239. What’s Next in Gaming; The True Essence of Product-Market-Fit; & Investing with an Emphasis on Retention and Engagement (Gigi Levy-Weiss)

239. What's Next in Gaming; The True Essence of Product-Market-Fit; & Investing with an Emphasis on Retention and Engagement (Gigi Levy-Weiss)
Nick Moran Angel List

Gigi Levy-Weiss of NFX joins Nick on a special Crisis Coverage installment to discuss What’s Next in Gaming; The True Essence of Product-Market-Fit; & Investing with an Emphasis on Retention and Engagement. In this episode, we cover:

  • Background and path to venture
  • The thesis and your focus at NFX?
  • Did you invest in Houseparty when it was Meerkat?
  • You’ve written about your thoughts on PMF…  How do you assess whether a company has real product market fit?
  • What advice would you have for those still trying to find it?
  • With this focus on product and retention…  What’s your response to investors that say distribution is more important than product?
  • Why do you think VC interest has been declining in the gaming space?
  • What has been the history/evolution in the gaming sector?
  • What’s next for gaming — Is there a step beyond the platform?
  • Are there any niches or segments within gaming or esports where you see the most potential?
  • 3 Data points:
    • Let’s say a gaming startup comes to you… they have 50k DAUs, K value of 1, 20 % MoM growth… 
    • What 3 data points do you ask for and why?

Guest Links:

Transcribed with AI

Intro 0:03
welcome to the podcast about investing in startups, where existing investors can learn how to get the best deal possible. And those that have never before invested in startups can learn the keys to success from the venture experts. Your host is Nick Moran, and this is the fall ratchet.

Nick Moran 0:23
Gigi Levy-Weiss joins us today from Israel. Kiki is founder and managing partner at an effects a seed stage venture firm headquartered in San Francisco. Prior to co founding in effects in 2015, giggy wore many hats, including CEO of 888 Holdings, president of Amdocs and founder of several startups, including play tikka, beachbum, Inception, VR, and others. geeky, welcome to the show.

Unknown Speaker 0:45
Thanks for having me.

Nick Moran 0:46
Yeah. So I give you this this, you know, very brief overview. Can you talk us through your background and your path to anavex? Yeah,

Gigi Levy-Weiss 0:53
I think I’ve, I was very lucky in being able to see the tech ecosystems from a bunch of different directions. So after spending some time in the Israeli military, like everybody in Israel, I was an Air Force pilot. I started my journey as an intrapreneur, and found the bunch of companies. Then after selling one of my companies, I started the journey into becoming an executive and ran a bunch of Israel’s large tech companies. In parallel to some of these roles, I ended up starting to invest in companies. And the first one was very fortunate, where I put just a bit of money and got like, 20x after a year and said, hey, I can do that. That’s nice. And so I continued investing as a hobby. And got very lucky, it was the, you know, good vintages, the kind of the 2006, seven, when everything great on the internet, just quote. And so I became a pretty active angel investor here in Israel. And then around five years ago, four and a half years ago, together with the games career in Stan and Stan Chudnovsky, at the time, and later on, Stan moved to Facebook and Pete Flint joined us, we found the FX, which is a seed fund. So basically, in a way, you could say that I started on, on the light side being an intrapreneur. And I finished my journey all the way to the dark side. And I’m a VC today. And so you know, I’m trying to be a good VC. I’m trying to be like a VC. That’s not part of the dark side. But I do feel that I made a full circle on that.

Nick Moran 2:27
Very good. Well, we’re happy to have you on the dark side. How many investments has in effects done now in in Israel,

Speaker 2 2:36
so on effects in general is made? You know, we’re now in our second fund as a seed fund and second fund, it’s a large one, it’s 270 5 million. The first one was 150. And we’ve made roughly altogether call it roughly 50 investments in both of these funds, and roughly 1/3 of them maybe just a tiny bit more in Israel. We don’t have actually a quarter for Israel or Silicon Valley. But the reality is that being that we’re three partners, effectively, it ends up being around 1/3 of the investments in Israel. Got

Nick Moran 3:08
it. Got it. And we did talk to James recently on the program. So he told us a bit about the thesis at NF x as well as many of the different software tools. We did a deep dive into as well as the the quick, the quick funding, or sorry, the fast the fast. Yeah, the fast funding program. But you know, what is your focus aside from Geo? You know, what is your focus area and effects?

Speaker 2 3:34
So first of all, I’m not geo focused, I mean, the funding general is focused on on Silicon Valley, and Israel. But we have made exceptions. We’ve invested it in New York and a bit in other places, including a couple of companies in Latin America, that were kind of very extreme cases of Finland’s phenomenal founders starting network effects businesses that we thought we understand that we like. And so I don’t focus just in Israel. But clearly, I do have an affiliation to Israeli founders, wherever they are. And then in terms of fields, we’re very field agnostic. I mean, I think that each one of us can have areas where we’re considered to be kind of, you know, maybe world experts, if you wish, like Pete is clearly the top guy when it comes to prop tech. And after founding Trulia and merging it with thinking and public, merging it with Zillow being on that board for a while, and investing in every great prop tech company. So you know, Pete, is that on top of being just a great general investor in every other field, James is clearly the networks and marketplaces guy. Right? James has invested in tons of marketplaces, including lifts and others. And on the other hand, he was involved in some of the very early social networks such as Tico, which is a company that ended up selling to Monster and so he really has a deep knowledge and of the history and the current status of each one of these products. And actually, you know, what are the ways we get to know each other as well? I both of us being early investors in house party and working on that together. And so you know, we do have that connectivity around this field. And me, while I’ve invested over the years, in practically almost every possible field b2b and b2c, I think that there are, you know, there’s a bunch of areas that that I feel stronger with. And you know, the the area that people sort of know me for over the years have been games. It’s an area that I’ve always been a gamer, it’s always been a field that excited me and there when when I started, there was not really an industry in Israel. And so some of the first companies in the field and Israel actually founded and the or helped set up and we now have a phenomenal gaming industry in Israel, which we can talk about. And so that’s one area. And in general kind of b2c digital first products is, is an area that I that I love, and that attracts me. And it’s always been quite interesting for me, because there’s really not that many investors in Israel that focus on this field, Israel traditionally has been more of a deep tech kind of country. And so that has been very good for me and very exciting. You

Nick Moran 6:06
mentioned house party was that was that Meerkat at the time that you invested?

Speaker 2 6:11
No, it was not mere cat It was introduced even live on air or air, which was before Meerkat. When I invested it was called the devil. And yet it was the first permutation of the product. And I think that the amazing thing about Ben, and about this company, and you know, even if the outcome was not necessarily, you know, amazing for us as investors, but the amazing thing was that Ben, and I’ve hardly seen anything like that ever. Before, after Ben came up with his incredibly strong thesis, on the strength of live video, in any communication between people, and about how live video has got to be the next leap. And when he came out, nobody was doing it. There was no not at all, there was no Facebook Live and Instagram, I did nothing, there was nothing there. And he just came and said, It’s not about the fact that the quality is happening, or some pieces about understanding that live video is going to be a new medium of communication for people. And then based on that assumption, which is helping people from all around the world connect better. Using live video, he ended up setting up four products. Fourth one being houseparty. Each one of them with a different thesis with a different social graph with a different use case, but with the same underlying assumption. And actually houseparty was going to America, it was number three, although actually, both the everyone here in air and a few permutations, you could call it like number five, and house Friday was number six, or whatever you want to call it. And the beauty of it, they were all separate products, and each one learn from the previous one. But they were all under the same core belief and assumption that Ben had in his veins, which was so right. And that’s what made this journey. So phenomenal. You know, other than the fact that it went up and down and up and down and up and down, which is, you know, it’s kind of it’s really, you know, somebody should buy the movie, right? It’s like unbelievable, the kind of, you know, the kind of roller coaster that this company went through, although, at the end of the day chose the same in any company. So I guess this was very visible. The

Nick Moran 8:16
Insight seems so obvious. Now, of course, especially in this the circumstances, I’m shocked, he was able to make it work, you know, through all those instantiations of sort of the broader vision. And, you know, the requirements around fundraising.

Speaker 2 8:31
Yeah, there are very little people out there that have what it takes to really, really, really succeed. And in building a kind of social, mobile, new product. You know, at the end of the day, what we found is that many of these are more around the right team that has the willingness, grit, desire and passion to make enough iterations. Because in none of them, almost none of them. It’s the first iteration that catches it’s like the fifth, the 10th. You change name, you change product to change interface, you change social graph, you change connections between people, you change, you know, the notifications, change everything. And if you’ve got the right team, then eventually and you’ve got the right insight, and eventually you you suddenly catches and you know that you’re onto something, but most teams would either be too slow in kind of iterating and iterating retreating, they would just fall in love with one thing and try to make it work with too small to change every time. That’s one. That’s one pitfall and the other pitfall is that many of them just kind of lose their energy after the third one or the fourth one. You know, you need to be ready to have huge conviction, huge drive amazing charisma to be able to convince everybody that the fact that the previous four one failed doesn’t mean that the fifth one not gonna work, amazing fundraising capabilities because money runs out and you need more money to do it. And also, you need to really be one of these intrapreneurs that understands this kind of very delicate fairy dust element that makes a product, something that you just can’t let go of. And then he’s one of those people. And you know, I don’t know, you know, I don’t know, you clearly suck and others, but I don’t know many, many other people that have that.

Nick Moran 10:27
Amazing. Well, maybe his next project, he’ll get another check from from FX. Yeah, well, you know, while we’re, while we’re talking about entrepreneurs, and the challenge of finding product market fit, you know, how do you assess whether a company has real product market fit?

Speaker 2 10:46
Yeah, you know, that’s the connection, not the million, but the billion dollar question when you come to investing. And at the end of the day, I think that when you come as an investor to look at a product or company and look at their product market fit, there’s a bunch of things that, that you really need to understand. And especially when you’re talking about Internet products, it’s not an easy task, because at the end of the day, whatever product you’re going to put out there in the internet, if you market it enough, you’re going to find a crazy community of people that are going to love your product. In other words, your product can be pretty miserable. But there will be some people in the northern part of South Korea that are going to love it, it’s going to cater to some obscure need that they have. And it could very well be that you’ll see amazing retention for that audience. And you’ll say, Well, you know, I have these, you know, 100,000 people in Korea that are using my product, and they’re using it every day. But it could very well be that you can replicate that in the United States or in Japan or elsewhere. And so it’s a tough question, because many times it’s easy for entrepreneurs. When I talk about internet, first, you can digital first products that are online, it’s very easy to fall in love with your own idea, and then look at the numbers and read them in the wrong way. And so as an investor, when you come in many times, you’d see like, you know, great retention cohorts, but then you ask yourself, are these the right customers? Could these customers actually pay? Are there enough of these customers? Where are they located? You know, are these the kind of customer that would change their behavior? Every now and then? This is pre monetization? Probably would, how would the cohorts look when you add monetization on top of them beat advertising or something else. And so it’s not an easy one. And what I try to look at is a bunch of things. The first thing is that we don’t really hear that much about the ease of customer acquisition, right, you can be a miracle customer acquisition person, and bring customers in very easily. But it doesn’t mean much if your retention and your engagement are actually low. Leakey fan when we and when when we come and look at a product that one thing we care about more than anything else is retention. Now we keep telling younger entrepreneurs that basically pumping marketing into a product that has poor retention is like trying to fill a leaky bucket with water, you know, it may look at it, if it’s filling up. And if you pour a lot of water, it may be even is filling up a little bit. But the minute you stop pouring the money in, which is your customer acquisition is going to it’s going to end up getting dried and water is gonna leak and products with poor retention or poor engagement are actually the same thing. They’re leaky buckets. And so we don’t care that much. You know, many times companies come to us and you know, I wouldn’t say we’re from but some companies come and they have like this great vanity mattresses or, you know, it costs us only 10 cent to bring a customer. And then we started diving in, you see that they’re promising the customers something that the products not doing, or they’re promising the customer is something that they would never be able to fulfill that promise. And so the customers are coming, they’re clicking, but they’re not saying. And so we’re putting an acquisition part aside, we’re putting that kind of growth of kind of just the roll numbers aside. And we want to see what’s happening to the cohorts, we want to see how people are actually using Salesforce cohorts look difference between products. And so if your product is a trip planning product, you know, you don’t expect the activity to be every week, right? That’s, you know, you may like or not like the field but you don’t expect it to be a weekly thing. Because there’s going to be a few weeks where you do it at peak up till the trip itself and then a few months probably off and so on and so on right episodes is very, yeah, this is very different from a social network or from a game. And a game has very specific retention patterns with where when I look at day one, day seven day 30 day 60 day 90 number of sessions a day and the pattern of the sessions. I can basically know whether this game has any chance of becoming successful or not. without having to look at anything else. And to be quite frank, at that point, I don’t really care how the game monetizes. Because it could very well be that the game monetizes really well. But if retention is low, it’s just not going to work. And of course, if the game monetizes super well, then it could be that slightly lower retention would still create a great game like strategy games, right strategy, games, retention is lower. But once the people started monetizing the retention is huge. In the later stages, convey hyper casual games retention is very short. But when its position is very quick, and customer acquisition is very cheap. And so there are these KPIs. And you know, there for every business, you’re looking at these retention and engagement, KPIs are what we’re looking at. And knowing these KPIs is, you know, it’s kind of 90% of my ability to analyze, knowing what they should be, is 90% it also knowing what questions to ask, and you’ll be surprised how many people in amazing companies don’t even know what are the right questions to ask themselves. So for example, you know, for, for social networks, there is something called the Power User graph, which is this graph where you plot the number of times a month, each one of the your users come back. So the total of this graph is 100%. Then you ask yourself, what percent of my customers come once a month, in the last 20 days, what percent of the my customers came twice what percent came three and all the way up to what percent came 28 out of 28. And what people observed is that, in the past, the rule is very simple. Most internet products, and most products in the world behaved in what’s called the fish and the whales way, which is it means that you’ve got many, many, many customers that are the fish, and they come once or twice a month. And then as you move on to more and more times a month, you’ve got less and less customers. And at the end of the day, you’ve got your whales, your ones are the ones that are coming every day, 10 times a day. And that’s only like zero 1% of your customers or 1% of your customers. And they’re also the payers, they’re the ones that you’re trying to get the most out of that that’s the way a game looks, for example, okay? When you look at something like Facebook, it actually behaves behaves differently. And so when you look at something like Facebook, it actually has the shape of a smile of smiley. And which means that there are many users that come once a month, and many us use it come twice a month. But there’s very little users that come around 17 days a month. And the reason is that if you’re so addicted in double brackets to the product, that you’re coming 17 times a month, you’re dramatically more likely to move on to 20 times, or 20, to one to 28 times. And so these products, these social networks have this pattern of a smile, like fat tails, is the end Exactly. And that what the body does, it means that you look at it and you say, well, actually, when something becomes so such a must in people’s lives, they actually start coming all day long. And then the graph starts looking like that. Now, you’d be shocked how many times you know, and this is something that famous that Facebook is famous for. And then when they acquired Instagram, one of the reasons was that they show the same pattern, Instagram, and then inquiry WhatsApp is even more extreme, because if you’re using WhatsApp, then in the countries where you use WhatsApp, everybody’s using it all the time. It’s like, you know, I use it probably 200 times a day, if not more. And I use it every day, of course, because it’s my main means of communication here in Israel. And so once you see that you know how strong the product is. And then when you know this graph, by looking at the percentages of the stage, you actually know whether this is a very strong graph or just a good graph. Now, you’d be shocked how many times you look at the social product, and you ask the founder, so you know, how is your insider called the smiley graph, the smiley app graph or your power user graph, and they’ve never plotted it, they’ve actually never heard that this is something interesting to look at. They’ve actually never tested themselves on it. They don’t know. And they’re shocked when they’re looking at it. Because suddenly it explains many things. And so the first thing is that retention in its various permutations and engagement is very permutation. They’re the best indication of product market fit. That’s one thing. The second thing, the second mistake that I see many people do is, is mistake what I’ve kind of mentioned that before is mistake, the retention patterns of remote non represent you’re not representing groups of people with the core product. And so many times you’d come to a company and they would deliberately or not deliberately choose the best users that they want to present to you. And so they would choose just the users in New York or just users somewhere it just uses above certain age or whatever. And many times you need to ask yourself, Well, does that choice of customers really represent what I’m trying to understand? You know, Words via maybe teenagers in, you know, in a very dense population area, this product is great for them. But then what does that mean? How many such dense population areas? Do I have that have kids have that have that kind of the same demographics? And will that create a large enough business. So that’s the second thing. The third thing is that many times I see founders excited about product market fit and what is not a large enough market. So like you’re you know, you’re super great. And your product is everything that every plumber, the specializes in taps that are made of gold with every need, right? It’s like, it’s the best thing that for these plumbers, but you know, there’s like 1000 of them. And each one of them’s willing to pay, you know, 200 bucks a month. And that’s not going to be a great business. And so, you know, product market fit is finding, you know, having something that your customers really need and would pay to not give up on but where the market is large enough. So that’s, that’s another and then the biggest trick that I like that I like using and product market fit is many times when you especially when you’re a seed investor, it’s very early. And so it’s very difficult to really get enough data. And there, what we try to do is something interesting, which is rather than checking the product market fit, we check the market fit of something we call the product promise, which is a bit of a trick. And this trick is new, and you probably couldn’t do it before Facebook and others gave you much better targeting capabilities. And here, this is the way it goes. Let’s say that you are building a product. That is for plumbers, as we said before, and let’s say that you’ve you’ve only brought so far 100 plumbers and they converted, okay, but you don’t really know that much whether this is really the thing or not

Speaker 2 21:53
what you can do, or even before that maybe even didn’t even touch 100 plumbers, what you can do is that you can create a campaign. And in this campaign, you’re basically promoting the best wording of your what we call your product promise. So the product promises the essence of what you’re going to bring to your product. If you think about our product market fit essentially, there are two stages in proving product market fit one stage is that the description of what you want to build is what your customers want. That’s describing you don’t you didn’t build anything. Other stage is your ability to execute, and actually turn that description into a working product. Yes. Oh, in the past, we didn’t have a choice. And so what we did is that we basically combined both of them, we said, I’m going to describe to myself the product. And then maybe I’ll do a focus group or something. But that doesn’t work. Because customers don’t necessarily know to tell you what they want. But I’m going to describe it to my product people to my tech people, they’re going to build it and then I’m going to see whether I can sell it. And so that takes me you know, 434 or five months to get to the MVP, and I spend money and why not separate to step but both of these stages. Because I can today I can target plumbers in New York and say, Hey, guys, here’s the product. Look at it. Here’s the Facebook ad it’s beautifully crafted, it’s beautifully written, it leads to a gorgeous landing page. It took me two days to do that. I didn’t write any line of code. And I’m checking the conversion, the clicks on the ad. And I’m checking the city the call to action on the landing page. And you know what, once they tell me yes, I wanted, it says, wow, we’re so glad to hear this is coming soon, you’ll get a free month. Once it’s in there, believe me, nobody will be upset and even if they will be upset, but you’ll upset 100 customers out of a few millions that you can have. That’s not really a big risk, right. And so we’re now really keen on testing products, b2b, b2c in various areas, by simply taking the product promise, putting it in an ad campaign, yes, and comparing it to results of other Ads campaigns. And this basically allows us many times to better understand Product Market Fit beyond what we’re just seeing in the usually very small initial numbers of a company.

Nick Moran 24:16
And I love that you’re saying this because I I’m sure the audience here is sick of my preaching. But I’ve been preaching this for about six years as we do a lot of hardware investing. So we test all these things before we ever tool anything or before we ever manufacture a product. And I’ve been working on a blog post right now, and it’s a bit pejorative and facetious, but it’s, it’s kind of software engineers are lazy. It’s because a lot of people you know, they move fast and they break things but they build the wrong stuff, wrong thing, right? And then they gotta keep fixing it. Whereas with hardware, you can’t you have to get it right. Because you know, each different rev of the product is a major effort. Yeah,

Speaker 2 24:59
and I fully agree with that. And I think that at the end of the day moving fast is breaking breaking things is fine. As long as you only break the things that you can only find out by breaking that without breaking find that without breaking.

Nick Moran 25:14
Right, right. So, so giggy with your focus on on product and retention, what’s your response to investors that say, distribution is more important than product?

Speaker 2 25:29
First of all, I think that every investor many times is it’s kind of stamped with their past experiences. And so I’m sure that somebody that invested in a company that had an amazing product, but didn’t manage to get it to market will now feel that go the market is everything. And I can’t say that’s not true. I can share that my experience and what’s kind of foreign my view of life was that, at the end of the day, great products, they don’t really, they don’t really market themselves anymore, sadly, but great products can be brought to market. If the product market fit is there, I’ve never let me even push it to the extreme. I don’t think I’ve ever really seen a product that had a nine out of 10 or above product market fit. That failed because of distribution. Right now, it could very well be that it looked like a really good product marketed but it wasn’t as good, which made it tougher to distributor, it made it tougher to convince customers, it could also be that people mistake mistook product market fit with real product markets, because for example, the product was too expensive. Right? So you know, you take you take a Dyson vacuum, and add a couple 100 bucks, it has amazing product market fit. But if you price it to 2000 books, it has zero product market fit, I guess or not zero, but much, dramatically lower. And so you know, when you think about hardware, for example, or products that are paid for, then price is part of your product market fit discussion. And you know, an iPhone at 1000 bucks still has good product market fit probably has better product market fit at 900 800. But lower margin, but it’s 5000. Even I wouldn’t buy it probably. Right. And so the price also has a part to it. Now, once you have product market fit all across your product, meaning that it’s also priced right and users love it. And when you ask them, Are they willing to give up on it? They’re all like, no, no, no, I need it, I need it. In these cases, distribution is hardly ever the reason why a company doesn’t succeed. That’s that, having said that, I have seen companies that failed, because they didn’t think growth in their, in their product development stages. And in their launch stages, and ended up with funnels that required huge amounts of money, which are just, you know, tough enough, it’s too tough for them to raise or which were too diluted or whatever. And so I think that the size of the outcome is, of course, also determined by the ease of distribution. But I think that this is secondary to find that your core product market fit, which for me is all about retention and engagement. I hope that that answers the question I’ve done undermining distribution. And that, you know, I’m, I’m considered to be one of the most aggressive kind of growth focused investors and founders before in Israel, I think and, and this is because Israel has this hardcore mentality of paid marketing that started in a bunch of in the tech industry and in the gaming industry, where we have some of the best performance marketers in Israel. And the thing that what I’ve been trying to push through that is understanding that if you just think paid marketing, then you’re basically going to be trading your equity for users, right. So you’re basically raising money or taking that money and investing in if you start thinking, you know, and then at the top of the pyramid, there is network effects, meaning that you’re really bringing value to users by by them having other users in the product, that’s like the top. If you can’t have that, then the reality. So you’re creating external incentives that are not necessarily the core of the product. But you know, you get five more lives for inviting people in Candy Crush, yep. Or you get five bucks for bringing somebody that pays five bucks or whatever. Invite a Friend program, these are like second thing. Third thing are all these kind of small hooks into products that are going to make it easier for you to invite people are easier to share where it’s like, it’s not TrueView reality, but it’s like being allowing you to easily expose the product to others. Right? And then at the end of it, there is paid marketing. And you can always you will always end up doing some of it. But the more you think about network effects and virality and growth hacks before you go and default to paid marketing, the less equity you’re going to have to give up for the same.

Nick Moran 29:57
Yeah, I mean, I couldn’t agree with The more I think he go to market and distribution and product are both necessary, right. But it, it connects to your point earlier about the leaky funnel or the leaky bucket if you don’t have a focus on delighting customers, and now that we have such recurring revenue oriented business models, whether it be software or hardware, it doesn’t help to acquire a ton of users that are going to churn. It’s just hemorrhaging your equity position, right? You’re complete. Whereas if you’ve got high LTVs, you know, that’s going to serve you great in building a muscle around delighting customers, versus building a muscle just on acquiring and giving them a crappy product. You know, I’m a more in the former camp myself. But in

Speaker 2 30:49
a way, I think, you know, sometimes people ask me why it’s easier for teams that are led by product people to raise money, then teams led by marketing people were salespeople. And I think that without necessarily kind of crystallizing that thought investors feel in their gut, that the product lead founding teams have a better chance of focusing on delighting customers have a better chance of first and foremost looking at everything and not from the perspective of how much is cost is going to cost me to bring a customer which is important. I’m not undermining that. But it’s a secondary question too. Will the customer fall so much for my product that they will do everything to keep it from going away? Right, which is what which is what you really want and and the team that are obsessed with that are the team that ended up succeeding and usually, again, without undermining from any other team, I think that it’s much easier to add the distribution and growth capabilities into a phenomenal product team than it is to add products, focus and product instinct into a great marketing team.

Nick Moran 31:59
Very well said. So, you mentioned gaming a couple of times is a specialty area of yours. Coincidentally, I was just talking to one of my founders today about getting an introduction to a fellow named Richard Garriott. Does that name ring a bell, Richard Garriott? He was the founder of origin, it was a it was a gaming company that was sold to EA, sort of games that were precursors to World of Warcraft. So ultimately, anyway, total sidenote, but let’s, let’s talk a bit about gaming. So we actually have an offer out to a gaming company at the moment. You know, why, I guess a good place to start would be why do you think VC interest has been declining in the gaming space?

Speaker 2 32:47
I think that it’s because of misunderstanding of the space. I think that gaming companies are, you know, they’re kind of a, an interesting animal that people don’t understand. And I think that for years now, people assume, for all the wrong reasons that investing in games is like investing in movies. And, you know, I keep hearing it from people and they’re saying, you know, to invest in game, I need to know that the guy or girl that are leading the company are super talons, and just like choosing a director, to lead a movie. And that’s just not our business. It’s a hit driven business. They keep saying, right, and in a way, it is a hit driven business. But you know, social networks are also a hit driven business, right? The few that work and then this Kansas, they don’t, and, and even most SaaS products or cannabis, you know, the big the multibillion dollar ones are hit driven businesses. I don’t see anybody everybody succeeding. And so the reality is that something changed in this world. And I explained what changed, I think that there has been an evolution of the game industry that we need to understand that basically, turn it into something completely different. So games when I was a kid, and then for many more years, in when I was a kid, you got these, you bought them on cassettes, or this but, and I and I coded them when I was 14. But you know, when you started getting consoles, you basically bought packaged goods. So a team working on a game for a long time, and they ended up in this box that’s shrink wrapped, and you bought it from a shelf off the shelf. And the team that built the game, once the game was out, that team was basically sent to do another project, right? Because these were kind of finished goods. Then the Internet came. And games moved from being kind of these packaged goods to being what we call game as a service game as a service is this understanding that basically the plot of the game doesn’t need to end when the game is released. And actually, in a way it’s better because you don’t need to now have 300 people work on a game for two years and then release it, you can actually start by releasing the first half a year of work or in the first year of work. And then if the game works well, you can add more scenes, you can add more graphics, you can add more tasks you can add or whatever. And then games became this live thing, that for many years, we used to call a game as a service. And that was great. The next thing that happened is that you’re going to people looked at it, and said, well, actually, we could do more than this. Because now that everything is live, we can do something called Live ops. And live ops basically says, our game as a platform, and as a platform with many, many customers, it would be stupid if we don’t start adding new events in the game all day long. And so suddenly, you don’t just get every month or so a new version that has, you know, a new part of the game or something or a new hero or a new weapon, or you also get, you know, the Sunday challenge. And, and the Tuesday, Super Game. And, you know, and the country versus country competition, or the clan versus clan tournament on Thursdays, and you start having these teams that are basically doing what we call live ops. And in these live ops, you’re basically making the game more and more and more interesting, and more and more and more, kind of the retention goes up, because it’s no longer just the same game that you play, where there’s a jump in more features, every once in a while, it’s actually always interesting. And you may like one event that somebody else made like a different event. And we get today in these games, there’s something today that is called the events calendar, where basically, there’s a whole team, some companies, hundreds of people that are basically planning events for the platform and launching it every day. And so that that’s where games became from just gaming the service to live ops, the next thing that happened is what we called game as a platform, where we started looking at games and saying, Well, you know, we have millions of customers, they spent hours a day with us, we would be stupid, if we just focused on the core game that we’re playing, they can continue playing that core game. But we need to keep these people interested. And so we keep them interested by adding features. That’s one thing we keep them into like, which is game as a service. We keep them interested by adding events, which is live ops. But we can also keep them interested by basically building more layers around the game that basically leverage the platform, the nature of the game. And so that, for example, would be new meta games. So that would mean that you have a game and the game is the mesh three thing. And you know, there’s many of those, but then you add on top of its card collection. Right now, what does card collection have to do with it? Well, he does, because the people are already here, they’re already playing the game. They’re vested in the game, they have currency, they have everything. They can now also do the card collection and you build a great card collection, you can do virtual pets, you can do trivia question years, you could do whatever you want on top of it, because these people are here for the entertainment. And the more entertainment you provide them, the better. And so you can now start thinking about fortnight’s in one extreme, where fortnight is adding new types of battles. And they’re adding new seasons. And they have special events that my kids are waiting for, in or for weeks, because they want to be in that particular event where you can win more, you can win special things. And you’ve got all these special offers. And all of that is turning this into a platform a lot more than it is just a game. Now, when you look at games today, and you understand all that complexity that was created, you basically find that there are two type of game talents that you need in a company. One game talent is indeed what people keep saying, which is you need the game talent you need. You know the you need the fairy dust, you need the director, you need the person that has the ability to create something amazing that people fall for that that’s one thing. But that’s no longer that’s no longer the only thing, what you need today, you need the knowledge and experience of doing everything else, of doing live ops of doing personalization of doing additional meta games, of balancing a kind of a you know, all of these things, you introduce tons of things, there needs to be somebody that balances the economy all day long. Because suddenly, it’s too expensive or suddenly too cheap, or suddenly they don’t need to pay or suddenly the game is becoming too difficult. And so there’s all these new skills and all these skills are not arts driven skills, like the first one. They are numbers driven skills. They are data driven skills. And so all the top gaming companies today have an phenomenal combination of Arts and Science, which is what I love so much about game companies because it’s the only place almost in tech, where there is such a pure connection between arts and science, and you still need the artsy people. Arts in order as a negative thing is a very positive thing you need the creators the people that come up with the idea with the storyline with the characters with making this super cool and make it compelling with that’s the fairy dust that people refer to, but then these people need next to them The people that know what to do with the data that people that collect the data, analyze it, and then use it for all the other thing we mentioned. And so if in the past investing in a games company was just like choosing the right, scriptwriter and director in the movie, today, it’s actually a very different thing. Because while it’s difficult to test the art capabilities, it is very easy to understand whether people possess the science capabilities, right, this is where we come from. So when I look at a team today, usually what happens is that by the time I invest, I am 90% sure that they are great on the scientific part. And I’m probably 50% sure that they’re there on their art part. Right. And so if in the past, every investment like this was 5050, now I’m kind of more like, you know, 7525. And that’s why I can do these investments. So that’s, that’s one thing. The second thing is that even in that, you’d see very big differences between different game companies, some of them are arts led, and some of them are more science LED. And the entire industry that grew up in Israel around essentially three companies that I was, I was very lucky to be involved in all three of them. One of them is called politica, which is about to go public for $18 billion. And I found that I was a co founder of that company, and sold it many years ago, sadly, but it’s doing phenomenally well still run by my co founder, Robert, who’s an amazing, amazing founder, and probably one of the best CEOs I know in the world. Another one a comfortable clarium That got acquired for more, more than half a billion dollars. A few years ago, that was a strategy games company, again, an amazing team of people that built this from scratch with literally no experience in Israel. And then the third one is a company called Moon active, which is now one of the fastest growing and multibillion dollar companies in the games industry. And all these three cup where I’m the investor, and the chairman, one of the investors and the chairman. And all these three companies are companies that have this great combination of art and science, but all of them are probably be more science led than art. And all three of them are companies through that test some of the most sophisticated game theory and data mining and data sciences people and machine learning that I ever know. And basically, every decision in these companies is data driven. And many times I would ask them, whenever another CEO that needs to understand how to be more data driven, and how to be more iterative. I send them for a day in a games company. And they come back with their heads spinning. Because the number of tests and number of iterations you’re doing a game company a day is what you make in a normal company in a month.

Speaker 2 42:41
And that’s why I ended up, you know, kind of asking for a favor sending somebody saying, you know, you’d go there, and you come back and implement the same thing in your company.

Nick Moran 42:50
Give you what comes next after the platform.

Speaker 2 42:54
In game, so yeah, so I think that you know, at the end of the day, the quality of graphics, the quality of internet connectivity, and the type of connection gamers now have to each other while playing the game, make these games platform, bring them to a new era, where the gap between a game platform and a virtual world starts getting blurred. And so when I think today, and you know, some people don’t think about it like this, but that’s how I look at it, when I think about who has the chance to be the virtual worlds where my kids want to spend time in. I think that you know, between the Facebook VR world on one extreme, and the fortnight world and the other extreme, I know what my kids would choose. Right. And so if fortnight had a place for kids and their characters to hang out between the games, and chat and talk, they would be there, they would be there because that is today their identity more than Facebook is their identity. Right. And so in that regard is these games become better and better, and the graphics become better and better. And I’m sure you’ve seen the, you know, some of the latest footage of the latest engines, which is like just unbelievable. I think that there is a chance that the next step is game is a virtual world but a real virtual world. Right. And so, you know, we think about you know, I clearly as a geek, I need to eventually speak about the science fiction movies and books. And so when you think about Ready Player One as an example of how VR can become a major thing in our world, who has a better chance of really building this always this world. Would it be a game company or? Or another tech company? I’m not sure what the answer is. I can tell you that in terms of the starting point. Uh, you know, the game companies have a much better starting points, right? Because I do there a lot of physical movement, I am already used to interacting with other people in real time and kind of, you know, crazy missions there right now I am, you know, I’m totally in love with my character, I equip it, I buy things for it, I’m willing to spend money for it, you know, I train it to dance the way I want it to dance, right? I do all these things. You know, how easy is it for me to now also communicate with my friends using this character, also when I’m not fighting. So I think that is the next potential jump. And indeed, that happened. That takes us industry from 160 billion, whatever it is, to I don’t know, to, you know, to half a trillion or something, because this is where retention just, you know, jumps up to the sky.

Nick Moran 45:50
So before we wrap up, I asked everyone this questions called three data points, I’m going to give you three data points. And you need to ask what three data points you would need in order to get to a decision. Now clearly, this is not the way that startup investing works. But but I’m going to give you a hypothetical. So let’s say a gaming startup comes to you. Let’s say they have 50,000 da use, they have a K value of one and 20% month over month growth. What three data points do you ask for? And why

Speaker 2 46:22
does it start with these three data points that you just said don’t mean anything, they don’t mean anything, because the Dow could be just the question of how much money they’re spending. A k factor of one is just a thing, right? It doesn’t mean much. It’s better than that lower than that, but it’s not that much. And 20% month on month growth is again, just a factor of how much money they’re spending. So actually, if these are the three data points I’ve given you probably at this point, you already lost my interest, because it shows that you’re looking at the wrong data. However, what I would ask you for is your d one 730 60 and 90 retention. Okay? What’s your retention in these days? And if you don’t know, the division of that, again, you’re probably the wrong founder. I would ask you, what’s your arm Dell, even at that early stage? Because they want to understand, you know, what’s been like baked into the, into the product right now?

Nick Moran 47:14
Was that average revenue per daily active?

Speaker 2 47:16
Are they an active user? Yes, yes. It’s not just for the paying users. It’s from it’s for everyone. And then I would also ask you, what’s your RPP average revenue per paying user? Right? So every time the user pays in a day, how much do they pay? And then the last thing I would want to ask a few at this point is what’s your engagement matrices? In other words, how many sessions a day and how much how length of time a day, and create that changes a lot from you know, it looks different on PC on console on Nova, a number of sessions versus length of session. And we these three things, the retention, the RPO and RPU, and your engagement, I know exactly whether this is a successful or not successful game. And actually, you may even know what’s the potential, because the ratio between these indicates the kind of the, it gives me a holistic view that can tell me also almost what’s going to be the potential of the game, unless it changes dramatically, right, you can basically take every game and turn it 180%. But on the core of the game, the way it is now, this would basically tell me what this game is worth. And what’s the potential

Nick Moran 48:22
would does your interchange at all if you know, it’s bootstrapped, and there’s no paid acquisition?

Speaker 2 48:30
No paid acquisition at all? Well, you know, then I would need to ask questions, like, did you get like any influencer that just mentioned you and because, you know, where did the customers come from? Right? Because words don’t come from thin air settee anymore. Right? And if you don’t know where they came from, that’s a ton. They’re big. Yeah.

Nick Moran 48:48
Okay, final two quick questions here. giggy. What do you know, you need to get better at?

Speaker 2 48:57
Wow, so many things. Where do I start? You mean in the problem in in investing, right? Not about my personal life, or, but I you know, I do need to get better in tennis, because I used to be really good. And my kids are getting so good that very soon, I’m going to be behind. So that’s one thing. I think that I need to be better at saying that’s me as an investor. And my personal problem is being able to better say, quick nose. Having been a founder. For many years, myself, Didn’t those are the part I hate the most? I hated that. When did I have to say to 99.6 or 7% of the people? No, all the time. I know that it’s, I remember that. For me. It’s just another company but for them as their only company. Yeah. So that gets me to the point of many times trying to learn more and get more into the deep which is not it’s not best for them because I ended up giving them feedback, but it ends up a lot of my eating a lot of my time, which I don’t have that much of so that’s one thing that I really You need to get better.

Nick Moran 50:00
It’s a great lesson. It’s something I hammer with my team all the time make sure that if the answer’s no, we do it super gracefully and super kindly and provide some feedback. And it worked to our benefit when we raised our last fund, because three of our LPS were founders that we had said no to that, early exits. And you know, it’s not just about that, it’s, it’s like you said, it’s about treating people with respect, especially when they’re putting their their life, their career, their financials on the line for what they’re doing. Yep. And then finally, giggy, what’s the best way for listeners to connect with you and follow along with you and add effects.

Speaker 2 50:39
So my email is giggy attend effects, which is fairly easy. And it’s also on our website, but easiest thing is to go to one of our products, which is called the company brief. It’s the company brief.com. Create a brief which is like a better doc sent just for startups, and for startup founders, and just then send it to us. That is the best way. Very

Nick Moran 51:01
good. Well, geeky, thanks so much for doing this. This is a real pleasure. And hopefully we can we can work together on a gaming startup one of these years that had

Unknown Speaker 51:08
thanks so much.

Nick Moran 51:14
That we’ll wrap up today’s episode. Thanks for joining us here on the show. And if you’d like to get involved further, you can join our investment group for free on AngelList. Head over to angel.co and search for new stack ventures. There you can back the syndicate to see our deal flow. See how we choose startups to invest in and read our thesis on investment in each startup we choose. As always show notes and links for the interview are at full ratchet.net And until next time, remember to over prepare, choose carefully and invest confidently thanks for joining us