The Venture Deadpool (Ep. 21)

[MUSIC] Hello and welcome to the GameCraft podcast. I'm your host, Mitch Lasky. I'm Blake Robbins, and this is a podcast about the modern history of the video game business. Episode five, the Venture Dead Pool. [MUSIC] That sounded ominous. I was going to say maybe that's a little too ominous of a title for this episode. But basically what we're going to do in this episode is we're going to try and delve into venture financing and the ways in which the misuse of venture financing in games companies can lead to failure. And I think as a corollary, why you're having trouble today, potentially as a developer, getting your studio funded by venture capitalists, because we're going to outline in the rest of this episode is a lot of specific examples of how some of these venture investments have gone wrong. And what that means, the underlying reality of that is that venture capitalists are losing vast sums of money investing in the games business at times. And it's those losses which are making them gun shy and reticent to go back and fund studios in the same way that perhaps they thought about doing during the flush period of a few years ago. And so I guess the corollary is the venture deadpool, why you're having trouble funding your game studio? Yeah, I mean, look, this entire podcast is around games as a business and really what makes a game company an interesting business, venture is one of those ways that we can finance these types of businesses. And I think it's, look, you've sat in such an interesting seat over the past decade and 15 years of investing into game studios and maybe content on some level. And so I'm excited to really dive into this one. So let's start basically by doing a bit of a recap on some stuff we've talked about in various episodes over the years related to venture financing and sort of give a little bit of a summary of venture financing and kind of why it's used and why it's useful. And then we'll transition and talk a bit about how venture back companies fail. Like what are the attributes of failure rather than the attributes of success? And from there, we'll talk about the investor side of the equation and maybe some of the mistakes that venture capitalists have made as they've evaluated games companies over the last few years. And then finally, we'll look at some specific examples. And interestingly, since we put this list together back in the fall of 2024 when we were originally thinking about putting this episode on the slate, a couple of the companies that we had put into our potential Deadpool have in fact died. And so I think we or at least have failed as venture investments. And I think we can now talk about those as well as a handful of others that we are a little bit worried about or that perhaps have some of the attributes that would make them suspect in terms of things that have led to failure in the past. Yeah, and look, you've sat in this really unique seat, both as a founder of a game studio and an venture investor. When you think about what are the real criterias of what would even make a company fit for venture financing, what does that look like? I think the first and most important and the one that we've mentioned over and over throughout the episodes of this podcast series is the desire as an entrepreneur to build a valuable company rather than a good product. Obviously, those things are not completely unrelated. It's very hard to build a valuable company with a bad product, but the reverse isn't always true, which is you can make a very good product and fail to create a very good company. And I think some of the companies we're going to be talk about in the Deadpool later on, the specific examples, are companies which have actually made pretty good to very good products, but which have just not managed their capital, managed their employee base, managed their spend in a way that would make them valuable enterprises and therefore suitable to venture investment. Because again, that was our real criteria early on. If you just want to make a product and that's what you're interested in, you're better off going to publisher financing route. If you want to make a valuable company, that's when venture is really your ally. So that's number one. Number two, things that are really valuable in terms of whether or not you should seek venture is whether or not you have a meaningful competitive advantage. I think that's really crucial. And it's not a genre or a gameplay innovation because those things are really a femoral as competitive advantages, but something durable. And again, as we've both seen, and you can speak to this as well, it's like the number of times that you're pitched something that's essentially a minor tweak on an existing play pattern. And when you ask them about, "Hey, what's the distribution strategy? What's the go-to-market strategy? What's the thing about this game that's unique that will make it different from all other games and stand out in a way when it's in a long list of similar games in a particular genre?" And your answer is, "Well, we've got this really great system that allows you to do X, Y, or Z, or we've got a better class of weapons, or we figured out this really cool way to respawn," or whatever. That's not a durable competitive advantage that's suitable for venture. Yeah, I might even add that the average venture-backed game studio can't really articulate why someone should be playing their game, or even how someone's gonna know that your game exists. And so in my mind, it sort of blends into that competitive advantage piece, which just is why should someone even play your game? Yeah, I think that's really true. And that's kind of what we're talking about when we talk about kind of, when we're talking about competitive advantage, right? I mean, competitive advantage can sometimes sound very business-y, or whatever, but like, I think when you simplify it in the way you just did, which is why would somebody choose your game? That's the clearest articulation. And that can't be something small, because occasionally we've seen these things minor tweaks produce short-term successes, but if you're really trying to create long-term success in the business, you really need a distinct competitive advantage. And then finally, I think the third attribute, desired to build a valuable business presence of a durable competitive advantage. I think the third leg of the stool really is that you have a founder or a group of founders who really have product taste and business judgment in combination, because not only do you need to make the right product and to make the right choices for that product and to spend money on that product in ways which are going to produce returns on that investment. So often we see companies that get into the death spiral of production in the video game business, and they just throw all of their resources into things that aren't either going to show up on the screen or that aren't going to lead to someone taking that game off of the shelf or virtual shelf and downloading it or out of the app store, they're spending their money on things that were in their design document or that are important to them and to their peers but that are not important to consumers. And the number of founders that I've met who have both that incredible product taste and at the same time the business judgment to know where to apply their dollars is really, really rare. Yeah, it's, look, I've sat in many pages with you with games studios and I've often found the best way to interpret this is how articulate are they when you start pushing on certain random aspects of their business. I've been there when you've asked, "Okay, what happens when you are now level 15 and you're 45 minutes in?" And mind you, these games aren't even built yet and largely just in a pitch deck, but the best founders I've found can articulate with real like crispness of where things are going but also just proving that they've sought to read these things in a way that way further than even the investors have. And that's on the product side. I mean, on the business side I will sometimes ask, "Well, you know what, what if you launch and you don't actually see meaningful revenue for six months?" What happens then, right? Because you're not going to be able to raise money at that point because all the investors will be sitting around waiting and seeing if your thing actually has legs. How do you solve that problem? What are some really dire business problems that you may face that you might need to address strategically and how are you going to do that? And I think, again, it's very, very unusual to find an entrepreneur in the games business in particular who sort of thought through those angles. So let's turn from venture from the perspective of the developer to venture from the perspective of the investor. And I think just a quick history lesson to remind everyone where we are at this recording in early 2025, we are now well out of the zero interest rate phenomenon period and unfortunately, staring down a double barrel potential recession with the new administration. But that notwithstanding, there was this period during, let's say, 2018 to into 2023, really, in which the games business was flush with cash because money was essentially free at the investor fund level and the success of some companies, some of which were not my portfolio, some of which were, I don't know, a Bingordan's portfolio and others. The success of those companies I think emboldened a new generation of game investors to start putting some of those large piles of cash to work funding studios. And that went on for a period of four or five years with a very high degree of aggression. And it was an interesting period because many of these new investors really had limited experience investing in the games industry. They were biz dev people at companies or in some cases professional gamers or lawyers or agents. They weren't production people necessarily or even more importantly people who had to make critical production decisions at an executive level, which is often necessary in the CEOs or founders of these startup game companies. And look, many of these investments made during this period would have fundamentally failed those three criteria. They pointed out earlier. Yeah, I mean, no competitive advantage or no meaningful competitive advantage. You know, the wrong kinds of founders, no desire to build anything other than a product. I mean, in a lot of ways, that's absolutely that's absolutely the case. But not having been through a cycle already, like coming freshly into the business and starting to deploy capital from that perspective. And again, often from a perspective of somebody already embedded in the games business, but at a lower level, that seemed like like, hey, that looks like what benchmark is doing that looks like what Cliner is doing that looks like what's what index is doing. And in fact, that was not the case. Yeah, it's there's another piece within all of this, which is because of zero interest rate, you had hundreds of millions of dollars flow into this industry. But in reality, there was there's no wind in the sales, you know, for any of these companies behind them. There wasn't a distribution shift or wasn't a technology shift. And so that alone actually makes it a really strange time to be playing maybe the most dollars ever deployed and venture into games. Yeah, it's a very interesting and important point, which is that a lot of these massive investments and massive inflows of capital into these new game specific funds occurred when we were on the decline in terms of technological innovation in terms of distribution innovation and really in terms of product innovation. And that isn't and that is kind of an illogical and interesting phenomenon that frankly hadn't really thought about before. Yeah, and look, it's as a founder is that makes your job a thousand times harder when you don't have wind in your sales to really push behind you to help make something successful. You're just going to be out in this ocean trying to paddle, but there's nothing that's going to push you towards it. And so I think about that a lot in this context where really the only reason why founders were attracted to start companies during this period was maybe the easy access to capital more than anything else. Absolutely. And then again, carrying on with the investor side of this equation, you know, one of the other problems was strategic. And there's really two components to this on the ones on the one hand, a lot of these firms, particularly the new game specific firms that that arose during this this period. And again, these companies motivated by the success of things like riot, like Supercell, like Zingga and others came in and started to deploy capital almost in a portfolio approach to risk, right? They they instead of really, really looking for the needle in the haystack, right? The Genova Chen, for example, in my portfolio, somebody who's a one of one who knows how to make games, who understands how to market and sell them, who understands how to position them and who's also doing something extraordinarily different than everybody else is doing. They started to deploy capital in what I'd call using the poker analogy a loose aggressive strategy, meaning they played a lot of hands, right? And they played a lot of weak hands often thinking that, hey, you know what? Nobody knows anything in the entertainment business. So we'll just like see if we can't through, you know, just the number of of chips we're going to put on the table, the number of hands of of we're going to play mitigate our risk in some meaningful way. Yeah. And we know how that's now played out and we're going to talk about that quite a bit in the rest of this episode. But in a lot of ways, it feels like the investors were blind to maybe the risks that they were they were taking. I could not agree with that more. I think that there was a lack of understanding of what truly makes games companies risky to invest in, right? Why they fail? The kinds of things we're going to we're going to talk about in the next section. And I think what happened was you often had investors funding the wrong people and the wrong kinds of products, right? And again, you look at the riot diaspora, for example, right? So bunch of companies will talk about several of them in the Deadpool portion of this. A number of companies were started by former riot executives or creatives coming out of the riot system. And a lot of these inexperienced investors rather than looking under the hood and trying to understand what actually made riot successful, they looked at riot as a finishing school for executives. And they figured, hey, if you came out of riot, just like, you know, general electric used to be back in in in the day where, you know, if you were a senior executive at GE, you were very likely to get a CEO job at another company. They looked at riot in that way, unblizzard and several other companies. And they funded these people coming out of these companies, misunderstanding fundamentally what made riot successful, riot, of course, was successful because of its people. But it wasn't like any one of these people or even any few of these people were solely responsible for creating the product in a way that would that that you could point to and say, they're the reason this game is successful. Instead, riot was successful because of a number of factors, including the fact that they made a moba at a time when the when when moba's, you know, were a unique and competitively advantageous genre to create. They did it with leverage distribution, not putting it on steam, but building their own payment system, their own way to go to market, marketing it in their own unique way to an already pre-established audience. A lot of these investments that were made in the riot diaspora that were made in these people who left riot had none of these attributes. And yet they were able to raise vast sums of money in the in pursuit of marginally differentiated strategies. Yeah. And look, we've talked about riot quite a bit on on this podcast, but riot in so many ways was right timing and and leveraging the distribution and the shift to free to play at a critical moment. And that's a lot of the core insight of that business early on. And if anything, the people who were there during those moments should really appreciate that. And when they leave, they should only be leaving to go and chase those very similar types of elements. Yeah, absolutely. It's really it's really interesting and yet, you know, unfortunately it it we'll see. Hopefully some of these work out, but as an investment strategy, not not, you know, look, I don't blame the people coming out wanting to get their studios funded. That's absolutely within their prerogative and good for them. I'm looking at this more through the lens of the investor and not really fully understanding the risks of funding those people, right? Further, and I think this is both a failing on the part of the entrepreneurs and also on the part of the investors because it's the investor's job as board members to be vigilant about these sorts of things. And that is that a lot of these companies utilize their capital like work for higher developers, right? They aimed their burn rates at completing production rather than the bigger picture of creating long-term viability and a valuable company. The number of companies that I've seen that come to me and look for funding where they're like, okay, we've got enough money to finish the game, but we don't have enough money to launch it is appalling, right? Because again, if you're running a company, you realize that finishing the game is only part of the equation, right? There's a whole bunch of other factors that will go into making this game successful. And if your burn rate is such that you run out of runway at the delivery of the gold master, that is work for higher developer thinking. That's like, oh, wow, we're working for the publisher. Okay, we're done with the product. We can hand it off and now we'll get more money because we finished the product. And it doesn't work that way. In real business, you finish the product and the financier who would then fund additional runway for you is going to look and say, hey, is that product actually successful? And if you don't have the money to take it to market, guess what? That product's not going to be successful. Yeah, I wonder if it's it ties in a little bit to the mindset of shifting towards premium games on PC as an aside here. In their mind, it's like, okay, let's just put it out there. We're going to spend all the money. We'll put it out there and people will come. We know how that plays out. But it is very jarring how many companies truly optimized for just let's get the game out. And look, that might even be by the time there is a series B, which is a whole other topic. But just simply at a seed round, let's get to a demo, which is even maybe crazy because it's like, you're really hoping the series of investors in the market, not just the games investors, the other series of investors are okay with that and understand that we're going to fund another 18 months to get this game out. It's really, really difficult. And so again, I think crucial for entrepreneurs to understand that simply putting 100% of the dollars into getting something really, really polished on the screen is not going to ensure your success. And in fact, may actually auger your failure. Yeah, there's probably some analog to traditional software, which is maybe over funding these things, which is, I think the average games founder, if given more money, is going to spend more time trying to polish it before giving it out, which is rational. Rather than giving themselves six months of runway to have a product in market to get consumer feedback, to test monetization, et cetera, et cetera. Exactly. Right, exactly. Now, let's turn to the notion of how venture back companies actually fail, right? And it's an interesting topic because it's not as obvious as necessarily you think it is. And in fact, it usually takes a really long time for companies that have raised significant amounts of money to actually fail. Across the venture capital landscape, there are countless examples of companies with big war chests that have raised significant sums of money. And they just keep pivoting to new businesses or narrowing their focus on subsets of the business that they had originally decided to enter. And they kick the can a little bit further down the road. They downsize. They let go of some of their employees. They reduce their burn rate. They pivot again. And again, I've been involved with and have seen companies like this that can go on for years and years and years without being able to raise any additional capital, but just really marshalling their existing capital to keep themselves alive. And it sort of reminds me of my former partner, Peter Fenton's used to have a saying where he was basically like the only sin in venture is when you're is having your company run out of money. And yet in the games business, I think the combination of the extraordinary cost of AAA development. And really, as we spoke about just immediately previously, bad cash management at the strategic level, at the sea level. And really the harsh reality of competition in the games business where customer acquisition has become an expensive and really long term project, right? It's not like the old crescendo marketing days where you put out the great product and everybody rushed to the stores to buy it. And in the first couple of weeks after launch, you really had a sense of what your trajectory was. That doesn't happen anymore. And you really need capital during that period to experiment, to modify, to keep your development team on, et cetera. And so I think there are unique aspects of the games business which lead to specifically bad outcomes. I think there are more companies running out of money in the games business than in in again, I only think I only know this anecdotally. But I would say in my experience, I feel like it's more it's more of a factor in the games business for companies to basically exhaust their treasury and run out of money than in other businesses. I think that's right. And I think it's a might stand from the fact that a lot of these founders sort of went to markets saying they want to build their dream game more than anything else. And so it's really built on the conviction of I'm all in on getting this game out and hoping that it works when we know how that plays out. When it's when it's not thinking about, hey, let's get a game out, learn, iterate, maybe shut down and still have runway or let's go spend a bunch of money on distribution, arbitrage is on some level. Yeah, I mean, look, I can share examples from my own portfolio, right? And they and you look at discord, right? Discord started as Hammer and Chisel. It was a game studio. The first game came out. It didn't work. But Jason Citroen, who was the CEO, was extraordinarily clever and understood this had been in the situation before. This wasn't his first rodeo. He had plenty of dry powder when we when that game clearly wasn't working. He did his best to try and turn it around. But at some point, he really he realized that like this was not an effort that was going to merit further capital investment. And so he marshalled his dry powder. We went into the boardroom and we started to think about other ideas that we could do with the capital. I went back to Tencent, who we had done a deal to license our Chinese rights for that failing game to and got them to help extend our runway and to give us a little bit of relief on the delivery of the game that we were clearly not going to be delivering at that point. And in that space that he had where he could keep a skeleton crew together and and start working on new things, he came up with discord. Yep. Right? Like miracles can happen in this business. Yeah, but when you have a founder who knows how to how to utilize capital appropriately. Yeah, and look, you need a founder who is not necessarily married to the game one that they're trying to build. And and that's the only thing that they're focused on. And look, that can work. But in a lot of ways, this is the idea that you're just going to one shot this like vision out there into the world and everyone's going to love it is actually just sort of a myth. It's naive. Yes. Yes. It's what it is. It's naive. Yeah. Because it does happen. It's not a myth. Right? Fair, fair, fair. There might be a few examples of it. I think there's a couple other things that we should mention in this in this case of how these companies fail. I think one of the things that founders often neglect and it's something I always like to remind them when we're when we're talking about early stage financing is the problem, which I'll call the problem of the naked bee. It sounds a little more salacious than it actually is. But here's here's what it means. It means that in the typical trajectory of the financing of a games company and I've been through this now so many times that I've seen this play out in reality. You raise your seed, you raise your series a typically you don't have enough capital with your series a to make it all the way through to launch and at some point pre launch you are going to potentially immediately post launch but usually pre launch you're going to have to raise additional capital and you're going to have to do that with no market validation. There's no way you're going to have customers playing your product and paying you in a way that's going to make your series be investor comfortable with the mitigation of risk that's usually associated with the series be round of financing and as a result you go into that round naked meaning you go in front of the venture capitalist and they ask you what progress have you made since the series a and all you can really talk about usually is production. Hey, we've completed x percent of our art. We've completed x percent of our design. We've completed x percent of our engineering and you can't really point to anything else and as a result that series be that naked series be can be some of the toughest money to raise in venture. Yeah and look it's because of inflated round round sizes and prices and valuations and all that the series be in a lot of times is not a cheap route. No, it's usually a big route. Yeah, and you know you're saying I need 30 million dollars at a 200 something post or whatever that is which you know what's called that roughly you're you're selling a decent chunk of your business but for the investor you're taking on real risk at a time where there's no proof points necessarily that anyone actually likes the game or that people are going to play the game. Yeah, worst case you're probably investing at the post money valuation of the series a and best you know worst case for the for the person raising money best case that would be for the investor worst case for the investor you're raising at a multiple of the post money valuation of the series a and as a result you're really taking on risk because you're downside here. I mean obviously there's you could go to zero but also even if it works your ownership interest in the company is going to be a sliver of what the series a investor's ownership is going to be. Yeah and look if you actually take time to think through the number of people that can write a 30 million dollar series B check in games there's not many there's actually maybe less than a handful that really have an appetite and and what that's ultimately led to in the past couple years was most people going to actually try and kind of publish your deal at this point at that point or you know there's been another interesting solution and that is I think some of these game specific fund partners who really looked at the business said hey if the if we don't want to expose our companies to the risk of the naked series B and so they wrote monster checks at series a right instead of the usual sort of 15 to 20 million dollars that's kind of the current norm for non game companies in at the series a round and non AI companies obviously which are insane at this point but you know in typical historical terms I mean we you know we when I started 15 years ago it was more like five to 10 now it's probably more like 10 to 20 closer to 15 to 20 for the series a but that's not enough to finish some of these games that have 50 60 million dollar budgets and so rather than expose their companies to that risk the series a's investors were passing the hat and raising a 30 to 50 million dollar round thinking that they were going to get the game done on that money and that led to its own set of problems because again with these lat these inexperienced developers who were not thinking about their companies big picture and we're not thinking that this money that they were raising was really going to have to get them through to some consumer proof point that would allow them to raise at a real multiple of previous valuations it just led to spending more money on the product and it accomplished exactly the opposite of what these young investors were expecting. Yeah there's actually is something I've talked about quite a bit within games which is there's very few growth rounds that happen in games in that typically it either works or it doesn't at a certain point like once it's out there in the world the games that work they really cash flow and so weirdly raising a series C or a series D unless they're the very good narrative of why you why you need more capital in most cases those things should not need that much more capital once they're out there in the world. I agree with that, 100%. Let's talk a little bit about why the game's business is challenging for investors and wrap this up. And then we can move on to talking about some specific companies. One of them is the difficulty of doing diligence. Right? You know, part of the job of the investor is to not just take what the founder is telling you in their 12 or 15 or 20 slide deck as the gospel and to go, oh wow, and write a check, right? I mean, part of the job of the venture capitalist is to look under the hood, to look at adjacencies, to look at competitive companies, to look at the market as a whole, and to try and come up with an actual thesis for why this company would outperform the market, why this company was a better investment than the average company in the space. And while game's investing is not entirely unique, it does have attributes that are, that make it very similar to other categories of venture investing, particularly software, consumer oriented software investing. It does differ materially from those other company strategies in a way that I think makes it uniquely difficult to diligence. And I think to understand the difference, it's worth thinking about the concept we talked about at length in our financing episode about, and something we mentioned at the beginning of this episode, which is this idea, this difference between building a valuable company and building an invaluable product. And I think that when you are diligenceing a company in this space, the venture investor tends to focus on the quality and the ambition of the founding entrepreneurs, a good venture capitalist, right? That tends to be one of the most important things, almost always, you know, you hear some form of a homily in the venture business around, we invest in people not products, we invest in people not ideas. The people are the thing that make companies important. You want to invest in, you know, A's higher A's, B's higher C's. So there's like a million versions of the same story. But at the end of the day, it comes down to what the quality of an ambition of the founding entrepreneurs, right? In addition, obviously the market dynamics, competitive modes and advantages, exit opportunities, all those things kind of factor in. Publishers and, you know, publisher financing, be me alternative to venture financing. Publishers are set up to evaluate the market potential of games. That is what they do. Many, some of them don't do it particularly well, but that is their job. They are there to evaluate whether products will work in the market. And that is very different, I think, from the way the venture capitalists approach holistically investing in game businesses. But it goes back to your work for higher point earlier of that's how most founders are actually spending money. And that might be a direct reaction of them, maybe you spend too much time with publishers or being more in the publisher mindset. For sure. And historically the publisher mindset, being the dominant mindset of the way the capital was distributed through the business for a long time, venture was really absent from the games business. And in fact, if you wanted to get a studio financed as an external developer, you had to go to publisher financing route, right? I mean, that was the only vehicle available to you. But what I find, what I think is particularly interesting is in order to make a venture investment in games work, you both have to nail the product and you have to nail the company side. And so often the people at the conventional venture capital firms who were tasked with diligencing these companies were capable of diligencing the people and the market and some of these other things, but woefully inadequate at diligencing the product or vice versa. But you very rarely had that unique combination, like a guy like Bing Gordon could bring to the table as an example. I mean, not to use the goat as the example, but Bing has this unique ability to not only see markets and strategy and founders, but also to drill down into what makes a product fun. And whether or not this game will ever be able to strike a chord with audiences. And I think that is, again, one of the things that has made venture investing so particularly difficult in the game's business and so fraught with failure. It requires taste on some level and the same way that you said earlier that it actually requires founder level taste as well on the product side. I think investors also-- and maybe this is a little bit of the fallacy or the trap that a lot of investors fall into-- is they think that they have good taste around what is a good game or a good product that the world wants to see when in reality time might just be completely false? Agreed. So before we begin looking into some of these specific companies, I just want to say a couple of words of caveat, which are number one, we're picking and choosing here. This is not comprehensive in any way. This list of companies we're going to talk about. We used pitch book data generally to confirm some of the anecdotal understanding that we had of companies and how much they raised and what the valuations were. Obviously, pitch book can be inaccurate at times. They don't have complete information. They're dependent upon publicly available sources just like we are. They're a bit better at it than we are. So we're deferring to them than using our own anecdotal understanding of what's going on. We aren't calling the companies or calling their investors for confirmation. So look, there's plenty of massive failures in the game's business that we're not going to talk about. And we're using these companies really just for-- because they're interesting examples, not because this represents in any way a comprehensive list of the companies in the space that we think are potentially in trouble. I think further, look, Blake and I are venture investors. Failure is part of the model. I'm often told by my peers that if I'm not failing occasionally, I'm not taking enough risk. So in no way are we talking about these companies to pretend in any way that we're smarter than the venture capitalists who made these investments or really casting aspersions on the founders who really, in many cases, did their best and just didn't make it over the hump. In fact, I'll be talking about a company in this list in which I was an angel investor, which I had a lot of belief in when it was an early stage company. And so again, we include ourselves amongst these investors as we're not immune to these failures ourselves. So please don't view it that way. We're not going to look at everything that went wrong in the games business, but we want to look at some of the really big swing failures. And I think part of the reason we want to look at the really big swing failures is because I think it's instructive for founders who are now going to venture capitalists today to understand that the venture capitalists they're approaching, whether at firms like mine that isn't primarily a game's firm, but has had a track record of successful games investing or whether they're going to the griffins, the galaxies, the anthoses, the bit crafts, the companies that have dedicated game portfolios, the A16Z game fund, for example. And all of these cases, these companies have probably either been aware of or have experienced catastrophic failure in their game portfolios. And remember that when you're pitching them, obviously everyone wants to focus on what could go right, everyone wants to focus on the optimism of the new company. But a lot of these venture capitalists that you're pitching as a game studio founder are suffering from post-traumatic stress disorder. In many cases, from this period where we're not talking about kind of a series A company that you have 10 to 20 million dollars in going bust. We're talking about companies that have raised 50, 100, in some cases we'll talk about not necessarily studios that have raised multiple hundreds of millions of dollars and have torched that capital. And that leaves big gaping wounds in the venture funds. We're not going to get into the way venture funds are structured necessarily in order to explain why that's the case. But trust me, filling in potholes of 50 to 100 million dollars, even in a billion dollar fund is a massive, massive problem. Yeah, and look, these companies, they were, in many cases, trying to go after ambitious DCs and genres. But ultimately, they did not work out. And it's important for everyone to learn from these lessons. And my hope would be that these founders would also want to be talking about these lessons. Agreed. So interestingly, we're going to start the Deadpool. Because most of the companies that we're going to talk about in the Deadpool are not dead, right? These are companies that it's a Deadpool for that very reason. It's companies that we are looking at and saying, wow, there's attributes of these companies or things that we're seeing in the market, et cetera, that make them feel like they are risky at this particular juncture, that there's a significant risk of failure. But since we put our list together back in the fall of the companies that we wanted to pay attention to, a couple of them have actually failed, or at least failed to return capital to their investors, which is really the way we're talking about failure. Obviously, some of these companies get acquired or accolired or whatever, and they are still functional within some larger entity. But from the perspective of the investor, they've torched capital. And that's what's really important to us. Not the fact that, okay, this game is still being published by somebody else and maybe has another chance at life with in that way. It's more, did this work as an investment? Yep. So the first one, because it's the most recent, because literally just a few days ago, this company announced that they were ceasing operations and shuddering their doors. is mountaintop. Yep, and that's Nate Mitchell. Who's a great guy? Yeah, just really, really great founder. I mean, he was one of the co-founders of Oculus to talk about just like someone who understands business and shipping and execution. He would check all of those all day long. He ultimately went to market, trying to build a 3v3 tactical shooter, which is a very tall order in many ways. And look, FPS is maybe the crown jewel of all genres to try and go after. And so I respect to swing. But Matt, I mean, they've raised close to $90 million. Yeah, I think $86 million and raised $20 million just a year ago from Anthos to fun when they were going to market with Spectre Divide, which was that tactical shooter you mentioned. And they got season one out. It clearly didn't resonate with consumers. And they couldn't raise additional capital to fun season two. And unfortunately, and sadly, they had to shutter. But I really, it's what if there's anything that you would look at and find fault with, it's that $20 million investment that was made a year ago on launch. And one has to really question what the bone structure of the company looked like at that point. And whether that $20 million investment was really basically keeping something that was already potentially going to fail, alive just a little bit longer. And I think in that same vein, the other company that we originally had on our list that has failed to return capital to its investors is Singularity 6. And that's a company that I was an early angel in. It was a group of the founding group came out of Riot. It was one of those Riot progeny. The pitch book shows it as having raised 50 million in capital as an insider. I can say that I think the actual capital raise was significantly more and probably closer to what mountaintop raised. They put all of this capital into a cozy sort of MMO RPG, kind of a Zelda meets animal crossing kind of game. Beautiful world, like very, very clever. And frankly, I've been thinking about this kind of persistent, more multiplayer, more social version of animal crossing for a long time. And I do think that there is an opportunity in the market for a product like this. But this is, I think, the classic case of not understanding that go to market and that that first six month period after launch, and maybe even 12 month period after launch, is really crucial to have a ton of drive powder because without it, you put yourself, you put the gun to your head where you've got an internal burn rate. And this company had a significant internal burn rate going into launch in order to get the product done. And they couldn't slow that burn rate down fast enough to allow any revenue that was being generated to catch up with the burn. And so you're just depleting your treasury month after month after month until it became untenable. And the company was sold to daybreak games, which is aggregating a bunch of these live service game companies and sort of running them for the service fees. Essentially, like a hotel management company that's running these life service games, actually, kind of a clever model. And it was an undisclosed sum. But as an investor, I can say with some certainty that it did not return capital to investors. Yeah. And look, it really is the classic tale of, and this is, there's a little bit of a curse of when you raise this much capital is you naturally ramp your team size up to match that. And so when you're at 100 employees at the time of launch, and really you were, you know, to our earlier point of you're just trying to, you raise enough money to get the game out. Yeah. I'm not talking about this company in specific, but let me just say in an anonymized way, I've looked at companies that were pre-launched, that were spending at a annualized run rate of $40 million a year. Like, yes. Right? Like three and a half million dollars a month in burn. Wow. And like that, that is an astonishing, astonishing number from a venture capital perspective. Okay, maybe somebody in a big company making call of duty or FIFA or Madden or whatever looks at that number, or particularly the grand theft auto team looks at that number and is like, that's our craft services budget or whatever. But like, for fuck's sake. I mean, if you're, if you see your, your spend starting to creep up into that range, you are going to be marked for death. Yeah. And look, what that really means is you're going to run our money. Hopefully, hopefully you get the game out. And if you do get the game out, then you basically have no runways. So you're like, we better make three and a half million dollars this month to meet payroll. Otherwise, this thing is dead. Or we're going to have to go try and raise capital and we're trying to raise capital on your knees again. And I think interestingly, as we now turn to some of the companies that I would call either on life support or whistling past the graveyard, this next example is precisely that, right? I mean, this company called Lodi raised almost 42 million dollars from a collection of really, you know, experienced game investors. And the reason why, I mean, I don't have a lot of specific information about their, about their traction or anything else. But that, but one thing here really stands out to me and that is that their last round, which was four million dollars, it was done roughly a year ago, I think, was done at a nine million dollar post money valuation, which means that they sold 44% of the company to raise four million dollars, a company that had pre, that has, that has, that had previously raised like 35 million. And when that happens, that is generally a very bad sign because that looks, that looks like a predatory late stage investor who's just going to give you enough runway to try and get to an, to an exit. Yeah. And look, Lodi's also, you know, X-rayer team, which take that for what you will, but it's more, far more of 40 million dollars. And the fact that you and I can't even talk about the game itself that's out there right now means something. Yeah. You know, they had previously raised their significant round of financing before this last round at nearly a 90 million post money valuation, which means that they went from 90 million dollar value to nine million dollar value in that period, which was less than two years, I think. And as a result, that is a catastrophic situation for their investors. Based on our list is in, is another company that was making casual games, an interesting company again run by industry insiders, people with a long history in the business called that's no moon. The company's raised $110 million to make essentially narrative driven games. So really try and do something from a product perspective that would, it would be hard to necessarily point to things outside of things that the margins in the games business like telltale and some other things like that that have succeeded with narrative driven games. I think you could argue that the last of us in some of the Sony games were strongly narrative driven, but obviously with massive AAA budgets and were real eye candy as well as being strongly narrative driven. But nevertheless, they raised a very significant round of financing. I haven't really seen much traction from any of the products that they've been involved in. And again, like a loady, they raised around 18 months ago of just $10 million, which if they were operating from a position of strength, a company that had previously raised $100 million would not be raising a $10 million round. That looks and feels a lot like and extend the runway round to try and get to some kind of a result or to try and roll the dice on some new product. And again, that's typically not a great fact. Yeah, it's crazy because when we were working on the side and never even heard of the studio before and that just tells you how crazy this overall market was. Yeah, but they could raise $100 million. Yeah. Again, we were laughing about this before we started recording today. But when I took my company public back in 2004, we got to our IPO with dry powder on $31 million to an IPO. Yep. Splitgate or 1047, it's referred to both ways. I think the company is called 1047. The product is splitgate. This company raised $130 million to make a multiplayer shooter. And they launched it back a couple of years ago. And the launch of splitgate one was kind of a train wreck. It actually had a bit of traction with consumers, interestingly enough. I think it actually got to like 500,000 players or maybe even more, but their back end technology seemingly couldn't scale. And it looked like they ended up in a situation where they were a victim of their own success. And the product effectively collapsed with the number of players that were trying to play it. And really, they never ended up getting the product out of beta. Yeah. And splitgate was like a one was almost like Halo meets portal on some level. The game looked good. And it had a lot of the right sort of marketing out to gate. But like you said, it sort of just fell over itself. And yeah, we're hearing splitgate 2 is coming. But this year, in fact, in 2025. And maybe there's a possibility. Look, we've seen it happen before with some of these independently produced games. Look at No Man's Sky. I mean, again, in the same kind of situation that's and we would have said, no man's guy was dead. And yet, you know, they made changes, they addressed concerns, they rebuilt it in the way that they needed to, and it's become a bit of a minor hit. - Yeah, I hope they take their learnings from it. It's a maybe a different time and market from when they initially launched it. And so we'll see, for any company to raise over $100 million and for it to fail, would be cast for our country. - I'm gonna say the same thing, but for the creators, it's a real problem for the industry. - Yeah, and so look, selfishly, I wanted to succeed 'cause we need more success stories, especially once it have raised lots of money from venture investors. - The next company we were gonna talk about is Bossa Studios in the UK. This is a studio that, you know, it's award-winning, one of BAFTA. I've come across them a number of times. I think they were working on something originally in the improbable engine, which we will talk about later when we talk about non-studio failures. This is a company that raised over $50 million and they still exist in sort of a ramp form. I think they're still making games, the studio, like as a not a publisher, not an integrated platform-based publisher, but simply as a developer working for publishers, but they sold their pre-existing business to TinyBuild in late 2022 for like $3 million. After having raised $52 million. And there were some really good investors in this one. I mean, Atomico, who's done great in the games business in Europe, LVP, our friend David Gardner, and friends, one of the smartest guys I know in the games business, really great guy, and Makers. Again, I just saw Jay a few days ago, one of my favorite venture capital companies in all of gaming. And then obviously money from NetEase, which we could talk about at some point in the future, but is looking like more and more dubious as time goes by. But those are the investors who took the L on this one, but a big crater this one. That one, it's crazy, 'cause when you look at the games, they feel almost, indeed, they feel more casual. And so it was, it's a little bit perplexing of like, how or why did they even want to raise that much to begin with. And then the last one I'm going to talk about in this particular category is Shrapnel, coming from a company called Neon Machine, and again, like with SplitGate, it's sometimes referred to as the company referred to as the name of the product and not its legal name. This is a company that raised 30 million bucks, probably closer to 40 million, pitch book has them at 30, I think, looking, just anecdotally at the evidence, it looks like it was probably closer to 40 to make a first person shooter with a web three component, with a token. This one was a weird one, because this one ended up in litigation between its initial investor because the web three component of it provided a degree of liquidity for this company that is unusual for these companies. And sometimes that can lead to some interesting behavior. There are companies out there and I think this company I would put on the list. Gala is another company I would put on this list, are using their token almost like a Kickstarter to fund the production of the game and to pay salaries and stuff. Like it's a very, very risky strategy to play that way with your token. And anyway, they ended up in litigation here because one of their early investors pledged their tokens as part of a bankruptcy workout. That the investor was going through a bankruptcy and pledged their tokens in the company and started selling those tokens in order to pay off some of their bankruptcy debts. And I think that started like putting pressure on the underlying currency, the company, then I don't know all the facts. I haven't read all the court documents, but it feels like that bankruptcy made it hard for the subsequent investors who had agreed to fund further development of the product to actually get their money in and it helped things up in a weird way. And it resulted in a bunch of ugly lawsuits back and forth between the founding team and their investors that ultimately led to the departure of almost the entire founding team and the creative team that was responsible for the Schrapnell product in the first place. So that has had to be restarted. Apparently it has been and I've seen some PR come out that well, we're still on track for a 2025 release, but I've seen those kinds of press releases before and I'd be very dubious about whether or not I believe them under these circumstances. And again, this is one of those cases where the product looked decent. This was not one of those things where it looked like a total scam. The product looked like it probably had legs, probably didn't look like a big hit, but it looked like it could have been a minor hit, but it just got sideways and it ended up failing. And I want to mention this one in particular, even though it's not one of the bigger ones on the list because I want to offer a little bit of a public service announcement to my peers in the venture business and really to companies in general who are getting involved with trust relationships with individuals, the CEO of this company, the former CEO and any event who's now departed and has gotten another job somewhere else in the industry. With somebody that I worked with 10 years ago when in my role at benchmark and somebody that I've known going back 30 years to when he did work at Activision in the '90s. And in my professional dealings with him, I found him to be a undistinguished sort of middle of the road journeyman. He's a relatively creative person. But in mine and my family's personal dealings with him, he's proved himself to be a person of questionable moral character. And he's had three significant positions since he worked with me and yet not one of the companies who hired him or funded him called me for a reference. Despite the fact that he lists working with benchmark as a significant achievement on his resume. And again, young venture capitalists call references. It's not we're not going to steal deals from you. It's like, even if you have to wait until the last minute, it's really important to reference these people. And I really find it astonishing that somebody who's who so obvious, not like he hid his relationship with me in any way. And yet nobody called me about it. And they might have done it anyway despite what I might have told them. But boy, they might have had a chance not to. In this last category that we're going to breeze through pretty quickly, these are, I think, too early to tell. But where you and I both have kind of spider sense that's tingling and we're a little bit concerned. And again, some of these things may work out to be huge hits. So I do not in any way want to cast dispersions on any of these companies. But there ones where I have a tickle in the throat that suggests to me that something is amiss. Yeah, I think they might just rhyme with some of the earlier cautionary tales that we talked about. And that's largely maybe why there's the tickle in the throat here is they just feel like they're down the same path on some level. Yeah, I mean, I think it's the, it's this kind of ambience awareness of pattern recognition, where we've seen companies with the same kind of structure and the same kind of trajectory. And it just feels a little off. And I think the first one, and I think it's one that would surprise a lot of people in the venture community. And also in the game community is theory craft. This is a company that was was the darling of the riot diaspora. Joe Tung, who was a creative VP at riot, is extraordinarily well regarded by all accounts. I've not spent a ton of time with him. But seems like somebody incredibly accomplished. And actually one of those rare game CEOs who kind of had entrepreneurial attributes, like who kind of felt like an entrepreneur, good sales guy, good promoter, in addition to potentially being a really good manager of a studio. And they raised at least by pitch book numbers $87.5 million. My own anecdotal awareness of this is that it was considerably more. I may be including some of the pre-sales that they did to sell the foreign rights to the product, which they used as a capital raising strategy. In any event, the title that they were putting all of this cash into Supervibe, which was sold to both investors and to partners as the next League of Legends, is out. It doesn't seem to be performing particularly well, declining numbers on steam from what we can see, not a lot of heat in the industry, a lot of disappointment from people that I know who were associated with it either directly or tangentially. I don't think this is necessarily high on my list of companies I would bet on in the Deadpool to die, because I think they've raised enough capital and have enough strategic now so to really maybe pull a rabbit out of a hat here. But it may not be with this product. And I don't know what their capital structure looks like. And whether or not they've got enough dry powder to pivot or to have a second product out there that could be a second bite at the Apple. Yeah, I think a lot of this hinges on how much did they spend to actually build Supervibe. And if it turns out to their earlier points, that we've really tried to stress, that they spent most of that just to get the game out. Yeah, if this company has a $3 million a month burn rate, I'm putting it higher in the Deadpool. Yeah, yeah. But the reality is they do have a real big team. And the game is out. And so they're going to have to make it. make some really tough decisions with the next couple of months. - The next company, again, is one where we have a lot of personal goodwill toward the team and we want it to work, but it's starting to feel a little dukenucum forever and that is bonfire. Bonfire was a company started nine years ago by Rob Parto, who was responsible for the hearthstone product inside of Blizzard. Many other important things was a significant creative executive at Blizzard and former Nexon, exec Min Kim, who I've known personally and who I really quite like. They raised $80 million and they've been making this multiplayer game that they've described as hard to describe, but like something you just have to play. Again, that makes me tiny bit suspicious. I think you should be capable of describing it in a way that makes me feel like playing it, but nevertheless, if you just tell me I gotta play it in order to really appreciate it, I think that's gonna be somewhat limiting your go-to-market, but apparently the game is nearing completion and about to be brought to market. One other sign that we've seen recently that wouldn't make us extraordinarily optimistic is the fact that it's rumored that Riot Games who held at least the North American publishing rights to the game is no longer the publisher of that game and that they've allowed Rob and Min to shop the game to other publishers. Doesn't feel like a real vote of confidence could suggest a strategic change in whether Riot really wants to do third party publishing and may have nothing to do with the quality of the product, but nevertheless, it's one of those things that tickles the throat. - Yep, yep. Oh man, this next one is, every time I, someone brings up this company, I'm always like, what is this, but also, how have they raised this much? And that's the company Builder Rocket Boy, which is now raised over $300 million. - $308 million according to Pitchbook. And because they're in the UK, they have to actually report, private companies actually have to report on, and so some aspects of their income statement are actually available online and Pitchbook aggregates that as well. And at least by their data, it looks like this company is burning somewhere between 50 and 75 million dollars annually. And again, if you've been listening to this podcast up until this point, you will know that that is a really, really dangerous sign. And how did this company raise $300 million former GTA executive, right? Is the leader of the company. And they were building something that was not crazy. I mean, like one of these sort of games with UGC, you know, very strong UGC construction set, adjacent, in fact, I made an investment like this in a company called Manticore that is making a game on the Unreal Engine, but also a very strong, which has a very strong UGC component. And so again, I think this was an interesting idea. I think it was insanely overfunded. - Mm-hmm. - And I don't see a lot of adoption for everywhere and doing a quick Reddit search. I find topics like, is everywhere dead? Is everywhere still viable? Like, it doesn't really feel like there's a lot of momentum behind this product in a way that at least is available to the public to see. And so I think this one belongs on the list. And again, if it goes, this is a big one. - Yeah, yeah. There's a couple of others that maybe would say are earlier on in their journey. So they probably have another one to two or three years of runway before we're really gonna know what happens with these studios. But these studios-- - Their studios where like the, we've been hearing leaks from insiders that have told you and I things about maybe the compensation structure or other things that are happening inside of these companies that again, even though they're very early and it would be impossible to suggest that they, you know, that they're on any kind of a downward trajectory, raise one's eyebrows. - Yeah, and look, I think there's again, maybe to a fault you and I are trained in pattern matching. But these do feel like they rhyme specifically around maybe the overfunding portion of this that rhymes and maybe hints towards what is the sign that this is going to break the structure or the pattern before? - Yeah, I would say let's not name these companies, but they are companies again that if you go out and look at companies that were started by either former rioters or people whose claim to fame is as a second or third designer on a game that was made by a very famous lead designer, you'd find them. - Yeah, this episode, you know, it's not meant to be ominous or on a dark note, I think in a lot of ways, it's more of a cautionary tale than anything else. And for my vantage points and maybe what I would just tell potential founders out there and also other investors is like, it's relatively clear that within the games industry, the more venture dollars raised does not increase chance of success. And so it's-- - And maybe the opposite is actually true. - Yeah, exactly. I mean, the indie side would certainly prove that raising no dollars is maybe the best way to go about this. And so I think it's really important just as an industry that we learned from these versus continued double and triple down on it. - Yeah, I would say for me, the less than I take away from this is that across the board, we have to be doing a better job training founders in the games business to be better stewards of capital. I've had the great good fortune of working with some founders like the Riot founders, like Genova Chen, like Jason Citron and others who are in fact excellent stewards of capital and who really understand how to strategically deploy that capital in the service of value creation. And I think that is a skill that is preciously lacking in a lot of game founders. And one that we as venture capitalists and as board members of these companies should really invest in trying to solve. - I couldn't agree more. - Cool, thank you Blake. - Thank you. - Onwards. 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