Venture Capital Private Equity investments in the Games Sector

Venture Capital / Private Equity investments in the Games Sector GameConnect Asia Pacific Craig Blair Craig@netus.com.au November 2007 Agenda 1. Background to netus 2. PE/VC landscape – US & Australia 3. VC process – how it works 4. VC investment in the Games sector 5. Opportunities in Games sector 2 netus • • • • Back by a team with extensive operational experience in running high growth technology & media companies  Daniel Petre, Alison Deans, Craig Blair Responsible for financing or launching many wellknown, technology & media businesses in Australia  MSN, eBay, Expedia, Monster, Charles Schwab, Ticketek netus is funded by News Ltd  Remains a separate entity but can access relationships within the News network of businesses netus has a very ‘hands on’ investment model  We like to work closely with the management teams of the businesses we are involved in 3 Venture Capital model – investing behind strong management teams with differentiated business models netus Investments: • • • Strategic partnership with Tantalus Interactive since May 2007 Netus provides finance and business development support Netus providing capital for acquisitions & organisational growth • • • Netus took a 19.9% stake of travel.com.au in April 2006, which included a Board seat Netus provided operational & marketing guidance & expertise to improve business performance Netus divested their shares in October 2007 with an IRR of 90% 4 Import model – launching proven International tech/media businesses in Australia netus Investments: • • • Acquired local SEM business to jump-start agency expertise Launched Efficient Frontier in AU & NZ, March 2007 Leveraged our business networks to build client base quickly Publisher of professional niche blog sites. Localises licensed content from the world leading blog networks eg Gawker network (Gizmodo, Kotaku, Defamer, LifeHacker) in AU Netus recruited the local editorial and sales teams JV with leading US provider - ReachLocal Inc - to provide online marketing solutions for SMEs Netus provides finance and business development support Netus providing capital for growth & IP development 5 • • • • • Agenda 1. Background to netus 2. PE/VC landscape – US & Australia 3. VC process – how it works 4. VC investment in the Games sector 5. Opportunities in Games sector 6 Introduction to Private Equity & Venture Capital investing Private Equity – An overview • • Broadly defined firms that make investments in companies on behalf of private investors Investments typically involve a transformational, value-added, active management strategy and are usually funded through debt & equity Private Equity investments can be divided into three main categories: 1. Venture capital (Seed & Early Stage): An investment to create a new company or invest in a start-up with strong growth potential (High Risk) 2. Venture capital (Expansion or Late Stage): An investment to expand a small or nascent company with undeveloped or developing revenues (Med Risk) 3. Buy-out & Distressed: Acquisition of a significant portion or a majority control in a more mature company that is under performing or distressed due to changes in market or business conditions. The acquisition normally entails a change of ownership (Low-Med Risk) • Source: Wikipedia 7 VC/PE Landscape - US Venture Capital – Early Stages Venture Capital – Later Stages (Buyout & Distressed) Private Equity Deal characteristics: -Total amt. invested -Number of deals -Size of deals -Typical fund size Investment criteria: - CY 2006 $US 5.0 Billion 1000+ $US 4.2 M (Ave.) ~$50-$250M - CY 2006 $US 20.5 Billion 2000+ $US 9.2M (Ave.) ~$250M-$1Bn - CY 2006 c. $US 28 Billion 200+ $200M-$5Bn+ $1Bn+ -Original/innovative idea -Good plan & mgt team -High growth potential -$6M D2C Games original IP for games & merchandising opportunities -Clear traction/profits -Proven business model & team - Plan for growth -Underperforming/ undervalued business -Strong cash flow -Low debt Recent examples: -$9M in Red 5 Studios to develop its MMO games -$150M in Platform 9 to fund studio acquisitions Source: PwC Venture Capital Fundraising Press Release, April 2007; Stuckincustoms.com – Recent venture capital deals in games Oct 2007 8 VC/PE Landscape - AUS Venture Capital Firms • • • ~10 VC firms (ave size $45M) Raised 40 $1.8Bn since ’99, Ave. size of funds has remained relatively constant Smaller local specialized & differentiated firms Strong focus on technology, biotech, software & internet co’s Typical investment size $0.5M$10M Portfolios of local VCs include • Hitwise • Seek • Tantalus Media • Distra – Payment software • • • • • • • Private Equity Firms ~45 PE firms (ave size $160M) Raised $13.7Bn since ’99 Ave. size of funds has grown from $50M to $400M Dominated by large & domestic international firms Strong focus on retail, industrial, media and service co’s Typical investment range of $20M-$1Bn+ Recent deals include • Qantas - $11.1Bn bid – Macquarie Bank, Allco Equity Partners, TPG • Myer Stores - $1.4Bn – TPGNewbridge Capital 9 • • • • VC/PE Landscape - AUS Venture Capital Firms • • • ~10 VC firms (ave size $45M) Raised 40 $1.8Bn since ’99, Ave. size of funds has remained relatively constant Smaller local specialized & differentiated firms Strong focus on technology, biotech, software & internet co’s Typical investment size $0.5M$10M Portfolios of local VCs include • Hitwise • Seek • Tantalus Media • Distra – Payment software • • • • • • • Private Equity Firms ~45 PE firms (ave size $160M) Raised $13.7Bn since ’99 Ave. size of funds has grown from $50M to $400M Dominated by large & domestic international firms Strong focus on retail, industrial, media and service co’s Typical investment range of $20M-$1Bn+ Recent deals include • Qantas - $11.1Bn bid – Macquarie Bank, Allco Equity Partners, TPG • Myer Stores - $1.4Bn – TPGNewbridge Capital 10 • • • • Agenda 1. Background to netus 2. PE/VC landscape – US & Australia 3. VC process – how it works 4. VC investment in the Games sector 5. Opportunities in Games sector 11 VC in Australia – How it works? What do we look for: • • • • • • • • • Differentiated or innovative offerings Strong management team Proven traction in business or record of success Strong focus on growing & developing business in Australia $2-6M investment for 20-60% of business No set time frame but typically 3-5 yr horizon Initial meeting & discussion of business (1-2 wks) Term sheet, bus. planning & due diligence (6-8wks) Legal document completion & investment (1-2wks) Typical deal: Investment process: How do we work with • • our partners: • Active, hands-on approach to management Work closely with management team to develop appropriate strategies to unlock business potential Assist with growth through capital investment in resources, infrastructure & acquisitions 12 Agenda 1. Background to netus 2. PE/VC landscape – US & Australia 3. VC process – how it works 4. VC investment in the Games sector 5. Opportunities in Games sector 13 VC investment in games sector – key considerations Market considerations: • Cyclical factors – Point of the hardware/software release cycle • Growth of non traditional games market – casual, handheld & mobile • Growth of alternative dist. channels – impact on publishers & developers • IP vs Fee for service – Payments of milestones, royalties, license fees etc. • Hit driven model – Profitability driven by success of each game with users 14 VC investment in games sector – key considerations Business considerations: • Management team – History of successful & on-time delivery • Quality of staff – experience of senior management, developers & creative team • Scale – Balancing of growth with creativity & team dynamics • Constraints to growth – hiring / sales/ publishers / culture • Differentiation – platforms, games, IP, publisher & industry relationships • Profitability – Revenue streams, development costs & cashflows 15 Agenda 1. Background to netus 2. PE/VC landscape – US & Australia 3. VC process – how it works 4. VC investment in the Games sector 5. Opportunities in Games sector 16 Where netus sees the opportunity in games 1. Invest into management teams • Strong management team • First class reputation with publishers for quality & delivery • Successful development & commercialization of own IP  We are very involved with our management teams to help achieve growth potential  We spend time with publishers & media companies to understand their views on Australian development 2. Invest in people – innovative hiring & retention • Ongoing staff training & development • Aim to make the business the organisation of choice to work in  Netus are serious about adopting best of breed HR programs from other sectors eg. Software development 17 Where netus sees the opportunity in games 3. Balance fee for service work with disciplined investment in own IP • Consider licensing deals eg. Newscorp (Fox) & establishing content partners 4. Gain scale • Allows better career opportunities • Enables investment in gaming platforms & QA environment • Better publisher deals, more interesting projects 5. Exit at scale to • Public markets • Publishers • Media companies - netus have the experience, credibility & relationships to orchestrate an IPO or media company exit at much higher valuation! - netus are actively investing in this space and are interested in talking to companies who fit these criteria! 18