I never went to Stanford Business School to learn the inside story of how venture companies work. The first time I co-founded a gaming startup, the world of VC was completely mysterious and impenetrable to me. Luckily, in the decade since that first, failed attempt, the world of venture investing has changed dramatically in ways that are hugely in the favor of gaming entrepreneurs.
So lucky for me I have friends like Anton Backman of Play Ventures and Nico Vereecke of BITKRAFT, investors at two of the top VC firms in gaming, to compensate for my lack of a high priced, post-graduate degree.
In the latest episode of Tokenomics, I sit down with these experts to learn what the dynamics are like inside VC firms during the latest crypto winter. As you can see from this episode highlight, VC firms are still actively investing in Web3 gaming during Crypto Winter. As explained here, they have something of an obligation to invest their funds, and that obligation to spend works in favor of the gaming entrepreneurs out there trying to build the future of gaming.
The following highlight has been lightly edited for clarity.
Nico: So for us it’s important to always keep in mind our job is that we’re investors. Which means that we have almost an obligation to deploy. And so it’s almost not an option for us to just sit on the sidelines because we believe that, given our experience, deals are too expensive and just don’t make sense. We have to adjust to the market.
So there’s no right valuation. We always need to take that into account. Today, I see that there’s less urgency. So it’s clear that founders have been realizing that, you know, if they send me a Telegram text with a 24 hour deadline, I’m having a good laugh. I’ll share it with my team so we can all have a good laugh.
But I do think that there’s still very, very competitive rounds out there. For example, look at the Limit Break deal. $200 million! Obviously they’ve been building for a while. But these are deals that are competitive. These are proven founders that have a proven ability to build games that monetize in line with the opportunities that Web3 brings.
Ethan: I want to unpack what you said. You guys both mentioned an obligation to deploy. A couple of years ago, I went to the Berkshire Hathaway investor meeting, and it was deeply weird. It was like going to GDC but there was no organizing principle. It was just like “we love capitalism!” It was deeply bizarre.
But one of the few things I took away from it was, an analyst will ask Warren Buffet and Charlie Munger the equivalent of “you guys have many billions of dollars of cash, why aren’t you investing those billions of dollars?” And they just say “we don’t see any deal we like. We think the deals are all wrong, and when we see a deal we like we’ll spend the money.”
They have no obligation to invest. There’s no one that can force them to spend their money and they can be as patient as they want to be. And if I understand how venture firms generally work, if I see a headline that says “A16Z raises $600 million for a gaming fund,” what I think that means is that basically, some pension funds or hedge funds gave them a set amount of money and A16Z promised that over 10 years, they’re going to invest all that money on a hypothesis.
And at the end of 10 years, all the money A16Z was given will be deployed. They will then over the next handful of years give back that capital and the returns that have been invested. Is that roughly right? What you mean by the obligation to invest is that you’re taking in money and you are promising to invest all of it over a period of time. If you just sit on it for 10 years, you’ve actually screwed over the pipefitters union of Northern California who is investing their members money in the hopes of giving them a stable retirement.
Do I roughly have it right?
Anton: In principle, yes. In reality, those timeframes would be much shorter.
So a typical VC fund would have, let’s say, a 10 year mandate. A typical setup would be that during the first four years you invest most of the capital. After those four years, you stop investing in new companies and any remaining capital you have in the fund is earmarked for your existing portfolio.
And you only invest in your portfolio companies’s future rounds after the 10 year period. And there’s usually a way to also extend that period. At the 10 year mark, you distribute those returns to the investors. So, the investors know that when they get into the fund after 10 years, they will get their money back based on certain multiples.
When it comes to someone like Berkshire Hathaway, even though they have outside shareholders, they’re essentially investing their own money. And they’re essentially investing proceeds from their existing businesses on their balance sheet.
Nico: And it’s always fair to ask the timing question to the VC that you’re speaking with. Especially if you’re in more advanced talks. Because, let’s say that the fund is in year three or year four of being deployed. You as a founder need to be able to present an investment case with a potential for exit within the remaining timeframe that that fund has.
So if you’re coming to them and telling them “look after eight years, our company’s going to be at its peak. And that’s when we expect to have an exit.” That’s not good enough for the VC depending on the timing there.
Ethan: So if you’re an entrepreneur in the audience and you’re thinking “Oh man, I really believe in Web3 and I have this great idea and I have a person I’ve worked with and we’re going to build a prototype, but now it’s crypto winter, no one will ever give us money! I shouldn’t even reach out to Anton and Nico on LinkedIn.”
You should! Because they have money that needs to be invested. And they’re just looking for the best teams with the best hypotheses to put that money into. And so whether it’s a bull market or a bear market, the opportunity is still there. And the question is whether you have the story, the capability, the track record and the blind luck to get that investment.
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