(2/2) $2B/year, $20M of venture $$, and class of Aatrox
How Riot Games helped me found my first venture-backed company, like so many other alumni, and what that means for gaming venture capital: Part II
Working in Riot’s Creative Development team gave me a lot of time with Brandon Beck (co-founder, CEO at the time) and Thomas Vu (a top senior producer) who were heavily focused on building and improving the intellectual property (IP) foundation of the League of Legends game. Though the game itself did not yet look and feel quite as polished as it later would in its $2B annual revenue / 100 million monthly active player state, the core mechanics and gameplay were all there and Riot had firmly entrenched itself as a top destination for elite talent.
Between meetings and sprints on tying together the technical, visual, production, and marketing elements of the projects we were working on, which were tied to major character releases (some of the biggest company-wide milestones), Brandon and Thomas explained to me how venture capital and strategic partnerships had shaped the company.
Before joining Riot I had little concept of how venture capital investment worked beyond bits and pieces I'd heard at Stanford from professors (many of whom were venture investors themselves) and classmates who had worked at or founded startups. Hearing about the early days of building the company and the game from Brandon made clear how the deal worked. Venture money had been the first piece of the puzzle for the two founders. Their thesis of commercializing a popular "mod", or modification of an existing game created by map editors like me, was attractive to investors: rather than creating something from scratch, their vision involved taking the already-proven concept (1M+ highly retained players enjoying the free mod) and monetizing it.
Doing so with the nascent "free to play" model was the core innovation that added both risk as well as a massive potential upside. Raising capital underwrote that risk based on the expected value of the possible successful outcome. Securing the money was a massive challenge for the founders, who had not previously created and run a game, as was convincing top talent to join and build the product once the capital was there. It took years to build a capital base and then attract the talent. Brandon told me all about the years of waging an uphill battle to convince first investors, and then top developers (many of whom said no initially), to buy into the concept and then successfully execute it.
I didn't think too much about it during the wild sprint that was getting our content out to ultimately hundreds of millions of players (that's a story for another post) and signing a fulltime producer offer at Riot, but when I returned to the Stanford MBA campus for year 2 the venture ecosystem sucked me in. A well-established VC was recruiting people to commercialize a hobbyist project involving drones that a friend and I happened to have expertise in.
Things got serious quickly when we got a prototype working, joined forces with several others who ultimately became my co-founders, and attracted offers for real pre-seed money ($1.5M). My first call was to Thomas, who told me to go for it and that if it didn't work out I could always come back to my old job at Riot. That sealed the deal.
The startup endured so I never did; we hit popularity with a game that allowed players to pilot drones from their computers using a videogame interface (players at home on PC, drones in exotic locations in Mexico), and then multimillion-dollar revenues licensing that tech for broader applications to government & enterprise. That eventually got us to $20M in funding and ultimately an acquisition. That's yet more fodder for another post; the most important takeaway years later from the Riot to startup experience when I hopped the fence from entrepreneur to venture capitalist was how venture talent pools worked in gaming.
These pools exist in the broader Riot ecosystem, and others like those associated with Blizzard, Peak Games, and many more; I've had the privilege as an investor to back entrepreneurs from several. All of them have generated billions of dollars in revenue, and built/represented billions more (we’ll go into detail on the exact scale of that value creation, and its best examples, in a subsequent post). They are a function of an immensely powerful talent flywheel: successful venture-backed company turns capital investment into an exponential return -> founders and early employees mentor the next generation -> next generation learns how the model works and the execution standard it takes to succeed -> next generation attracts capital of its own, forges teams with whom they've built trust, and takes the next swings.
More important than simply being able to attract capital, I would argue, is the appreciation & understanding of the talent and quality bar required to gain traction in gaming fostered while working within these talent pools before raising venture. Entrepreneurs from these ecosystems emerge with a great deal of context from having built products that meet the immensely high bar that's forged in the fire of these companies, which have succeeded in expanding the gaming market and simultaneously taking attention share and wallet spend from players who only churn from incumbent products when an upstart offers something truly better.
What does this mean for allocators looking to place dollars into the continually growing videogame ecosystem? Several things:
access to these talent pools is critical
entrepreneurs emerging from them have a highly sophisticated understanding of the venture model and their options
relationships, reputation, and respect are mandatory to secure deals with them, and actually add value as a Board member / investor
The mentorship, learning, and invaluable understanding of the quality and innovation bar that comes from "coming of age" within one of these ecosystems is unbelievably powerful. In future posts we'll delve into the detail of what this DNA looks like with deep dives into examples of alumni from these pools, and how they're building the next juggernauts in the space.