Investing in the Future of Gaming | Dan Bunting • 6
00:00:00 I like to tell people who are early in their careers that luck is always a part of it but you have to make your own luck VC startup land is probably the most challenging thing that uh you can choose to do with your life but you know great rewards if you pull it off too really like the best founder mindset in gaming is going to be somebody who understands that they got to be fast Scrappy agile get something to Market as quickly as they can it's not going to be the best thing that they've ever made it's going
00:00:25 to be the thing that's going to teach them the most important lessons they need to build to game two and game three [Music] welcome back to VC unfiltered I'm Lucas Po's managing partner of Pegasus Angel accelerator super excited to have you here today on the show we've got Dan from 1:00 a.m gaming joining us he's going to talk about all things gaming uh content Publishers a little bit of infrastructure he's going to walk us through a couple of his hot takes uh as well as the uh uh some of the things he
00:00:57 looks for in an investment so Dan welcome to the show super excited to have you here thank you so uh 1:00 a.m gaming um you're in one of the most interesting spaces to me uh I'm an avid gamer I would love to invest more into the space and so I'm super excited to find out more about uh uh what you guys are investing in what you're kind of looking at and and uh all of that kind of fun stuff yeah so 1 am is a seed stage um gaming focused uh Venture Capital fund we focus on content so you know a lot of if you look at VCS in the
00:01:29 gaming space Bas a lot of them do diversify quite a bit into you know call it businesses to business or Tech platforms um we tend to be very content focused um which is you know a little unusual but that's kind of that's sort of what our Niche is um and so we're looking for Studio Founders you know have put together their leadership team have a vision for what they want to do and a plan um and they are out pitching um you know to investors and we hope to lead the round uh for seed rounds um our
00:02:02 you know typical round for us at seed would be3 million to $6 million investment um and of which we typically will we will lead with at least half of that yeah and that's that's the nutshell version no that's great so so you talk about content so walk me through that a little bit more so like what spec like what is that actually Encompass it's really just games I mean we do have some portfolio companies that are not directly games um they might be gaming adjacent one of our Port codes is a digital comic book
00:02:36 distribution platform um so that one's a little you know some of them are kind of outside of our typical portfolio Investments but for the most part it's you know when we say content it's games and um game makers you know or you know even some content creation um type people okay so not not really like the infrastructure piece of it very much more an actual game and so so walk me through that kind of like that life cycle of an actual video game if it's going from kind of the Indie realm where they're first kind of starting or or
00:03:11 like what what does that actually look like as you as you kind of progress to a large game that we've all heard about I guess if you look at the landscape of games that are out there um from Indie to u to AAA um it could be you know game team could be as small as one or two people um we generally don't would invest in somebody that didn't have a co-founder for the most part um it's important that we have that the founders have a partner that um complements their skill set and that they can you know lead the team together
00:03:43 uh but so you know so I think at the smallest scale you could have a two-person team that just happened to be extremely talented in different areas different disciplines um up to you know a AAA size team you know for Call of Duty for us we were you know we were uh my teams were 400 people at the studio but that was only a part of the game development uh pipeline you'd have Outsourcing teams that were all over the globe um you would have other Studios that you're partnered with for development um you know it could be
00:04:17 1,500 people at any given time um overall so that's kind of I guess the scale of what you would look at you know where we tend to focus um for founder search is on a a small small agile team of people who can wear a lot of hats um you know it's it's tough when you've been doing when you've been making games for a long time and you've kind of gone through your career progression and you're in a leadership role if you're on a large team you're probably not getting your hands dirty as much as you used to
00:04:48 and you might be a little rusty with the tools and you know it's like that makes it a lot harder to move into an independent game funded by a VC because you just don't have the luxury of just having leadership positions most of the people on that team are going to have to be building stuff um and that's just because you know just the economy of at that level of um of game development is you know it's just a much smaller team size you know we we would probably you know our average team size is probably going to be anywhere from 10
00:05:27 to to 20 people at that uh seed stage how do games actually get out into the market you were Call of Duty right that that's a whole different kind of ball game but from the seed to from from the seed stages you're looking at like like what are those actual next steps for them after they're kind of funed it's like we're building the game but it's I feel like half of the battle around games is getting the word out so like what are they actually doing out there to to to to make that kind of breakthrough it is tough um that's
00:05:54 probably one of the hardest parts about being an independent game if you don't have a publishing part partner for example and you're trying to do it all yourself um it's a very very challenging Road um I think you know in most cases gaming startups are going to look for a publishing partner um there's strategic reasons for it there's you know they have expertise generally Publishers have expertise in uh especially marketing um marketing and and PR and um yeah so you you know the ideal scenario is you find a publishing deal
00:06:30 um and if they don't do any game financing then you then you will probably get they'll probably take a smaller rev share if you go into a partnership with a publisher and they do game financing then they're going to be taking a larger rev share um but that is effectively how Publishers get paid is they they take a cut of the um the profits from the game they don't generally have a stake in the company um that's where I think VCS and Publishers have serve a different role if you're trying to do it by yourself there's a
00:07:02 lot of people who who do it it's just very very hard it's like you know you have to be out there constantly talking about your game going everywhere you you can trying to maximize um awareness and exposure I mean just just getting awareness is probably the hardest thing just getting your name out there and getting people to know about you um is the hardest part about it it comes from videos it comes from attending uh festivals attending uh trade show show is trying to get uh featured at you know one of the many
00:07:34 industry events that happens around the year um and you know getting media coverage although traditional media doesn't go as far as it used to um in the game you know in modern times so it's you know it's a lot of community building I think most Founders you know the more open they are with their Community as they're building the game the more they interact with with their kind of core audience and they build out from there then the more success they can have organically um but it's still you know even with that it just takes a
00:08:07 lot so is that one of the main things that the companies at this stage are kind of looking towards that they're getting that kind of beta out and they're building out that kind of community to make sure that they're going in the right direction to then continue to expand is that is that kind of the the initial Focus before you get to the publisher or uh how important is the is the actual Community to them there's different ways to to do it um but I think that you know you look at a typical VC backed smaller VC back
00:08:38 startup um and often times they will release into Early Access months or even a year or more out from the full game launch and that is to start building that audience and potentially even earning Revenue prior to the games launch to help get them across the Finish Line our model I kind of you know think about sort of the ideal candidates are going to be able to come in operate in a fairly agile fashion and try to get uh real Market reaction data uh within 12 to 18 months uh and it's a pretty you
00:09:15 know that's a pretty tall ask you know even with on Call of Duty we were three to four years development timelines and um that's across you know a, to 1500 people in any given any given moment so you can imagine um trying to do that with a 15ers team in 12 to 18 months it's it's um it is the gauntlet like it is you know being in gaming VC startup land is is probably the most challenging thing that uh you can choose to do with your life but you know great rewards if you pull it off too yeah oh that's great
00:09:52 right now what you describing I was just thinking about power world right like they launched I mean uh insane success right they they launched a what like half or a third of the actual game on De beta to get everyone galvanized and very excited about it and pull in revenue is that kind of the metrics that this that the uh that the startups are looking at for those additional rounds like when they're looking to go raise a series a is that like what does that actually look like for them does it need to be
00:10:23 kind of out in Market I'm trying to quantify like in my head what the what those like stepping stones are cuz like if I'm looking at B sash right it's like oh you need a million or a couple million in ARR to be able to go and raise that successful series a so what does that kind of look like from a gaming perspective like what are those metrics that they're looking at for those later additional rounds gaming VC is still pretty young in its development so I would say that we haven't as an industry quite figured it out yet um the
00:10:49 right way to do it but I generally speaking if you're going to you know go after series a you at least have I would call it your game at let's say Alpha state where a very large percentage of the experience is is more or less complete and fully playable and you have metrics that show that it's the success um trajectory is there and the thesis was right and there's validation of that um and you just need to to scale um and kind of take it across the Finish Line bring it to launch um you know that we don't
00:11:28 there's just not a lot series a in gaming BC right now um there was a lot of you know huge investment activity in the let's call it 2019 to 2021 time frame um and uh I think that many of the people many of the people who have invested at that larger scale that was happening in that time are still kind of trying to wait and see what happens um some of those Investments have already kind of Gone by the wayside just seen a lot of series a activity in gaming interesting sometimes on the platforms and and and Tech side you do more
00:12:07 actively than than on the uh you know game content side I do want to dive a little bit into your background because it's quite fascinating you were you were at a AAA studio for ages right so walk me through that walk me through uh how it was any of the key insights that you would love to offer some of maybe the the um uh the people that you might end funding here in the next year or two you know the way that the industry operates now is very different from how it did then um I joined in 2003 when I after I moved to LA in 99 um
00:12:44 and had worked in uh TV worked at a TV network for four years and realized that it just was not that was not the path I was on for my life um and you know fortunately um my wife who was at that time my girlfriend had convinced me that it was time to saddle up and and like get on the right path and figure out like what is what are you actually going to do with your life so it was you know I I knew gaming from from an early age I've always loved gaming it wasn't until I think my either senior year in high
00:13:19 school or early college when I realized when it kind of dawned on me that you can actually make games um and uh do it as a career um it was I think the um was it misted or Riven one of those games that um came out of Sierra that had an extra bonus disc and I remember seeing it and it was it was sort of like behind the scenes of the making of the game and that was what you know kind of made me have that AA moment I could actually do this as a career when I first moved to LA I didn't know anybody
00:13:49 didn't have any kind of network at all and when I finally committed to that path I basically just kind of Hit the pavement for for six months and anybody who would listen to me or not still still would bug them um and just you know it's just kind of it's sort of how I've operated at various points in my life when I'm trying to jump into something new and uncomfortable is I just force myself to get out there um it's not easy um you know I'm naturally I would say fairly introverted to a certain degree um I don't you know it's
00:14:22 not easy for me to go out and just talk to people randomly yeah but I also you know I force myself into those difficult situations um and I think that you know I was very fortunate I got lucky um to meet the right people that eventually brought me in to interview and that was the the job at Treyarch um and you know I think from my first Contact to actually walking in the door for my first day on the job was about six months um and that was during a time when I was just you know I was talking to everybody anybody and everybody in
00:14:57 the game industry I like to tell people who are early in their careers that luck is always a part of it like there's no getting around the fact that you have to have good fortune for things to come together and and get you in the right place that you want to be but you have to make your own luck it's not something that just randomly happens you have to put yourself out there into every opportunity you possibly can until something clicks and it's kind of you know you talk about you know startup kind of pitch process expect you're
00:15:26 going to get 90% rejection rate or 95% rection rate it's it's a similar you know idea you you just have to have um some really serious persistence and um absolute confidence that that's the right thing to do it's absolutely true and especially now for the founders when I I look at it they're like well it's taking longer to do my race and normal I was like but yeah this is this is one of the worst times to ever raise uh ever in the state in the time of venture capital and so it's like yeah it is it is the worst time you know
00:15:59 there it's also there's a part of it you know I I have brought um people in my network who are who are raising and you know it wasn't quite ready and um it just wasn't the right time and they are now basically bootstrapping and just trying to build whatever they can with a couple of Founders maybe three people um who have taken the leap and and left their jobs and are and are sure that this is the right thing to do and they understand that this is the worst time possible to be raising money and so
00:16:28 if they can basically hold out long enough and start to build things um with a very very very small team um Bo strapped then going into next year at some point it's going to open up again um we saw it just you know there was just that half Point um rate reduction that I think is going to hopefully start um pushing Capital back into the investor market and um you know I think people are still there's still some some injuries and and people are still burn from kind of the free money period um and so I think it will be a slower start
00:17:05 because people are just going to be generally a lot more cautious and and we are gaming VC is is fairly young like I mentioned so it's you know it's going to take a little time for it to right side right size and you know for for this industry to figure it out yeah no I I think that we're we're kind of at that point though to to your point the the Half Point drop was a big is a in this space is a big deal and especially with the rest of the year continuing that kind of trajectory is going to help
00:17:31 drastically and I genuinely think it's going to open back up a lot next year and to me a lot of the the founders now that are raising are I mean those are the ones that are going to be the the best like we look back at 08 and 09 it's like well Airbnb and Uber started both during that insane time and once you're kind of if you're forged in like the brimstone of a volcano like you're going to be yeah the the the yeah the startups that are that make it through the other side of this period are going to be you
00:18:01 know rock solid they're going to have they're going to have B you know survived the battle and uh come out stronger on the other side 100% And and honestly I like the approach of the founders that you're even just talking about the ones that are just Bush trapping and just trying to maybe do a little bit of hybrid entrepreneurship and and get kind of some stuff done to get some of that those early points I think those are my favorite Founders like just just out the gate because they're like well we can't get it done
00:18:27 this way and that's okay we're still going to get it done so tell me about uh uh one of the more recent Investments that you've made or uh uh cuz I know you've done Angel Investing maybe one that went South and maybe why it went South May as a learning experience I've only been Angel Investing since about two uh 22 um and I was just going back and looking I have six um Angel Investment Portfolio companies none of them have gotten to the point where it's like that make or break moment yet I know you know my first investment had
00:18:59 has definitely had a couple near misses but uh their game came out today actually their so their first their first title came out today so I'm hoping I'm eagerly looking for the you know metrics on that see how it's doing and you know when I was first first starting to think about VC and Angel Investing in like what to do to help the next generation of game makers be successful um they kind of cold calleded me and you know you get a lot of that if you are out there in LinkedIn and you have those
00:19:27 kind of tags in your profile you get a lot of you get a lot of cold calls but you know sometimes you know I do like a very initial pass of vetting and just making sure that they like the the real deal and I met them and I just I liked their work ethic they were they were keeping their burn rate very low um they were based in New Mexico strategically because they get like a 25 to 30% discount back um from state of New Mexico and you know they just kept kept themselves lean and um and I appreciated
00:19:55 that about them and and uh it was kind of my my first check to write and so jumped in and then today is the day that it uh their first game came out hey that's super exciting and honestly even with the typical first investment normally it crashes and burns within 3 to six months so you should be feel very happy they did they they had their near-death moment um I you know I tried to help as much as I could but you know at some point they just you have to find the right partner they did fortunately
00:20:22 find a publisher that was also a startup publisher and I've since gotten to know the founder of that pretty well um and very thankful that that uh you know he picked up their game out of whatever however many games they were looking at at the time I've I've seen more because I just looked at one that was trying to disrupt the publishing space and I find that as a very interesting from an infrastructure standpoint for gaming is a very interesting space because don't Publishers take like like 40 or 50% oh
00:20:52 yeah it at least yeah and there's usually it's usually laded up you know based on how much the the budget is and then how much um Revenue it's generating and there there's usually a ladder that will that will decrease their stake over time as you hit those Milestones but it's the publishing models are all over the place I I personally think that publishing needs to be disrupted that's um part of my my whole thesis in in this space right now and you know I I believe that there is a role that they play you
00:21:23 know they are they I use the analogy of a sailboat they are like the the large uh sale let's say maybe a Spiner sale which is like the thing that is just going to collect as much air as possible they're they're growing the tent right they're growing the audience in gaming that's their job that's that is really the the role that they play in this ecosystem they're not going to be innovating they're not going to be taking risks they're not going to be necessarily carrying the the the the rest of the the
00:21:52 work that's going behind building that wind for them um and so I think and I also think that the more more you see these mergers um the more you see consolidation at the top and the less competition there is immediately behind them then the worst it's going to be for everybody um they are going they're going to be best when they when they feel fear when they feel that there's somebody you know constantly on their heels and that's where I think the disruption needs to happen is in that space um independent you know ablea
00:22:20 games um independent games that that Punch Way outside their weight class um that's where I think um you know this this space is right for disruption and that's kind of you that's where my objective is over the next couple years um and you know I I'm always looking for partners that are aligned with that thesis and aligned with that um that mission and um that's kind of what we're going after nice no that's super exciting because yeah I mean that's the yeah if they're if they're not scared they're not going to move by change if
00:22:52 you don't need to if the complacency is g to be if if if the big Publishers get too complacent and it's going to you it's going to be bad for everybody yeah yeah no 100% our final segment my favorite segment is around the hot take and so um and you kind of just touched on one a little bit with the Publishers but what what would be kind of your favorite hot take uh about either the gaming space or just a hot take in general about investing I think that you know kind of similar to the point about the Publishers needing
00:23:22 disruption I think VCS also are broken um like VC and gaming is broken right now um and it's unfortunate that such a you know nent movement of of venture capital investment and gaming had to happen when it was the best possible conditions you know and so like the wrong lessons were being learned from people and I think you know you see anywhere from 50 to100 million deals going in um for firsttime Founders or you know teams that have just exited a let's say a big a big name Studio or publisher um and unless that team has been a part
00:24:03 of the zero to one process in a different startup they don't really have the right tool set necessarily to do it and they may be extremely talented they may be you know exceptionally talented they may have a lot of experience they may have great great brains you know on the team but they don't they may not have the tool set to understand how do you actually scrimp and save and and cut cost down to the bone and do everything that you can yourself and find you know the cheapest best quality output in
00:24:37 Eastern Europe or South America or whatever you can right to get it done so I think that is where the next era VC is going to emerge um not in those massive 50 to150 million deals but in the smaller scrappier startups that can scale uh pretty quickly once they um get traction you know and I like I said 12 18 months is kind of our our window that we ideally would like to see um a seed uh a seed company get to Market of some sort whether it's early access or full launch um but un like learn lessons
00:25:13 another thing I tell people here's another hot take that's I think really really Val valuable for your listeners is don't pitch your magnum opus as your first startup idea like you know I see so many of like you know I've been dreaming of this making this game for years this is the game to end all games um and that's just not where you need to be like you need to be starting in I got to build something small and fast make mistakes quickly learn from it and then move to my next you know my next venture
00:25:43 like get the next game out it's game two and three you know power world I think was game three for that studio yeah you look at balers gate um they had Divinity original s before that was I think they they game three or game four your dream game is not your first game as a startup founder yeah that's that's a mistake I just I feel like everybody makes you know unfortunately there was just a lot of capital flowing at the time to to you know support that kind of mindset but I think really like the best founder
00:26:10 mindset in gaming is going to be somebody who understands that they got to be fast Scrappy um agile get something to Market as quickly as they can and it's going to it's not going to be the best thing that they've ever made it's going to be the thing that's going to teach them the most important lessons they need to build to game two and game three I mean a that's a that's a really good point I thought I was going to end it there but I actually have another question just in my head I've been thinking about this so I
00:26:40 was thinking about open world right and I don't know if you remember the so Goosebumps used to have like a Choose Your Own Ending and I've been and I'm wondering if you've seen anyone like approach you with this like to to to actually start making it cuz I would love to play it uh the idea of like an open world that has AI integrated into it and so that you're choosing truly the directions that you're going and that you're having a unique game experience in some type of actual open world without that that is totally separate to
00:27:10 what someone else is doing I don't know if anyone has approached you with something like that and uh or how they're actually thinking about integrating AI into uh the games that are being developed from a storyline perspective I mean AI is the Hot Topic in in you know any investing space right now um games included um I think that a lot of the energy around AI has been on gen AI um really focusing on like you know building better tools that can get people there from a to A to B faster which is great I mean I think that's
00:27:44 that's it's a necessary part um it's not you know it's not part of our thesis necessarily as as a VC firm um I'm more what I'm actually more interested in in in seeing from from Founders is how are they using AI to improve quality of life for their players um it's the you know I think that's probably the next wave of AI Innovation that's going to come after you've got some of the tool sets that are out there helping people um build faster and cheaper you know I've talked about ideas for what that means with
00:28:16 other people um I think there is you know the text to speech capabil or or uh speech to text capability in games could be very interesting when you start to think about control mechanics and input um input mechanics and how can you utilize speech to text in a way that uh actually makes the gamer's life Fuller and more interesting and deeper have a deeper connection to that game experience I have seen you know one we just took a pitch meeting a couple weeks ago um where they are using um characters with
00:28:52 um kind of AI generated dialogue trees um and I think that is you know that's a that's a fun one um definitely if you can have it to where it it creates a lot of variety but then you also you know the worry is always going to be like when is this uh AI going to hallucinate and start having like a really weird crazy conversation with you it's like I mean you think about the bugs that people like to post on YouTube games right now just just imagine what's gonna come in the future um it'll be pretty entertaining
00:29:22 but uh but yeah for sure I think I think people there's definitely people out there thinking about it you should find a co-founder and and and come pitch your game IA want play it I'm not going to build it right yep oh God awesome well Dan thanks so much for coming on the show really appreciate it and uh yeah thanks for having me all right