Bullshit talks, Money walks
Let’s start with a quick Gaming Econ 101 quiz:
Is a company profitable with revenue of $1m/month and expenses of $800k/month?
(Yes/No/Maybe)
Is company A’s $0.20 ARPDAU better than company B’s of $0.15?
(Yes/No/Maybe)
If you are versed in the idiosyncrasies of free-to-play (f2p) gaming then congratulations for answering ‘maybe’ on both. You don’t have enough information. It is a fairly common practice for developers to state their revenue, not as just the money they receive for their services, but also include what is earned by the distribution platform (e.g. Apple, Google, Facebook). In a practice fairly unique to gaming, developers (devs) call this “gross revenue.” In conventional accounting (GAAP terms), revenue is the money a company collects for its delivered services — not the money a partner company collects and then pays you with.
Take the 2nd question in our quiz. If company A is reporting ARPDAU (average revenue per daily active user) of $0.20, but that is gross revenue, the real revenue they might see after Apple takes its 30% cut is $0.14. If company B was reporting its ARPDAU of $0.15 as net revenue (after Apple takes its cut), then that is actually better than company A.
As an angel investor and now as a founding partner at Signia, I have auditioned thousands of gaming companies and seen many more decks over the past 7 years. Rarely is it clearly stated which numbers the dev is using and so forces the question “is this net or gross?” It is the most frequent question asked by gaming investors, but it shouldn’t be!
In the heady early days of mobile gaming, the practice of reporting numbers as “gross” was so pervasive that the prospective investor, including yours truly, was willing to deal with the noise, mental gymnastics and wasted time. Those days are over.
The industry has simply become too competitive. Now I will ask the question once. If the answer is gross, the pitch meeting is essentially over. I do understand that it is the CEO’s job to sell and make a good first impression. However, the best way to stand out is a firm grasp of the success drivers and the ability to communicate them in the most transparent, direct way possible. When I get a sense numbers are being presented in any other way, I get nervous. Time to move on to the next deal…
Sunny Dhillon (our rockstar principal at Signia), wrote an article that appeared in Venturebeat several weeks ago titled “Mobile is Mordor”, explaining why Signia may have made its last investment in mobile gaming. It has had the desired effect of reducing our inbound deal flow for mobile games. Frankly, we saw too many undistinguished companies come in over the transom. Mobile has become incredibly challenging for various structural reasons, including an almost complete reliance on paid user acquisition. In fact, it has been 3 years since we’ve made an investment in a mobile developer when we put the first money into Super Evil Megacorp (SEMC). If you don’t know SEMC, you might remember them from their presentation on-stage at the Apple WWDC last year or from the TV spot featuring their mobile MOBA VainGlory that Apple ran this past holiday season.
Super Evil Megacorp has the rare culture among gaming companies of consistently under promising and over delivering. As Super Evil’s Kristian Segerstrale stated during a recent board call when referring to Vainglory’s revenue numbers “…net, of course. We always report our numbers in a way that investors can do the math.”
At Signia we have a few other company filters that help us quickly pass on gaming investments. Perhaps we will share those another time, but beyond showing revenue as net, we do expect to see these simple metrics (assuming enough time has elapsed from the launch for the data to be useful). Note that these metrics don’t just apply to games. It just so happens that game devs live in these numbers more than most.
Retention metrics: D1, D7, D14, D30. What is the percentage of users that are returning exactly 1, 7, 14, and 30 days after install?
Monetization metrics: ARPDAU — average revenue per daily active user (net of course).
User metrics: DAU — the number of users that are active on a single day. MAU — the number of users that are active during a month. Please do not show us a total user or cumulative install chart (that’s almost worse than showing gross).
In conclusion, let me be clear that Signia loves backing passionate entrepreneurs. We expect you to put your best foot forward and dazzle us with your vision and strategy. When it comes to the numbers, if you don’t have any — no problem. We invest in teams and vision. If you do have numbers, give it to us straight.
