Creating Value For
Video Game Companies
         Mitch Lasky
      Benchmark Capital
Irell & Manella LLP




     SERUM
bizpunk.blogspot.com

twitter.com/mitchlasky
Fundamentals



    “Value” = Equity Value
Fundamentals

       Three Basic Valuation Events

 1) Raise money from private investors.
 2) Go public and sell stock on...
Fundamentals


    Discounted Cash Flows Method

    Comparable Company Method
Fundamentals

      Discounted Cash Flows (DCF)

 • Today’s value of a future stream of cash flows
 • “Discounted” to adjus...
Fundamentals

        Comparable Company

      1) Identify competitive sector
      2) Determine relevant metrics
      3...
Fundamentals

        Many Factors Affect Value

    •   Management & team
    •   Intellectual property & technology
    ...
Fundamentals

  Marchetti’s Three Laws of Valuation
 1) Value is established only by what someone
    is willing to pay fo...
The Real World



Think about your exit going in.
The Real World

          Rules for Enhancing Value

 •   Understand what creates value in your niche
 •   Seek to own or ...
The Real World

       Why do companies buy?

       •   Growth
       •   Market Entrance
       •   Exclusivity
       •...
The Old World

         Packaged Goods Value Chain


                            Develop.   Owned
Middleware   Distributio...
The New World

                  Game       LiveTeam
                 Dev. & IP     CRM

       Tools &                   ...
Strategic Value

       Blue Ocean vs. Red Ocean
   • Blue Ocean strategies are worth a
      significant multiple over Red...
Strategic Value

         Beyond the Blue Ocean

       • Market share & aggregation
       • Barriers to entry
       • G...
Strategic Value
       Distribution Innovation vs.
          Content Innovation

       • Content innovation drives
      ...
1992           2004
Revenue        $300 million    $3.1 billion
Market Value   ~$250 million   ~$15 billion
Strategic Value

     Recent Distribution Innovations

       •   iPhone
       •   Social Gaming
       •   Free-to-Play ...
Examples

     State of the Traditional Buyers

                                  Δ
             1/3/06    1/2/09

    ERT...
Examples

               Recent Valuations

 $50-$100MM   $100-500MM         $500MM-$1B    >$1B


                   Rare
...
Examples

            Going Public

       • Predictability
       • Operating constraints
       • Liquidity
Conclusion
GDC '09: Creating Value for Video Game Companies
GDC '09: Creating Value for Video Game Companies
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GDC '09: Creating Value for Video Game Companies

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  • Lasky isn't the most gifted speaker. Has a bit of a stuttering problem.
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  • Mitch is a real pro and is usually a few steps ahead of us. Great insights into how investors value emerging opportunities.
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  • Great stuff - wish there was audio available. I guess CMP will eventually post it at the for-pay MyGDC vault.
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GDC '09: Creating Value for Video Game Companies

  1. 1. Creating Value For Video Game Companies Mitch Lasky Benchmark Capital
  2. 2. Irell & Manella LLP SERUM
  3. 3. bizpunk.blogspot.com twitter.com/mitchlasky
  4. 4. Fundamentals “Value” = Equity Value
  5. 5. Fundamentals Three Basic Valuation Events 1) Raise money from private investors. 2) Go public and sell stock on an exchange. 3) Sell the company.
  6. 6. Fundamentals Discounted Cash Flows Method Comparable Company Method
  7. 7. Fundamentals Discounted Cash Flows (DCF) • Today’s value of a future stream of cash flows • “Discounted” to adjust for time & risk • Discount rate reflects buyer’s cost of capital (investment return) • Highly dependent on good forecasting, accurate discount rate (“garbage in, garbage out”)
  8. 8. Fundamentals Comparable Company 1) Identify competitive sector 2) Determine relevant metrics 3) Assess relative value
  9. 9. Fundamentals Many Factors Affect Value • Management & team • Intellectual property & technology • Scarcity / uniqueness of asset • Defensibility of market position
  10. 10. Fundamentals Marchetti’s Three Laws of Valuation 1) Value is established only by what someone is willing to pay for an asset. 2) Valuation is always about the future. It’s not about what you are “worth” today but what’s expected of you tomorrow. 3) If someone is willing to value your company by a metric other than discounted cash flows, SELL!
  11. 11. The Real World Think about your exit going in.
  12. 12. The Real World Rules for Enhancing Value • Understand what creates value in your niche • Seek to own or control your value-rich assets • Manage for long-term competitive advantage • Strive to be #1 at what you do
  13. 13. The Real World Why do companies buy? • Growth • Market Entrance • Exclusivity • Intellectual Property • Talent
  14. 14. The Old World Packaged Goods Value Chain Develop. Owned Middleware Distribution Publishing Capacity IP
  15. 15. The New World Game LiveTeam Dev. & IP CRM Tools & Virtual Tech Goods Billing Network & Ads Ops Distrib- Cust. ution Acq.
  16. 16. Strategic Value Blue Ocean vs. Red Ocean • Blue Ocean strategies are worth a significant multiple over Red Ocean strategies • Red Ocean companies are easier to value against comps; have lower likelihood of break-out success; generally lower margins
  17. 17. Strategic Value Beyond the Blue Ocean • Market share & aggregation • Barriers to entry • Growth vs. cash flow
  18. 18. Strategic Value Distribution Innovation vs. Content Innovation • Content innovation drives audience expansion. • Distribution innovation drives value creation.
  19. 19. 1992 2004 Revenue $300 million $3.1 billion Market Value ~$250 million ~$15 billion
  20. 20. Strategic Value Recent Distribution Innovations • iPhone • Social Gaming • Free-to-Play + Virtual Goods • Used Games / Resale
  21. 21. Examples State of the Traditional Buyers Δ 1/3/06 1/2/09 ERTS $18.2B $5.6B -69% MSFT $240B $178B -26% THQI $1.8B $305MM -83% VIA-B $26B $12.2B -53%
  22. 22. Examples Recent Valuations $50-$100MM $100-500MM $500MM-$1B >$1B Rare Mythic JAMDAT Traveler’s Tales Cryptic Harmonix Blizzard Pandemic/ Red Octane Bioware DICE Blue Lava
  23. 23. Examples Going Public • Predictability • Operating constraints • Liquidity
  24. 24. Conclusion

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