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For many, nowadays, the term “games” might evoke images of battle royale arenas and names like Fortnite or League of Legends. But gaming as an industry didn’t always look this way. What’s now the popular model of Massive Multiplayer Online (MMO) arose from titles such as World of Warcraft, Starcraft 2, and Dota, which, in the 2000s, completely revolutionized both gaming and investor paradigms.
These seismic shifts in the interactive entertainment industry led to a wild, fast-changing era for games in the 2010s. Minecraft and Fortnite created household names, and streaming took off on platforms like Twitch. Swept up in the mania, I enjoyed playing Skyrim and League of Legends.
For Archie Stonehill, this was a magical time, too. As a teen, he would find renewed passion in gaming playing the Last of Us, a narrative-type apocalypse game, and The Witcher 3, an open-world fantasy role-playing game. He explained “I’ve always thought that games were the most superior art form in the world because they can do things no other art form can. They embrace user interactivity, force the player to make moral decisions, or give them a sense of accomplishment when they achieve something.”
He loved games, but he never expected to go into them professionally.
When Archie arrived at Harvard in 2013, he initially experimented in theater and the arts. In a serendipitous foreshadowing of unexpected career choices, though, Archie found himself attracted to consulting. In fact, he hadn’t even known what a management consultant was until a startup internship his sophomore year.
“A lot of the other interns there were business school students. A couple of them were consultants. And I thought, these guys were really smart and the way they thought about business was really interesting. They taught me so much, and they told me about what consulting is like.”
So he gave it a shot and applied for several positions his junior year. After a great introduction to McKinsey, he decided to go there for his summer internship. “If I had influences, it would be the people that I met at McKinsey my junior summer,” he reminisced. “It was the first time I had meaningful mentors.”
When he graduated he took an offer to work full-time in the firm’s Private Equity group, which proved to be a daunting challenge. The clients were sharp, demanding, and had short project timelines. Archie spent most of his early time doing due diligences: researching and problem-solving which helps clients make investment decisions.
It was tough, but McKinsey taught Archie a lot about himself and his abilities—he earned a promotion to engagement manager just 1.5 years in. “It’s just such a phenomenal place for personal development,” he told me.
After two years, whetting his appetite for massive investment deals, Archie set his sights on entering private equity full-time. A last-minute decision changed everything. An ex-McKinsey mentor had founded Makers Fund, a venture capital firm that focused on interactive entertainment, and offered Archie a job. While VC’s uncertain, relationship-heavy investments seemed diametrically opposed to the analytical depth of private equity, the opportunity was undeniably enticing. He could finally combine his love for games with his professional career.
Archie’s split-decision would influence his entire career path, much like McKinsey did. “It was more that I was entering games than VC. If someone had said you could join a games VC fund or join a games private equity fund I probably would have chosen the private equity fund. But I ended up loving VC.”
Archie’s first challenge was the dramatically different investing approach that VC demanded. In VC, he was dealing with early-stage, pre-revenue companies and taking on a considerable amount of risk. He reminded me, “generally private equity companies want to make money on every single one of their investments. Some VCs pretty much assume that they’ll lose out on eight or nine out of ten of their investments and make most of their returns from the one-in-ten hit.”
And ironically, even though he entered Makers Fund to invest in games, the games he was investing in weren’t the ones he grew up playing. When he started, gaming had already begun its dramatic evolution in focus and model.
The types of games we invest in are multiplayer. They’re often free-to-play. They’re what’s called service games. So when you play The Witcher, you play it once, then you maybe play it again. But you only pay for it once and play it. In a game like League of Legends or Fortnite, however, it’s free to play and your relationship with that game stretches over years. And if you’re the developer, you’re monetizing over the player’s lifetime as opposed to the initial purchase.
This new model, Games as a Service, was a complete paradigm shift both for investors and gamers like Archie. Instead of releasing a game every few years and receiving a lump sum of unpredictable revenue for each game, companies like Epic and Riot focused on consistent improvements to the same game, which is more appealing for private equity exits or public markets; the revenue is forecastable, visible, and guaranteed.
As Archie put it: “It’s a much more attractive company to investors if you know exactly what you’re going to make next year.”
While Archie adjusted to the new style of investing and games that were being pitched, he also began developing his own niche and skills. Most VC investors are often ex-founders or have startup backgrounds, and Archie admitted he felt self-conscious at first about his comparative lack of experience. But his analytical, consulting-based approach to investing also brought value to the table.
“I’ve kind of learned to trust that mindset of problem-solving a bit more, to know my strengths, and not focus on my weaknesses. I’m non-technical. I’ve never designed a game. So I don’t pretend to have done so when I speak to founders. What I have done is help businesses scale and solve problems.”
Archie attributed that level of skill and analysis to his time at McKinsey. McKinsey “doesn’t teach you the solution to a problem, but how to get there,” he explained. “They teach a way of researching and breaking down a problem into its constituent parts.”
For example, when he looks at a company, he might investigate market size to determine if a company can scale to a meaningful extent. And he can use his time-tested problem-solving toolset to efficiently gather information, following the 80:20 rule to maximize the amount of intel obtained from the information he starts with.
Archie’s investing strategy is tailored to his own life experiences, but one thing he shares with all other investors is the ability to see each game within the context of the whole industry. Because he sees so many games, he has a finger on the pulse of the major trends.
Here are some of the most interesting takeaways I got from the interview.
First is the creation of the metaverse—a collective, virtual shared-space. We’ve all shifted our interactions to platforms like Facebook, Snapchat, and Instagram in the past decade, and Archie sees games taking on an increasingly social role in our lives too.
“These are trends like games as the next social networks or the gaming metaverse. In other words, the next iteration of how we interact with each other online. We’re seeing a lot of successful startups already expand that way and attack games from a much more socially centered perspective. Before, you had a game with social features, and now socializing is at the heart of the gaming experience. A company like Roblox functions as much like a social network as it does a game for its users, which include roughly 75% of American children aged nine to twelve”
Second is the idea of democratized game development. These are no-code game engines, which allow anyone to create their own version of a game without having to have complex or deep technical experience. Even League of Legends was originally based on DOTA, a game originally built as a modification of Warcraft III.
Third is mobile. The demographics of mobile games often lean heavily towards females, and the sector’s growth is opening up a new market. The trends in mobile are also changing revenue generation strategies. Privacy concerns have driven new data policies, which means that mobile developers have to adapt their user acquisition strategies to stay relevant.
Fourth is live-streaming. Although live-streaming is popular for games in the west, in East Asia the medium has taken on increasing popularity in other lifestyle areas, such as cooking or e-commerce. In China, for example, live streaming e-commerce is already a $160B market. Interactive live-streaming will enable concurrent live interactions between more people than ever before.
Many games try to fit these new trends, but not all of them have an investable thesis. Archie reminded me, “the company thesis matters as well. We look for a company that has a strong perspective on games as a category or the market or where there’s an opportunity.”
Founders might also have to demonstrate meaningful traction. On mobile, you have a standard set of metrics such as retention, monetization, and user acquisition that you can measure quite early in product development. On PC or console, it’s much harder to track user engagement, so Archie often uses team quality as a proxy for future success. In fact, the team is almost always the most important factor for him. “If I had to summarize what I look for, it’s a team that has a very strong thesis and an argument for why they’re the best team to capture it.”
As such, many red flags come down to faults in the team. Founder due diligence is a major one. Are there references? Have they done what they say they’ve done, or what they want to do? Given that he’s probably going to be working with the founders for five to ten years, he needs to make sure that the relationship is sustainable.
This can also be extended to the feasability of their goals. “It varies based on the project but we see over-scoping a lot, so having unrealistic production plans. People sometimes put only focus on just one element of a product, whether or not that’s the technology or the game design, and don’t pay attention to some of the other aspects, particularly things like production or budgeting, which are equally important when you’re building a business” he said.
Regardless of any minute details founders could focus on, Archie, like many investors stresses that the big picture matters the most. And this might just be the biggest takeaway for many entrepreneurs looking to dip their toes in interactive entertainment. “You’re pitching the company, not the product. You can have a phenomenal game, but the company is ultimately what the VC is investing in,” Archie said. Successful companies “tell a story that stretches for five to ten years, not two to three.”
One of the things that I’ve been surprised about in VC is how important experience is.
The famous examples of venture-backed companies, like Facebook, are of these college kids dropping out of university and starting companies after having never worked anywhere else. That is the tiny tiny minority of venture-backed and successful companies. Experience is everything because the team is always the most important factor for every investor. So get really relevant experience in what you want to work with—I don’t think you can overstate the value of that.
But if you’re in college, you have a great idea, and you can execute on it, go ahead and do that. But I think that our perception of VC, entrepreneurship, and startups is colored by a tiny minority of examples that get a lot of attention in the press or in the media. In reality, the most successful founders are generally the ones that have relevant experience in what they work in and in management; that’s also what a lot of VCs look for.
There’s nothing wrong with working in what you want to do for a few years, getting that experience, and then going and starting a company.
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