Investment notes: Layer AU$3.88m Seed
Today, we are excited to announce our investment in Layer’s AU$3,888,888 Seed financing round, a managed marketplace seeking to democratise access to licensed content for games and metaverse owners, alongside Carthona Capital, Flying Fox Ventures, Ten13 and Black Sheep Capital.
Golden Era of Gaming
Since its birth in the 1950s, the gaming industry has evolved from its crude arcade-style into immersive worlds where the line between reality and simulation is blurred.
Already one of the world’s largest and fastest-growing entertainment industries before the global pandemic hit, gaming has continued to accelerate into a global phenomenon that is almost a US$200 billion market, eclipsing the global film and music industries combined.
Games are now a bedrock of culture. When the worlds of technology and creativity collide, it transforms the varied imagination of developers into rich expressions of visual art, featuring realistic graphics, voice-overs, use of motion capture technology, music equal to film scores and original storylines.
The increasing diversity of game formats, stories and genres is also driving further adoption while altering the demographic of players dramatically. Gone are the days when the average video game player was a teenage boy roaming the streets of Grand Theft Auto in front of a television screen at home. Among today’s 3 billion global players, the average consumer will be thirty-something, as likely to be female as male, will play on multiple devices and can come from anywhere in the world. Gaming is open to all.
We have been fortunate to have a front-row seat to the industry’s development over the past five years through our investment in Gamurs and are excited to back another team in the space with Layer, a managed marketplace for IP owners and game publishers.
Advancements in technologies such as payment processing standards, broadband infrastructure and developer platforms have reduced the barrier to entry and opened the gaming industry to many new independent developers (indies) and smaller operation publishers.
With a record number of titles launched each year, leveraging IP has become a core strategy to stand out in a crowded market. In 2020, 23% of overall US mobile game player spending was generated by IP-based titles. Furthermore, this market share of IP games is outsized when compared to 9% of games using IP.
The benefits of pursuing IP deals do not flow unilaterally. There are two sides to the industry: IP rights owners who license their content in exchange for royalty payments (licensing out) and licensees of the IP rights, who exploit the popularity of the brand to attract consumers (licensing in).
Global retail sales of licenced merchandise and services reached US$280 billion in 2018, generating royalty for IP owners of US$15 billion. Disney owns one of the largest IP portfolios with which it generates a significant portion of its revenue. But it’s not just globally recognisable brands such as Star Wars that can benefit from leveraging IP; anyone with IP assets should be considering how to monetise their brand.
This is where the problem begins and where we believe the opportunity for Layer is.
Executing IP-based games is fraught with challenges. Given the dynamic environment of games, licensing in games is the opposite of consumer products licensing where licenses are awarded few restrictions beyond meeting well defined commercial criteria and complying with a style guide.
The opportunity for the fast-growing in-game goods and IP-based games segment is arguably similar to consumer merchandise licensing and yet the current process to license games does not reflect this.
Our thesis is that in the metaverse, gaming will become the next great distribution channel akin to newspapers in the 20th century. Many brands optimistically view the space as a limitless market for promoting their products and services and are looking for ways to engage in this budding space as a result.
Early moving brands are starting to take steps to register their logos and trademarks for goods and services that are accessible exclusively in the metaverse, including downloadable virtual goods for virtual online worlds, retail stores that carry virtual goods, digital collections services, and others (e.g. Nike has recently filed an array of trademark applications indicating its intention to sell virtual shoes and apparel in the metaverse as well as acquiring RTFKT).
But outside the major developers and largest licensors (e.g. Nike, Disney, etc), the biggest barriers for a game to license IP are the frictions associated with identifying and securing a collaboration partner and price discovery. For games, deals are bespoke and manual, relying on cold emails or personal and third-party (i.e. agents) relationships. IP holders approach the market passively and with a risk-management-before-revenue stance. It’s an incredibly inefficient market.
Layer aims to address these problems by aggregating and automatically matching parties based on mutual commercial needs. Layer’s ability to add greater value to network participants also extends to providing data insights and tools to help each side assess opportunities and standardise the transaction workflows.
At Aura Ventures, we believe that founder market fit is a preceding criterion for a company to develop best-in-class solutions to problems.
What resonated with our team as we got to know the Layer founders was their deep passion and conviction about the problem domain gained through personal experiences of its inefficiencies.
The two founders, Rachit Moti (former Go1 new markets lead) and Chris Illuk (former Propeller Aero product lead) are not only experts in their respective domains, but also deep-thinking product people. When we first met them, beyond their go-to-market and product expertise, we were impressed by their ability to articulate a long-term vision, build an MVP quickly (entered Startmate in August 2021 with no more than a business plan), and define clear milestones that would substantiate their vision over time.