Games as Investments

This one was done together with Sam Myers of Balderton Capital:

Gaming has been a great hunting ground for VCs in the last decade. A usual suspect when it comes to pushing innovation forward, gaming as an industry found itself in the middle of a perfect storm over the past 10 years that made it the perfect high-risk, winner-takes-all profile for a VC’s portfolio.

With the benefit of hindsight, it is pretty obvious why this is the case. Not only is it a massive market, but it is also a market where the old-guard (AAA) had little advantage over its smaller, faster-learning competitors as the market embraced mobile and casual-web.

From an investing perspective, gaming since 2009 had the perfect characteristics to win big as a VC:

  • A new audience and a much broader demographic than before. Not only did far more people have easy access to games through a playable device, the smartphone, but the audience of those who did was different from those who played games on console and PC.

  • New ways of playing. Mobile helped casual grow up because it is the perfect device for 5-10 minute sessions, 5-10 times per day. A new platform not only means using new tools, but also designing for a different format and a type of player behavior AAA had no experience designing for.

  • New platform. On both mobile and casual-web, those who began developing for the new platform early won out. Whenever a new platform comes out it leaves a vacuum for new IP to be built and discovered as players look for new things to play.

  • New business models grew with a new platform. F2P worked so well simply because there was now a big enough gamer population to build big business by monetizing only the 1%.

All-in-all, these 4 shifts not only grew the market but also contributed to something even more important – making it more valuable to be small, nimble, and experimental than to be big, well-capitalized and experienced. An early-stage investor’s dream!

Looking at gaming today, however, shows a very different story. The “new guys” pretty quickly became old guard and, at least within casual/mobile, seem to be holding their positions pretty well through being well-capitalized (try competing with King and Supercell using their own UA techniques) and experienced (e.g. Clash Royale and Clash of Clans are quite different games but came from the same team inside Supercell).

At PGC, the two of us got talking about exactly this – where do we see the same opportunities in gaming now that we could have spotted in 2009? Yes, we agree that as the new gaming market grows and matures, the obvious place to look is in the tools and platforms supplying the market (more around investing in those selling the shovels in the gold rush at another point) but gaming itself continues to be a great place to invest. It is just not obvious where.

Setting the scene for the overall games market

This is a really big market. The whole market is about 100 billion USD, according to Newzoo and SuperData with some 30% each coming from PC & console and 40% from mobile (roughly speaking). Mobile is growing the fastest, casual web (Facebook and various flash game sites) and handheld consoles are falling. In broad strokes, the biggest market and the fastest growing is Asia, but western markets are also growing but at a slower rate.

The Old – PC & Console

Some of the most successful VC investments have been made in well-established markets where companies managed to change the rules of the of the game (no pun intended) and grow quickly off a user-base that was already there. Better addressing demand that is already in the market can often be far better than building your own market.

Unfortunately, this isn’t quite the case when it comes to ‘the old’ in the gaming world. While Steam has been a source of some indie successes, existing IP still dominates and the number of games seems to be growing faster than the number of gamers, making it difficult for new companies to truly break through.

Some companies are attempting to rewrite the rules in this, now mature, market. One way of doing this is to use new tools and concepts to redefine the production process, in the way Bossa has done using Improbable’s Spatial OS and user-generated islands for Worlds Adrift, and Hello World’s No Man’s Sky managed to shoot to into a top 12 spot on Steam in 2016, with a peak of 220K concurrent players. But in general the staying power on PC and console is far worse than on mobile, making it a more difficult space to bring home VC-style returns.


The Now – Mobile

This is the platform we both know most about. The good news is that, contrary to what we used to think about the longevity of a title, hit games have pretty amazing staying power. If your game becomes a hit, it can pay off over 5 years or more.

The bad news is that mobile is now incredibly competitive and the rules are pretty well understood. You can either make money through showing ads to a huge audience of players or by creating a huge in-game economy and keeping players in the game for long enough to make them valuable.

In the first option, it is all about climbing the Top Downloaded charts through simple and approachable games. The value of each individual user, however, will be too low to spend to acquire profitably, meaning you either need to strike massive virality or effectively cross-promote. The former is incredibly difficult to engineer and the latter places existing, bigger companies at a massive advantage.

The second route is all about building the right economy in the game, pacing it well, and making sure there is enough content and social interactions to get past the 100+ hours of play / $1000+ spend hurdle. The big guys already have this figured out and are doing it well. They also have the war chest to outspend once they find the right lifetime-value to acquisition cost ratio, so striking gold in casual is becoming increasingly difficult.

Investors also have this figured out by now. Once you find a company with games showing the right KPIs for a hit, it will be obvious to the market that the company is going to do well, and its valuation will shoot up because of it. Investing before these are in place, however, is far too risky, as even the best teams working on what looks like incredible concepts often fail to build truly captivating games.

To do well when investing mobile games, you need to look for the unseen and change the definition of what good looks like. Instead of looking for the Day 1 to Day 30 retention benchmarks that have determined a hit in the Casual era, we should look for those that can build strong Day 30+ retention, but likely at the expense of having a narrower audience. There will likely be more games building games for smaller groups that can spend significant amounts on mobile, in areas like collectibles – where people have been used to spending significant amounts outside of gaming – or for turns-based or eSports-related games, where long-term retention can hold up well.

Still lot’s to be done!


The New – Building for Tomorrow’s Platforms

So is now really the time to move into greener pastures? With mobile maturing, it makes sense that gaming entrepreneurs and VCs are looking for the next platform to build an empire on top of. The issue with new platforms is timing and uncertainty. Not only do we not know when these markets will develop to the degree they need to in order to build a big business but we also do not know fully which experiences work well, making it difficult to pick winners.

The first, obvious one to comment on is VR. The opportunity in the long run could be huge, and VR is seeing some of the benefits for newcomers for developing on a new platform. There is still a content and IP vacuum, which means that new players (although not many of them yet) are actively looking for new content. Being seen in the mobile app store is far more difficult than in VR app stores and those who build the strongest IP in the coming year have a good shot at winning big once the market matures.

Yet, for 2017, we remain VR sceptic. The timing issue is pretty clear when you consider that that only some 1-2M units of high-powered tethered versions sold in 2016 and a total of 5M Samsung Gear VR headsets have been shipped overall. Overall, these are some pretty small numbers, considering that tablets sold some 18 million units during their first year on the market, and one of the top VR games announced revenues of only 3 million USD.

For the foreseeable future, VR will remain a place where a lot of VC money seems to be putting money in, but due to its limited market size, will not be getting money out. Prepare for the VR desert and raise for money for at least 3 years’ runway.

AR, in its lighter form, brought one of the biggest successes of 2016 – Pokemon Go. It shot straight to the top, and though the hysteria has since died down, it is still maintaining a respectable #10 spot among top grossing iPhone games (in the US). Overall, it was a good demonstration of how well a combination of strong IP and using AR capabilities like computer vision and location on mobile can build a new category. We hope to see more of this in 2017. As we go towards AR From near-eye displays like Hololens, the opportunity is huge – far bigger than that in VR – but, again, suffers from the same timing problem from both an adoption and hardware development perspective.

And finally, something that we see as more immediate – the rise of chat games. It is likely that we will follow the lead from Asia and move towards a new platform geared towards social gaming, in-chat. At the moment, the experience is still clumsy and the gaming experience to date are shallow, but we are hoping to see a lot of evolution here, and we are expecting to see it soon. The audience is already there and it has great links to social features and virality. Facebook is working on sidetracking the app-store here in the west and is likely to encourage a new breed of social games built as ‘apps’ within Messenger.

A portfolio approach to investing

The unique thing about gaming is that everyone seems to have understood that this industry is a portfolio play. Because it is hits-driven and because it is difficult to predict success, even for developers with a decades of experience, most studios try to have multiple, sometimes simultaneous, shots at goal. VCs have realized in recent years that investing in games is no different – gaming is one of the only industries where it is accepted that a single VC can make multiple, potentially competing bets in the same market. For those who can, the best option is probably to balance backing teams exploring less trodden paths in mobile and a few big, longer-term bets aiming to own new platforms.

Don’t Blame “Marketing” for Product Failures

Actually, this headline is misleading. You definitely should blame marketing, but not quite in the way most of you think. If you bring something to market, and cannot sell it, then your marketing does not work. But “marketing” is a much broader concept than just the ads and promotion that most people associate with the term.

When talking to indie developers, you will often hear them talking about a “a good game” they did, which they, unfortunately failed to market properly. Hence, they made just about no money with their game. Marketing for indie developers with limited resources and fame is really challenging, no argument there. The app store has matured quickly, with big developers with big budgets fighting over customer attention. In this environment, it is really hard for a small developer to get their games noticed and played.

However, the bigger problem often lies elsewhere. Usually, it is not fair to simply blame marketing for the failure to get to profitability. It is easy to blame marketing as this is the side of the process the core game development team often does not understand.

It seems common for indie developer teams to want someone else to do the dirty work of promoting the game. This leaves the developers to concentrate on pure art, without having to think about the dirty parts of selling the product.

Now, let’s go back to marketing basics. The good old Philip Kotler who every marketing novice has had to suffer through in college said that marketing consists of a “Mix” of “4 P’s”. Namely: price, promotion, place, and product. Notice that the product is in there! Marketing is not only about advertising. That is only one ingredient of the soup, even if that is the part most people instantly think about when they hear the word “marketing”.

So, let’s review what the 4P’s mean for marketing mobile games.


This is pretty easy. In the physical world it’s about where you sell your product, such as a specific cafeteria or retail store. For us in the mobile space, it will all boil down to Apple’s App store, and Google Play. — At least outside of China (let’s not get started on your 200 other options inside China).


This is also pretty standard. What we’re talking about here is free to download, and 4-6 IAP price points for hard currency. Usually, these price points will be from the set of 2, 5, 10, 20, 50 and 100 dollars. As a starting point, just do it, and move on to discuss something more important.

Later on, when your game gets some traction, you likely want to tailor your price points to your players based on market and player behaviour. If you don’t have the framework in-house, Scientific Revenue can help you with this.


Promotion is what most people think about as marketing. This is only the advertising part, and it can be challenging.

At times, I’ve seen some consultants at conferences tell developers that they need to reserve money for press releases at launch. This is a part where F2P mobile and premium PC/Console games differ enormously. For the premium titles, you are building up expectations ahead of the launch. There are gamers (who self-identify as such) who follow promising upcoming games and want to read about them. That’s often not true when it comes to mobile F2P players.

On mobile, there are lots of gamers who do not think of themselves as gamers. Usually, they do not really follow upcoming games with anticipation, or read a lot of news about mobile games. As a consequence, press releases and game reviews in (game specific) outlets will give you a measly handful of extra downloads for a F2P game.

News outlets will, in general, interest the early adopters searching for the Next Big Thing. These early adopters can be a great market for premium games, as they will pay up front. For F2P games, early adopters are a really bad fit. By definition, they will soon get interested in the Following Big Thing, and abandon your game. Thus, relying on them will lead to bad retention numbers.

Performance marketing is different. If you have a working product where you get the famous LTV > CPI (Lifetime Value is larger than Cost Per Install), you will be able to advertise profitably.  If you do really well, you might also be able to do brand marketing, but honestly, that is quite far away for most indie developers.

All-in-all, promotion can get your game noticed, but without a really great game (product) you will only get a temporary boost. Yes, you do need to reserve tons of money and effort into promotion – that is essential – but before you do that, make sure you have a product worth promoting.


When doing F2P, it’s clearer than ever that the Product itself is part of the marketing mix. Getting downloads is only the first step of the funnel towards making money. Most of the funnel actually happens inside the game. The complete path of your customer will look something like this:

Ad=>AppStore=>Download=>Tutorial => Retention => Virality =>Monetization

What we need to note is that F2P “internalises” the selling of stuff. During the old days game developers could develop the game and leave the selling of the product to the physical retailer and its personnel. Nowadays instead, your own monetisation mechanics need to work. You need to use all the behavioural data that used to be left to the bricks and mortar stores and their marketing. A physical store used to run the Christmas sales, now you need to run the whole Christmas event yourselves – inside your game.

You need to create a product for a market, not find a market for the product you already created. The question is how to stand out among 800k games, and what features to implement to target that specific market or segment you’re aiming for. For this, you will need competitor data, and feature trends – to know where to differentiate to be noticed, and where to follow others for the things that just work. It’s  not just new games coming to the market constantly, but new ways to make games interesting and able to generate revenue are invented all the time. You will also need to recognise and implement features that fit the synergies of *your* game, and are the best investment for your time and efforts.

Last, you need to use virality to build the user acquisition into the product itself. Again, this a a very clear point where marketing is integrated into the core of the product from the start.

Key Takeaway

So how can you, as a game developer, utilize the product-part of the marketing mix to its full potential?

Ask yourself  a couple of key questions: WHY would my players recommend this game to their friends? WHAT makes my product interesting and appealing? HOW can I make the game better and interesting in the long run while keeping players coming back for more?

You will either need to create an internal analysis team able to provide answers to these questions, or you’ll need to figure out where to find these answers externally throughout the whole development cycle and way after global launch.

When equipped with the necessary information, designer skills and knowledge in all the parts of the marketing mix you will multiply your chances of becoming a winner in the contested marketplace – and your marketing team responsible for the promotion will have a product that will basically sell itself.

Monetisation: Let’s go Whaling

An oil sheik and a wall street trader got into a fight, who won?

All the other players who got to play for free! (And the game company)


This week, I will finally get to the big monetisation article. It’s a subject lots of people want to know about, even though their problem is often elsewhere – in retention.

Anyway, let’s get down to it with everything I have learned over the years about monetisation. This one is focused on In-App Purchases (IAPs). Next time, I will write about the other half of the story, which is advertising.

Let’s start with the most important thing: have enough to sell. As I have outlined before, the most important rule of a mobile F2P game is not to run out of content. If there is always something you can pay or play to get, you will have the basics for both retention and monetisation. Top games now have in-game economies worth tens of thousands of dollars.

I’ve seen a few different ways to break down monetisation into categories. One way advocated by Will Luton is to offer each Bartle Type their own things to buy. Content for Explorer types, Customisation for Socialisers, Competitive Advantage for Killers, and Convenience of speedups for Achievers.

The problem with this is that Content is incredibly expensive to make. Basically, no team can create new content at the pace required to keep superfans satisfied. Customisation of purely aesthetic things is nice, but will usually generate only single-digit percentages of the income. The vast majority of the income is likely to come from things that give a meaningful in-game advantage as opposed to fancy hats that lack any effect on gameplay.

Competitive advantage means pay-to-win, which can be very lucrative with the right approach. However, make sure that you do not overdo it and end up with an unbalanced game that feels unfair to new players and anyone not spending money. The power-gap between payers and non-payers should feel reasonable.

This leaves us basically with the speedups that Will calls “Convenience”. Most of F2P revenues come from selling different versions of speedups. It is similar, but slightly different from straight-off pay to win.

Think of two friends: one with a lot of time, but little money, and his career driven friend with more money but less time. The speedups should allow them to progress at the same pace. The career girl can pay to keep pace with her friend who has more time to grind.

This brings us to monetisation by stage of progress. I really like Dimitar Draganov’s way of breaking down games into Hook, Habit and Hobby. In short, the Hook is what draws you in. Great production values, a unique game, etc.. After that the game has to develop into a Habit that you do several times per day. Last, is the Hobby phase where the players spend more time thinking about the game and it’s different layers.

Early on, in the Hook phase, the game should offer some great value “ice breakers”. Something quite cheap that feels very valuable – designed to convert players into paying customers. Converting people early has a several virtues. First off, it’s the biggest step for a customer to take. If they do buy the ice breaker, they are way more likely to buy other things later. It’s also great for retention. Someone spending early on is mentally committing to the game, and will play it more often.

In the Habit phase, it’s all about progressing through levels or building out your village, etc.. Here, we will be selling faster progress. With premium currency speedups you’ll be getting your cool new stuff now, instead of after a couple of days or weeks of grinding. A few things to think about at this stage:

-can you prolong it with using gachas instead of direct upgrades? By making upgrades into lotteries, you can both add excitement, and effectively make the game longer. Look up “Skinner Box”, if you want to know why that works..

-no hard pay gates! Having a level that you can only pass by paying is still a bad idea. The free players are still valuable for you marketing your game, and producing content in PvP games.

-try to keep an acceptable power gap between spenders and non-spenders in the game.

Last, the Hobby phase. This is where you have the superfans who have already upgraded their stuff maximally. To these players you can sell consumable boosters of different kinds – effectively allowing for an infinitely high spending cap in the game. For instance, in many war games, this means speeding up training of armies that are then consumed in the next battle.


Before diving into the tricks, take a minute to decide how you want to earn your money. Is it the King model of relatively low spend from a huge volume of users? Or is it the Machine Zone model of very high spend from a much smaller number of superfans?


That’s the framework. Now for some of the tricks used.


The Hot State – Thinking Fast

One of the best books about behavioural psychology is Daniel Kahneman’s Thinking Fast and Slow. He’s one of the founders of the field, and got a Nobel prize for it. Even the name of the book gives us a first hint about how we should design our games.

In short, our brains work in two ways – the fast way (intuition) and the slow way (thoughtful reasoning). Without effort, you can tell what 2+2 is, and complete the phrase “bread and …”. To tell me what 17 * 24 is, you have to start your slow reasoning brain with quite a lot of effort.

The thing is, no one will start the slow reasoning brain to make a purchasing decision in a mobile game. It does not matter if you are offering great value. It’s just too much effort to ask.

In practise this means that you might (as we did) offer help to the player in two ways. Some booster is very powerful and is offered up-front before playing – you have to plan ahead and think a little before you see it’s a good investment. Another booster is available right when you need it in the game – like a revive button available for a few seconds after dying. This rule explains why the latter one will be much more popular than the first. Aim for instant gratification!


Loss aversion & Endowment effect

People are odd in the way that we value things that we already own higher than things that we do not own. I will work harder to keep $100 in my pocket – compared to the work I will do in order to gain an extra $100. This means that you can always give the player some resources, and then threaten to take them away. This is way more likely to trigger use of hard currency than a straightforward sale of the same amount of resources.

A lot of games lets players collect resources during level, and then takes the resources back at the end if the players do not finish – and offer the player an opportunity to keep what they gained by paying hard currency.

Basically this has been used in arcade games since the 80s. Put in another coin when you are at your personal best so that you do not have start over from the beginning.

For a deeper understanding of the psychology at work, pick up either “Thinking Fast and Slow” by Daniel Kahneman, or “Predictably Irrational” by Dan Ariely.


Offers and Scarcity

People value things that are hard to get. Underneath it all might very well be the same triggers as for Loss Aversion and the Endowment Effect. Scarcity creates demand. Even if nothing needs to be scarce in a digital game, you should create rare items that players lust after. Time limited offers are a form of scarcity that play on the fast thinking and loss aversion aspects to become a really great monetisation tool. Combine with gacha (see Clash Royale)!


Subscription model

Try to sell things that pay off over time – the more you play, the more value you get out of it. This helps monetisation and retention at the same time. For instance, the Clash of Clans builders work like this. Buying an extra builder with hard currency allows you to progress faster – but only if you also log in more often.


IKEA effect

People value things they have put a lot of time and effort into. The value is not only tied to how useful things are, but also to how much effort it cost me to get it. This allows you to get people more attached to your game, because they created something in it. And the more attached they are, the more it makes sense to spend hard currency. This shows up as the “investment” phase in the Hook cycle from Nir Eyal’s “Hooked” book about how to build habit forming products.

See the Hook cycle:



When people don’t know the price of things, the first suggested number will become their “Anchor”. That’s why a good wine list in a restaurant starts off with a premium bottle costing hundreds of dollars. When you get to the bottles for merely $50, they will feel affordable. People also tend to go for the mid-range item that feels like good value for money.

To use this trick, start off by suggesting to players that they buy something really expensive – expecting them to turn it down. Then offer a good discount, or sell another item that offers better value.


Social Proof

We are herd animals. People do what other similar people do – it’s the social norm. In your game, you would want the social norm to be that people pay for IAPs. Under no circumstance should you tell your players that the majority of them do not pay.  If, by some chance, the majority of a sub-group of players DO pay, you should absolutely let everyone in that group know about it. Paying would then become the social norm for that group. As an example, you could tell everyone in the clan about it every time one clan member spends hard currency.



Availability is a shorthand for what we judge as likely to happen. What people hear about often they will judge more likely to happen. Thus, people will estimate that tornadoes kill more people than asthma, even though asthma kills 20 times more. Tornadoes are news, asthma is not.

To use this one, you should tell clan mates when one player finds a rare item. It will make them judge it as more likely to find one for themselves when they often hear about others finding them.


Just the right amount of choice

Think about the right amount of choice to offer your players. More is not always better. Look up the Jam Experiment to find out why:

On one day, shoppers at an upscale food market saw a display table with 24 varieties of gourmet jam. Those who sampled the spreads received a coupon for $1 off any jam. On another day, shoppers saw a similar table, except that only six varieties of the jam were on display. The large display attracted more interest than the small one. But when the time came to purchase, people who saw the large display were one-tenth as likely to buy as people who saw the small display.


Whales take longer to convert

There have been some suggestions that heavy spenders take their time before they start spending. For instance, look at this from Game Analytics.gameanalytics-graph-r471x

Some stats of this kind are slightly misleading due to successful companies building in-house analytics, and therefore not being part of the dataset. Anyway, a game we know well suggests that about 50% of revenue comes after day 120. So, once again, make sure your game can be played for a very long time.


Core loop goes through the Store

Make the store where players spend hard currency as central to the game as possible. Try to make sure that the core loop goes through here, so that players are accustomed to it and just a tap away from spending. In all its simplicity, Hill Climb Racing does this beautifully. You drive a race, and after it is over, you are taken straight to the upgrade store, from where you choose to drive again. After each race you are therefore reminded of available upgrades.


There are some tricks that I have never seen used but could still work based on research in behavioural psychology.


The Labeling Technique

This is something I have not seen anyone try. In short, if you put a label on someone, they are more likely to behave according to that label. Tell people that they are generous and free spending on brilliant art such as your game. Correctly done, it might increase spend by over 10%.


Ask to spend Because..

Another similar technique is that people are more likely to accept a request if they are given a reason to do so. Which means that you can ask them to spend because… For instance, try explicitly stating in the IAP shop that the game was made by an indie dev that appreciates contributions to keep producing and maintaining the game.


Sad and Tired Players

When people are sad or tired, they are far more likely to comply with what someone else tells them. Fortunately, I have not yet seen anyone trying to use these as tricks. No game that I know of makes will wake people up in the middle of the night, tell them that their dog just died, and then ask them for a big IAP spend!

Last, the joke up there in the beginning. That’s to remind you that you get the highest spend from rich competitive guys. Remember that less than 1% of players can contribute a large part of your money.

Selling your company

After taking a good old nordic-style (i.e. nice and long) vacation, I’m back. This week is about selling game companies. Unfortunately, I have not sold mine for untold fortunes. However, my friends at the next door game company sold theirs.

Let’s start off with why you would even consider selling your company. Some people start game companies intending to keep them. Investors usually call these companies “lifestyle businesses”. It is the sort of company where the founders get to work on the games they want, without ambitions of growing large and making fortunes. Actually, working on the “games they want” might be a little strongly worded. “Making the games the market wants” is unfortunately closer to the truth if the founders want to stay in business more than a few years, but you get the point.

For many companies, there are good reasons to consider selling, if someone offers enough money. Basically any company with investors has to work towards selling the company. The point of investing in a startup is to tie up money for some 3-8 years, and then get it back with a nice profit (say 10X your money), so that you can re-invest it in the next startup. For this, even a small trickle from sharing the profits will not be enough. The investors will usually want to free up all the money they put in, by selling their stake. An external buyer will let them do that. Which is why any investment deal includes a clause stating that the aim of the company is to grow to point where it can be sold.


Now let’s for a moment go back to my friends’ business. They did not have any external investors or shareholders apart from the two founders. Why would you want to sell in such circumstances? In short, to get some stability and lock in your gains. In case anyone missed it, the games market is very volatile, and you never know when you happen to hit a dry spell of several flops in a row. Even for a successful company, a few years of developing games killed in soft launch will be very taxing for the company’s finances. Which means that an offer from a bigger acquirer that can provide cash for the founders, and a buffer for the company, can look very tempting.

Now, let’s look at it from the acquirer’s perspective. I have some experience doing that, as I worked for Nokia Corporate Business Development before founding my own company. Basically, I was on the team looking for startups to buy.

For us as buyers, the question was always: “why is the startup more valuable as part of us than as an independent startup?”. The acquirer wants some strategic benefit. Often it is about a large established company trying to play catch-up with the new trends in their industry. For instance, EA bought Playfish in 2009 for $400 million to get into the social games boom that they were late to.

At the other end of the scale are the so-called “acqui-hires”. It’s a way for large companies of attracting talented workers by acquiring their companies as a way of hiring them. This is quite common in boom times in booming areas where it’s otherwise hard to hire top talent. Which means that it happens in San Francisco, and hardly anywhere else.

A recent trend out of Asia, and China in particular, is companies buying revenue and profits. These companies have a lot of cash from an existing profitable business, or from investors, and want to show growing revenues in new areas. They therefore invest their cash to be able to show growth e.g. in games business outside of China. This is usually done to look good to investors.

So much for why the parties come to the table to discuss buying and selling companies. Then the big question is “How much?”.

Answering that can be tricky, as there is not any generally accepted way of pricing startups. It comes down to how much the seller and buyer thinks it will be worth to them. In boom times, that’s going to be a whole lot more than at other times.

To get a starting point, we can look at how the company has been doing. On the stock market, companies are usually compared with the Price/Earnings ratio – P/E or PE for short. You take the price of all the stock of the company (Price) and divide it by how much profit the made (Earnings). For instance, for EA that would be some 300 million shares times $80 (price for a share) giving a total “Price” of $24 billion. This is then divided by the profit they made (1.1 billion), for a PE of slightly more than 20.

On the stock market, a rough rule of thumb is that a fair price is when the PE equals the growth percentage. Which means that investors buying EA stock estimate that EA can grow their profits by around 20% per year. Of course, this is very rough. If a company makes a loss one year, their PE will be sky-high. Likewise in boom times.

So where has the PE been for recent game company acquisitions? It was around 7 for the original sale of Supercell to Softbank. When Softbank sold to Tencent, they valued Supercell at some €9 billion, for €845 million in profits, for a PE slightly above 10.

For smaller companies, it seems similar. My friends’ company, was bought for mid-single digit millions and a high single digit PE – depending on what Price you use for calculating it. Which brings us to the next part: earn-outs.

Of course, it’s not only about the money. There are other aspects to buying and selling companies. The biggest among them for the buyer is how to keep the team they just bought working efficiently. This can be done with carrots and sticks. The carrots come in the form of delayed payouts and earn-outs. The sticks in the form of non-compete agreements.

The job of an earn-out is to to get the founders and key employees to keep working as hard after the acquisition as they did before. Therefore, part of the price they get will be dependent on them hitting some milestones in the years after the acquisition. Some 2-3 years afterwards is typical, with targets concerning revenue, profits, downloads, daily or monthly active users or similar.

The buyer is going to push a large part of the deal towards earn-outs, as that removes risk from them. The startups earlier investors are going to push in the other direction, as they lose control of the startup, and then have a large part of their investment return dependent on something they can no longer influence in any way. After all, the acquiring company can make changes to the team or strategy that makes it impossible to reach the earn-out targets. A few years can be a long time.

The other way of keeping key talent is simply forbidding them from leaving with non-compete clauses. Usually, that means that the key people (who got money in the deal), cannot just quit and start/join a competitor. There is some suitable time, up to a few years, after quitting that they cannot do that, without facing significant penalties.
That’s the rough outline of how it works. Now go out and sell your companies! Or actually… wait for someone to buy it. That’s after all how it actually works. It’s very hard to sell a company. Companies are bought, not sold. The acquirer will be the one who initiates it all.

Is Clash Royale Losing Steam?

Anyone with any interest in mobile gaming will know that Supercell released their 4th game, Clash Royale about 3 months ago now. The game has been another super-hit, and is for once something new and fresh on the otherwise quite stale top (grossing) charts.

There are several things that Clash Royale did beautifully, but it also has some weaknesses. It is by now dropping on the charts that it dominated for the first months.

Let’s start with the good stuff:

-Instead of an energy mechanic, they invented a new chest system. You win a battle, and you’re rewarded with a chest. Some chests take 3 hours to open, others 8 hours. It all results in a great pacing of the game, without the annoying “artificial” timers so often found in F2P games.

-The core game is very easy to play, deploying troops with a simple drag. Still, it has a lot of depth, with some 50 cards – carefully designed to complement and counter each other.

-There is an elegant gacha mechanic in finding the cards, and a double cost of gold and cards to upgrade. It makes you want to spend on the missing resource.

-Synchronous multiplayer gives a completely new level of engagement, previously rare in mobile games.


Quite deservedly, the game shot straight into the #1 top grossing position in most countries. It kept that up for a few months, but is by now dropping below Clash of Clans into positions #5-6. That’s still really, really great, but raises the question of why?

One reason is that the game starts to get grindy after a while. In a sense, all mobile F2P games do that, but personally I noticed it more in Clash Royale.

The core itself, with its inherent ~50% win rates felt like arm wrestling someone equally strong as I am. Which means that it quickly gets exhausting instead of fun. Personally, I would prefer a greater variance where I either clearly screw up and get crushed, or clearly crush the opponent. Asynchronous games can hide the problem by letting the attacker (who is active) win way more often than the defender (who is offline).

The Arena system also has both good and bad sides. It gives players a very clear progression path. The problem is that it is a very linear and one-dimensional progression. My progress along that path will quickly slow down, and if that’s what I care most about, I will feel as though I do not progress at all. In contrast, in Clash of Clans I cared about all of my buildings (and walls!), which meant that I felt I was always progressing with something.

One odd part about the game is that the basic play cycle does not loop the player through the meta-game parts where you upgrade cards. Usually, it’s a good idea to return the player to the upgrade screen after each round in the core game, but Clash Royale does not do that. It just leaves you on the main Battle screen where you can start the next battle or open a chest.

My top guess for why Clash Royale is dropping in the charts is still none of the above. It is that the first month on the App Store got such a tremendous boost that it just could not keep that level over the long-term. Clash of Clans built a huge fan base over the last 4 years. When Supercell launched another game under the Clash brand, there was a ready audience for it. Competitive players who care about the brand and about their own performance in the games.

I feel fairly certain that a large part of the committed (and high spending) Clash of Clans players immediately downloaded Clash Royale when it was released. After only a few rounds of testing, they figured out that the game was fun and competitive. They then proceeded to desire an early advantage compared to their friends (who also came over from Clash of Clans), and opened up the wallets to get a head start.


Apparently, some three quarters of early Clash Royale players were also Clash of Clans players. 
I would bet that it was this immediate inflow of high spending fans that quickly drove Clash Royale to the top. This effect is now diminishing. Some of the top spenders might already own the “perfect” deck of Clash Royale cards, and will need an update with more content before they can spend more. Therefore, my best guess is that Clash Royale will keep dropping awhile more before it settles on a sustainable level – likely still quite high up on the charts. Of course, continued development of the game can very well make it rise back up. I wouldn’t want to underestimate the good guys at Supercell.