gdc '09: creating value for video game companies
Post on 21-Oct-2014
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Creating Value For Video Game Companies
Mitch LaskyBenchmark 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 an exchange.
3) Sell the company.
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 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”)
Fundamentals
Comparable Company
1) Identify competitive sector
2) Determine relevant metrics
3) Assess relative value
Fundamentals
Many Factors Affect Value
• Management & team
• Intellectual property & technology
• Scarcity / uniqueness of asset
• Defensibility of market position
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!
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 control your value-rich assets
• Manage for long-term competitive advantage
• Strive to be #1 at what you do
The Real World
Why do companies buy?
• Growth
• Market Entrance
• Exclusivity
• Intellectual Property
• Talent
The Old World
Packaged Goods Value Chain
Middleware Distribution Develop.Capacity
OwnedIP
Publishing
The New World
Tools &Tech
NetworkOps
Distrib-ution
Cust.Acq.
Billing& Ads
VirtualGoods
GameDev. & IP
LiveTeamCRM
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
Strategic Value
Beyond the Blue Ocean
• Market share & aggregation
• Barriers to entry
• Growth vs. cash flow
Strategic Value
Distribution Innovation vs.Content Innovation
• Content innovation drives audience expansion.
• Distribution innovation drives value creation.
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 + Virtual Goods
• Used Games / Resale
Examples
State of the Traditional Buyers
1/3/06 1/2/09 Δ
ERTS $18.2B $5.6B -69%
MSFT $240B $178B -26%
THQI $1.8B $305MM -83%
VIA-B $26B $12.2B -53%
Examples
Recent Valuations
$50-$100MM $100-500MM $500MM-$1B >$1B
Mythic
Cryptic
DICE
Rare
Traveler’s Tales
Harmonix
Red Octane
Blue Lava
JAMDAT
Pandemic/Bioware
Blizzard
Examples
Going Public
• Predictability
• Operating constraints
• Liquidity
Conclusion