A deep dive into Canada’s micro climate for game investments

Above: Execution Labs’ investments.

Image Credit: Dean Takahashi

Della Rocca: Everyone talks about the great talent that exists here. We’ve been fortunate to have a robust game industry in Montreal in particular, and more broadly Canada at large. To echo some of JS’s points, we invest here because we can see the difference that the work we do makes in terms of building a company into a sustainable business.

When we invest, we invest with a five-year plan in mind. We don’t necessarily imagine that we’ll all become billionaires off the very first game, but we do want to put you on a path where that kind of success is possible. Building companies around those teams and enabling them to build games in a sustainable way over the long term—You’re able to have that momentum and credibility and community around your studio.

The talent is there. But we do have to provide the business side of things. And for those who are in Canada, it almost goes without saying that the level of government support – tax breaks, things like the Canadian Media Fund – provides an extra advantage. We can come in with some seed funding and leverage that to get three times or four times the amount in Canada Media Fund funding or tax breaks, which extends the run rate. In something like games, which is very risky, having that extra buffer helps tremendously.

Zhu: CMGE is headquartered in China, but I relocated to Toronto a few months ago to have a better reach to Canadian studios and game companies. I’ve been to Vancouver and Montreal as well. What I’ve found is that Canada has a very strong foundation in the gaming industry. In Vancouver, Electronic Arts is huge. They have one of the biggest studios in the world there. Ubisoft likewise has its big studios in Montreal and elsewhere. There’s an existing base of talent to create top quality mobile and PC and console games.

I’ve been in contact with many Canadian studios that have been doing work-for-hire for top-tier IP owners in the U.S. They’ve accumulated experience, talent, and funding that they could use to produce their own IP in the future. We have some very good options here as far as investment, licensing, and publishing.

GamesBeat: Investment always happens in a certain climate. That determines what kinds of valuations are perceived and created. The climate now is very interesting for games in that some forces are going in its favor, but others are working against it.

In the first nine months of this year, a tech advisory firm called Digi Capital has been counting up the deals that have happened. Overall, deals in the industry are down 74 percent compared to a year ago. But last year was kind of a miraculous year, with $24 billion worth of exits in the industry. Even with the $5.9 billion acquisition of King by Activision, we may only get halfway there this year. Game investments in particular are down 35 percent.

We’re in some kind of transition, or something else is going on. How do you perceive this larger climate? Does it affect your thinking in any way about what to invest in?

Della Rocca: The game industry has always gone in cycles. Last year there were some very large individual transactions, some outliers. If you remove those, the numbers are slightly more in line. Mojang was purchased for $2 billion and so on. Investors collectively tend to experiment. They look at different opportunities and trends. They try a lot of stuff. They’re building diverse portfolios to see what may or may not stick. There are definitely waves of activity. VR is probably the current wave, whereas a year or two ago it was mobile studios. There is a lemming effect that happens, to an extent.

At Execution Labs, we’re still very hungry and active. We’re constantly looking for good studios and good teams to invest in. On a more micro scale, we have a certain agility because we’re doing investments in a cycle, two times or so a year. We’re able to adjust and respond to the market in each batch. One cycle might be more mobile-focused. Another might be more Steam-focused, or more casual versus more core. That allows a certain agility in how we invest. We can respond to transitions in the marketplace.

Cournoyer: Another angle to look at is that the time people spend playing games falls into their entertainment bucket. It’s time they spend having fun. As platforms where people spend time grow – mobile was the last wave – you have great companies being built to ride that wave. They grow with the platform. The same thing happened with Facebook.

Right now we’re in a market where the mobile sector is maturing. It’s difficult for a tiny startup to go in and become really large in a mature market. You need a new platform. People talk about VR. I’m not sure VR is ready. I’ve tried most of the technology and I don’t think it’s ready for prime time yet. Maybe Slack is another one. People spend a lot of time on Slack. Maybe there’s a game that can be built on that platform. Messaging could be another one where there hasn’t been much gaming done. As a game developer I would look for that growing platform where people spend a lot of their time and look to build a game there.

For investors like ourselves, early stage investors, it’s hard for us to invest in game companies in a mature market. We’re not looking for 2X or 3X. We’re looking for 10X or 20X or 50X on our investment. It’s hard to see that in a market where only the top 10 or 20 games are worth that much and they’re all owned by the big studios.

Alloul: In reality, it is much more difficult to raise money to build game or entertainment companies. You have to develop a relationship with potential investors. Investors tend to work with people they know, that they’ve followed, that have some kind of past track record.

Investors also get excited by visions of a new field. That’s why we’re seeing so much investment in VR. We’re investing in VR, but not in content. We’ve invested in an analytic platform called Retinad, simply because we want to have our finger in the wind. We want to be able to understand what’s coming.

Investors are people like you and I. They want to be able to read the future. You need to develop a relationship with a concept that isn’t just “me too.” You need to come up with a new angle to differentiate yourself from what already exists. Building a company or building a product is one thing. Actually marketing and selling the product is the biggest challenge. How do you overcome the challenge of putting your product in front of users? We’ve talked a lot about user acquisition, techniques for engaging with viralities and so forth. But the challenge is how you get your product in front of potential buyers. Investors are very attentive to the strategies you’re putting into place to go to market.

Above: MIGS 15 venue at the Palais de Congres in Montreal.

Image Credit: Dean Takahashi

GamesBeat: Ringo, you have a different perspective on the market from most of us. One of the bigger things in recent years was Asian companies investing in Western game companies. That trend still continues, but China has seen a lot of turmoil in the stock market this year. That seems to have affected the global investment picture. What’s your own perspective?

Zhu: Investment in the game industry has dropped a certain percentage, but from what I’ve seen and heard, Chinese companies and Asian companies are still trying to expand their investments in the western world. CMGE, with our investments in mainland China, Korea, and Taiwan—We’ve invested in game engine providers, game developers, instant messaging developers, and comics and animation creators. But we’re also trying to find opportunities in Canada and other parts of the western world.

We’re looking for studios with the capability to produce mobile games that can be successful in both Asia and the west. We’re not looking for games targeted at a specific country or region. A good game is always a good game. It can be successful anywhere.

When it comes to VR, we feel like it’s still in the early stage. We’ve seen a lot of conferences and meetings happening every month in China with people continually talking about VR and AR. But in addition to the hardware, we haven’t seen any content or game based on VR or AR developed in China. It’s still in an early stage. We’re waiting for a good time to get involved.

GamesBeat: When you take a lot of these things into account, what do you think is the most favorable sector within games?

Cournoyer: We’re seeing a big move toward machine learning in the IT space. People think of business analytics today as—I look at data. I put it in a way that I can see it. Then I make decisions based on that. The next level is to have the computer make the decision for you and tell you what should be done, operationalizing that into your business processes.

We see that happening in security companies, in IT companies. Facebook does it all the time. Some of the bigger game companies, the Kings of the world, have big machine learning teams. But these technologies are becoming much cheaper to use now with companies like H2O and LDB. The game studios that use machine learning to automate decisions in design and the operation of their games early in development, right from the get-go, will have a better shot at becoming successful.

GamesBeat: Are you talking about automating the targeting of users, for example?

Cournoyer: Automating at all levels. Not just for acquisition, but in the way you retain users, the engagement in the game, how you bring in the times you ask for someone to pay for something. Automating all of those processes from the beginning—Some big game studios will come into being, ones that don’t exist today, will be automated from the get-go. That’s one area we’re looking at.

GamesBeat: Does anybody else on this panel agree with that?

Alloul: I think what you’re saying is valuable, but it’s not always essential. The big move I see in the current market is people investing in big IP. You don’t have to spend as much on user acquisition to monetize those IP. We’ve seen a couple of very successful moves from conventional companies like Glu Mobile, which invested heavily in acquiring branded content from big stars like Kim Kardashian. (I am involved in a company called Complex Games that licensed intellectual property from Games Workshop. We know that model well).

I’m involved in a company called Icejam that’s trying to approach the market differently, modifying the behavior of the player and engaging it into a more viral component. You force them to interact more with other variables. We call it playable data. I believe that virality and engagement will substitute themselves for things like just buying users. It’ll make a big difference in the community. That’s why investors are looking more at platforms that will facilitate those moves, as opposed to simply investing in a content play that will be faced with the same old mechanisms for user acquisition.

A larger topic is how entertainment has moved from single group usage to wide usage. I’m sure will speak about that more later.