Investing in the Asia Games Space – Past, Present and Future

1. Investing in the Asia Games Space – Past, Present and Future John Lee May 21, 2013

2. About the Speaker – Bio at a Glance • Over 12 years in the Asia games space as a investor • Part of the team at Softbank Venture Capital that invested in multiple game startups including NCSOFT • At NCSOFT led APAC Publishing (ex-Korea), led the investment for Zepetto (Point Blank) • Chief Strategy Officer at GigaMedia, invested in XL Games (Archeage), IAH Games (Singapore), Softstar (Taiwan) • Chief Strategy Officer at ZeniMax Media Asia Pacific, with seven global studios including Bethesda, ID and Arkane • Co-Founder of the Hong Kong chapter of Angelvest, the largest angel network in greater China • Personal angel investor in multiple game startups • Board member of multiple game and media startups • Personally invested over $15,000 into Kickstarter projects

3. I’ve been through four waves of game investments Current Wave – 2012 ~ Present • Mobile based social • Started by AniPang / Clash of Clans • Peaked at ??? 1st Wave – 1999 ~ 2005 • PC based MMORPG • Started by Lineage 1 • Peaked at World of Warcraft 3rd Wave – 2009 ~ 2013 • PC based social games • Started by Farmville / Zynga Poker • Peaked at Draw Something 2nd Wave – 2004 ~ 2009 • PC based casual • Started by Kart Rider • Peaked at Crossfire / Dungeon & Fighter

4. In Asia, games has had massive success • Korea has over a dozen IPOs related to the industry • China has over a dozen IPOs related to the industry • Draw Something acquired for $200 mil by Zynga (2012) • Funzio acquired for $210 mil by GREE (2012) • Pokelabo acquired for $175 mil by GREE (2012) • Gloops acquired for $430 mil by Nexon (2012) • Cygames gets $300 mil valuation from DeNA (2012) • Supercell gets $130 mil investment ($770 mil valuation) but… Important to note a few things: • Korea and China IPOs are all vintage pre-financial crisis • Funzio was at 2.5x revenues, Gloops at 1.5x revenues • Most public game companies are way off their highs

5. Asia startups have been quick to follow the $$$ • Korea and Japan usually first to innovate, but quickly replicated by China and SE Asia • Korea pioneered the MMORPG and casual games PC space, but its time is largely past • Korea has all but ditched PC based development, all of the money now pouring into mobile and tablets (Sunday TOZ / AniPang, Lineage Eternal, etc.) • Japan innovating on mobile, Million Arthur, Puzzle & Dragon • China has done a great job at copying the best games (with some exceptions) from Japan and Korea, and launching in China as a first mover, PRC is big enough to get big market caps • Southeast Asian game startups trying to follow the dream and be the next ‘OMGPOP’ or next ‘Supercell’

6. But it’s a really crappy market now since 2009… • VCs need to ask “What’s the business model?” • Overall economic slowness, terrible macro-economic climate • Poorly performing tech IPOs like Zynga, Facebook • Drop in the overall number of IPOs, period. • VCs are sitting on a backload of Series B and C companies that aren’t having exits • Uncertainty about monetizing mobile • Relative freeze on major acquisitions from companies like Google, Electronic Arts, Yahoo!, etc. • Sh*tload of seed funded companies around the world going… no where

7. Most VCs don’t want to invest in the games space • Games are a hit-driven, winner take all business with maybe room for a #1, #2 in each genre per market • When there is a dominant leader in the market, must ask what the key drivers for switching will be, likelihood is, most players will not • In early stage game investment deals, the only proven indicator is the past track record of the team, but even that is largely inconsistent • Some very costly failures in the games space spooking investors – 38 Studios, Flagship, Gazillion, Real Time Worlds, Red5 Studios just to name a few • “Are you kidding me” comes to my mind most of the time. Most entrepreneurs have crazy and unrealistic expectations on self-valuation (see next page).

8. Most games startups have unrealistic expectation • Seed money is way too easy to get in Asia – government subsidies, government programs, government grants, EASY TO INCORPORATE, HARD TO EXECUTE • Too much dumb money (high net worth friends or families) flooding the market at a seed level in Asia • Easy seed rounds usually pre-set the valuations of studios way too high Hit the Series A Crunch (a.k.a. the cliff)

9. What’s a poor startup to do? Woes is me! • Have realistic expectations on funding. Series A is not something that is following 8 months after your seed. You need to demonstrate and show a clear business model before raising more money • Seed is the new Series A. So put your mind in the mode of ‘my first VC round is going to be a B round’ • Scale back the vision of your game product to fit around your seed round. Bootstrap. Crowdfund. Eat Ramen. Be ready to eat Ramen for a year. • Start small and grow big – break up your game vision, build and release a slice, validate your audience and ideas – VCs love validation, not unproven ideas or hypotheses

10. What about Crowdfunding? WOW! I’m all for it!

11. But… Crowdfunding doesn’t scale well for Asia • Kickstarter depends on Amazon payments, which is only partially supported by bank issued credit cards from 16 countries around the world • Kickstarter primarily caters to a US audience  so Asian companies pitching on it naturally at dis-advantage • Does not support alternative payment channels like PayPal • Cultural issues such as trust abound • Regional regulatory issues abound

12. Also the vast majority of Kickstarters are < $100K STATE OF KICKSTARTER $ raised # successful projects

13. Set your expectations

14. Asia Game Exits ex-Korea/Japan in a word.. suck. For the vast majority, game company exits are not IPO, but modest trade sales or acqui-hires • Zynga acquires XPD Media (2010) • Six Waves / LOL Apps acquires Smartron5 (2011) • Changyou acquires 7Roads (2011) • DeNA acquires Punch Entertainment (2011) • YY acquires E-City Sky (2012) • Kabam acquires Balanced Worlds (2012) • Asiasoft acquires CIB (2012) Realistic Advice: set yourself up for a more modest exit, and taking care of investors by managing expectations around a trade sale or acqui-hire deal with a major game company.

15. Final Remarks • The VC business has changed. It’s a bad economy. Not a great time to be a VC either. • Seed is the new Series A. Don’t expect a Series A. Plan for your next round around a traditional Series B definition or exit building upon your seed round • Complaining about venture capitalists ‘not getting the games industry’ is not going to get you funded. Set a clear business model and milestone plan. Validate it with data. Even better, validate it with revenues. • Raise money at the angel level at a reasonable valuation • Ask for a big valuation when you are justified to get one. Comparing yourself to the guys who just got funded isn’t the way to do it. • Its not too late. You can always go work for EA.