EGD News #72 — Overfishing
Sent on March 12th 2021.
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It’s Joakim here. Greetings from Helsinki!
I’m quite thrilled about the spring weather that we have in Helsinki; it’s freezing, but the sun is up high, and things are looking good. This week I’ve been working on many podcast episodes that will be coming your way during the spring. Some of these will actually air in June, as there are so many in the pipeline.
As a reminder, before we go into the news, I want to mention the free webinar on March 24th with Jesse Lempiäinen from Geeklab. We’ll be covering how mobile game developers can test their game before they write a piece of code. Register for this free webinar by going here.
Now, onto the news.
🎙 Angel Investing and Founder/Idea Fit
This week on the podcast, I had a chat with Ethan Levy, Executive Producer at N3twork, a San Francisco-based games company, behind the hit game Legendary: Game of Heroes. We talked about my approach to angel investing and the concept of Founder/Idea Fit, and how founders should think about themselves as a good fit for the idea they are pursuing.
Here are my favorite highlights from the episode.
Ethan: What do you look for in a good pitch? How does someone stand out against those 99 other inbounds you’ll field each month?
Joakim: First, I look at the founder’s commitment and ambition level. Are they at the level where I know they should be? Also, how strong is the team that they’ve put together, what’s their background. Finally, I look at the idea that they’re going after. Is it something that I can understand? Meaning, do I know what it takes to win in that space, what are the risks in that space, and am I comfortable with the unknowns and the risks?
Ethan: How many conversations do you typically have with a team from the first pitch to invest?
Joakim: Probably at least five. And I talk to people close to the founders, do reference checks, ask some people for thoughts on the space if it’s not entirely familiar to me. Then that usually leads to an investment decision, possibly in a week of starting the work. I typically do mention in our first meeting if I’m beginning to pursue an investment. I want to sort of give that signal to the founders that I’ll start spending time on this, which would possibly lead to an investment.
Ethan: You’ve said your first investment was a great founder/idea fit. Can you explain what you mean by that?
Joakim: I want to see that the founder is the right founder or co-founder team to build the particular startup. If you’re doing hybrid casual, you want to have founders who obsess about sec-to-sec gameplay, about deep core gameplay. If you’re doing battle royale, can you explain why Zooba isn’t doing as well as Brawl Stars? If you can, you have founder/idea fit.
Why does it matter? I’ve seen teams rapidly develop a game, soft launch it, and get day-1 numbers of 30%, and they go like, “Huh, ok, let’s move on to the next prototype.” Founder/idea fit is about being a bit less wrong about what will work than the rest. That’s a competitive advantage that I want to back with an investment.
Read the full transcript and listen to the episode by going here.
Overfishing is a threat, which WWF describes as follows: “Catching fish is not inherently bad for the ocean, except for when vessels catch fish faster than stocks can replenish, something called overfishing.”
I’ve recently talked to gaming founders who have ended up giving 60 to 70 percent of their company to one investor before they’ve even gotten started.
The popularity of investors owning a majority became popular on the TV show Dragon’s Den. On the show, an investor says that they’ll invest 100,000 USD for 51% of the company. The explanation is that they want to control and oversight over the use of their money. I’d call this overfishing.
Why? Startups are incredibly hard. Not only is it hard to find a game that works, but there’s also a constant stress that eats at the founder’s motivation. When an investor has thirty or forty companies that they are involved in, owns most of your company, how can you expect to build something remarkable, something that lasts? The founders will need to go through hardship to achieve greatness when the founders are already minority owners at the idea stage.
What’s the harm?
Let me elaborate on the overfishing a bit more.
Suppose an investor owns over half of the company at the idea stage. In that case, there’s not much left for future investment rounds, and future investors will know that further founder dilution will harm the founders’ motivation to keep pushing. And great investors know that new funding rounds are more than likely, each chipping away at the founder’s equity.
Bottom line: Giving anything over 30% to investors at the idea stage is way too much. It’s a long journey, with many bumps, challenges, and further fundraises.
Diluting too early, and founders lose incentive. If they’re a solo-founder, that’s already tough. To alleviate stress, having four co-founders and each owning 10% when the company is still at the idea stage isn’t a good motivator.
I have talked to a few founders who have been close to signing investors who want half of the company. They’ve defended their approach as not feeling that there would be any other options. Yes, there are.
What are the options
As a first-time founder, you might feel that your team isn’t impressive and that you can’t expect to get anything better than this one investor taking a large percentage of the company.
I got news for you. You shouldn’t gamble your company with one investor who wants a lot. There are hundreds of investors out there who will give you fair terms. Many investors know not to overfish.
How to raise from the best investors? Prepare from day zero:
1) Casually ask investors what they are looking for and what kind of teams and ideas do they back?
2) If you’re an inexperienced team, what do they need to prove that you are VC backable? Usually, it’s a combination of some missing talent in the team and some metrics proof of a game that works.
3) Ask what kind of ownership percentage they want. Overfishing alarm bells go off if they wish to have more than 25%. You can do better.
📝 Review of Hiring with a Vision Masterclass
Sophie Vo, Studio & Game Lead from Voodoo, has launched a new initiative called Rise and Play, a knowledge-sharing platform for leaders in the gaming industry.
I wrote a review on Sophie’s first masterclass, “Hiring with a Vision”, but before you head on over to my site to read the review, here’s a quick interview that I did with Sophie over email.
Joakim: The masterclass you created is such a needed thing for gaming. I’m so happy you created it! What inspired you to start working on the masterclass?
Sophie: I’ve been doing lots of mentoring and coaching over the past years and enjoyed how much I could help individuals during these sessions. However, this approach is not scalable, and I wanted to share my knowledge on a larger scale. So I thought: what if I create content sharing knowledge like I do during my mentoring sessions, but record it and share it with people who need it? That’s how the idea of the masterclass started, and here we are. So far, it has gotten a very good reception and already helped many people. This gave me the motivation to continue to create more valuable content for the community of leaders.
Joakim: Cultural differences. You say: “So it doesn’t become a hurdle to work with a diverse team but becomes a strength.” You didn’t provide the strength examples there. It would be great to hear some of those from your experience.
Sophie: I am briefly mentioning it in my lesson “Crystallise your team vision” here. When you have people who share different perspectives, they can point out to each other the blind spots on a solution proposed instead of jumping on the first obvious idea. Especially in a creative environment, you want to avoid consensus and have people debate with valid arguments on what could be the best solution. It also creates awareness and humility to deal with people who think differently than you, so you don’t hold on to a single truth, your truth.
Joakim: Performance reviews. What do you see as their role in a modern organization?
Sophie: Very important. People need feedback to grow. I am doing a whole course about it in “Grow and Develop Your People.” I’ll share my framework on how I onboard, grow and offboard people. These are difficult topics for a Leader but absolutely necessary when you want to keep a great team together.
Joakim: Interviews: how do you measure drive and competitiveness?
Sophie: Through the screening interviews, you can get a sense of it based on what candidates describe as motivating for them. From their past career choices or based on how they describe the achievements they’ve done. Or through their team values. Ultimately, the best way to observe it is when you work directly with the person. Another interesting place where I see competitiveness in action is when playing games with people :). You see quickly who are for the win!
Joakim: Another question on interviews: how do you surface a person’s emotional instability in an interview, especially when the references came back good?
Sophie: I mentioned in my course about “character inconsistency” among the red flags you can spot during interviews. For example, the candidate is very enthusiastic at the start of the process but later becomes defensive or aggressive through the process and starts to blame the recruiters. I would push a bit more during the reference calls to understand or ask for more references to inquire about the candidate’s character.
Joakim: Final question: What new courses do you have in store? Can you give any teaser on what is coming next? 🙂
Sophie: Hiring is the very first step of building a team, so I’m very eager to release the next courses which address the core part of building a great team: how do you build an autonomous team for the long-term, how do you develop people (1:1, performance reviews, calibration feedback), how do you detect when to part ways, how do you create more awareness as a Leader?
Check out my review on Sophie’s masterclass by going here.
📃 Articles worth reading
+ A First Look at Applovin — “[Applovin’s] clever vertical integration results in a healthy business flywheel where AppLovin uses its unified marketing, monetization, and analytics technology stack to drive user growth and revenues across the entire AppLovin Apps portfolio.”
+ The Roblox Microverse — “In short, Roblox isn’t a game at all: it is world in which one of the things you can do is play games, with a persistent identity, persistent set of friends, persistent money, all disconnected from the device that you use to access the world. That is the transformational change.”
+ Women vs. men: Salary expectations at startups — “For data engineering roles, women with three-to-four years of experience on average say £42,300 is the lowest salary they’d take. Men with the same experience say it’d be £46,700. In recruitment roles, women would accept £33,900, men £36,200.”
💬 Quote I’ve Been Thinking About
“You miss one hundred percent of the shots you don’t take” — Wayne Gretzky
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That’s all I have for you this week. Until next week!