Tag: andreessen horowitz

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Video Games – Evolving from Social Networks to Ad Marketplaces

video games, startup gamified models, startup gamification, ads, advertisement market

With the 2020 series of events, many of us have started to look for other ways to pass our time. Some have looked towards Netflix and Disney+. A number, baking (even ice cream making; thank you to everyone who got an ice cream machine before me). And others, gaming. The number of friends, who had no track record of gaming and suddenly started talking about how to farm iron nuggets in Animal Crossing: New Horizons, skyrocketed. Anecdotally, more than 3-4 fold more.

Games = social networks

Games have become the new social networks. I’m not even talking about the gaming subreddits on Reddit or the Discord channels out there. And much like how social networks are communal hubs of interaction, games, like:

…*deep breath* just to name a few, offer just as much, if not more. People spend hours indulging on the platform and interacting with friends. Not only that, because content is native to gaming platforms themselves, it makes it easier for friends to connect and share content on progress and goals. Much like groups and communities on social networks, many games have clan systems that increase retention and engagement on the platform. Games are just sticky.

By the numbers

They aren’t discrete “one-off” purchases, like my old Nintendo 64 cartridge games, but evolving engines of narrative and relief, or as Andreessen Horowitz calls them – living franchises. What started as “one-off” buys became downloadable contents post-launch (DLCs). And looking at games like World of Warcraft, Fortnite, with constant monthly updates, patches and hotfixes, the games you buy “in the box” are no longer the same beast as before. And now we have a term for it all – Games-as-a-Service (GaaS).

In 2019, there were over 2.5 billion gamers in the world. That’s about 1 gamer out of every 3 people in the world. Together, they spent $120.1 billion on games and grew the market 3%, in a study by SuperData. And you know even Neilsen wants a slice of the pie when they acquired SuperData in 2018, a research company dedicated to tracking the game and e-sports markets. No surprise, Neilsen’s not alone. 44.2% of Tencent’s investments have been into gaming – owning 100% of Riot Games (League of Legends), 40% of Epic Games (Fortnite), 81.4% of Supercell (Clash of Clans), 10% of Bluehole (PUBG), and even 1.3% of Roblox and 2% of Discord. Sony, Microsoft, Apple, and many others are no stranger to putting their dollar into gaming as well.

Though many in 2019 weren’t bullish on the 2020’s growth numbers, in hindsight, we’re seeing a whole different wave of optimism. Hell, March 2020 was a real winner for gamers, spending $1.6 billion on games, their hardware, software, accessories and game cards, thanks for COVID. Needless to say, Animal Crossing topped the charts. I can’t imagine the number at the end of 2020.

Social athletes

You also have Twitch streamers, YouTubers, mods, and creators who become the local/global authority on the market and often ubiquitous with the games/genres they play. Who can actively and passively sway how a community thinks and acts, just like big-time influencers on social media. They have effectively become, what I call, social athletes, turning their hobby into a full-time pursuit. And earning paychecks by representing the brand/team they love most, as well as through sponsorships and partnerships. Shroud, a former competitive e-sports athlete, now one of the biggest streamers in the industry and formerly exclusively streaming on Microsoft’s Mixer, took a 1.5 month break after the Microsoft shut down its Twitch competitor, Mixer. And on his first day back recently, he had half a million viewers tuning in to watch his revival on Twitch.

The next frontier

Just like how social networks evolved into ad-based revenue models, games are evolving into a similar beast, as well. Mobile games have been no stranger to advertisements for a long time. But we’re now seeing the change now on PC and console games. And in a slightly different nature. Where the ads are embedded into the game experience itself, rather than the pop-out kinds.

Epic Games’ Fortnite definitely took it all to the next level – from their live, in-game events to their virtual cosmetic options that acted as film promotions. The latter, much like, how LEGO releases a whole series of movie-related sets to help with promoting it. And their live events are no joke, whether it was:

  • Their live Marshmello concert (with 11 million attending live),
  • Their Marvel crossover event where players could play as Thanos,
  • Or, when 3.1 million players got a sneak peek into a never-before-seen scene in Star Wars: The Rise of Skywalker before it came to theaters.

As expected, many other games are following suit. Recently popular PC game, Fall Guys, is now hosting a “battle of the brands” on their Twitter – a bidding war to have your brand featured as a cosmetic in the game towards a good cause of donating to Special Effect, a charity dedicated to helping gamers with physical disabilities.

Last I checked, the bid is at $420,069.69. And yes, I’m sure the numbers were intentional.

So, what’s next?

Well, it’s an exciting time. Not too long ago, influencer marketing blew up. And now brands/games are becoming influencers in and of themselves. Whether that fall under influencer marketing or a new bucket, I don’t know. What I do know is that though we are all far apart right now, the world of media is bringing the larger world closer together. As more games:

  • Go cross-platform,
  • Are discovered organically and socially,
  • And are fueled and accelerated alongside co-creaters, influencers and user-generated content…

… while technologies, like 5G, virtual and augmented/mixed reality (VR/AR/XR), cloud gaming, and blockchain, bring more interactions into each game, building larger and immersive worlds, I’m quite bullish on the growth of the gaming industry. And as the gaming industry evolves, their learnings will bleed into other industries, via gamified models – from Pioneer gamifying the process of building a business to Superhuman gamifying productivity, first through emails.

Why? They’re sticky – high engagement and retention cohorts. And I dare say, sexy, as well. Frankly, game companies don’t just launch with minimum viable products (MVP), but minimum viable happiness (MVH). Or as Jiaona Zhang, VP Product at Webflow and lecturer at Stanford’s School of Management Science & Engineering, calls it: minimum lovable products (MLP).

If you’re interested in a deep dive on how to offer MVH or build an MLP, check out my previous post on the topic:

A Reason to Stay

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Looking at Business Models – Consumer Behaviors and Gross Margins

startup business models, waves, consumer behaviors

While sipping on my morning green tea, I’m inspired by Venture Stories’ recent podcast episode where Erik was interviewing Charles Hudson of Precursor, where they codify Charles’ investment thesis, markets, business models, among many other topics. A brilliant episode, if I say so myself! And it got me thinking.

Some market context

In the past few months, I’ve been chatting with a number of founders who largely seem to gravitate towards the subscription business model. Even pre-COVID, that seemed to be the case. And this notion was and is further perpetuated where a plethora of VCs turned their attention to XaaS (X-as-a-service).

Why? Pre-COVID, the general understanding was that consumers were:

  1. More expensive to acquire,
  2. And, harder to retain,

…which I shared in one of my February posts. I’d even heard some investors say: “Consumer social is dead.” Although I personally didn’t go as far as to illustrate the death of a vertical, I had become relatively more bearish on consumer than I did when I started in venture. Clearly, we were wrong. The question is: how much of this current situation will still hold true post-COVID? And honestly, your guess is as good as mine. But I digress.

Given the presumption that the consumer industry was faltering, many VCs re-positioned their theses to index more on enterprise and SaaS models. Models that had relatively fixed distribution channels and recurring revenue. It became some form of ‘guarantee’ that their investments could make their returns. And as the demand for startups shifted, supply followed.

The Business Models

Though there seemingly has been an overindexing of subscription models in the consumer space, I’m still an optimist for its future. The important part is to follow consumer behavior.

  • What do their consumption patterns look like?
  • What do their purchasing patterns look like?
  • How do customers think about value?

Here is a set of lens in which I think about business model application:

Subscription“One-off”
Continuous consumption patterns
>3-4 times in a month
(Ideally, >3-4 times per week)		Discrete consumption patterns
~1-2 times a year
Extremely episodic in nature
Proactive, expectant behaviorReactive behavior
Examples:
Food
Groceries
Music
Education		Examples:
Moving homes
One-off Conferences
Travel
Car
Note: The examples are generalized. The business models will depend on your target market. For example, travel for the average family may not happen on a recurring basis, but travel for a consultant happen weekly (pre-COVID).

The Extremes of Gross Margins

Of course, I can’t talk about business models without talking about profits. The ultimate goal of any business model is to realize returns – gross margins. Unfortunately, there’s no silver bullet on how you price your product. While you find the optimum price (range) for your product A/B testing with your customers, here’s a little perspective onto the two extremes of the spectrum.

  1. If you have insanely high margins, expect lots of competitors – either now or in the near future. Expect price-based competition, as you may most likely, fight in a race to the bottom. Much like the 1848 California Gold Rush. Competitors are going to rush in to saturate the market and squeeze the margins out of “such a great opportunity”.
  2. If your margins are incredibly low, as Charles said on the podcast, “there better be a pot of gold at the end of the rainbow.” You need extremely high volumes (i.e. GMV, “liquidity” in a marketplace) to compensate for the minimal cut you’re taking each transaction. A fight to monopolize the market. I’m looking for market traits like:
    1. Growing market size.
      • Ideally heavily fragmented market where you can capture convoluted, antiquated, and/or unconcentrated processes in the status quo.
      • Why unconcentrated? Don’t underestimate the power of your incumbents’ brands and product offerings. Like don’t jump in ad tech if you’re just going to fight against the Google and Facebook juggernauts, who own 80% of the ad market.
    2. Insane network effects.
    • For example, payments or food delivery. Food delivery is one where you have to reach critical mass before focusing on cash flow/profitability. I get it. It’s a money-eating business… until network effects kick in. Sarah Tavel wrote a Medium article about this where she explains it more elegantly than I have.

In closing

I’ve seen many founders end up taking their models for granted or sticking to a single generic revenue structure. But the best founders I meet make this a very intentional part of their business. Sometimes, even having different revenue streams for different parts of the business. If that’s the case for you too, Connie’s piece about multimodal models may be worth a read.

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A Reason to Stay

Photo by Hayden Scott on Unsplash

In the first startup I joined, we messed up our initial business model by not providing a reason for small- and medium-sized business (SMB) owners to stay. We created a marketplace between SMBs to transact with each other. But, after the first one to three transactions, they had no need for our platform. The scary thing about marketplaces isn’t that you’re connecting suppliers to their demand network, but not providing any bonuses after onboarding – a reason to stay.

Some of the stickiest companies are marketplaces because they provide that reason to stay. More often than not, providing a lovable product so convenient, it’s much easier to use the marketplace platform than to do the transaction themselves, and an easy, passive way to be discovered by future clients/customers that would be much more difficult on their own.

Why Multiplayer Video Games Work

In his book The Messy Middle, Scott Belsky, Chief Product Officer at Adobe and founder of Behance (acq. by Adobe), a discovery platform where creatives can showcase their portfolios and engage with others’, shares that when crafting the ‘first mile’ experience, you need to optimize for three questions:

  1. Why are your customers here?
  2. What can they accomplish?
  3. What can they do next?

Arguably, I believe that founders should always have these three questions hovering above their product strategies, beyond the ‘first mile’, only embedded more implicitly. Video games do an amazing job in this regard, especially massively multiplayer online role-playing games, or MMORPGs for short.

Why play the game? Find escape and sanctuary to be someone players want to be but can’t in the confines of reality.

What can they accomplish? Achieve that endgame that players see in the trailers and in the tutorial (the onboarding for an MMORPG user). The endgame is self-defined as well. Of course, the game optimizes for the power creep meta endgame. Yet, players can always opt for a ‘destiny’, a story, they find compelling, like becoming a fashionista, a wealthy merchant, a mentor, a content creator, and with faster computing systems and more robust infrastructure, a contributor to the game itself, through user-generated content (UGC). The Steam Workshop is an excellent example of UGC.

What can they do next? Level up their character and gear. Tackle the next quest – main or side – towards something larger than themselves. There’s always a defined goal, as well as actionable steps and additional incentives laid out for the players. This creates high retention value – a reason to stay.

The same is true for many other types of genres of multiplayer games – multiplayer online battle arenas (MOBA), battle royale (BR), first-person shooters (FPS), and more. It’s just the narrative of the endgame may change a little towards leaderboard domination. E-sports, content creation, and live streaming then offers a new tier of recognition and endgame for many veteran players.

Back to Marketplaces

I’ve always argued that as a founder, you want to focus on unscalable wins before thinking of scale pre-product-market fit. Focus on the individual experiences. As Li Jin, partner at the reputable a16z, wrote in a post about the passion economy, “[great founders] view individuality as a feature, not a bug.” The best marketplaces, like Uber, Airbnb, and Medium, started off focusing on the unscalable wins for a small individual subset of their potential users. These products offered their early users a reason to stay:

  • (Additional) Incentives and tools, to make their stay worthwhile;
  • Discovery platform to help them grow their brand and customer base, actively and passively;
  • And, subsequent community and network effects.

Early adopters jump on a new product, as fast as they jump off one. They’re finicky. They’re window shoppers, but at the same time, the most willing and likely to try out your product. Luckily and unluckily, the San Francisco Bay Area has no shortage of these folks, and being a tech startup, with its initial user base here, often inflates your early metrics. In short, the goal of your product is to make these technological butterflies fall madly in love with you and your product. That’s the tough part, but it’ll also mean you’ve found product-market fit (PMF).

Where do we find ‘love’?

Instead of a minimum viable product, or MVP, Jiaona Zhang, Senior Director of Product at WeWork, in her First Round Review piece, chases the “pixie dust”, or what I like to call the secret sauce – a truly unique, money-making insight. This magic is found through diligent iteration on consumer feedback, especially in the beta stages of a product. During the beta, users have the serendipity to discover “that magical moment in the user journey where the user realizes that this product is different from anything else they’ve ever experienced”. Her framework, designed from the perspective of the consumer:

Wouldn’t it be cool if users could [a process/action that would 10X their lives]?

What We Learned

The same was true for us at Localwise. Of course, we were motivated by poor retention metrics. But, we learned what businesses truly needed by asking each of them in person, as well as flyering (and getting rejected, or worse, ignored) to college students and to shops. So, still deeply in love with the community we built, we found that need when connecting local talent to SMBs. For businesses with high churn rate with temporary employees and a need to build a brand, that was their reason to stay.

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