Gaming Reloaded - What is next?

Akash:

Hi and welcome to Matrix Moments. Today we have with us Salone Sehgal who is the founding partner at Lumikai, a gaming focused venture capital firm. They recently launched their Fund 2 with a corpus of 50 million dollars and have been actively investing and shaping the gaming ecosystem in the country. What, now four years?

Salone:

Three years.

Akash:

Salone has two decades of diverse experience across investment banking, venture capital even before Lumikai and in the past has also built and scaled a gaming company. Excited to have you here, Salone, I think before we dive into the craft of gaming of business and investing it would be great to share with the audience how did an investment banking turned entrepreneur end up deciding to setup a gaming focused venture capital.

Salone:

Yeah, that's a great question, but first of all thank you so much for having me here and it’s really a pleasure to be talking to you and talking to you guys about gaming. I got into gaming as a very accidental actually entrepreneur. I used to be a keen gamer and I grew up playing games but I never saw anyone who looked like me either playing games or in a game world. And I left my investment banking career wanting to do something different and a colleague of mine from business school approached me and said hey, do you want to build a gaming company. And I never really thought about gaming as a career and little did I know that a decade later I would be launching a gaming focused fund, you know, the hypothesis behind that company was that 60 percent of the world’s casual gamers are women but less than 20 percent of games are actually built for them and the endeavor was to build a very large immersive social world way before the Metaverse became popular and so did a lot of cool building, you know, did a bunch of collaborations with strategic partners, brands, influencers, celebrities, we also had an India based SKU and that's how I got really entrenched into the Indian gaming ecosystem but India gaming of 2013 was very different from India gaming of 2023 but here I am.

Akash:

And this was truly social, this was a team, this was based out of India or London?

Salone:

No, it was based out of London.

Akash:

And if you were to talk to founders today and even in a folio or when you meet new founders building and gaming what do you carry from those days of being and entrepreneur which you bring to the table as in VC now, what would be those top 2-3 things that you're able to work with founders around it?

Salone:

You know, I used to cover gaming and tech even before so my journey with the games industry has been fairly deep even before I was building. But I have very renewed – I had renewed interest and respect for gaming entrepreneurs and gaming as an industry. There is I guess no other industry with the kind of telemetry and analytics and kind of studying user behavior better than what gaming does. And when people look at the games industry in their head or when they think about gaming in their head they see this 13 year old boy playing counter strike or Dota in the basement but little do they realize that actually because of this technology paradigm where computing has changed and where you’ve got all the entertainment now possible in very, very small powerful devices especially those of mobile. That transcended and broke down and made gaming accessible to very, very large demographics. So you have now a gamer is a 70 year old playing casino slots, it’s a 50 year old playing Heyday, it’s your 24 year old playing Corvett Fashion, it’s your 16-35 year old playing Clash of Clans and I think that the kind of demographic expansion which has happened in gaming has also meant that if you're a gaming founder today you have to understand who you're building for and what is that specific either consumer enzimes that you have or what is that specific genre that you're targeting because the industry has expanded like never before. And I think the second is now there is a lot more capital available than ever was for gaming entrepreneurs. There are globally 30 plus funds in gaming which investment gaming several of them are regent focused, you know, targeting Israel, Turkey, China, South East Asia, Eastern Europe, several of them target specific verticals in gaming whether it’s game tech, gaming infrastructure. So there is a lot more capital now available for gaming founders so hence over this next generation the kind of ambition, the kind of vision that founders can have it can be much bolder, right, and also tech has changed so dramatically as well. So I think the first is obviously really, really understand your user base and the second is there is a lot of now capital available for gaming. So be bold in your visions of what is it that you want to build, I think those are the two insights that at least I had.

Akash:

And that's super interesting, I think over the last 7-8 decades gaming has pretty much become the mainstay of [0:05:27] [Inaudible], I think at least in the US its bigger than all of music, movies, everything combined as an industry.

Salone:

Absolutely.

Akash:

And I think the bigger shift has also been which we would love to talk to you about would be gaming has evolved from being this SKU retail based distribution of physical like early days of ‘70s when you used to have arcade games and [0:05:52] [Inaudible] as a distribution to now almost these large giants emerging. You have Riot’s League of Legends, Minecraft, Roblox, it’s an endless list. If you have to play that arc forward as venture capitalist now where do you think the big shifts are coming in gaming over the next ten years.

Salone:

I think a little bit of what I said before and you're absolutely right, in Western markets the gamer has kind of been through this certain trajectory, you know, it was arcade games, then came PC games and console, then mobile and subscription. And they’ve gone through various business models. There was this approach of you had paid games and premium games and then free to play emerged where games became a service where it became important – where games were no longer like the movie business because a long time back people used to like to compare games to the movie business. But it was no longer that, right, it was no longer ship and pay, now it was you send a game out and then you have the ability to retain and engage a user for months to often years. Clash of Clans for example is nearly 6-7 years running because that’s the power of live ops. You're constantly generating new contents through events, live events that you do within games. And I think the business of gaming has dramatically changed. I believe there are a couple of things, you know, the first is this technology shift which is happening which has made obviously games very accessible. The second is this demographic shift and you have now a digitally native population who has learned to swipe before they can type. So the kind of immersive experiences, the kind of interactive experiences now they are looking for, they are seeking, that's going to drive the future of whatever entertainment an immersion is going to look like over the course of the next decade. But more importantly what people forget to realize is that gaming and game tech is already mainstream, we just don’t know it. It’s changing and shaping the ways we make movies. For example I don’t know if you saw Avatar: The Way of Water that entire movie is shot in a green studio, it’s actors wearing bodysuits and face gear where they were then rendered into the movie an environment --

Akash:

Now virtual production is going even further ahead.

Salone:

Absolutely. Right, if you look at Mandalorian and all of these they use unreal. We’re seeing gaming and game tech now being used in healthcare, right, for example you’ve got medical residents being trained in VR for complex spinal reconstruction surgeries. You're seeing game tech being used in infrastructure, Unity Powers Hong kong I think for simulating footfalls and traffic, we’re seeing low tech industries like fashion embrace gaming whether it’s digital collectibles or whether it’s body mapping or virtual trials to reduce returns. So gaming is everywhere, right, and that's what’s made it this 250-300 billion dollar gorilla in the larger global industry and this revenue is actually leaving aside the ancillary revenue that's coming, it’s not counted in, this is just content, it’s game IP hardware, peripherals, streaming etc combined, so the potential for this industry is just it’s massive.

Akash:

And if you trace back and again the same evolution early days of gaming the money was actually not traditional venture capital, more akin to movies business even publishers. And they would bring in the usual editorial, marketing, sales, distribution. Now in this platformized world what roll does venture capital play in shaping gaming ventures.

Salone:

And that's a really great question, you know, venture capital and gaming is a very, very recent phenomena. It’s probably the last five years, when I was building there was one VC that was doing games investing globally and that was London Venture Partners so LVP. It was the fund that I ended up joining and but before that the only option that game developers essentially had were publishers and publishers would – it’s an interesting journey with publishers, right, they take a share of your revenue, they will potentially take control of the IP and then they will have roffers on future IPs whereas I guess with equity investors it’s a little bit different, right, they sink and swim with you. If you don’t make money you don’t make money but if you make money then the venture investor is part of that journey of partaking with you. But I think now because the industry has become so complex it is so deep, it so broad, that the role of the venture investor is now emerging in games and there are a couple of things that a good sector focused fund can do for you. Because if you're a great founder capital is no problem for you, right, you can go to even an agnostic fund and they’re likely to finance you. However if you're looking to be setup for success it’s great to have industry veterans and sector experts on your side because after capital you as a early stage founder you will struggle with who to hire, how to hire, which is the best talent because eventually gaming as in industry you're competing with global best, right, so you need access to global best in terms of knowledge, in terms of best practices. Like if you want performance marketing experts you can't take a consumer tech performance marketing expert and put them into a gaming company you need somebody who’s built in that space before. You need access to strategic advice and strategic investors because eventually 90 percent of exits in gaming happened via strategics. Also those are the guys who are best placed to provide you access to best talent or the best kind of knowhow. You also need access to distribution, you know, if you're a content mobile gaming company right now building for the global market distribution is a huge issue and if you want to distribute how do you distribute, how do you monetize? If you want to go to ad based monetization or IIPs what are best practices there, what’s the best ad tech platform to do this. So gaming as a ecosystem in itself has so much complexity that from the outside it looks like this monolithic entity. You invest in a games company games is like content and that's it, you kind of ship it out. But there are so many sub verticals, verticals, so many genres which makes it very difficult sometimes for a founder to pass through all of that and a good venture investor will essentially try and demystify that for you and will potentially help you set you up for success and this is notwithstanding the fact that they’ll also help you on the fund raise and open up doors which you ordinarily as a founder could not have opened for yourself. And I think those are very important junctures especially for a gaming founder.

Akash:

Totally agree. And I think which is also why unlike you us being a [0:12:53] [Inaudible] venture fund when we decided to go deeper in gaming it meant that you have to build out a team very differently. And hence the team which we’re structured is also all gaming folks, people who’ve gone through that journey, who have been doing that. I agree, it’s very difficult, people tend you paint you with a single stroke and say it’s just content, it’s not, it’s far more complex. But just pushing that venture investing angle a bit more we went from retail distribution to platformized distribution, they’ve become platforms of their own now. Minecraft is a giant platform, Roblox is a giant platform. The largest platform based publisher so to say is Tencent. Do you think that they’ve become so big now that again we could end up being in a zone of saying you have a few publishers who now actually unlike in the previous world where it was only retail distribution now they do control the digital distribution. Do you worry about that?

Salone:

So because I’ve been now in the gaming industry for more than a decade, right, there is a particular kind of – there’s a peculiarity to gaming which is that the industry is very dynamic. Ultimately gaming as you mentioned it essentially is sits at the confluence of technology, culture and new media and it’s very influenced by what is the current zeitgeist. Every two years you’ll have a new genre, you have a new breakthrough, you’ll have a new platform that will emerge, you’ll have new tech, new demographic and what some of these larger players have – I guess I’ve come to the conclusion of it is better to buy than to build. And as a result of which in fact it drives certain outcomes for the games industry and if you will trace back data you will see and you can trace it back the last five years, six years, seven years over a decade. You will see that more than 90 percent of exits in gaming happened via strategic M&A. it’s these large companies and these large publishers as you said which are very cash rich, don’t have that much debt and are constantly looking to either consolidate or diversify, enter new markets, new geographies, enter new demographics and that is very interesting especially as a venture investor where you're often looking for liquidity events because eventually at the end of the day the idea is to be able to invest in a company and be able to exit at a certain return. And in the gaming industry that's very frequent because every couple of years you’ll see this wave of M&A that will happen. You know, 2010-2012 we saw massive M&A like Walt Disney Playdom, we saw Sony Gaikai and these are big outcomes. Then 2014-2016 you saw Tencent Supercell, you saw Zynga Natural Motion, you saw a bunch of these – Mahjong Microsoft, that was that period. Then if you look back to more recent times, 2019-2022 we saw mega and mega exits, and at each point of time you’ve seen bigger exits because gaming is becoming bigger. Apart from let’s say Microsoft Activision you also saw Unity iron Source, you saw Take-Two Zynga, you saw Sony Bungie and those are the mega ones. But there is this sweet spot of M&A which exists between let’s say 200-800 million dollars and then there’s 1-5 billion dollars which happens remarkably frequently in this industry. So for us from a investor perspective we actually welcome it because eventually these large players will become buyers of companies that if these become category leaders it will eventually become buyers and I think that's the more interesting side of gaming and I don’t worry about that. There have always been large players.

Akash:

Yeah, it’s a great opportunity and you mentioned somewhere that and let’s double click on that new demographics, new geographies, if you would think of some top of mind thesis for new company creation today like vector, broad vectors, what would those be? Let’s talk demographics, what is that big wide opportunity that founders could go after?

Salone:

Well, I think one is the India market, right, and there’s a reason why we are in India. When we looked at inflection markers let’s say and I’ve covered China, Turkey, Vietnam, I’ve seen the rise of those markets and when I started to look at the India market and this was back in 2017-2018 and I’ve been tracking the market for a long time now. Certain inflection points that I had seen in other markets started exhibiting in the India market, whether it is the rise of smart phones, whether it is very cheap data, whether it is the rise of digital payments and now an average Indian consumes 20 gigs of data a month. The biggest beneficiaries of that are video content and gaming. And with the rise of digital payments I think it unlocked what was the biggest reason for skepticism for a lot of venture investors in India was monetization. And even when we launched the fund let’s say about three years back a lot of people said oh, Indians don’t pay for games, there’s only RMG in India. And for us it was a matter of time to be able to showcase that, no, actually monetization is unlocking for this market. Now games constitute in India more than 50 percent of the app store, right, the top five Indian publishers have grossed over $900 million over the last four years building for the global markets also building for the local markets. So that kind of monetization shift, that kind of domestic success stories are now starting to emerge so for us India is a key part of that thesis.

Akash:

And on that front I totally agree like last two decades we’ve seen a company list on the Indian bourses, we have had successes like PaySimple, we’ve had bootstrap successes like Gameberry, multiple, right? But even if you just playing the devil’s advocate there, right, even if you think of the bulk of it when we look at companies like Dream 11, Zoopee, WinZO, many more this still form the largest share of dollars in India. And many a times as founders as investors one does tend to have this clear view bias, keep looking back and you’d still think, yes, big four publishers, $900 million gross last four years but it’s still a blip. If you had to think of a why now and we do expect it to inflect, we do believe all of us believe it will inflect what is that big why now, that now it would truly inflect?

Salone:

Yeah, I think that's a fair question, I think everybody asks us that. I think the biggest battle is changing perceptions and that's the only way you can do that is either through lived experiences, or through data. And when we looked at the data everybody said oh, RMG is a 100 percent of the market, that's the only way that monetizes but actually over the course of the last three years RMG share of total revenue has actually been reducing. So RMG is not a 100 percent of the market.

Akash:

Surely not 100 percent.

Salone:

It’s actually 57 percent of the market as of last year. IIPs and ad revenue in India on games has actually steadily been growing, in fact last year IIPs were outpaced actually RMG growth. So when you start seeing those green shoots that's when you know where the opportunity is because the half of the revenue buy is actually very well represented from venture capital. The other half of the revenue is actually underserved and untapped. That's the opportunity that we feel very excited about because that's the opportunity and that's the trend that we have seen in other markets. Eventually IIP growth, ad growth, eventually IIP growth ad growth eventually those do outstrip. Because if you look at let’s say an Indian gamer their sociology is very different from that of the Western gamer. You see, they were never PC gamers, they were never console gamers. A Indian gamer is many times a first time smart phone user so they have been exposed to everything from video chat, social media, audio chat, messaging, games, all at the very first time. The first time you're spending money on games is actually via RMG, that's their first digital transactions and micro transactions that they’re getting used to. Eventually will they transition into IIP, is there a market for IIPs we believe there is. Will these uses transition perhaps, perhaps not. But there is a prevailing view where there is a fair overlap of fantasy gamers with those of the gamers which play let’s say Battle Royale so there is a large Venn diagram there which overlaps and those are the folks which are also spending. Prior to let’s say three years back nobody thought a one gigabyte game like a BGMI, like a Free Fire would be making any money at all in India but it does. In the last year revenue growth has actually outstripped download growth. Out of the top 10 grossing titles there have been foreign publishers particularly have now seen revenue growth ranging from 40-70 percent just from the India market. So, yes, and India market is not a China market, it’s probably not going to be a China market, let’s say it’s not going to work with the pace of that. But those green shoots are really undeniable at this point of time. It’s very easy to say oh, 5 game publishers do $900 million that’s a blip but literally four years back that was an impossibility.

Akash:

That didn’t exist.

Salone:

That didn’t exist. How many companies, consumer tech companies have top lines like that in India. So that I guess shift is happening, it’s gradual but we’re long term investors and we’ve got investors who are long term patient capital and I guess that's the inflection points that we’re seeing in the market at least.

Akash:

I think for all of us who are spending time in this space that's what excites us. But if one was to look at the content attribute just that piece and let’s say across casual, hybrid casual, mid core, hard core, in the Indian context we have been not seeing big breakthroughs come out especially at least in the mid core, hard core side. You mentioned BGMI and the Indian audience is unlike let’s say the markets that you spoke of, let’s say China or even Korea they actually ended up having a lot of local hype creation. Why is it that in India we’ve not seen local hype creation yet?

Salone:

The operative word is yet, right, and so you see in China and I think we talked about this remember once before, you go back in history and you look at what happened in China, right, in 2004 in China 60 percent of revenues came from foreign IPs. In fact the Legend of Mir was a Taiwanese title which was the top grossing revenue title and everybody said oh, Chinese IP they do only piracy, they only do counterfeit games and it’s never going to happen. And by 2007 the market shifted, China gaming market in 2007 was about a billion, a billion and a half very similar to in terms of IIP revenue and ad revenue, very similar to I guess India to some extent last year from our research that we did. In literally five years from 2007-2013 Chinese gaming market went to $13 billion and what happened between these ensuing years over this decade is essentially a couple of things. 3G happened, digital payments happened but more importantly talent started emerging. It was three games companies went public, there was Giant, Perfect World and Kingsoft I think these three went public. There was a lot of foreign M&A, Walt Disney came and setup, Vivendi came and setup, there was a big push from the CCP around building games for the Chinese youth and a way to kind of talk about Chinese culture. So then that when NetEase and a few others launched Fantasy Westward Journey which were based on Chinese lore and in fact it took NetEase many trials and many iterations to actually come at Fantasy Westward Journey. More importantly entrepreneurial talent emerged where and this is something that we’re seeing right now. In India we have seen the likes of a Zynga, we have seen the likes of a GSN, Scopely, a EA, a UB Soft, a Glu Mobile, a Rock U, they all have teams in India but there was never any capital. So an Indian game developer was always hamstrung for capital and this is the non RMG side, these are the guys who were building gaming content or platforms etc. However now the fact there has been a publicly listed company, there has now been more capital, there are venture capital funds which are now actively looking at gaming so now over the course of the last three years we ourselves has now seen over 1500 companies in this space. We’re seeing now founders emerge from these large game teams and these guys have now managed P&Ls of 50-100 million dollars and saying we know Liveops, we’ve seen the 0-1 journey.

Akash:

And not just Liveops, they’ve seen the entire lifecycle.

Salone:

And they’ve seen the entire lifecycle of from 0-1-100 and some even exit. So those founders are now emerging and saying, hey, we want to build and we want to now be building the Playrix from India, the King from India or we want to be part of that. And we have seen that in Turkey, we’ve seen that in Israel and of course the China market built both domestically and globally as well and that kind of emergent founder behavior is now coming. So I believe that this will only progress, you know, we progressively we’ll see more talent emergent, we will see more capital. And gaming as an industry has already seen liquidity, that's right.

Akash:

And just from the business model bit we’ve seen premium, freemium, RMG, three big broad buckets of where you put slot each gaming company or a game IP do you see more innovation happening on that front?

Salone:

Definitely on the free to play side, premium games in India are still a very, very small fraction. I believe that it’s not a very significant part in terms of – and depends on what you define as premium. Is that in terms of AAA games etc or --

Akash:

I mean this is on monetization.

Salone:

On the monetization premium games is obviously a very, very small segment.

Akash:

And anyway free to play is now pretty much the dominant --

Salone:

Absolutely. And free to play is pretty much I’d say the largest grossing part of at least mobile gaming. And India being a 98 percent mobile market is something that we believe that free to play is probably the best way to access that market. RMG of course you guys are investors in the space and there have been a spate of regulatory developments which have taken place in that space. So for us we always saw that there was a depth and breadth to India gaming which was beyond that as defined as RMG and that's where for us we’re our portfolio is a reflection of that. We have content place, we have platforms, we’ve got tool stack infrastructure, we’ve got some that we call which are at the intersection of what we call systems of play. How do you take an applied game mechanics and how do you disrupt existing industries like a Fintech, a health tech, an Ed tech and those are exciting for us. So that's essentially our thesis.

Akash:

Got it. And just one last bit, we have been thinking hard about it as a theme. It has been that beyond the thesis typical monetization models it seems like if you look at Roblox, Minecraft, it seems like this is going to huge conversions of media, social and gaming all becoming one. It’s a gaming platforms are the new social platforms. Social platforms are the new media platforms and the media companies. Within that convergence do you see big unlocks happening in terms of the business of gaming which goes beyond IIP and RMG, do you see or are you seeing company creation happen where these platforms can now start playing a role in driving commerce, driving what we think of that old Disney flywheel which used to be there of taking an IIP and then monetizing it multiple ways we see that happening in India?

Salone:

I think, you know, that's a really interesting question and there’s two parts to it, games becoming new social media but having – I’ve been in the games industry for a long time, that’s always been there, we’ve always had large social words in gaming exist.

Akash:

From the oldest race.

Salone:

From the oldest race. Worlds Away was 1985 and that was a social world which enabled people to interact and socialize with each other. Then 2001 Roomscape came out, Roomscape live, which was again another --

Akash:

Roomscape is actually a master lession in builidng social platforms.

Salone:

Absolutely, right, and in fact every successful consumer facing app is actually a game in disguise. If you use Instagram, Facebook, your virtual gifting, your likes etc all of these actually originated from gaming. And apart from Roomscape there was a second life EVE Online, EVE Online is just this fantastic example. Yeah, exactly, fantastic example of games as a livelihood or gaming as just more than entertainment gaming as a community that's always existed. I feel the demographic shift Roblox is actually very interesting, Roblox has a almost 50 percent female demographic, the demographics have shifted right now. And I think that has made gaming so much more powerful and I do believe there is definitely a convergence or a move towards where games just become more than entertainment it becomes more social, it’s about community, it’s about hanging out. And but whether that emerges out of India that is a question that I believe I think that we’ll still wait to see that play out because some of these large platforms have already got distribution and they’ve already kind of got that infrastructure all set and in place. Whether it can be whether it be a India specific play I think that will depend, I think that needs to be a adapted to a very different kind of a context. You know, in our portfolio we have a company called ILU for example, that’s a social gaming platform but in a very different way. It’s almost interactive television, they’ve got everything from live game shows to astrology, to celebrity quizzes, to influencer led games on their platforms and again that has a 50 percent female demographic built for largey Bharath Users and that’s a very different kind of a play. But it’s also a platform play bringing people together, entertainment, hanging out, meeting friends. And I think that’s a very India centric play. And that's an interesting play in its own right. So I feel like there are these opportunities in category sets, now whether it is going to b exactly Roblox local like I'm skeptical about that but it’s interesting to see that behavior emerge.

Akash:

No, perfect. And on a parting note one advice you would give to future founders what would that be

Salone:

Well, I think if you're looking to build in games who you build with is often as important as what you build and whether it is your choice of investors, whether it is the choice of your co-founders, whether it’s the choice of your early team so pick one.

Akash:

Perfect. Thank you. Thank you, Salone, and thank you every one. All of us, Salone and us remain super excited about the business of gaming. And if your building do adopt Salone@lumikai or reach out to anyone, Vivek, myself, or Rahul in the team of Matrix. We would love to collaborate and looking forward to investing in back in this ecosystem together.

Salone:

Yeah. Look forward to it and thank you so much again for having me.

Akash:

Thank you, thank you.

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