Choose Your Own Venture
Mitch Lasky on what venture firms look for in a games business, and how a developer can maximise its value
Mitch Lasky has been in the interactive and videogame business for over 20 years, and has held senior positions at Activision, Jamdat and Electronic Arts. He currently works for Benchmark Capital, the venture firm funding a number of gaming businesses including Riot Games, Gaia Online, Linden Labs and Vivox.
At the Game Developers Conference last month Lasky delivered a session on how developers can realise their greatest financial strengths, with some of the revelations flying in the face of conventional wisdom. In this exclusive interview, Lasky talks to GamesIndustry.biz about opportunities for developers to gain value, why intellectual property is no longer the most valuable asset, and how the current economic environment is influencing investment decisions.
It was a subject I think was fairly interesting to the audience, which is that very few people in the videogame business rarely think about making money in the way that people in a lot of other industries think about making money. There's a lot of labour of love in this business, there's a lot of lifestyle, and people want to be in the videogame business, or they want to be game developers.
They don't think about creating what we would call equity value. Making their shares valuable so that if somebody ever comes to buy them, they get a premium. What I was trying to explain was the mechanics of equity value, how they apply to the videogame business, and how developers - from an iPhone publisher to someone who's launching a free-to-play MMO - could take steps now to help maximise their exit opportunity in the future.
There are a couple of things but you could summarise the whole thing as "Think about the exit going in". Know what is going to make your company valuable. If you want to be a packaged goods developer, if you want to be a PlayStation 3 developer, then intellectual property is going to make you valuable. Capacity is not going to make you valuable. We've seen that story played out a million times. Capacity is worth less than one revenue dollar per revenue dollar. But intellectual property has strategic value. And exclusive value.
If you're cutting a deal with a publisher and they're offering you a USD 15 million contract to make your game in return for all the rights to the intellectual property, or USD 10 million but you keep the rights – take the 10 USD million. Because ultimately the multiple effect that's going to produce, the value that's going to produce on your business, is well in excess of what you're giving up. Think about value and what is going to be valuable as early in the process as possible, as opposed to when someone shows up with a cheque.
No. People bent over backwards to create intellectual property and that was the name of the game. Can you get enough scale and leverage as a developer to create intellectual property? I do not think any longer that is the value driver in the videogame business. With the IP development business you're buying lottery tickets and you're hoping that one of them works. Every so often somebody wins, and everyone else says "That's why I'm playing". But only one out of 1000 won.
To me, what's really generating value nowadays is distribution innovation. Things like social gaming. I would say iPhone for Apple, but maybe not for any of the publishers yet. Although there's some promising early things going on there, I think it's still too fragmented to really argue that it's created value for anyone other than Apple.
For the retailers, used games has been a huge innovation. It's completely screwed the publishers because they've the cut the developers and publishers out of that revenue stream. It's been disastrous for the creative side of the business, but it's been wonderful for GameStop. Their margin on the used stock is enormous. Free-to-play and virtual goods models are tremendously innovative too, and possibly the future of a lot of content in this business.
Yes, and you get closer and you own the customer. You have a relationship directly. I would argue that Steam is one of the most valuable assets in the videogame business. It's under-appreciated by a lot of people in the videogame business just how valuable that asset it. It's insanely valuable. I would argue that Steam is significantly more valuable than the assets of Half-Life, Portal, all those brands and properties. Steam is still twice as valuable as all those brands aggregated. It goes back to the point of intellectual property versus digital distribution.
I don't know that I have good advice for the packaged goods developer at the moment. I advised a number of companies a couple of years ago to develop expertise in either the Wii or other platforms that I thought were going to be high growth. Some of them, like the Wii, turned out to be a place where if you developed a real expertise you probably would still be getting work now because publishers are devoting a lot of resources to the Wii. If you're not already an established PlayStation 3 or Xbox 360 developer it's going to be very tough going.
We're looking primarily in areas where our capital can create leverage. Funding a PlayStation 3 product would be idiotic because we have no natural advantages, there's no disruption that we can create with capital in the PS3 market. It's a red ocean.
We've funded Gaia, we've funded Linden Labs. These super innovative and completely non-traditional business models where venture capital can help them build a very disruptive business. We've just funded Riot Games in LA who are essentially creating a core game but with the attributes of free-to-play casual games. We funded Vivox, which is essentially a cross-game communications platform.
These are not areas where you'll see investment by the traditional games companies. They are usually electronic distribution enabled. If you want to make a USD 4 million Call of Duty SKU for the PS3 and Xbox 360 it's a USD 30 million proposition, which is significantly smaller than we put into these companies. And you're hoping that capital produces an outsized return.
It's electronic distribution, it's leveraged customer acquisition, it's not a dollar of marketing buys a dollar of revenue. But virality, search engine optimisation, things where we can take advantage of the 'frictionlessness' of the internet environment. And non-traditional payment methods, not USD 60 for a shiny disc. Free-to-play with a virtual goods market.
I think venture firms are in two minds. All of us have existing investments that are being hammered. And then we have new investments where the companies we're looking at have less access to capital and capital is at much less valuation, which means higher ownership or lower risk for us. It's the best of times and the worst of times. New investments are wonderful, existing investments - some are highly drought-resistant and are thriving - but some are experiencing difficulties. All venture firms are experiencing that same dichotomy.
Mitch Lasky is a partner at Benchmark Capital. Interview by Matt Martin.