The Age of Profitability
For VC funded and VC hopeful gaming companies, profitability is the name of the game...
In a sad portent for the state of the games industry, a unicorn has fallen. Rec Room, a multiplatform, UGC metaverse once valued at $3.5b, is shutting down. And in this shutdown, there is a crystal clear message for all VC funded and VC funding aspiring founders in the games industry: we are firmly in the age of profitability.
There will be an aquihire of some talent and technology to Snap, and a high integrity shut down that includes the leadership specifically calling it early so they can do right by its people (and perhaps even return some capital to investors). It is sad news for the players, the founders and the many employees and their families who have lost their jobs.
And the reasons are clear. “Despite [our] popularity, we never quite figured out how to make Rec Room a sustainably profitable business. Our costs always ended up overwhelming the revenue we brought in,” reads the shutdown announcement.
My 20+ year career in the games industry has been spent primarily working for or contracting with VC funded startups. And for most of those startups, the success story we were trying to tell was one of growth. We aimed to create traction that proved growth, and told the story to investors “if you pour money into this startup, we will convert it into rocket fuel that takes this ship to the stars.”
Its through this type of traction, this type of growth story, that a UGC metaverse play that brought joy to over 150 million players and creators can be valued at $3.5 billion despite being a money losing venture.
For those purely in the AI space, hypergrowth is still the name of the game. But here in the games industry - where recent years have seen plenty of big ticket failures are few substrantial exits - profitability is top of mind.
When it comes to running companies and making games, I take a broad view of success. If you are measuring yourself only against the metric of a profitable exit, then statistically you will fail, since of course, nearly all startups fail. But there are many other forms of success, and Rec Room achieved many of them.
Raising $300k is an achievement, let alone nearly $300m.
Releasing on 1 platform is an achievement, let alone 6 of them.
Serving 150 players is an achievement, let alone 150 million of them.
Putting roofs over heads and food on the table for hundreds of employees and their families is an achievement.
But, despite all of these achievements, Rec Room did not succeed in the most important way for any VC funded startup. Because the second you take money from the investors, your are signing a contract. You will do everything in your power to bring your investors a multiple on their investment. If they’re early stage, they might be hoping for a 100x or 50x return. In later and later series, it might be a 10x or 5x return. But still, a return is what you are promising to chase when you take their money.
In the past few years, we’ve seen plenty of 8 and 9 figure VC investments into gaming companies and platforms. And we’ve seen plenty of these investments go to zero without a meaningful game launch, or launch a game that was DOA, or launch a live service that petered out within months.
The environment for raising money from LPs has changed, and in lockstep the environment for raising money from VCs has changed.
For one of my clients, I am assisting them with shaping the story for their VC pitch. In the first pitch feedback session, one of my strongest pieces of feedback, even at a pre-seed stage, was that the story was lacking a focus on profitability.
For any pitch at this stage, I would strongly recommend two things:
A credible story for how this company will chase profitability with their pre-seed and seed funds
A feature roadmap and P&L that backs that story
Not that these elements will guarantee landing an investment. More that they are table stakes. If you are not achieving profitability and growth in your seed stage, the chances of you landing series A investment in the current market are weak. Just showing signs of growth, in most instances, will not be enough.
So if you are an early stage founder and will be chasing VC investment in the near future, do your diligence. Focus on profitability with slower growth, not hyper growth at any cost. Hyper growth might have worked a decade ago. It might still work for OpenAI and Anthropic. But it is highly unlikely to work for you.