Investing in the Asia Games Space – Past, Present and Future John Lee May 21, 2013

2 About the Speaker – Bio at a Glance Over 12 years in the Asia games space as a investor Part of the team at Softbank Venture Capital that invested in multiple game startups including NCSOFT At NCSOFT led APAC Publishing (ex-Korea), led the investment for Zepetto (Point Blank) Chief Strategy Officer at GigaMedia, invested in XL Games (Archeage), IAH Games (Singapore), Softstar (Taiwan) Chief Strategy Officer at ZeniMax Media Asia Pacific, with seven global studios including Bethesda, ID and Arkane Co-Founder of the Hong Kong chapter of Angelvest, the largest angel network in greater China Personal angel investor in multiple game startups Board member of multiple game and media startups Personally invested over $15,000 into Kickstarter projects

3 I’ve been through four waves of game investments 1 st Wave – 1999 ~ 2005 PC based MMORPG Started by Lineage 1 Peaked at World of Warcraft 2 nd Wave – 2004 ~ 2009 PC based casual Started by Kart Rider Peaked at Crossfire / Dungeon & Fighter 3 rd Wave – 2009 ~ 2013 PC based social games Started by Farmville / Zynga Poker Peaked at Draw Something Current Wave – 2012 ~ Present Mobile based social Started by AniPang / Clash of Clans Peaked at ???

4 In Asia, games has had massive success Korea has over a dozen IPOs related to the industry China has over a dozen IPOs related to the industry Draw Something acquired for $200 mil by Zynga (2012) Funzio acquired for $210 mil by GREE (2012) Pokelabo acquired for $175 mil by GREE (2012) Gloops acquired for $430 mil by Nexon (2012) Cygames gets $300 mil valuation from DeNA (2012) Supercell gets $130 mil investment ($770 mil valuation) but… Important to note a few things: Korea and China IPOs are all vintage pre-financial crisis Funzio was at 2.5x revenues, Gloops at 1.5x revenues Most public game companies are way off their highs

5 Asia startups have been quick to follow the $$$ Korea and Japan usually first to innovate, but quickly replicated by China and SE Asia Korea pioneered the MMORPG and casual games PC space, but its time is largely past Korea has all but ditched PC based development, all of the money now pouring into mobile and tablets (Sunday TOZ / AniPang, Lineage Eternal, etc.) Japan innovating on mobile, Million Arthur, Puzzle & Dragon China has done a great job at copying the best games (with some exceptions) from Japan and Korea, and launching in China as a first mover, PRC is big enough to get big market caps Southeast Asian game startups trying to follow the dream and be the next ‘OMGPOP’ or next ‘Supercell’

6 But it’s a really crappy market now since 2009… VCs need to ask “What’s the business model?” Overall economic slowness, terrible macro-economic climate Poorly performing tech IPOs like Zynga, Facebook Drop in the overall number of IPOs, period. VCs are sitting on a backload of Series B and C companies that aren’t having exits Uncertainty about monetizing mobile Relative freeze on major acquisitions from companies like Google, Electronic Arts, Yahoo!, etc. Sh*tload of seed funded companies around the world going… no where

7 Most VCs don’t want to invest in the games space Games are a hit-driven, winner take all business with maybe room for a #1, #2 in each genre per market When there is a dominant leader in the market, must ask what the key drivers for switching will be, likelihood is, most players will not In early stage game investment deals, the only proven indicator is the past track record of the team, but even that is largely inconsistent Some very costly failures in the games space spooking investors – 38 Studios, Flagship, Gazillion, Real Time Worlds, Red5 Studios just to name a few “Are you kidding me” comes to my mind most of the time. Most entrepreneurs have crazy and unrealistic expectations on self-valuation (see next page).

8 Most games startups have unrealistic expectation Seed money is way too easy to get in Asia – government subsidies, government programs, government grants, EASY TO INCORPORATE, HARD TO EXECUTE Too much dumb money (high net worth friends or families) flooding the market at a seed level in Asia Easy seed rounds usually pre-set the valuations of studios way too high Hit the Series A Crunch (a.k.a. the cliff)

9 What’s a poor startup to do? Woes is me! Have realistic expectations on funding. Series A is not something that is following 8 months after your seed. You need to demonstrate and show a clear business model before raising more money Seed is the new Series A. So put your mind in the mode of ‘my first VC round is going to be a B round’ Scale back the vision of your game product to fit around your seed round. Bootstrap. Crowdfund. Eat Ramen. Be ready to eat Ramen for a year. Start small and grow big – break up your game vision, build and release a slice, validate your audience and ideas – VCs love validation, not unproven ideas or hypotheses

What about Crowdfunding? WOW! I’m all for it!

But… Crowdfunding doesn’t scale well for Asia Kickstarter depends on Amazon payments, which is only partially supported by bank issued credit cards from 16 countries around the world Kickstarter primarily caters to a US audience  so Asian companies pitching on it naturally at dis-advantage Does not support alternative payment channels like PayPal Cultural issues such as trust abound Regional regulatory issues abound

STATE OF KICKSTARTER $ raised# successful projects Also the vast majority of Kickstarters are < $100K

Set your expectations

14 Asia Game Exits ex-Korea/Japan in a word.. suck. For the vast majority, game company exits are not IPO, but modest trade sales or acqui-hires Zynga acquires XPD Media (2010) Six Waves / LOL Apps acquires Smartron5 (2011) Changyou acquires 7Roads (2011) DeNA acquires Punch Entertainment (2011) YY acquires E-City Sky (2012) Kabam acquires Balanced Worlds (2012) Asiasoft acquires CIB (2012) Realistic Advice: set yourself up for a more modest exit, and taking care of investors by managing expectations around a trade sale or acqui-hire deal with a major game company.

15 Final Remarks The VC business has changed. It’s a bad economy. Not a great time to be a VC either. Seed is the new Series A. Don’t expect a Series A. Plan for your next round around a traditional Series B definition or exit building upon your seed round Complaining about venture capitalists ‘not getting the games industry’ is not going to get you funded. Set a clear business model and milestone plan. Validate it with data. Even better, validate it with revenues. Raise money at the angel level at a reasonable valuation Ask for a big valuation when you are justified to get one. Comparing yourself to the guys who just got funded isn’t the way to do it. Its not too late. You can always go work for EA.