EGD 067: Gigi Levy-Weiss, NFX
Today I’m talking with Gigi Levy-Weiss, the managing partner of NFX, a seed-stage and Series A venture firm. Before starting NFX, Gigi was a founder and one of the companies he founded was Playtika. Since early in his career, Gigi has worked in gaming and with gaming companies, and he has a lot of interesting insights into funding and company building.
- Israel has been building up a gaming ecosystem
- They have mobile gaming companies Playtika, Plarium and Moon Active grow and spawn people
- “So right now in Israel, we have very happy with three very successful game franchises. And now the industry is thriving because around these three great game franchises, we’re seeing hundreds of games companies that are starting, I think a little bit what you’ve seen in the Nordics over the years when you get the seeds and then people leave each one of these seeds that they start companies with similar DNA.“
- The essence of network effects for startup founders, is to think about users bringing continuous value to each other, once they are in the service
- “Once you start thinking how your users can bring value to each other, then suddenly you’re creating more defensively and this is these are the kind of thing we’re doing.“
- Zynga’s power in the early days was based on having users who stick around and then move to the next game, but Zynga was unable to move to mobile
- “And so we can basically go to them with our next game in a cheaper way. And that’s going to keep us on top. And that actually worked for a few years, until they didn’t move well to mobile.“
- Network effects in gaming
- Candy Crush has invites but those are viral effects, since they don’t in themselves create a long lasting effect. Friends can churn immediately.
- “when you want to get more lives in Candy Crush, invite five friends, that not network effects, that’s a viral effect. It’s a viral effect, because you’re basically giving me something that I want that potentially should have cost me some money or that I could have bought for money. And you’re giving me a cheap alternative for that. And so I’m doing good and everybody’s happy.“
- “So if we mentioned Candy Crush, yes, the invite a friend is not important, but maybe the map with you see where your friends are on it once you connect to your Facebook account. That’s kind of challenges you to do a bit more. And that is basically a very, very limited small network effect.“
- Clash of Clans is still at the top of gaming because of it’s network effects
- “Clans, where basically the behaviour of a Clan is a full social behaviour, like a small social network where the pressure, the peer pressure, to contribute to the Clan, to do more to bring more resources is actually becoming exactly what you want it to be, which is it brings you more value because there’s because there’s other users, the other users are getting more value from you.“
- Coin Master is fun, and has network effects, when you have your friends playing, you are stealing money from them and revenging them.
- “The core of [Coin Master] is the attacking and stealing your friends money. And what we found that is that realistically, if you don’t have friends in the game, then the game is not as fun. And that becomes a real social experience, which is why the game is has such strong retention and such strong engagement because the actions are actually happening between friends.“
- Candy Crush has invites but those are viral effects, since they don’t in themselves create a long lasting effect. Friends can churn immediately.
- Network effects in the metaverse
- “The first thing is, how easy would it be to create additional worlds like this? Additional mega worlds? And the reality of course, is that the more comprehensive the world is, the more network effect there is in it, meaning that there you already have the connections. You already have all your assets, you already have everything, then it’s going to be tougher and tougher to create these new mega worlds. This is why these companies are worth so much because they are becoming mega worlds.“
- Supercell is a creatively lead company
- The art side is strong at Supercell
- “But Supercell is very clearly led by the creative element, where when you look at the way also the way they develop the games, again, I’m not involved in the company, but I have many friends in the company, how they started developing the games, all the way to up out to basically, they continue developing the features for the games. This is led by the creative part of the business. Supercell is a company where my judgment from the outside is that even today with all you know, billions of revenues and hundreds of millions of players and everything. I still think that is a company that is sub-optimized.”
- It’s hard for scientific people to join Supercell, since it’s so creatively lead
- “On the other hand, I know that when some of the more scientific and numeric people join the Supercell in some cases, it was tough to them because it was creative lead.“
- The art side is strong at Supercell
- It’s easier to invest in a data-driven games company
- “After investing in 20 games companies, it is relatively easy for me to know which team can excel on the scientific optimization side. And it’s almost impossible even for me after doing all this all these years to predict who is going to be amazing on the creative side. And that and that, basically is why I think a lot of the investments in the industry over the past few years went towards the more scientific side of things, because this is easier to analyze.“
- “You know that if you’ve got the people that have these skills, it is likely to be optimized well, it is likely to be to allow them to develop the product in an iterative process that will get them to the feature that will get users the right KPIs that they want.“
- Generalist funds in gaming, figuring out gaming
- Anyone can invest when the games company is making $10m
- “I think that the big difference between there.. so take step backwards, I think everybody could invest in a games company once the revenues are in the 10s of millions of dollars. The reason is that, unlike any other industry, you’ve got so much data, and you’ve got so many KPIs that you can analyze that literally with, you know, an hour in the data room, I know the health of a company all the way.“
- There’s no reason to have specialized later stage gaming VCs
- “And to be quite frank, there’s no late stage specialized game VC. The reason is that once it becomes late stage, there’s really no benefit to your gaming specialization. Simply because everybody can analyse the data. Everybody can look at it, everybody can can find comparables and stuff. So the question then becomes who has more money, who is more general contacts who can help more company building.“
- How generalist funds could invest at early stage of gaming?
- 1) Develop a sense on measuring the creative talent and flare in the company
- “The first thing is having that nose that can smell whether something has derived creative flair, which is you know, everybody that’s in movies knows that to do this for movies, and everybody that’s in music knows how to do that in for music, and everybody that’s good in investing in games need to have that.“
- 2) Develop an ability to understand the early numbers better
- “The second thing is that being able to detect already for early KPIs, what’s happening in the in the game? Meaning that Yeah, for generalist VC, you need a lot of numbers, you need the lawyers, you need the revenues to be able to analyze, but oftentimes more educated person in the games industry can see this a lot earlier.“
- 3) Develop pattern recognition for spotting success in early stage companies
- “And the third thing is to be able to better analyze whether the character of the people that you’re interviewing is in line with a pattern recognition of what’s successful in early-stage games companies.“
- 1) Develop a sense on measuring the creative talent and flare in the company
- Anyone can invest when the games company is making $10m
- Playtika’s acquisitions
- It seems that Playtika isn’ as hands-off as Zynga and Stillfront
- “When you look at Playtika, they created a very sophisticated optimization machine, that basically: they buy a company. And once they bought the company, they are starting to implement some of their capabilities into this company, into the game. And I think that’s part of it, you know, without giving too much detail part of it is actually technological. And what they’re doing is that they’re basically putting all their tech skills and capabilities into the game, so that the game becomes better. In day zero, almost.“
- They look for companies where they can immediately change the performance of the games
- “And so I think why the Playtika acquisitions are more interesting is, because they basically taken every company that they acquired, and they dramatically changed the trajectory. In other words, it’s not about more of the same. It’s not the same natural growth. And it’s not just about spending more money. It’s about increasing ARPU, it’s about increasing retention. It’s about putting additional layers of meta games into these into these games in no time because everything is already ready. It’s a service that you can call. And this is something quite unique that nobody’s done before.“
- It seems that Playtika isn’ as hands-off as Zynga and Stillfront
- Investing in metaverse companies
- These companies take a long time to build and it’s hard to get a conviction on something working early on
- “I think that many of these, when you look at it, have had very little venture investors, because the cycle to get from beginning to successful business is incredibly long. And, and so, yeah, I’m sure there are, there will be new ones, but each one of those took like 10 years, and a lot of turns and a lot of bad years. And so you know, it’s very difficult to identify them.“
- These companies take a long time to build and it’s hard to get a conviction on something working early on
- How much CEO should be involved in game making
- A games company makes great games. Nothing more. No biz dev needed.
- “You know, it’s the business is incredibly simple, right? If you build a great game and you know how to market it, then you know how to then do live ops and retain the customers and you know how to monetize it, then you’ve got a great business. It’s very simple. It’s very clear.
- You don’t need to go outside. You don’t need to go to many conferences. You don’t need to speak on many podcasts. You need to basically iterate and iterate and iterate and iterate until you find your games product market fit, or you don’t, and then you move to the next game. And if the CEO is busy in other things, that means that there’s less attention on these things, which means the chances of success are much lower.“
- A games company makes great games. Nothing more. No biz dev needed.
- Questions: Why do Supercell people identify as creative lead? And why Playtika people identify as data lead? First, it is a part of the tech, startup and gaming culture in these countries. Second, that’s what they’ve been good and so the heritage is what they are proud about.
Early mentions of Gigi
I talked about Gigi in EGD News #38, and there some additional knowledge shared there, so check it out.
NFX video presentations
Here are some of my favorite Youtube videos from NFX.
Hey, kicking it off. I really want to hear like how you got into involved into tech into gaming and eventually getting into venture investing.
Gigi Levy Weiss 02:51
So it’s, it’s a long story. I’ll try to shorten it. The beginning is that I grew up in Tel Aviv and like everybody in Israel went to the army. I was a pilot. And then as you get out of the army in Israel, the typical thing to do is to say, Hey, I’m smart enough, I can start my own startup. Because that’s what everybody does here, of course, a lot more today than it was when I graduated the military service, but it was still already then quite a thing. And so I started my first company that was not successful. My second company was more successful sold that fairly early not not a huge exit, but more money than I ever thought I’m gonna make early on, and then continued creating companies and every once in a while, some managing larger companies and sort of thought that that’s what I’m always going to do. And then around the 15 years ago, while managing a large company, a friend of mine from the squadron came with an idea. I really liked the idea and I gave him $25,000. And I said,
Gigi Levy Weiss 03:52
you know, yeah, let’s go for it. And I helped him along the way a little bit. And, like, it was the first one a year and a half later, I think Get a check for, like, you know, 20 x on the SEC. Okay, great that I can do that. That’s nice. Yeah. And so I’m gonna take all that money and reinvest it. And so I invest in another few companies and another few are successful. It’s a lot of it is the vintage, we’re talking about the great the good years of the internet, where every great team with a good idea basically succeeded a lot less competition. And so this becomes something that I do as a hobby. And then in 2011, as I left my last day job as CEO, I was running the games company called the 888 traded in London, Canada, 2000 people, you know, everyday job. And as I was leaving that position after five years and about to take another one, one of the companies that actually founded along the along the ways, which is called playtika, which is a games company, we can talk about that later, get sold, and it gets sold the less than a year after we found it. So you know, We found that it and then after less than a year in season directive, acquired it. And we made the each one of us the three founders made the nice outcome out of out of it. And then I thought that maybe it’s a good indication that instead of finding a day job and doing investment as a hobby, I can turn investments into my day job. Yeah. So
in 2011, I started investing full time, over the years invested in more than 100 companies as an angel investor. I was very lucky investing in some of Israel’s finest entrepreneurs and and being part of their journey.
And so till now more than 30 experts in various fields, and then four years ago, ended up finishing my journey into the dark side, as people say, from being a designer to then being an executive and then being an angel and then eventually becoming a VC. And they set out a VC called and effects together with two great partners in Silicon Valley. But really a bit different. We’re all of us are founders. And we’re very much a founders for founders. We can talk about that later. And so today I have today I write a VC.
And the funny thing is that across everything I did, I grew up as a gamer. And I think that one of my first moneymaking things ever was I remember coding games in on Commodore 64 for people in my neighborhood where basically what I learned is that personalization works. What I used to do, I used to sell them a game, like any stupid game, but I would put into the code that their name would appear there, or a character that does it looked like that because the pictures were huge, but the character that somehow resembles them. And and I used to, I used to send it to them because they were excited that they could get something personalized and I remember sending these cassettes and so I was always a gamer.
I always loved gaming, it was part of everything I did all my life. And I think that when I ran they did eight which eight is a is a gambling company’s an online gambling company. And when I looked into what are the capabilities that exists inside the company that we can take elsewhere, one of the areas that immediately jumped to mind were games. And I started looking for games, talent in Israel, there was none. There, Israel was completely out of the throw was great in telecom equipment was great, and, you know, Voice over IP and the security and everything, but there was really no game industry. And so I started thinking, what would it take to create one? It really no. And so I started investing in companies in the field. And so the first one was not great. The second one was not great. But then I think the third one was a company where I’ve had an idea, not the not the actually not the real idea that eventually Playtika became famous for but I had an idea I gathered the team, and we started working on something and that became Israel’s first mega games company. Then after that, I invested in a company called Plarium was one of the first Investors was the chairman of the company in Clarion became the second mega game company in Israel, which is a you know, strategy and RPG game company that eventually got sold to an Australian company called Aristocrat for never disclosed, but pretty hefty amount. And then after that, one of my other companies that I invested actually, eight or nine years ago when he just started I think was the first investor called Moon Active became the third Israeli mega game company.
So right now in Israel, we have very happy with three very successful game franchises. And now the industry is thriving because around these three great game franchises, we’re seeing hundreds of games companies that are starting, I think a little bit what you’ve seen in the Nordics over the years when you get the seeds and then people leave each one of these seeds that they start companies with similar DNA.
And so now the industry is just booming more than you could ever expected to in such a short time.
Joakim Achren 08:57
So I actually bumped into NFX last year. Because I was seeing Jamie, on some, some YouTube videos talking about the network effects, which super interesting theory around, especially in gaming where you have social social ties to players inside the games. Can you talk about the thesis of an effects, the network effects and how that relates? How do you see that relating to gaming?
Gigi Levy Weiss 09:22
Sure. So when we set out the fund, we thought, you know, like anybody setting up a fund, we thought do we want to have any specific theme that we’re focusing on to make the fund more successful. And the one thing that immediately came to mind, which was something that each one of us, James (Currier), Pete (Flint) and me touched with many of our companies over the years was the theme of network effects and network effect is this
phenomena where you create products where the next user joining the product brings value to the group that’s already in the product but even more so importantly, gets a lot of value from the fact that there are many other using using it. Then the two easiest displays of network effects are networks and marketplaces and networks are WhatsApp, or Facebook. For that regard.
We’re basically, even if somebody comes tomorrow with a slightly better product, the reason why describes defensibility is because of all my friends, and all my groups and everything already in this application, so I’m not very likely to leave it. And so that’s a network effect. And the more users that are using it, the stronger it becomes, and it just becomes a more reinforcing phenomenon. And that’s great, what we call defensibility.
And in marketplaces, if we think about eBay, then the more buyers there are the supply the sellers needs to be and the more sellers are this, the place that the buyers need to come to, and it could, you know, the UX could be horrible and the service could be not great. And it could still look like an application or like a website that was created years ago. And still, it doesn’t matter because the network effect is there. I may not like it, but if I want to buy something, this is the place where secondhand things are so I’m going to go there And then of course, as you go into the stronger network feature places where you need very high density like like a local marketplace like Craigslist, you can even be a worst product and survive because if I want to sell my bicycle in Chicago, then I’m going to go to Craigslist, because there’s no other place that has enough density for me to be able to sell it and vice versa if I want to buy it.
And so these network effects are a phenomena that covers something topic that we call this instability in startups, which is what we believe brings high value to startups and there are other different stabilities in business but these are the difference abilities are usually very much not available for startups are for example defensibility can be a brand. So you know, Apple has such a huge brand that they can come up with an okay product, sometimes people will still buy, but unfortunately a startup can’t wake up and say I want to have the greatest brand tomorrow. And the other one could be scaled Walmart, you know can have so much scale that it can go and buy things the cheapest and then sell it the cheapest to customers and clearly that’s amazing. However, again, I can’t wake up with a straight up and say I want to start with scale.
And the other one is what’s called embedding. embedding is when you’re an Oracle and you put your database in, and then nobody can take it out. Or when you’re an Intel and your your chip is inside the computers that others are standing, again, startup come to people and say, I want to be embedded, please let me in. Because when you’re strong.
And then there’s a little bit of tech IP, like patents, which today hardly work has true defensibility. And so the only thing that is really native to technology and native to startups, very native to the internet world, and our network effects.
And when we looked at the value of companies, that of tech companies from the beginning of the internet in 1994, we found that that around 70% of the value came from network effects businesses, but only around 20% of the companies we’re seeing had network effects to their core.
So this realization that only 20% of the companies with a very specific characteristic. Getting 70% of the outcomes and the fact that all the companies that we like, all the companies that we think about and say, Wow, that’s a great company, all of them are network effects company, you know, be Uber be Slack via Lyft be, you know, all these companies are network effect companies. And that got us to decide to focus on it. And so that’s, you know, we thought we focus on it as much as calling our fund and effects. So, so good three letter domain, of course, and, and so that’s our theme and what it means it doesn’t mean that we only invest in companies that have inherent core network effects, although many of them do. It means that we would often invest in entrepreneurs that have another business, but wants to create network effects defensibility around or products to include it so you can have a SaaS tool, and that SaaS tool is a single player thing. But
Joakim Achren 13:58
Do you think like the on the gaming side, probably the strongest example is Supercell, with how they’re kind of like the incumbents now, and nobody can topple them because of all their network effects.
Gigi Levy Weiss 14:09
So I think that in games, there are a few layers of network effects. And I think that many times people games is the place where people can choose the most and network effects with viral effects. And you know,
when you want to get more lives in Candy Crush, invite five friends, that not network effects, that’s a viral effect. It’s a viral effect, because you’re basically giving me something that I want that potentially should have cost me some money or that I could have bought for money. And you’re giving me a cheap alternative for that. And so I’m doing good and everybody’s happy.
That’s not network effects. The product does not become better for me, or for the other user, because I’ve just invited friends. In other words, in even more so some would say that the product is far worse because I’m spamming and that in general, if you just gave me the lives, I would be a much happier customer. These are viral effects.
In games, eventually, network effects don’t exist in many games. And so the network fit that we do see, the first year it is, before you look at more deeply true multiplayer games. The first year was basically having a network of players. And so that was the original Zynga thesis, if you remember, we have so many games, and we have so many users, and now the viral channels are closing down. But we already have hundreds of millions of users.
And so that was the first layer of network which really had nothing to do with the product. They said just to do with distribution and access. So that was one thing.
The next layer of network effect comes when you’re starting to expose the user to what other users are doing.
So if we mentioned Candy Crush, yes, the invite a friend is not important, but maybe the map with you seeing where your friends are on it once you connect to your Facebook account. That’s kind of challenges you to do a bit more. And that is basically a very, very limited small network effect.
But it does create that. And then as you go to more and more games that are really, really social, then you’re starting to feel the real network effect, of course, all the way to games that have
Clans, where basically the behaviour of a Clan is a full social behaviour, like a small social network where the pressure, the peer pressure, to contribute to the Clan, to do more to bring more resources is actually becoming exactly what you want it to be, which is it brings you more value because there’s because there’s other users, the other users are getting more value from you.
And the game developer looks at and says that’s great because they get more more involved in the game. I think that brought it to the extreme in terms of leveraging these network effects in a very, very simple way is Moon Active’s game Coin Master. Because Coin Master is, you know, it is it has a little bit of casino elements or you could call it social casino game, but the core of it is not the casino game.
The core of [Coin Master] is the attacking and stealing your friends money. And what we found that is that realistically, if you don’t have friends in the game, then the game is not as fun.
Stealing the money or for stealing in double brackets, the money from people you don’t know is not as fun. And when somebody steals your money and you don’t know them, you don’t want to revenge as much. Because you don’t know them. You know, who cares? But the minute they’re people that you know, in the game, that becomes really exciting.
And that becomes a real social experience, which is why the game is has such strong retention and such strong engagement because the actions are actually happening between friends.
When you think about Supercell I think that one of the most amazing things that Supercell did is when you look at a game like Brawl Stars that allow two kids to very easily play together because they’re close to each other. And, and basically now yell in real life as the battle together against another game. I think that this is really This is really the, you know, a great a great experience that without it, the game would have been great, but would not have had these numbers.
And, and so network effects are very much embedded into modern gaming, especially in multiplayer gaming.
And I expect that as games become essentially virtual worlds more and more, right, and as I you know, I can’t see a world where a few years from now, you will play fortnight only in the game, and you would not have a life for your character when you’re not fighting. Yes, right. We’re still in this bizarre world where get getting into the game you’re fighting within your character goes to sleep and you’re not fighting the character is not doing anything other than if you buy some skins. And I’m you know, I’m kind of sure that the games that the monster franchises are going to expand and as they expand and as your character becomes more socially engaged with other characters, I think that these network effects are only going to get stronger which means that getting new games to beat the old games is going to be tougher and tougher.
Joakim Achren 19:03
Yeah, let’s dive deeper into talking about the structures in these games companies and how they operate how they think, again, a previous podcast that you had with Erik Torenberg, you mentioned this interesting distinction between creatively lead games companies versus data driven games companies. Can you expand on those?
Gigi Levy Weiss 19:24
Yeah. So I need to be careful here. Because I got, after this podcast, I got beaten by both the people that I considered creatively lead leaders and the people that I considered the data driven leaders.
Each one of them, of course, assumes that he’s really good on the other, the other side, and so everybody’s grading everything, I’m not undermining anybody. And I’m talking just about, you know, everybody is great at both, and I’m just talking about who has a little bit more weight on both sides.
Joakim Achren 19:50
It’s a theory.
Gigi Levy Weiss 19:53
Let’s keep it there. Please do not use my theory to think about anybody in particular. But, over the years as I’ve ran into a similar actually two types of game companies. And I think it’s better to start by explaining to people that are not from the game industry, that games is probably the toughest startup to build. Because it is a rare creation of art and science.
And when people listen to me say that many times they say, you know, you’re just are just science that we don’t understand what you’re talking about.
But the reality is that you can take the most brilliant game design, like, you know, amazing, amazing game, amazing graphics, amazing story. And if the game is not balanced, balanced for those that are not not familiar with it, meaning that you need to spend too much time on a specific level or you need to spend too much money on something or it’s something’s just too difficult. If the game is not balanced, then it doesn’t matter that the creatives are great. The user is going to try it once twice, they’re done. They’re going to go away. Because they can’t, you know, there’s no progression that makes fun for them. If on the other hand, you bring the best, the best level designer, and mathematician and the game is perfectly balanced, but it just doesn’t have the, you know, the fairy dust of something that is beautiful and fun. And you know, beautiful is not necessarily just really beautiful, something that just captures the mind in the right way, then yeah, you know, the math will push me to progress at the right pace. But I will get bored and I will just move on in life.
And so again, games companies are tough because you need to have that great combination of art and science. And I think that in some of these companies, and this is after really investing in like 20 of them. I think in some of these companies, you found two founders, one of them was the art person and one of them was the science and art is not necessarily the the art of drawing art is everything. It’s the creative of the game.
And so in companies like Playtika, there were two, Robert who was the numbers and an operations guy and Uri, who was the creative and game thinking guy and together, they created this amazing balance that made the company what it is.
And in other companies, you get founders that actually do both. And so I think that there are while all companies need to have both, what I’ve found over the years is that there are companies where the creative elements are stronger. And there are companies where the scientific mathematic element is stronger. And this creates very different DNAs in these companies.
And so if I take two companies, let’s take Supercell on one hand and Playtika on another, both of them are creating great games, and both of them are incredibly successful companies.
But Supercell is very clearly led by the creative element, where when you look at the way also the way they develop the games, again, I’m not involved in the company, but I have many friends in the company, how they started developing the games, all the way to up out to basically, they continue developing the features for the games. This is led by the creative part of the business.
If you look at a company like Playtika, while of course there is creative, a lot of creative in there a lot of creative people, a lot of very talented people. The way the product is developed is always based on data. The way the product is optimized is always based on data, the way the users are presented with options are only always optimized by the data.
Now, both of these methods created incredibly successful companies, but they’re very different in their DNA. And I think it’s kind of funny to see that I don’t think there was a single employee in history that moved from Supercell to Playtika or vice versa. And when Playtika tried to bring in some of these creative people, they found the very optimizing DNA to be tough for them, because you can’t really build for the sake of the creative element.
On the other hand, I know that when some of the more scientific and numeric people join the Supercell in some cases, it was tough to them because it was creative lead.
Now, as I said, both of them create great companies. I think that the one thing that I that I told Erik and I did I find important as an investor, is that the only big difference between the two is that even
after investing in 20 games companies, it is relatively easy for me to know which team can excel on the scientific optimization side. And it’s almost impossible even for me after doing all this all these years to predict who is going to be amazing on the creative side. And that and that, basically is why I think a lot of the investments in the industry over the past few years went towards the more scientific side of things, because this is easier to analyze.
And it’s almost impossible even for me after doing all this all these years to predict who is going to be amazing on the creative side. And that and that, basically is why I think a lot of the investments in the industry over the past few years went towards the more scientific side of things, because this is easier to analyse.
You know that if you’ve got the people that have these skills, it is likely to be optimised well, it is likely to be to allow them to develop the product in an iterative process that will get them to the feature that will get users the right KPIs that they want.
Again, you also need to make sure that there’s great creative people and but this is more predictable than saying, if we build a great game they will come, which is, you know, this is a bit overdoing it but this is basically the premise of counting on the creative flair.
Joakim Achren 25:06
Yeah. Do you think it’s like for investing? The best option is to invest when the creative people have sort of like, figured out what is, you know, the magical game and then you go into optimising that because this, like Playtika’s case and even recently you had Peak Games, which was an optimizing company for the last several years. Like is that the face when it sort of makes sense for these kind of like, big outstanding returns for VCs? Or can you invest when there is nothing really there? There isn’t a product yet?
Gigi Levy Weiss 25:44
Yeah, it’s a great question. I think that when you invest in people that have the right background and skills on the optimization side that they are likely to do okay. And you can basically it’s easier to bet on them even before you see the game. When you invest in people that are creative and It’s very difficult to bet on them early on. And that’s why many of these creative flair games, companies, unless it’s people that are very senior and people know them and they can basically raise their reputation. In many of the other cases, investment comes up to you have an initial playable game out. And people can see that you’ve got the flair people can touch the game and feel that it’s that it’s really, really great.
And, of course, I think that you as I said before, you need both of them. Although I have to say that when you look at Supercell.
Supercell is a company where my judgement from the outside is that even today with all the you know, billions of revenues and hundreds of millions of players and everything. I still think that is a company that is sub-optimized.
In other words, I’m quite sure that if you got more scientific elements of optimization into it, then it could make more money. Now, it may turn out to be a different company, which is not what the founders want, which may eventually change the DNA of the company, which is not great. Yeah. But it’s clear that most successful company in the recent years, had both. And all of them, I think all the new ones that entered the market as Peak as Playrix, as one active at a very, very strong leg of science and optimization, a lot more maybe the creative side of the business.
Joakim Achren 27:21
Yeah. Like this is an observation that I’ve had like the early stage seed investors, they’re betting on the domain expertise in the team. And then then when you go into like the Series A, B rounds, then you’re doing more based on data, that it’s already, you know, there’s numbers that are going up, then it’s more favorable for a generalist VC as well to get involved. But how do VCs who understand gaming, in your mind see gaming as venture scale versus the generalists?
Gigi Levy Weiss 27:54
I think that the big difference between there.. so take step backwards, I think everybody could invest in a games company once the revenues are in the 10s of millions of dollars. The reason is that, unlike any other industry, you’ve got so much data, and you’ve got so many KPIs that you can analyze that literally with, you know, an hour in the data room, I know the health of a company all the way.
You know, there’s 50 questions that I would ask that will immediately tell me what’s happening in the game early on later on. What’s the end game of the game? Are people liking it? Are they loving it? That’s great. And so the minute that you get enough users to have meaningful data, this is becoming something that everybody can invest in, literally everybody.
And so when you look at all the large rounds in the large games, companies, none of them came from specialised VC.
And to be quite frank, there’s no late stage specialized game VC. The reason is that once it becomes late stage, there’s really no benefit to your gaming specialization. Simply because everybody can analyse the data. Everybody can look at it, everybody can can find comparables and stuff. So the question then becomes who has more money, who is more general contacts who can help more company building.
And that’s why we haven’t seen any late stage game pieces. When it comes to the early stage. There are three things that are quite unique, where you, especially as VC can can do a much better job.
The first thing is having that nose that can smell whether something has derived creative flair, which is you know, everybody that’s in movies knows that to do this for movies, and everybody that’s in music knows how to do that in for music, and everybody that’s good in investing in games need to have that.
That’s one thing. Yeah.
The second thing is that being able to detect already for early KPIs, what’s happening in the in the game? Meaning that Yeah, for generalist VC, you need a lot of numbers, you need the lawyers, you need the revenues to be able to analyze, but oftentimes more educated person in the games industry can see this a lot earlier.
Right? And so it’s… many times you see it, it’s kind of funny. You see a games company that is going to, okay numbers. And then all the game companies look at buying it and nobody, nobody buys. And the VCs that invested they sometimes they don’t understand. I’ve had one of these, they don’t understand it, but the numbers are okay. Yeah. But the point is, yeah, they look okay. But if you’re in the genre, if you know exactly what to expect, you see the weakness at the end of the retention, you see the fact that people are coming every day. But the engagement is low, you see that it’s monetizing, but it’s not spread correctly between the users, you see a bunch of things.
And so the first thing is to be able to identify early on whether there’s a creative flair.
The second thing is to be able to understand the early numbers better.
And the third thing is to be able to better analyze whether the character of the people that you’re interviewing is in line with a pattern recognition of what’s successful in early stage games companies.
And I think that this combination, these three things are the reason why quite interestingly, unlike in other fields, or maybe there are a few very specific ones.
But in the early stage investing in games, you see that most of the companies that became successful, that had external investments came from people that are in the game industry. So there’s not a lot of generalist investors because it was very difficult with thousands and tens of thousands of game companies. It’s only this specific either with a specific knowledge of games that were able to identify who’s going to be more more successful.
Joakim Achren 31:25
Like thinking about the whole mobile space where recently happened the Peak acquisition by Zynga, there’s been a lot of these bigger companies forming up, who gathered, like Playtika, acquired Seriously last year. The forming of these incumbents now in mobile, do you think there’s still space for like fast moving startups? Or is it more about like figuring out the creative side, getting a really good game, scaling that up and you become one of the big ones like why didn’t Small Giant stay independent, like questions like these. What do you think?
Gigi Levy Weiss 32:02
Yeah. So first thing is that I think that both companies, both Playtika and Zynga did a phenomenal job in their acquisitions, especially the latest ones Zynga did like some bigger ones, but they did a phenomenal job with their acquisitions. But I think there’s a big difference a big differences. And again, this is knowing it from the inside.
When you look at Zynga, basically they buy the companies, and they’re more or less, let them be. A little bit of IT, a little bit of this, but they let them be.
When you look at Playtika, they created a very sophisticated optimization machine, that basically: they buy a company. And once they bought the company, they are starting to implement some of their capabilities into this company, into the game. And I think that’s part of it, you know, without giving too much detail part of it is actually technological. And what they’re doing is that they’re basically putting all their tech skills and capabilities into the game, so that the game becomes better. In day zero, almost.
And so that the founders of the company that sold the company to play the cup are suddenly their eyes open, and they see all the opportunities and all the things that they can do. And that’s where the magic starts to happen.
And so I think why the Playtika acquisitions are more interesting is, because they basically taken every company that they acquired, and they dramatically changed the trajectory. In other words, it’s not about more of the same. It’s not the same natural growth. And it’s not just about spending more money. It’s about increasing ARPU, it’s about increasing retention. It’s about putting additional layers of meta games into these into these games in no time because everything is already ready. It’s a service that you can call. And this is something quite unique that nobody’s done before.
So this is one thing that that’s one of the uniqueness of Playtika is an amazing company. I think that the outcome of this is that when we look at, you know Playrix that are basically investing in every good developer in Eastern Europe you see Playtika that’s buying everything that is great and it’s the right size. You see Zynga trying to do, to regain their position in the market by doing bigger and bigger acquisitions. And all strategies seems to be working.
What it does is that it does create a tougher environment for new startups in the mobile space. And so when I look at another, you know, another team with another kind of generic idea in mobile gaming, given their good team, I can look at and say, how much money will they need now to get above the noise? How much success will they need to have on all fronts so that this becomes a meaningful game? And how easy would it be for the founders to say no to a $100 million offer that may come maybe a bit earlier compared to where it should come? Because at Playtika or Zynga or somebody else knows that on their channels. This can be worth a lot more.
And it’s funny because, you know, investing in heavier tech companies over the years, you see this with the with Cisco buying a company, and I’ll, you know, tell you a story of the company without naming it, but you know, Cisco came to buy company, the company was selling like only $10 million. At that time, it was many years ago, let’s say that the valuation of something that sells $10 million, should have been around $80 million, maybe. Okay. And Cisco comes in and puts an offer for 200m. The board sits there scratching their head and says, Wow, how can even think about it? We don’t think it’s worth 200. Now, we couldn’t raise it 200 for sure. And so they called the CEO and they say this the CEO, so, you know, we need to think whether we want to continue or not and, and 200 at the normal multiples in the market, you should be sending like 50 million. Okay, you’re selling 10 now, how sure are you that you can get to 50 million and how long is it going to take you? And so the CEO says I’m sure that I can do it, but I need a new head of sales and I need this and I need that I need to invest more in r&d. So by the time the CEO finishes, they’re basically thinking that, okay, maybe we do not want to take that risk. Now the reason why Cisco then I asked Cisco, why they’re doing it and Cisco saying, well, because we know that this product and our channels is going to sell around half a billion dollars. right for them. There’s really no question. And this is what we’re seeing all around. And this is I think, what’s happened it goes through the games industry.
Joakim Achren 36:26
Yeah, that totally makes sense. Hey, your thoughts on on Minecraft, Roblox and the Fortnites of the world?
Gigi Levy Weiss 36:35
Joakim Achren 36:36
Yes. Do you think there’s like big venture scale opportunities in these kind of new theme parks, competitors for Fortnite, or do you think it’s more about being like businesses that utilize the theme parks like these virtual concerts, virtual movie theaters, things like that, like services on top of that?
Gigi Levy Weiss 36:56
Look, it’s a good question, and I think that I see a few a few trends happening
the first thing is that we’re basically these worlds are becoming more and more comprehensive. And I believe that they will continue becoming even more. So as I said before, about Fortnite, I think that, you know, Fortnite is just a small step away from being a complete virtual world, right?
It’s not today, it’s just the game, but it could be a complete virtual world. I mean, my kids communicate with other kids there. They arrange fights, they arrange battles, they, you know, they go to the, to the closet to the closet to change their skin. And so with a little bit more effort, this can become a much bigger world, which I’m sure will happen over time. Now, when you put all of this into VR one day, which is something we can talk about, then that’s even more extreme. And so the question then becomes two things.
The first thing is, how easy would it be to create additional worlds like this? Additional mega worlds? And the reality of course, is that the more comprehensive the world is, the more network effect there is in it, meaning that there you already have the connections. You already have all your assets, you already have everything, then it’s going to be tougher and tougher to create these new mega worlds. This is why these companies are worth so much because they are becoming mega worlds. So that’s that’s one thing.
The second question is, is there really an ability to build a business on top of them? And I think that in this in a way, both you know Minecraft, Roblox potentially doing a slightly better job and epics not at all they need to open it for people to build their businesses on top. Because the secrets here is that every person that you can divert away from trying to build their computing world, into building on your platform into your game into your world that just made you stronger, because that is network effects. Because then you’re basically letting demand which is the users on one end, meet supply, which are the developers, and you’re doing it on your on your game. So at the end of the day, you know, you want to create a huge app store which is your world. And and the more you do that, the stronger you become.
And there’s always this kind of tension between the people that are saying, Well, you know, we’re a game, and we want to sell the most in our game. And we don’t want to let anybody in because we’re making all the money right now. And the alternative, which is, hey, we’re a platform, and we want as many people to build our platform. And as more people build on our platform, we become stronger. And so it’s like, its short term revenues versus long term defensibility. And of course, in the long term, the App Store and “come and build here,” you also need to make sure that the customer experiences no damage. You don’t want to be in a position where, you know, people don’t enjoy the game anymore.
But the reality is that all of these platforms, the ones that will be great at allowing others to build their businesses on top of it, they’re the ones that are going to win.
Because it doesn’t matter how many developers you can hire into your company, you’re still never going to have as many games as people build and put on the App Store. And similarly, you know, you can build as many modes as you want. On Fortnite or whatever you want, but if you’re going to let all the talented people add to it, then it’s going to be much stronger. And so, yes, I think these are going to be very difficult to win against.
I think that many of these, when you look at it, have had very little venture investors, because the cycle to get from beginning to successful business is incredibly long. And, and so, yeah, I’m sure there are, there will be new ones, but each one of those took like 10 years, and a lot of turns and a lot of bad years. And so you know, it’s very difficult to identify them.
Joakim Achren 40:35
Yeah. Another topic regarding this, you know, bringing up big companies like seeing them grow. Like, I’m sort of like waiting to see more like this Jeff Bezos of gaming to come up. How do we get more like this huge, like, iconic founders to the work in gaming to grow in gaming, like, what are the best ways have you seen
Gigi Levy Weiss 40:59
Well, first of all, I think that there are you know, we have quite a few, I think gaming billionaires, I think they are mostly quieter in their nature and not as noisy and I also think that one thing that I that I like about this industry is that because we don’t take ourselves too seriously in general, I haven’t seen any of these people think that their God just because they have a successful games company
And I think that all of them remember how their first games were not successful? And none of them know that a lot of it was also luck and timing. And so I really think that we maybe are missing more the kind of the, you know, the external facing characters, the ones that want to talk about it.
And you know, be I think about all the most successful game CEOs out there. They’re all amazing people. Ilkka (Paananen), Ricardo and Robert and you know, Dmitri from Playrix. They’re all amazing people, but none of them is has the character to be a Jeff Bezos and to go out and say, yeah, you know, look at me what I built. And I’m not sure we need this.
I think that at the end of the day, this is an entertainment industry. I think that this is making a lot of people very happy around the world. I’m happy to be part of this industry. And and I think that it’s good that the industry doesn’t take itself too seriously what it does on the money side, of course, but it’s how I’m happy that nobody says we’re changing the world and you know, look at us and we’re so brave.
We are an entertainment industry in that regard, then we’re doing a great job. This is becoming one of the biggest verticals in entertainment globally, and it’s growing much faster than anything else is the favorite pastime of kids, and it’s going to be also the favorite video pastimes of them as eSports continue growing. And I think that it’s good that we’re kind of still humble around it.
Joakim Achren 42:49
Yeah, that’s fair. Yeah. More talk about CEO, this kind of early stage CEO. Where does a pre product market fit no metrics yet today, before Focusing on strategy and running a team versus this kind of hands on the wheel execution with the product. What do you think?
Gigi Levy Weiss 43:07
Yeah, I’ve never seen an early stage games company that succeeded without the CEO being hands on and every bits and bytes of the business. I think that the founding team, and specifically the CEO, if they are not obsessed with the numbers, if they’re not obsessed with everything that is core to the company’s success in DNA, then the company will not succeed.
It’s true for every company for every startup. But it’s a lot more so in a place where you don’t have bizdev deals where one deal can bring you everything and you don’t have, you don’t need to go and talk to your channels and maybe your channel.
You know, it’s the business is incredibly simple, right? If you build a great game and you know how to market it, then you know how to then do live ops and retain the customers and you know how to monetize it, then you’ve got a great business. It’s very simple. It’s very clear.
You don’t need to go outside. You don’t need to go to many conferences. You don’t need to speak on many podcasts. You need to basically iterate and iterate and iterate and iterate until you find your games product market fit, or you don’t, and then you move to the next game. And if the CEO is busy in other things, that means that there’s less attention on these things, which means the chances of success are much lower.
Joakim Achren 44:13
Excellent, excellent advise. And then when you invested into a company, what what is your approach to helping as an investor helping the CEO?
Gigi Levy Weiss 44:26
One of the things that I’m really happy about and effects and, and I’d like my partners and also me is that for a second, we don’t think that by investing in a company becomes our company. You know, the people that don’t sleep at night are the founders that people that work hard are the founders, we got the luxury of joining. And it’s a privilege. And so the way we look at it, we don’t demand meeting we don’t demand updates, but we’re a resource.
So when I invest in a company, I’d become a resource. Now in some areas, I can be a good resource, because I didn’t know because I know people in Apple. Because whatever in and I can assist in other places that could be an OK resource that I can also you know, I can interview people before they hire them and help them think whether they’re great for the job or not, I can maybe play the early player roles and and see what I say about it they can look at the KPIs and tell them what I know from other places.
So all of that are things that I can help with but you know, I am a resource for them I do not dictate how they are going to use it and it’s very different between them some of them are amazingly strong and you know, they would meet me every few weeks and kind of you know, update me or tell me and and i look at them and say great, keep updating me I’m happy and others will call me literally every day with questions or send me WhatsApp messages asking me what to do about this and what to do about that and both are okay.
It also comes in stages of course there you know, when they’re in the stage of kind of building and they’re just heads down then they may need less help. When they’re launching and they need to see to get another eye on the numbers or to get more help in some areas then they may call me and more. But my principle is that I am a resource for them.
You know, I usually do like every week or bi-weekly meetings. And I’m always available over email and over messages. Because, you know, the only benefit I have is that I’ve seen this so many times. I’m not smarter than anybody. But I’ve seen it so many times, that many times where they ask the question, I have the answer, not because I’m some sort of a genius, but just because they’ve seen it five times before.
So if I can help them, not waste time on finding the answer that I have, that’s great. And that’s why it’s also nice to be in real time. Because if it’s gonna be in two weeks when I meet them, then they’ve already stumbled with a question for two weeks.
And so I’m very available. I don’t think I know anything better than others. But I share all the knowledge I have. And usually, especially with game companies, because I love it. I’m also very close to them. And I’m going to give as much feedback as I can now
Joakim Achren 46:54
As a VC, what do you think is really hard about your job.
Gigi Levy Weiss 46:59
I can tell you what’s hard to me. The toughest thing for me is insane, you know. And so, you know, we were fairly own fund and, and we’re getting a lot of deals all the time. And you know that the numbers are practically that we’re saying no to 99.8% of companies, which means that from 1000 companies we’re seeing, we’re investing only in a handful, which people don’t realize, it means that we’re attending, you know, 998 people or something that we’re getting to know.
And this is really, really not fun because, for us, it’s just another company that we’re seeing. But for every one of these founders, it’s, it’s their world. This is their baby. This is what they’re working on. And I remember being a founder and I remember getting the NOs and I remember getting these blunt NOs or aggressive NOs or unkind NOs.
Thinking to myself, how can they not remember that for me, it’s the one thing and so we’re trying to be very, we’re trying to explain why we’re not investing, we’re trying to give advice where we can even when we’re saying no, no, we’re trying. We’re constantly working on our rejection emails to make them as helpful and as as personal as possible.
But this is taking a lot of energy. And it’s not fun. It’s not fun, because many times you know that you’re not helping somebody dream. And that’s the last thing I want to do. Yeah, then on the practicality side, the flip side of it is that I really hate all the emails. I like, I get hundreds of emails, if you know, one day my email server being Gmail will go down and burn. And I will lose all my emails that when they may not be that bad.
Joakim Achren 48:38
Yeah, you just start all over. There’s always new startups.
Gigi Levy Weiss 48:41
Joakim Achren 49:20
Yeah, yeah, I recently started using Superhuman you probably know them yeah.
Gigi Levy Weiss 49:26
I played around with Superhuman I they still don’t have a unified inbox. So when they will have unified inbox I’ll probably move over as well. Constantly negotiating this feature with them.
Joakim Achren 49:37
Good good! Hey, some final questions for you Gigi. What’s your favourite book and why?
Gigi Levy Weiss 49:43
I think my favorite book of all time is Dune. I’m a big science fiction fan and read probably everything possible. And what Dune has in it has and before that was Lord of the Rings has like a game.
An amazing craft of building a world that has such great internal rules that you basically find no holes in them. And he (Frank Herbert) does is that both of these books do it without having to undermine the basics of human character so that it will be completely fictional. In other words, it’s a different world, the rules are completely coherent. It’s a fascinating world. But the drivers are very, very humans, strong drivers.
I think that in a way, this is also what made the Game of Thrones so strong, because again, a fantasy world but one where the human behavior is very, you know, you could see it in, in today’s world, you don’t need to see it in the fantasy world. So that’s my book. I think that that’s also Dune the book that I quote the most.
Joakim Achren 50:44
Yeah, yeah, that’s a good one. Do you have a story that has shaped how you approach your work today?
Gigi Levy Weiss 50:52
I think that the you know, the story about the emails and people not replying to me is it’s quite a quite a big one. I think. That many, many years ago, I ran a company that had a lab and I remember that because we’re building a bunch of things and I remember that I was walking around one night and I was the last person closing the office with fairly large company 200 people. And I remember stopping at the lab see there’s light and and seeing that there is a person inside. Who I never spoke to, like just Hi Hi. And I decided that I’m gonna stop and talk to that person and I spoke to him for like, I thought it was gonna be like 25 minutes “What are you doing here? Don’t you need to go home it’s late” and ended up being a one hour conversation where that person told least four or five things that didn’t know about my company. Well about who’s doing what about you know, you should check this thing where something doing something bad and and I remember walking out of this of this meeting but of this encounter, and thinking to myself “How stupid I was thinking that I know more than others,” because they may know more than others, but there’s probably for every person you’re ever going to meet, there’s going to be at least one thing that they know that you don’t know, which had you known would have made you better. Yeah. Now and so you know, this case and alongside some others, have really, really changed the way I treat each one of meetings I have. And so, you know, when people ask me, “Why are you taking so many meetings with companies,” I explained to them that every meeting that I take with a company, even if I say no, I learned something? I learned something about the industry they do, I learn something about how they could better theirs or learn something about the technology they’re going to us. And being that as an investor, you need to continuously learn all the time, then this is something that I decided to take into my every day in a very extensive manner.
Joakim Achren 52:47
That’s, that’s really good one. Hey, that’s the last question. like not to bombard your inbox anymore, and let’s find a sensible way but how could the listeners reach out to you guys at NFX?
Gigi Levy Weiss 53:01
Easy, they can basically go to gigi at nfx.com and send me an email. Or if you want to be better and better preferred, then you can actually do something else, which is go to https://thecompanybrief.com/, which is this tool we built to help founders pitch VCs much better, investors much better. When you go to the company brief, it’s very easy in there to decide that you want to pitch an NSX partner and then you just do
Joakim Achren 53:29
We read it. Nice. Hey, Gigi, this was so great. Thanks a lot. Really appreciate what you’re doing on YouTube and everything. Thank you The videos coming man.
Gigi Levy Weiss 53:41
Thanks for having me, man. Bye bye.