Creating Value For Video Game Companies

Mitch LaskyBenchmark Capital

Irell & Manella LLP

SERUM

bizpunk.blogspot.com

twitter.com/mitchlasky

Fundamentals

“Value” = Equity Value

Fundamentals

Three Basic Valuation Events

1) Raise money from private investors.

2) Go public and sell stock on an exchange.

3) Sell the company.

Fundamentals

Discounted Cash Flows Method

Comparable Company Method

Fundamentals

Discounted Cash Flows (DCF)

• Today’s value of a future stream of cash flows

• “Discounted” to adjust for time & risk

• Discount rate reflects buyer’s cost of capital (investment return)

• Highly dependent on good forecasting, accurate discount rate (“garbage in, garbage out”)

Fundamentals

Comparable Company

1) Identify competitive sector

2) Determine relevant metrics

3) Assess relative value

Fundamentals

Many Factors Affect Value

• Management & team

• Intellectual property & technology

• Scarcity / uniqueness of asset

• Defensibility of market position

Fundamentals

Marchetti’s Three Laws of Valuation

1) Value is established only by what someone is willing to pay for an asset.

2) Valuation is always about the future. It’s not about what you are “worth” today but what’s expected of you tomorrow.

3) If someone is willing to value your company by a metric other than discounted cash flows, SELL!

The Real World

Think about your exit going in.

The Real World

Rules for Enhancing Value

• Understand what creates value in your niche

• Seek to own or control your value-rich assets

• Manage for long-term competitive advantage

• Strive to be #1 at what you do

The Real World

Why do companies buy?

• Growth

• Market Entrance

• Exclusivity

• Intellectual Property

• Talent

The Old World

Packaged Goods Value Chain

Middleware Distribution Develop.Capacity

OwnedIP

Publishing

The New World

Tools &Tech

NetworkOps

Distrib-ution

Cust.Acq.

Billing& Ads

VirtualGoods

GameDev. & IP

LiveTeamCRM

Strategic Value

Blue Ocean vs. Red Ocean

• Blue Ocean strategies are worth a significant multiple over Red Ocean strategies

• Red Ocean companies are easier to value against comps; have lower likelihood of break-out success; generally lower margins

Strategic Value

Beyond the Blue Ocean

• Market share & aggregation

• Barriers to entry

• Growth vs. cash flow

Strategic Value

Distribution Innovation vs.Content Innovation

• Content innovation drives audience expansion.

• Distribution innovation drives value creation.

1992 2004

Revenue $300 million $3.1 billion

Market Value ~$250 million ~$15 billion

Strategic Value

Recent Distribution Innovations

• iPhone

• Social Gaming

• Free-to-Play + Virtual Goods

• Used Games / Resale

Examples

State of the Traditional Buyers

1/3/06 1/2/09 Δ

ERTS $18.2B $5.6B -69%

MSFT $240B $178B -26%

THQI $1.8B $305MM -83%

VIA-B $26B $12.2B -53%

Examples

Recent Valuations

$50-$100MM $100-500MM $500MM-$1B >$1B

Mythic

Cryptic

DICE

Rare

Traveler’s Tales

Harmonix

Red Octane

Blue Lava

JAMDAT

Pandemic/Bioware

Blizzard

Examples

Going Public

• Predictability

• Operating constraints

• Liquidity

Conclusion