Three Years of Investing in Games
Lessons from a16z and Riot on predicting hits in a very non-deterministic world
It is now my third year venturing away from my home of NYC to the land of sun, entertainment, and games. In that time, I’ve worked at Riot and a16z, was one of the first investors recruited to help build up Games Fund One and SPEEDRUN, and have seen thousands of game studio pitches from many talented developers. There’s still a lot I don’t know, a lot more to learn, and I’m still early on in what I hope to be a decades-long journey, but I wanted to share a few reflections and learnings for game devs, players, and investors alike.
Finding the Reason You Can Win
This is both on the personal and professional front. I’ll start with the professional first.
VCs are looking for alpha like any other good investor (excess risk-adjusted returns relative to a benchmark). However, that alpha can be much harder to find due to the sheer amount of variance in early-stage investing, and because markets are getting more efficient (e.g., the Benjamin Graham-style cigar-butt investing would likely not work in today’s day and age due to the efficiency of PE markets at pricing private companies). So we look in different areas: teams, genres, stories, metrics, insights, etc.
Those reasons can come in different shapes and forms, but there needs to be some spike on which the startup hinges its success. Perhaps it’s a clever go-to-market strategy like Content Warning, where they discounted their list price to $0 on April 1st to solve the cold start problem. Or it’s a strategy that leans into existing strengths like OTK launching Mad Mushroom, a new-form publisher that leverages this creator-led distribution meta. Loftia is another example of distribution strength, with a Kickstarter campaign that generated $1.2M in pre-sales and 500K+ followers across TikTok and Instagram. Palworld, legal troubles aside, was only able to go viral by latching onto a popular IP and giving it a spin that no one would have thought of: Pokemon with guns.
It can also be a spike in design. That’s a little bit harder to show, but qualitatively we evaluate whether you’ve really gone deep on the specific genre that you’re targeting. Have you thought through your audience and all the player motivations, have you played all the games in genre, have you identified the gaps, have you identified where you’ll innovate and why that’ll be compelling, have you figured out what’s going to really make this new game tick. Stephen Lim has always been my guru here, and I’ve learned a lot from him on this subject.
It can be a new market that you’re one of the leaders of right now. Primodium is led by two ex-YC brothers building in the frontier of fully on-chain games. Zaranova is creating an AI game where you must pretend that you’re an AI and trick others to believe you, while Altera is building some of the best agents in games starting with Minecraft. Trass Games just launched Yeeps, a new type of hide and seek game that leverages the unique tactile affordances of VR. Any new market is going to seem early and the games like toys, but this is where the next wave of innovation occurs.
It can of course be the team too. Which is what matters the most at the end of the day. There’s lots of great teams out there and they come from all types of backgrounds, but to provide a gross generalization they all have high IQ and high hustle at a minimum. On top of that, they’re often able to have a strong ability to manifest their vision into reality, whether that be the product, the capital, or the people necessary to get the job done. Just know that as VCs, it is our duty to do the diligence through reference checks to assess whether each team is really top 0.1% in their field, and it’s the founder’s job to prove that they are the best.
On a personal front, any job that’s worth doing is going to be a grind, whether that’s developing a game, founding a company, or investing in startups. If there’s one thing I’ve taken from my time here it’s that there’s a lot of really smart, talented people going after great ideas and working their butts off, and even then they might not achieve what they want. But if you don’t try, then it’ll never happen.
So at the end of the day, you have to have faith in yourself, and the people around you. People’s perception of you might change, they might disparage you on this or that, so what matters the most is executing against what you believe to be true.
Capital Requirements in a Shifting Market
You might be thinking, ok Robin, great but how do all these theoretical concepts apply to me? Here’s some very tactical advice for aspiring founders and game devs out there: find the right-sized idea for the right-sized founder.
So for instance, if you’re a new developer starting out and you want to make the next big MMORPG that’ll cost $50M-100M+ in budget, that’ll be a vision that’s really hard to execute on and get the capital for. You earn the right to raise big sums of capital, and only very few industry veterans can command the type of team and cache required to go after those opportunities. Instead, figure out a way to build up to that grand vision.
Look at the story of Mihoyo for instance. Started by college students hacking away at anime games, they only raised one round of capital to launch their first game, FlyMe2theMoon, a puzzle game based off of the ending of Neon Genesis Evangelion. They tuned their skills with Houkai Gakuen 1, 2, and 3, and used the 3D engine of the 3rd iteration to eventually develop Genshin Impact, their landmark title that generated over $5B in spend just on mobile alone.
The capital markets are also changing a lot in the gaming landscape. A decade ago, there were very few VCs that invested directly into content and platform-based publishers. Then Bitkraft (2015), Makers Fund (2017), and PlayVentures (2018) came onto the scene. Now there are mainstream tech VCs that have taken notice: Index investing in Backbone, General Catalyst investing in Triumph, Lightspeed investing in Gardens, etc.
However, the capital markets for content is still quite small compared to the hundreds of VCs that will fund the next enterprise SaaS or AI startup. Those markets are more developed, and there are sophisticated growth investors that will pick up the tab once you get to scale. As a studio, there are a decent chunk of options when you’re starting out (including our games x tech accelerator SPEEDRUN). However, due to the budgets that some games need downstream financing can always be a concern. There are only a select few VCs and publishers (often from Asia) that are willing to foot the $15-40M Series A/B checks that might be required to finish the game. So how do you get those?
Execution Is All That Matters
One of the founders I work with Christian says it best in his pitch here (PW: SR002). In games, there are fewer metrics to go off of if you play in PC/console land. Compare the Series A of a game studio to the Series A of a consumer app, and you’ll be comparing a vertical slice / beautiful corner to an app with hundreds of thousands of MAU and strong D180 retention. There are two paths here:
The first is just making the game really, really, and I mean really good. We play about a hundred games a year give or take, and a few of them stand out amongst the crowd. What’s important is to have a strong thesis about the genre that you’re going after, and really execute against the pillars of that thesis. If it’s a shooter then your gunplay should feel top notch. If it’s a survival-crafting game then the core building loop should be well fleshed out. A few studios that have impressed me in the last year: Red Rover, Ruckus Games, Gardens, Mountaintop, Mainframe.
The second is finding ways to GTM early and fast. Theorycraft’s done a great job here of hosting progressive playtests with players to get early retention / engagement data. Odyssey Interactive partnered with renowned animation studio TRIGGER for a killer trailer, and also launched their game PC first (and rolled cross-platform quickly after) with a clever Twitch streamer tournament. Web3 has also done some really clever things here with airdrops, token incentives, quests, early land (Pixels and Parallel are defining the early playbook here).
Remember, traction is king, so the more you can do to show that, the better. In a rough stack ranking of what VCs care about:
Users: DAUs // MAUs + Retention
We care about this the most because it represents product-market fit
Monetization: CAC, ARPU, LTV, ROAS
Engagement: session times, # of sessions
Community: Size of Discord, # of Twitter followers, GMV
Concluding Thoughts
I often get asked what it’s like to be a games VC, and I tell them it’s the hardest job I’ve ever done - lots of uncertainty, long hours, very non-deterministic - but I wouldn’t want to do anything else. In what other job do you get paid to listen to founders tell you about their dreams, and help them achieve them in some small way. It’s really, really cool to just see people and companies grow and evolve over time.
I hope these essays will continue to be helpful to the community and give some more insights regardless where you are. I plan on writing weekly, on Mondays, on games, web3, consumer, anime, tech, UGC, VC, philosophy, and more. If you liked this please hit subscribe to help me grow!
I love the energy in the pitch from Christian. Are all game ptiches like that? 👀