Sent on May 21st 2021.
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It’s Joakim here. Greetings from Helsinki!
This summer, on June 22nd, I’ll be speaking at the LevelUp 2021 conference. I’m moderating a VC panel, with Salone Sehgal from Lumikai Fund and Michael Cheung from Makers Fund. You can apply for a ticket by going here.
Now, onto the news.
🎙 Valuations for early-stage startups
This week on the podcast, I’ve got Ethan Levy back and he wanted to ask me about startup valuations, what’s all the terminology around the topic, how to prepare for a fundraise with a valuation in mind, and how investors and founders can think about the right valuation for a startup.
Here are my favorite parts of this discussion where Ethan asked me these really great questions.
How should I prepare for the fundraising process?
If you are planning to go down the VC path of raising VC money, you want to understand what is really something that most of the gaming VCs are looking for. What is the sort of package of team, idea, market, execution phase, and all the risk and unknowns that they are willing to tolerate?
Start thinking like [the investors]. What kind of games company would you invest into? That’s all something that you can easily learn. Sell them what they are looking for and you’ll get VC money.
It might sound weird and phony, but the best gaming VCs are actually quite good at understanding the risks and making a case for something that has a higher likelihood of succeeding. So if you’re thinking about starting a game studio, learning from VCs will derisk your company anyways.
As an angel investor, how do you go about determining what you think is a fair market value for my company? What are the factors you consider?
Fair market value at the early stage, when there is no revenue or even retention numbers, it really depends on the team.
- Is the founding team solid? Rock star founders, no weak links.
- Are the founders serial entrepreneurs?
- Are they business builders?
- Have they been heads of studios?
How does valuation come up in investor meetings? What does that conversation look like? Is it driven by the founder or the investor?
The investor might ask: “What valuation were you thinking? What dilution were you thinking?” This question can even come up early in the round.
Founders should never talk about valuation. It should be something that the market will decide. You need to answer: “Look, we are looking for the right partner and the right amount of money to scale the business. I assume that valuation and all of this stuff is going to work itself out. Because this is a very investable business.”
Listen to the podcast by going here.
🗓 More effective meetings
I work with several founders every week. I have calls with them where I help them with issues that they’re struggling with. A few weeks ago, one founder I’m working with asked me to help him conduct more effective team lead meetings.
For the last few years, I’ve been reading up on a bunch of leadership books. As this question on more effective meetings came up, I was consuming The Advantage by Patrick Lencioni. In the book, Lencioni talks about how to set up a good meeting. Lencioni describes bad meetings as ones where people are “going to a meeting, smiling and nodding their heads when a decision is made they disagree with. They then go back to their offices and do as little as possible to support that idea.”
In the book, Lencioni shares a better model for an effective meeting, starting with a real-time agenda being created, which works as a foundation for any effective meeting.
I spent a few days preparing a model for running more effective team lead meetings. Then we went through the model with the founder, and they’ve now successfully used the model in their lead meetings.
Read more about the effective meetings by going here.
This newsletter is sponsored by Favro
😇 There’s not enough full-time angel investors in gaming
I recently Tweeted that “There’s not enough full-time angel investors in gaming,” which is totally true. In Europe, I only know of a handful of angel investors focused on gaming, and even out of those, only a couple do it full-time.
If we look at the capital allocators for game development, you’ve got angels, VCs, and game publishers. Let’s first tackle why there are more full-time VCs and full-time game publishers.
Fund. The reasons are valid for all VCs and several game publishers. They’ve created a fund of either other people’s cash or their own, and then they are allocating the money into promising companies or projects based on their professional assessments. Angels are investing their own capital, and not many people dare spend a decent portion of their savings on risky startup bets.
Professional. The full-time VCs and game publishers have been selected either by limited partners, by a governing organization, or by other circumstances. They have proven their understanding of the games they invest in and have seen that the model works. Anybody can start being an angel.
A job. A VC or game publisher role is a job, and it comes with a team. You get to work on exciting projects and build a business around venture capital or game publishing. Being an angel can be lonely, and you’re working on the cases by yourself and not making the decisions with the support of a team.
So how do we get more full-time angel investors? I believe we need a funnel where we can start the funnel with people who have enough extra cash to invest in gaming. Let’s say a minimum of $10,000 a year. It would be preferable that these people would also have gaming experience, either from working in gaming or with gaming companies.
What then happens in the funnel is interesting. People start investing somewhere around $2,500 in companies. Two things need to happen:
Develop investing skills. The angel starts developing their due diligence and other investment deal-related skills. What is a reasonable valuation, what a good game studio looks like, and their investment risk appetite? When investing in game studios, two things matter. The team and the game. You want to read if the founders can get a game off the ground before the money runs out. Lots of variables play into this.
Develop value add skills. When you’ve invested, you can’t expect to lean back and watch your investment multiply in value. Jump in and help the founder. You can play their game as it’s being developed, send feedback, share insights that you’ve come up with in your career in gaming. Build up a specialization in how you help the founders. Usually, it’s something that comes naturally from your background. There are so many ways to help.
People will drop out from the funnel as they get burnt. In Finland, I’ve talked with several people who’ve been investing in gaming as angels but have left as they didn’t understand the business well enough. But you can develop those skills. You can learn to know what looks like a good investment target, and you can learn to support the entrepreneurs. It just takes time.
📃 Articles worth reading
+ Game M&A hit all-time high of $39 billion in Q1 2021 — “Close to $1 billion in capital was raised from nine games-focused VC funds across the previous nine months. Global investment platform Bitkraft participated in 10 deals, leading three of them for a disclosed deal value of $160.5 million.”
+ Favorable Conditions Never Come — “We all face distractions from the deeper efforts we know are important: the confrontation of something not going right in our lives; an important idea that needs development; more time with those who matter most. But we delay and divert. It’s easier to yell at someone for doing something wrong than to yell in pride about something we did right. It’s easier to seek amusement than to pursue something moving.”
+ You Weren’t Meant to Have a Boss — “Technology tends to separate normal from natural. Our bodies weren’t designed to eat the foods that people in rich countries eat, or to get so little exercise. There may be a similar problem with the way we work: a normal job may be as bad for us intellectually as white flour or sugar is for us physically.”
💬 Quote that I’ve been thinking about
“That’s all any of us are: amateurs. We don’t live long enough to be anything else.” — Charlie Chaplin
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That’s it for this week. Hope you enjoy a sunny weekend!