It’s game on at Andreessen Horowitz

Kevin Dowd Staff Writer

People were bored during shutdowns. They feared a mysterious plague. The idea of escaping into virtual worlds didn't sound too bad. That's one theory for why consumer spending on video games surged during the pandemic: Americans spent $56.9 billion in the space in 2020, according to market researcher NPD Group, up 27% from the year prior. That figure topped $60 billion in 2021, up another 8%. There are signs that rapid growth is already slowing: Spending was down 8% during the first quarter of 2022. But Andreessen Horowitz believes something has changed for good—that the video game industry "has entered a new era." And so this week, the Silicon Valley giant launched its inaugural games fund, a $600 million vehicle that will back game studios, gaming-focused consumer startups and other companies building technology and infrastructure for the broader gaming ecosystem.

Andreessen Horowitz has some big ideas in the gaming sector. Getty Images

Andreessen also announced a notable deal in the space this week, leading a $24 million Series A investment in Metatheory. A blockchain-based gaming startup led by Twitch cofounder Kevin Lin, Metatheory focuses on franchise games with intellectual property that can be used to create NFTs and other digital content. So far, a title called DuskBreakers is its biggest success. Also drawing participation from notable crypto investors like Pantera Capital and FTX Ventures, this deal melds Andreessen's gaming strategy with its belief in the potential of Web3. It's no surprise investors bullish on Web3 and the metaverse are also intrigued by the potential of video games. If vast, immersive online worlds are indeed the future of entertainment and consumerism, then it stands to reason that the gaming industry—which has more experience than anyone in building those types of worlds—will play a key role. As Metatheory demonstrates, games can also be an attractive area for NFTs and other digital products and transactions that are key parts of the Web3 vision. Andreessen tabbed three general partners to lead its new games fund. Jonathan Lai previously invested in the industry at Tencent, and before that he worked at Riot Games, best known as the developer of League of Legends. James Gwertzman once founded his own game studio and most recently led the game industry vertical at Microsoft. And Andrew Chen worked on the growth team at Uber before joining Andreessen as an investor in consumer tech. While this fund may be new, it doesn't come out of the blue. Mixed in with Andreessen's steady stream of recent investments has been a notable number of gaming startups. Last week, the firm led a $6.5 million seed investment in StartPlaying, a site that hosts tabletop role-playing games like Dungeons & Dragons. Earlier in May, it led a $40 million investment in Irreverent Labs, the maker of MechaFightClub, a blockchain-based game that involves robotic fighting roosters. Other recent investments include One More Game, an online game developer, and Sky Mavis, creator of the blockchain-based game Axie Infinity. I don't think I'll be signing up for MechaFightClub any time soon. When it comes to video games, I'm a simple man—some might say out of touch. I still play Peggle. But that's part of growing up: Pop culture passes you by. Investors like Andreessen are doing their best to stay forever young.

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A warning for private equity Jonathan Kanter, the top antitrust enforcement official at the U.S. Justice Department, sent a shot across the bow of the private equity industry in an interview this week with the Financial Times, warning that a regulatory crackdown on buyouts could be in the offing.

Jonathan Kanter has some questions for private equity. Getty Images

One of Kanter's main concerns seems to be add-ons, where firms use one portfolio company as a platform to acquire and consolidate several other players across an industry. The prominence of these deals on the PE landscape has been steadily growing. Add-ons made up 72.4% of all U.S. buyout activity in 2021, per PitchBook, up from 54.5% back in 2010. "Sometimes [the motive of a private equity firm is] designed to hollow out or roll up an industry and essentially cash out," Kanter told the FT. "That business model is often very much at odds with the law, and very much at odds with the competition we're trying to protect." Kanter made some other comments that could raise blood pressures up and down Wall Street. Here's the full piece.

What goes up… Klarna is in talks to raise new funds that could reduce its valuation from $46 billion to somewhere in the low-$30-billion range, per a report in the Wall Street Journal, the latest sign that the venture market's go-go funding days of 2021 have come to an end. The pandemic surge in e-commerce was a boon for Klarna and other companies in the buy now, pay later space, spurring a spree of high-priced deals, including Square's $29 billion acquisition of Afterpay. In August 2019, Klarna raised funding at a $5.5 billion valuation; that figure climbed nearly ninefold in less than two years.

It's been a rollercoaster past two years for Klarna and CEO Sebastian Siemiatkowski. Bloomberg

But now, a wave of layoffs is sweeping across the startup landscape. The prospect of more down rounds is looming. Instead of growth at all costs, many investors have grown more interested in the bottom line. And the boundless optimism that surrounded the tech sector earlier in the pandemic has abated. For Klarna in particular, regulatory scrutiny is another headwind. The Swedish startups as one of five companies ordered to share information with the Consumer Financial Protection Bureau as part of an inquiry into the buy now, pay later space. Still, for companies like Klarna and Instacart—which in March reduced its valuation from $39 billion to $24 billion—this still looks much more like a correction than a collapse. A lot of early investors and employees will still be very happy with a $30 billion-plus valuation—just not quite as happy as they were at $40 billion-plus.

Clearlake's big leap Only a select few private equity firms have ever raised more than $10 billion for a single fund. Clearlake Capital joined the club this week, bringing in $14.1 billion for its seventh flagship vehicle. From its headquarters in Santa Monica, Clearlake has rapidly established itself as a force to be reckoned with on the fundraising landscape. It was only seven years ago that the firm raised its first $1 billion vehicle. But it has scaled up significantly since, thanks to a track record of successful bets in the tech, industrials and consumer sectors. An example: In 2018, Clearlake bought healthcare IT company Provation Medical for $180 million. In December, it agreed to sell Provation to Fortive for $1.4 billion. Earlier this month, Clearlake inked its highest-profile deal yet, playing a key role in a group that agreed to buy Chelsea FC in a deal worth £4.25 billion ($5.3 billion). I wrote in some more detail earlier this week about how, between that deal and this new fund, Clearlake might be ready for its closeup.

They Said It

"What we've got is JetBlue in the middle of a quasi-merger with American Airlines, one of the big three that they purport to compete with, and they're attempting to buy a competitor and take seats out of the market and raise fares. And that's going to be a big issue, and one that our board viewed as insurmountable." —Ted Christie, CEO of Spirit Airlines, speaking to CNBC about why Spirit's board unanimously rejected the latest takeover offer from JetBlue

Just The Facts

— It's a bird, it's a plane, it's a SPAC! Electric airplane startup Surf Air Mobility struck a deal to go public at a $1.4 billion valuation by merging with Tuscan Holdings Corp. II, a blank-check vehicle backed by Stephen Vogel, a longtime private equity investor who's sponsored a series of SPACs in recent years. Concurrently, Surf Air also agreed to combine with Southern Airways, a commuter airline that serves 39 cities in the U.S. — Indonesian digital payments startup Xendit unveiled $300 million in Series D funding on Thursday, with Coatue and Insight Partners co-leading the round. My colleague Yessar Rosendar has more on the investment, which drew in other big names like Accel, Tiger Global and Kleiner Perkins. — Malaysian oil giant Petronas agreed to buy Perstorp, giving the Swedish specialty chemicals maker an enterprise valuation of €2.3 billion ($2.4 billion). For PAI Partners, the company's current owner, the exit has been a long time coming: The firm first acquired Perstorp in 2005. — Thoma Bravo led a $100 million Series D investment in Imply Data, valuing the analytics database startup at $1.1 billion. Based in Burlingame, Calif., Imply was founded by creators of Apache Druid, an open-source analytics database widely used across the tech industry. — Brookfield Asset Management agreed to buy HomeServe, valuing the provider of emergency home repairs at £4.1 billion ($5.1 billion). The Canadian investor will pay 1,200 pence per share, a 71% premium to the price of HomeServe stock when Brookfield first revealed its interest in March. HomeServe has been publicly listed in London since 2004. — Velocity Global, which makes hiring, payroll and other HR software, raised $400 million in a Series B round co-led by Norwest Venture Partners and Eldridge Industries. CEO Ben Wright told Bloomberg that the Denver-based startup is now worth at least $2 billion, without specifying further. — CVC Capital Partners is no longer considering a formal takeover bid for Brambles, an Australian company that provides pallets and crates for the shipping industry. Brambles, which has a market cap of A$15.9 billion ($11.1 billion), had said on Monday that the two were engaged in preliminary talks. — A couple updates from the intersection of private equity and real estate: Partners Group agreed to buy a portfolio of 3,500 existing single-family rental homes in the U.S. (plus another 1,000 that are under construction) at a gross asset value of $1 billion. And EQT agreed to buy a portfolio of student housing assets in the U.K., comprising more than 2,300 beds across five university cities.

What We're Reading

Inside the mind of Mike Cannon-Brookes, the Australian tech billionaire who wants to stop his country's biggest utility from spewing carbon—and who isn't afraid to throw a few elbows to get his way. (Forbes) A.J. Steigman sold 300 homes in Atlanta last year, more than any other real estate agent. The former chess prodigy and investment banker did it without ever setting foot in the city. (Wall Street Journal) Will the VC deal machine keep churning? Is a spree of take-private buyouts on the way? A rundown of eight key themes to watch as the private markets navigate this new era of economic uncertainty. (PitchBook) On the $60 billion rise and fall of Do Kwan, the would-be crypto kingpin who has instead become the industry's ultimate cautionary tale. (Intelligencer) For many kids, going to elementary school during the pandemic has been a strange experience. For 140 third graders in Arizona, their first field trip in more than two years was a very welcome return to normal. (Atlantic) Volatile chicken prices have wreaked havoc on Wingstop during the pandemic. In response, the Dallas-based chain is thinking about buying its own chicken farm. (Bloomberg)

What To Watch For

Ontario Teachers' Pension Plan Board wants to start buying more companies. That's according to CEO Jo Taylor, who told Bloomberg that doing so would allow OTPP to save on fees and play a larger role in shaping how companies address ESG principles. The pension investor—one of the continent's biggest—is no stranger to billion-dollar buyouts, but it's better known for investing as an LP in others' funds. And when it does direct deals, it's typically as a co-investor alongside another firm or firms. The market for majority buyouts is already crowded. But with nearly C$242 billion ($189 billion) in assets under management, OTPP has a lot of weight to throw around.

Kevin Dowd Staff Writer I am a staff writer at Forbes. I previously wrote for PitchBook, where I created The Weekend Pitch, a weekly newsletter about the private markets. Before that, I covered high school sports in the Pacific Northwest, and I graduated from the University of Washington with a degree in journalism and creative writing. I live in Seattle, where I read a lot of books and play a lot of golf. Follow me on Twitter.

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