22nd July 2016
Could you please both introduce yourselves, by telling us from what backgrounds do you come?
Thibaud: "We met and built our friendship since University, 20 years ago. Guillaume has spent most of his career as a Venture Capital Investor: he was the first employee and a very successful Partner at Idinvest which has been the French Venture capital success story of the last 15 years. Over time Guillaume focused his investments from technology to media Dailymotion (video streaming), Deezer (music streaming), Molotov (non linear TV) and mobile game studios. On my side, after covering the Internet sector as a sell side analyst at BNP Paribas, I joined Vivendi in 2000 where I was successively in charge of M&A, Strategy and Innovation for the media assets (Universal Music, Canal+ and Activision Blizzard). Hence we have both been involved in the digital transformation of media for the last 10 years, each of us with a different angle: the VC and the media industrial incumbent. We combined our forces more than one year ago to prepare Level-Up, the very first fund specialized on mobile gaming with an industrial strategy."
Could you please explain us what type of fund is Level-up, what type of investments are you actively looking to do and in which markets?
Thibaud: "Technically, Level-Up is a Venture Capital fund that will invest in 30 mobile video game studios. We will select senior teams, with excellent track record and who master the Free to Play business model (sale of digital goods, also called Freemium). We invest very early stage i.e. at seed-stage and follow on a the A round, without co-investors. We target a 40% to 50% ownership with the management keeping control: we want to have productive boards, only focused on business/product interaction. Average investment will be around €5m (€1-2m in seed + €2-5m at Series A), hence the Fund size of 150m€. With this we can build a portfolio of 30 studios that will develop around 100 games in 3 to 4 years, out of which we can reasonably assume that 20 to 30 will be in the top 150 on app stores i.e. profitable. We focus on a proven segment where the key success factors are known and where we can execute our portfolio strategy by funding the second generation of studio creators "
Could you describe the mobile gaming market by geography and what is your investment scope?
Guillaume: "For the first time in digital age, European companies are more successful than US studios: there is more European studios in the top 50 than US ones! The market is basically divided into two zones of equal size: Europe/US is a homogeneous market and Asia is another zone. To date, few companies succeeded in both zones, mostly because of cultural differences and complex distribution in Asia. For European studios, Asian expansion can be an incredible leverage. This is why we will invest around 70-80% on European studios and 20-30% in Asia: we gather European and Asian talents and build bridges to Asia by nurturing a collaboration culture between founders, exposing our European talents to their Asian peers so that they can prepare for expansion."
Why did you choose to specialize in gaming?
Thibaud: "Gaming represents 80 to 90% of app revenues on Apple/android stores: despite being a young industry (5 years) it is already large ($38bn) i.e. twice the global music industry. It is growing $5bn a year. The gaming market is highly fragmented, app stores need new games and support new entrants. Independent studios (what we call "Indies") who master the Free to play model have taken the lion share of this market and, thanks to low capital needs and the scale effect of app stores, have unprecedented profitability ($1,2bn profit for Supercell but also $30-40m annual profit for any game in top 50). There are many investment opportunities, the second generation of independent studios is emerging and consolidation will occur fast."
Guillaume: "Just forget for a second about the term "gaming" and you would agree with us that a market which is at the same time: growing fast, fragmented, open to new entrants, not capital intensive, benefitting from huge scale effect thanks to global distribution and with business cycles from production to revenues being as short as one year is a sweet spot for an investor. As a specialised fund in a fantastic sector, we have put in place an attractive value proposition to attract the best founders and have the expertise to select the best teams."
Indeed, what is your personal track record or experience of investing in this sector?
Guillaume: "First we do love game production, we understand it and are founder friendly. We are part of the small gaming community and this is key to succeed in this sector and attract the best talents. When at Idinvest I invested in 4 different countries in 7 studios, with an 8x return; two studios out of seven have had games in the Top 50 revenue rankings worldwide. This success obviously helps for sourcing, as gaming is a small community. But above the return, I experimented success and failures on more than 30 games, and learned when to stop/revamp a game. Detecting creative talent require experience but managing them and growing them also require support, trust and care. We aim at creating a well-balanced environment for talent, leaving founders enough freedom so that they express the best of their creativity but knowing. We also have to be able to stop a project quickly if it doesn't show adequate performance metrics. Nevertheless we could keep supporting a "failing" team on a new project, because, in creative industries, even the most talented team do not succeed all the time. This is why investing in games is different than investing in technology: it is early stage management of creative talent, midway between VC and Media management skills. Our Founders shall find within Level-Up the best environment. They will also access to a community of founders where they can share, compete or collaborate. This collaborative environment raises the level of creative teams. I experimented it with my 7 investments and all founders I have funded have stressed that this is the most valuable support a VC can give them. This experience and culture makes a big difference when investing in gaming."
Indies (independent studios) such as Supercell and King profits are probably as profitable as large publishers. Does this industry have no barriers of entry? Are the best opportunity in Entertainment focused in the Gaming industry?
Guillaume: "Yes, for an early stage investor, mobile gaming is a unique opportunity to succeed in media. In other entertainment segments big publishers like Universal or Warner in Music or Warner/Disney in movie TV, or even Electronic Arts/Sony in console gaming control distribution and finance "superproductions": it is almost impossible for new entrants to build a business that really scale; The economics of mobile gaming have lower capital intensity and faster development cycle (12 months) than traditional gaming: small talented team win; Distribution is open: an indie game has an immediate access, through app stores to potentially billions of customers. As a consequence, Indies lead and are highly profitable. EBIT is in excess of 500m$ for several top 5 studios. But even if hits are extraordinarily profitable, any company in the Top 50 would also achieve a $30-40m+ profit, and companies well managed with a game in the top 150 can generate positive profits."
Mass adoption of mobile technology has boomed in the past decade, together with startups with a mobile-first approach. How fast-growing is the mobile gaming sector?
Thibaud: "Mobile gaming has grown $5bn in 2015 to 38bn$ and is expected to exceed $74Bn in 2020 i.e. will be larger than the global TV advertising market."
What is the return on investment scenario for an individual that invests in a specialised fund such as Level-up?
Thibaud: "We expect to be in top quartile of VC in terms of performance with a lower risk and a faster return than in technology VC. Obviously, as we own a significant stake in all our portfolio company, a single company with a top-50 game would repay the fund and any "hit" would drive up performance. Even if we try to fund as many Unicorns as possible, our performance can be very good even without "Top 50 hits". We like to summarize our limited risk approach by demonstrating that we can achieve a 3x return on 4/6 years even when assuming none of our portfolio games enters the top-50 ranking on app stores. If only 30 games (out of 100 tried) are only in the top 50 to 150 profitable zone, the portfolio combined EBIT can be in the $50-100m range: we can reach critical size at the level of the fund with a collection of "small studios" and deliver excellent returns.
A growing subsector of Gaming is e-Sports. What is your vision over this sub-sector?
Guillaume: "There is a lot of hype around it. It will be a very big sector, no doubt, Twich is already the biggest TV channel in the world. But so many actors (console manufacturers, internet platforms, telcos, retailers, media conglomerate…) are trying to enter the market, with huge investment and/or differentiating assets. What will be the winning model is still unclear. We as a VC fund, consider it is very difficult to deliver value to our investor short term with an acceptable level of risk. We have the same approach with Virtual Reality or Augmented reality: a promising area, lot of discussions around it and still in its infancy. We will monitor opportunities and market changes but prefer to focus on the less risky segment of mobile free to play studios which is proven and where we know we can execute."
Are corporate companies adapting to the evolving trends in the gaming industry through in-house developments or through acquisitions of start-ups?
Thibaud: "Yes they are trying both organically and by acquisitions: but, even if they progress and will continue to, it takes time. It requires transformation of their organisation and processes as capital intensity, development cycle and business model are different from what they do in traditional gaming. And for Level-Up, who is building a portfolio of "targets", it is a good exit opportunity. Again, our portfolio will launch 100 games of which 30 profitable i.e. 20 teams (600 to 1,000 employees), diversified revenue streams, a line up of 20 new games a year and 40 founders. Level-Up can be attractive for media groups… We are putting together the second generation of mobile game studios. We think a portfolio strategy is the safest way to prepare for the next consolidation phase. We hope this can help produce fantastic games that can be played for years whatever culture you belong to.
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