- Embedding. Oracle has been embedded into enterprise behavior, and it’s hard to rip them out.
- Brand. People are used to Uber; it’s the definition of ride-hailing.
- Network effects. It’s native for the digital age. Companies that focus on network effects tend to become bigger over time.
Watch this video on all the 13 network effects, defined by NFX.
But now, back to Gigi. I bumped into this fascinating interview with Gigi on Venture Stories, a podcast I highly recommend for people to understand venture better. Here’s a breakdown and main takeaways from this interview.
When Gigi looks at game companies today, he sees two different types of game companies.
Creative lead “There’s the type of game company that works on the core principle that if you build a great game, they will come. In the mobile world, the company that’s the most like that is Supercell. Probably the best game company out there. They’re just building amazing games. And everybody’s happy. Everybody’s playing them.”
Data-driven “These are games companies that are all about optimization. They’re all about methodology. Zynga was the first. It’s all about fast iteration. It’s all about saying, ‘We don’t know what people are going to like, we have some guesses. We don’t know. But we’re going to improve that.’ These companies are based on deep data science, iteration and optimization. Taking nothing for granted and testing everything. They’re constantly optimizing, making the game better.”
“They know that if you increase the LTV, then you can spend more money on the CAC (customer acquisition cost). If you can spend more money on CAC, you bring in more customers. Bring more customers, you make more money, and you can improve the game even more, and so on. And that creates an advantage that is over time very difficult to compete against.”
Takeaways here: I’ve heard that Finnish developer Seriously, which was acquired by Playtika (Gigi’s portfolio company) in 2019, they are getting much leverage from Playtika’s data driven culture. I would personally say, as I said in a previous EGD News, that Helsinki has lots of creative talent, but lacks in data talent.
How Gigi invests in gaming?
“Investing in these creative lead game companies is very difficult because I need to make the same bet that I would make on a movie. When games were packaged goods, they were like movies. In other words, when you invested in a game, you had to think, do I have the best director? Do I have the best art? Do I have the best storyteller, the best of everything. Because if I don’t, it’s not going to succeed. That made games the same kind of investment like movies, which is not very much a VC thing.”
“But when I see one of these data-driven games companies, that’s an easy one, because I can look at how good they are. I can see how they’ve optimized games before. We call all of them, Supercell, Zynga as games companies, but they are actually very different companies. For me, it’s easy to invest in data-driven ones. They have a process of continuous improvement, and improving CAC to LTV equation. I know that when you do it right, you can grow the company exponentially.”
Takeaways here: There’s a lot of talk about being data-driven versus data-informed going on in the mobile gaming space. I believe the middle ground is essential since I want great art and great storytelling, combined with optimizing to make a more compelling experience. I think that it will give us more innovation. And above all, more ways for early-stage startups pay salaries, to be frank.
Out of Gigi’s investment portfolio, what do the companies that succeeded have in common?
“They had an excellent infrastructure for looking at data, improving it and iterating. And it doesn’t matter what the game was, slots, strategy, simulation, RPG, etc. All of them had the same drive toward optimization, the same focus on data, the same understanding of games-as-a-service live ops and games as a platform. All of them, while being very different, exercise similar principles.”
“Also, these games are of high longevity. While there isn’t really any monopolies, the combination of knowing optimization and data science in this field and getting the talent, having the capacity financially and knowledge of UA, and then being able to build these games. If you look at the top 25 games, it’s the same companies there for a few years now. When you look at the top 100, there’s a lot of changes, but top 10, the changes are much smaller. These games are just mega games. People continue playing them for years.”
Takeaway: This emphazises both Playtika’s and Zynga’s strategy to pay a premium on acquiring highly profitable companies with games that retain players for years. Read EGD News #32 on Zynga’s M&A model.
In 2020, what is Gigi looking for?
1. Phenomenal teams “The first thing is phenomenal teams doing the same kind of games. And you know, that’s been working for us. We’ve invested a bunch, and we’re doing a few more investments.”
2. New monetization or consumption models “There’s a company in our portfolio that is taking games and allowing people to play skill-games for money in a legal manner. It’s growing fast. It’s taking the same principles, the same understanding of how to build an exciting game, and how to retain the customers, etc. But they’re giving people another layer of excitement which is around real money. So different models of engagement or monetization are one thing.”
3. New platforms “We’re excited about new platforms. We invested in a company called Volley, doing voice-based games. They have millions playing every day on Alexa. It’s growing fast as all these big companies are pushing voice. It’s likely going to be a good games platform. We’re putting our finger on the pulse on AR and VR, waiting for the devices to be around so that we can invest in that.”
Interactive film. Is there a future there?
“In games, the customer is expecting infinite changes in the game, in a very personalized level in real-time. Whenever you try to do a movie that’s interactive, the latest one was the Black Mirror episode that was interactive; it’s difficult and expensive. It’s not yet delivering the kind of value proposition that people want.”
“The industry is not there yet, even creatively, to think about how does a movie that changes for the consumer, going to look like. [The tech needs to get] to the point that you can dictate 10 endings, without shooting 10 endings. You’ve got two stars, and you decide whether they kiss or kill each other or whatever, without shooting 100 endings. The day that happens, this industry will change completely, because then it will have the same capabilities of games.”
Takeaway: I believe that interactive stories like Episodes and Stories is the start to something like this, and there’s more to come, including VC interest.
Other can industries can learn from gaming?
“Every once in a while, I meet non-gaming company CEOs that I think are not moving fast enough, or not understanding the extreme, in which you can iterate and optimize. I send them for a day or two to a games company. They come back completely shocked. And then they start implementing this in their own company.”
Here’s some exciting content that Gigi has produced on startups and VC.
- Demystifying The Fundraising Process: Befriend VCs
- Why Startups that Survive are “Learning Organizations”
- What VCs Don’t See: Why We’re Bullish on Gaming Startups
In this first article, in the article series of “How VC works”, I want to share my learnings on how VC works and how entrepreneurs can take advantage of this knowledge. Not to screw VCs over, but to make the process more transparent for everybody, and to allow entrepreneurs to spend minimal time on fundraising, but instead building and growing their company.
I recently bumped into an interesting investment memo from 2012, when Bessemer Venture Partners invested in Twitch. Ethan Kurzweil, a partner at Bessemer, writes in this post, in detail what they got right and what they got wrong in the investment memo.
In May 2020, I did a webinar with free-to-play consultant Nick Murray, where we talked about the ways that developers can create long-term engagement for their players, and to keep them playing the games from months and years to come. We specifically talk about what is long-term engagement, why it matters and how developers in hybrid casual can take learnings from midcore.
Last week 🗓
If you missed out on the EGD news last week, I took a look at player motivations in gaming. I’d read arecent article by Celia Hodent, the former UX Director of Epic Games, and wanted to cover how the forces of intrinsic motivation govern which games do well which don’t.
Articles Worth Reading 📃
+ 7 RPG Player Personas — Brett Nowak wrote an interesting article on RPG personas. He’s found that there are seven distinct player personas who love playing RPG games, i.e. Empires & Puzzles, Marvel Strike Force, Star Wars: Galaxy of Heroes, etc. “On the whole, RPG players are most motivated by experiences of exploration and discovery, including story and character progression. They strongly prefer strategic challenges, followed by emotional challenges and puzzles. In terms of gameplay, they are drawn to exploration, combat, and resource management.”
+ Craft is Culture — Alex Danco writes about the changes that are happening now in the 2020s, in this COVID and digital era transition. What will really matter for companies? “Hiring and craft become the same thing. The more effort you invest internally into craft development and celebration, the more people will want to work with you.”
+ Empowerment Loops — Brett Bivens is a facinating business writer. In this article, he talks about this thing called Empowerment Loops, in which a company enables more people to participate in an activity. “Many of the world’s most important companies are built on Empowerment Loops. I dove into the core insight driving Nike, TikTok, and Figma and explored how the same principles can be applied to find opportunities in other markets.”
Quote that I’m thinking about 💬
“When thinking about whether you should hire someone or not, try to imagine the average quality level of the people at your company. Then ask yourself whether the new hire would increase that average or not. Only hire if the average will increase.”
— Petteri Koponen, former Chairman of Supercell
Previous EGD News
Here are some previous EGD News to read: