The Rise: Video Games, Facebook, and LVMH

Introducing a new series of compilations sharing the stories behind the world's most interesting and important companies.

A company is a collection of people. A startup company, to use one definition, is the largest collection of people you can convince of a plan to build a different future. The way that this collection of people — employees, investors, customers — becomes convinced of that future is through storytelling.

Effective storytelling at any stage enables companies to separate themselves from competitors and gain power in the marketplace. Telling a better story lowers cost of capital and creates an edge in attracting and retaining talent.

It is because of this that I have been fascinated by the stories companies tell about themselves as well as those crafted about companies by outsiders.

Within a different context, stories are a tremendously valuable tool for learning.

My favorite way to build a mosaic of a market I am trying to get smarter on is to try to understand the stories behind individuals companies within it — how they got their start, the ups and downs they experienced as the grew, the tradeoffs they made at critical inflection points, and how this all ties to where they are going next.

I shared a bunch of my favorite “Rise of Company X” stories in this thread on Twitter a couple of weeks ago and ever since have been struck by a bout of Baader–Meinhof – everywhere I look, I see stories about the rise (and occasional fall) of companies across all different industries and geographies. Inspired by the great work of people like Polina Marinova, Kevin Gao, and Sriram Krishnan, I thought it would be valuable to share the best stories I come across about the world’s most interesting and important companies with you in a structured way.

The Rise is an ongoing (probably intermittent!) series of compilations that I am developing that pull together the best “Rise of Company X” stories around a single theme. I will also include a recurring set of additional sections — commentary on how the stories tie together, key questions the research prompted, “sub-stories” about important products or critical junctures in the lifecycle of different companies, etc.

From time to time, I will publish original “The Rise of Company X” essays on companies I am researching. I will also continue sending out my own essays on other topics. These will stay on the same newsletter feed for now.

Here is the outline for this week’s edition:

  1. 🌅 The Rise: Video Games — quick primer on the state of the market

  2. 👾 The Rise of Epic Games — a featured company profile

  3. 🕹 The Rise of the Rest — links to great stories on the rise of the other important video game companies

  4. 🤔 Questions I’m asking about Video Games… — a few thoughts prompted by all of this research

  5. 🐙 FAANG Focus: DST’s Facebook Investment — a feature on an under-told story about one of the big tech players

  6. 👜 Request for Stories: LVMH — ideas for where to look and what to write about next

This first edition is quite long but is packed with interesting stories…there are something like 45 links spread throughout. I hope it is useful and fills your weekend with good reading!

I would love to hear what you think of the format and content. If you have thoughts, please come share them here on Twitter (retweets and likes greatly appreciated 😉).

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🌅 The Rise: Video Games

It seems crazy to call a market with almost 3 billion billion participants and annual spend of over $150B “early”. But despite its scale, the gaming market only recently graduated in the public’s mind from something kids do when they should be studying or playing sports.

The pandemic has had a lot to do with this rapid shift in perception. The trajectory of the video game space and the companies within it has been structurally shifted over the last six months, and the impact so far has been staggering.

  • Publicly traded gaming companies like Take-Two, Activision Blizzard, Zynga, and Nintendo blasted through analyst expectations and are experiencing once in a lifetime growth. Aaron Bush provided a helpful look at Q2 earnings season at Master the Meta.

  • Discord announced a $100m funding round led by Index Ventures at a valuation of $3.5b. There are now more than 100 million active users on the service that spend 4 billion minutes in conversation on 6.7 million active servers. Discord’s recent growth outside of gaming (Discord was adopted as the primary app for distance learning this year in France, for example) once again proves that early adoption among the gaming community is often a precursor to mass market penetration.

  • Epic Games — maker of the Unreal Engine and Fortnite — raised a round of $1.78b at a valuation of over $17b. This gives the company ample resources to go after what might be the biggest vision in the entire technology industry, let alone gaming (more on that below). Also… 👀

Video Games — along with the technologies and design mechanics underpinning the industry — are expanding rapidly into every part of our lives (educationmedicinemusic) and the market is becoming the foremost battleground for the future of big tech. And while investors clearly believe video games represent a valuable opportunity, they may be still underrating the scale by orders of magnitude.

The arc of video games, of course, doesn’t start in the present period. The virtual worlds billions of us experience today — and the even more immersive worlds coming in the near future — are built on centuries of human imagination along with decades of technological and creative advancement.

Below are a set of my favorite (incredibly well-researched and written) stories about the companies driving this technological and creative progress.

👾 The Rise of Epic Games

The format for these posts is still a work in progress. For this initial edition, I’ve opted to go a bit deeper on one company (Epic). That may change in future editions!

Epic Games Primer (Six Part Series) by Matthew Ball and Jacob Navok

If you want a further deep dive into where the gaming market is today, the most helpful thing I can do is direct you to go listen to Matthew Ball’s recent interview on Invest Like the Best.

In that interview, he summarizes a lot of his writing from this incredible six-part series on Epic Games. I alluded to the scale of Epic’s grand vision above but this comment drives that home:

The only explanation is that he (Epic founder and CEO Tim Sweeney) single-handedly believes he can crank the TAM up. And we're not talking about cranking the TAM up by 10% a year, even compounded over a decade. But the idea that this can meaningfully pull forward, not in the sense of COVID, 2025 to 2022, but the metaverse future of 2050, can arrive in 2035. And all of that comes from taking as much of the technology that just enables today to work and writing down the margin so that those that are building for the future have the profits to reinvest in the business. And at least in my experience, I haven't seen an infrastructure play as deep, as broad, as potentially immediately lucrative that is taking that degree of an approach. Everyone else is saying, "Let's keep our margins down. Let's grow our reach. Let's build out better infrastructure to grow the market, yes, but secure our position.” I've never seen one that is so focused on TAM lift.

In 2019, Epic Games reported $4.2 billion in revenue and $730 million in EBITDA. In April alone, thanks to the pandemic, Fortnite revenue was somewhere on the order of $400 million. Epic has said that in April, players spent 3.2 billion hours in the game. There was also the virtual Travis Scott concert that drew more than 27 million people the platform.

All of the success to date — and its position in the Metaverse it hopes to pull forward — hinges on its Disney-esque ‘flywheel’:

If Epic is successful in building out its ‘flywheel’, it will even more dramatically reshape the digital world - from data and privacy rights, to emergent technical standards, the distribution of profits, and the very ways in which humans work and relax. And all of this is critical to Sweeney’s long-term vision of society’s future: the Metaverse.

For a quicker primer on the trajectory of Epic and what brought them to the brink (maybe past it) with Apple and Google, check out Mario Gabriele’s thread on Twitter.

🕹 The Rise of the Rest

Here are ten other great pieces on the rise of different companies in the video game market. Like I said above, the format here is still a work in progress, so expect changes in the future! The clock kind of ran out this week on having time to summarize but I recommend all of these!

🤔 Questions I’m asking about Video Games…

  • At what point does the strength of existing IP held by some of the largest content players — made more powerful by the highly engaging world building being done around said IP — start to suck the oxygen out of the room for earlier stage and independent creators? Game developers have often been among the most capital efficient businesses to scale, but will that continue to be the case?

  • As communication around video games encroaches on the “water” unit of consumer attention, what does that mean for music streaming, podcasts, and other audio content? I spoke about this recently with Howard Lindzon on his podcast, Panic With Friends.

  • Discord seems to be on track to become a big public company, but I’m fascinated thinking about divergent M&A paths and what that means for the market. This list doesn’t even mention the large gaming companies that could make a play.

🐙 FAANG Focus: DST’s Facebook Investment

The stories behind the rise of the world’s largest tech companies are well told. This section pulls out smaller stories about teams, products, or key inflection points that were critical in powering the growth of these trillion dollar behemoths. This week, I am focusing on Yuri Milner’s bold investment in Facebook.

As it set out to raise its Series D round of funding, Facebook was in the process of recovering from the Global Financial Crisis that had slowed its growth and crushed advertising spend. But the company was consistently cash flow positive, growing revenue 70% year over year, and was still being valued by some Silicon Valley investors vying for the round at north of $5B.

What came next — outsider Yuri Milner and his firm DST leading the round at a $10B valuation — was one of the most impressive and lucrative investments in the history of venture capital.

Forgive the long pull quote but the entire story below, told by Marc Andreessen, provides an almost perfect description of the value accessible to investors who gain a unique perspective by being "on the ground" and reasoning with a view of the tactile reality of the situation at hand:

Yuri came through Silicon Valley in 2008 or 2009 for the first time, and he basically said ‘I’m in business and I want to invest.’ His first big deal was the Facebook deal. As you may recall what was happening in this timeframe: Facebook had printed an investment from Microsoft at a $15 billion valuation. Then the stuff hit the fan and there was a serious downdraft in valuations.

After the financial crisis, Facebook almost raised their next private financing round at $3 billion. Then there was a reset of the process, the economy started to recover a little bit and the process was re-run. Top American investors were bidding at the $5, $6 and $8 billion level for Facebook and Yuri came in at $10 billion. I was on the Facebook side of this and I had friends who were bidding on and I’d call them up to say ‘You guys are missing the boat, Yuri is bidding 10. You are going to lose this’ They basically said: ‘Crazy Russian. Dumb money. The world is coming to an end, this is insane.’

What Yuri had the advantage of at the time, which I got to see, was that Yuri and his team had done an incredibly sophisticated analysis. What they’d basically done is watch the development of consumer Internet business models since 2000 outside of the U.S., so they had these spreadsheets that were literally across 40 countries — like Hungary and Israel and Czechoslovakia and China — and then they had all of these social Internet companies and e-commerce companies that had turned into real businesses over the course of the decade but were completely ignored by U.S. investors.

What Yuri always said was that U.S. companies are soft because they can rely on venture capital, whereas if you go to Hungary you can’t rely on venture capital so the companies have to make money. So he had a complete matrix of all the business models across all of these countries and then came all of the monetization levels by user and then all adjusted for GDP.

Then, out at the bottom came: Therefore, Facebook will monetize at X. And his evaluation of what Facebook would monetize for was like four times higher than anybody else’s evaluation of what Facebook would monetize for. So he got the deal and has now made, now 24x on his $1 billion of capital in five years on the basis of superior analysis. To this day, I still greatly enjoy teasing my friends who missed that deal. He had the secret spreadsheet and you didn’t.

Immediately after the investment, Milner joined Mark Zuckerberg and TechCrunch founder Mike Arrington for an interview where he sheds additional light on the reasoning behind the Facebook investment that would go on to earn him billions.

👜 Request for Stories: LVMH

In every edition, I will include requests that I come across (usually via Twitter) or that I have myself for stories about specific companies or markets. This week, LVMH.

I’ve lived in Paris for the last two years and the Arnault name hangs over much of business (and cultural) life in the city. The rise of Bernard Arnault himself is well told, including in what might be my favorite CEO profile of all time from back in 2001.

The LVMH empire is vast and remains powered by Arnault’s unique combination of financial brilliance, creativity, and competitiveness.

My friend Leon wrote a great piece recently called Chaos and Control ($) looking at Arnault’s operating philosophy. And this timeline from the FT is quite informative. There is also a ton written about Arnault himself (a recent piece here from Forbes, for example).

Dot plot showing LVMH's diverse acquisitions since 1996

But I would love to read more on the how all of this history ties to what comes next for the company. What role does luxury retail play in a future (and present) defined by digital commerce? How can the French company continue to gain power in a world dominated by the big US and Chinese tech platforms?

If you have seen anything on LVMH or Arnault, please let me know and I’ll feature it in a future edition!

Thank you for reading!

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