In between the miles of booths at the Consumer Electronics Show, we stopped at the Gaming Summit to listen to a Q&A between Rick Thompson, the gaming investor who co-founded Playdom, and Michael Vorhaus, the managing director of Frank N. Magid Associates research firm. Thompson has had great successes as a tech investor, most recently selling Playdom to Disney for up to $763.2 million in 2010.
He left Playdom in August, 2011. Since that time, Thompson has funded the next generation of game companies, including mobile-gaming firm Funzio, which Gree bought last year for $210 million. He has also invested in Wild Needle (acquired by Zynga for $3.8 million), Idle Games, Red Robot Labs, Grand Cru, Rumble Entertainment, Project Slice, Fun+, Airy Labs, Noise Toys, Viki, Social Shield, Udemy, Triangulate, AdChina, and Iddiction. That probably makes him one of the most active investors in games to date. He serves on the advisory board and is a general partner of Signia Venture Partners.
In his interview with Vorhaus, Thompson wasn’t shy. He said that Mark Pincus, the chief executive of Zynga, should give up his supervoting rights that give him control of the social-gaming company. If Pincus does so, said Thompson, Zynga’s stock price would double overnight. Thompson has had the luck of being at the right place at the right time. At Playdom, his team built Mobsters with six people in a week. Within a month, the game was generating $4 million a month.
Here’s an edited transcript of the interview between Vorhaus and Thompson.
Mike Vorhaus: Rick has been spectacularly successful, the founder of many companies with total exits well in excess of $5 billion. Flycast a lot of us remember from the 2000 period, $2 billion dollars there. One of the earliest engineers at Octel, a $2 billion dollar exit. Playdom, which we all know about. Adify, which some of you know about, a statistical ad network. Funzio is Rick’s most recent well-acknowledged success.
I will tell you that Rick does find time for other hobbies. Sometimes for a stand-up paddle board, which reflects the excellent shape Rick is in. He’s a remarkable poker player. Do not play poker against Rick Thompson. So, Rick, how the hell did you get into this whole world? How does a University of California Santa Cruz guy become the founder and entrepreneur of $5 billion worth of companies?
Rick Thompson: How did I get into investing? I remember my first investment. I was 10-years-old. Space was a new thing, the new frontier. I invested in a company called Rocket Research. I saw it double in the course of about six months, and I was hooked.
I’ve always had an interest in the markets and the idea of investing. To me, it has some of the same properties of gambling if you will. Making smart bets. But I didn’t get into investing in private companies until I was an early employee at a successful startup. Even though I was employee number three, I didn’t get a lot of options. I started buying options from departing employees and ended up doing fairly well acquiring secondary shares. Obviously, I didn’t have a lot of capital to work with.
My career path was as an entrepreneur. I identified a new platform — a growing market — online advertising, in 1995. Started a company there. Had an exit and had some capital to work with. I started doing some social investing, I would say, investing alongside some friends angel-style. But I still considered myself an entrepreneur. I started up another company, Adify, in 2005. It was at that point I realized that I liked the early-stage startup process. If I spent my time around fundraising and investing, I could also bring capital to the table. Adify was an instance where it was self-financed by the founders. We got follow-on financing.
As a man approaching the middle 50s with a four-year vest, I wasn’t going to get that many new startup opportunities if I did it serially. I started working with really good teams, investing in them. Sometimes bringing the ideas, sometimes investing in their ideas. Helping with capital formation as a founder but not having an investing schedule. That led to a model that we’re now calling the founder-investor model, where we’ll take oftentimes a percentage of the common, provide some debt financing to the company, and be part of that early stage.
Vorhaus: Founder-funder, I’ve heard you say.
Thompson: Yeah. We’re struggling a bit with the name, but we’ve actually settled on founder-investor.
Vorhaus: Are you a super angel?
Thompson: No, not a super angel. Super angels are super because they do lots of deals — very high velocity — putting in fairly small check sizes. $100,000 to $250,000 dollars in maybe 50 or 60 companies a year.
Vorhaus: Why games? Adify was an ad network. Flycast was advertising infrastructure. But you’ve been in quite a few game companies – six or seven in your portfolio.
Thompson: I didn’t intentionally start out as a games investor. I found myself as one. I invested in a company that was doing applications on the Facebook platform. It was a young, pragmatic team. We looked around and saw what was working. It was pretty clear that there was a big opportunity in games. We had 200 million free users. They wanted games.
We spent one week building a game called Mobsters with six people. We were earning $4 million a month within a week of launch. I found myself in the games business. I gained some insights. My background was online advertising, so I understood customer acquisition, which was a big advantage on Facebook in 2008. As a founder-investor, I didn’t have an investing schedule. I was chairman of the company, but I was also free to invest in other gaming companies.
Vorhaus: Are you a gamer at all? Do you play any games yourself?
Thompson: I play chess. I play poker. My partner Dan Fiden taught me how to play craps last night. I like board games a lot.
Vorhaus: Do you play them online, or do you play them in your living room?
Thompson: I play Hooks and Ladders with my daughter and Risk with my son.
Vorhaus: Tell me about the online poker space. I’ve seen you play poker in real life, and people were telling me last night that sitting at a table with you was one of the scariest things that ever happened to them in the poker world.
Thompson: My wife will tell you that I’m kicking myself for missing the online poker opportunity in the early 2000s. Then it became illegal for U.S. citizens to be in that industry, which was a pretty sad thing. The opportunity came around again when the Justice Department shut down all the offshore sites and said that only companies that have been cleared will be allowed to compete. That created an opportunity to cover that base. Online social gaming is still a huge opportunity.
Vorhaus: What’s your read on real-money online gambling, where we’re headed on that versus the Zynga approach or just people going out to discover a poker game on the web using Google? Apparently, people are spending money, but they can’t take it out.
Thompson: Yeah, it’s called free to play. It’s not gambling. Gambling requires consideration in an element of chance, and consideration out. In free to play, there’s no consideration out. It’s strictly a form of entertainment.
Vorhaus: Do you think the space is overcrowded, or do you think we’ll see a phase two or a phase three of online poker games and online casino games?
Thompson: The legalization hasn’t come to the U.S. and probably won’t happen in 2013, maybe even 2014. I do think it’s inevitable. I do think players in the social space will be part of the online gambling ecosystem as that evolves. That’s a big part of my motivation for getting into the social casino space.
Vorhaus: Where are you headed these days? What else is out there? Do you want to make movies? TV shows?
Thompson: We stick to our knitting. Signia, the fund that I started with Dan Fiden and Ed Cluss, is continuing to do what we do: work with early-stage companies in our founder-investor model in areas we understand. Mobile is a major driver. Through gaming now, we have a pretty good handle on customer acquisition in that ecosystem. That’s leading us into some content companies creating games, but more often, they also have a platform component to it — a platform for others to develop and market games. Some technology and infrastructure. We’re interested in augmented reality. We think Google Glasses is going to be exciting although it’s at least another year out before we’ll see that enter … . The smartphones will start to get displays. In the meantime, enterprise, small business. We’re reworking business processes on mobile. There are hundreds of opportunities. We’re interested in everything from vertical B-to-B utilizing mobile-social networking is still particularly interesting on mobile, what’s going to happen there. The messaging and chat apps where users can connect with their friends, exchange information, and play games on mobile. It’s going to look very different from it has on the web.
Vorhaus: I have here a list of 14 of your investments. I’d buy a personal favorite, which is Iddiction. I’d love for you to tell us a thing or two about Iddiction. Then we’re going to see if you like me as much as you say you do. What’s your favorite on the list?
Thompson: Iddiction is a great example of something we’re really proud to be involved in. It’s a company that helps create distribution and discovery for app developers, particularly on iOS. We’re also incorporating Android in the future. It’s a difficult problem that all app developers face. Distribution is hard and can be expensive. Iddiction is one of the few companies I know that has a loyal following of users that look to Iddiction for apps they can get a deal on. Iddiction has a feedback loop with their user base. “What kind of apps are you looking for? What would you like?” Their users call out and say, “Here’s a paid app that costs $2.99. We’d like it for free.”
Iddiction goes to the creator of that app and basically, no charge, offers 40,000 or 50,000 downloads of that app to its user base, which drives usage and helps that app get up higher in the iTunes store. That continues a circle creating an increased number of users. It serves its users well. It helps developers get their apps discovered. Many of those campaigns are done for no charge, but their revenue model also involves working with quality [developers] who pay to get their apps discovered. They sell it at a very competitive rate, so they can choose the apps they want to have developed. What I like about that company is that it’s user-centric, it’s quality-focused, and it’s playing a key role in the ecosystem.
Vorhaus: Tell me what Fun+ is like. What’s it like working with a very rapidly growing Chinese-based social-game developer? Are they in Shanghai or Beijing?
Thompson: Actually, I think it’s both. Fun+ is interesting because Facebook is pretty much blocked in China. Fun+ is a Chinese Facebook game developer. The team there is obviously able to access Facebook directly in order to develop products before it, but their customers are all outside of China, mostly in Europe. They take advantage of lower-cost labor and an understanding of the Facebook ecosystem and develop apps that they localize for a some countries, mostly in Europe and the Middle East.
Vorhaus: You get a lot pitches. You get a lot of people coming into your office looking for a partnership. What do you look for in a pitch?
Thompson: Most every investor would say they look at growing markets, team, and technology, in that order. We very much emphasize a market opportunity, particularly something that’s disruptive. We love new platforms because they’re disruptive and create exactly the sorts of opportunities we’re looking for. As far as teams, we will start with a team, or we’ll start with one person and help build a team. We’re also all operating people inside Signia. We understand technology and the risks and how to go about building it. Those are areas where we can help out. Obviously if the company has all of its elements put together, they may not need us. Things that we look for are a great market opportunity and a seed, a core to build the company around.
Vorhaus: I’m hearing increasingly about a financial reluctance to take series A and B [venture capital] money and give up a lot of your company at an early stage. I’m hearing about a lot of emotional rejection of VCs also. What’s going on here?
Thompson: It’s important to have investors who are aligned with entrepreneurs in terms of outcome. There is a lot of tension, potentially, in that relationship. Part of the important thing for any entrepreneur is to have investors that they want to work with, that they like and that they trust — investors that they can be honest with. There are a lot of entrepreneurs who practice their pitch. They learn all the right answers so they can pass the test and get financing. But I think they’re cheating themselves in many cases.
It really is a dating process. When you’re dating, if you really like video games, is it important to go for walks in the park and hiking and jogging and all these healthy things that you try to advertise when you’re dating? Or would you rather play video games and watch a movie? When you’re in that dating process, either as a funder or as an entrepreneur looking for funding … . You certainly get in with them professionally. You are in a sales mode. But it’s important to be honest. Through all the process and after the transaction closes, it’s really important to be completely honest about the business and the challenges. That’s really the only way that investors can help. I think what happens more often than not with venture investors taking a seat on the board is that entrepreneurs try to carefully manage their board. They manage their investors because they’ll be looking at investors for formal financing. And that VC really can’t help. What we do differently at Signia is we’re part of the creation. We’re part of the early team. We talk to not just the C-level people but to the director and the engineers. We network and help connect them.
Vorhaus: I hear a lot of founder-[chief executive officers] talking about feeling a real reluctance to lose control of the CEO and the business side. How do you feel about those types of deals?
Thompson: I think if Pincus were to give up his supervoting rights, Zynga stock would probably double overnight. I think it’s bad for all other constituents within a company. All other shareholders suffer. Real, true entrepreneurs are glad to share power as well as responsibility and the burden of it. Not all entrepreneurs should be CEO for life.
Vorhaus: The stock just moved 2.25 percent in the last minute. So there you go. Do you own that many stocks?
Thompson: Not very many. I have a few favorites, and I dabble every once in a while, but I’m too busy working in private markets.
Vorhaus: What’s the one that got away for you? What’s the one you said no to that you truly regret? Your wall of shame?
Thompson: That’s a good question. I don’t look backward too often. It’s probably not a good thing to do. That wall’s pretty clean.
Vorhaus: I stand in the presence of some people who want to write you some pretty big checks for your fund. Your track record would suggest that would be a wise idea. What would you want in a limited partner? What do you want before you take somebody’s money? How do you decide between one $10 million and another $10 million.
Thompson: This is a first for me and my team — taking outside money. First is people that we want to work with. It’s very important that we create relationships that have good outcomes, that can endure. People that we like being around. People that will understand that we go through peaks and troughs and help us manage our business.
Vorhaus: Is there ever going to be a Kickstarter of venture capital?
Thompson: That’s going to involve the SEC. It probably isn’t a good idea.
Vorhaus: What do you see in terms of major trends on the horizon? You’ve operated in a macro category. What do you see being disruptive? What are the trends we’re going to see in your areas of expertise over the next five to 10 years?
Thompson: I can’t ever go out that long. I’m not usually the one to see the next big platform. If I was, I’d be doing it. The next year, communications, messaging, chatting, and sharing on mobile are going to create a new huge company that we don’t know of yet. They’ll come out with a lightweight app that lets you connect with your friends in the way that you want to connect with them. I believe that very strongly. That’s one of the things that we’re looking for. Educational technology has started to take off. It’s a national travesty that our education system spends as much money as it does and is in such bad shape. It’s ripe for major change, in spite of the political obstacles. Google Glass, maybe in 2014, will become something very exciting. Instead of a smart phone, you’ll have smart glasses. It’ll do the things we now think of a smartphone doing in a much more convenient and easy fashion.
Vorhaus: Just to be clear about this, you’re not talking about edutainment, right?
Thompson: No. We do education; we do entertainment. I think that edutainment and crossing the two is really tough. Edu-charity and enter-charity, those are also very tough. They’re different things. You can make learning more fun. You can gamify. We do that. But we wouldn’t call it edutainment. We’d call that a great learning app that engages its users. We wouldn’t do any sort of hybrid deals, though.
Vorhaus: How do you develop and find new talent? Are you hanging out in garages in Palo Alto?
Thompson: One of the benefits of success is that it breeds more success. We’re very conscious of working with our entrepreneurs and our teams to create outcomes and strong relationships. The conflict you mentioned previously with founders and investors, it also exists with founders and employees when their interests are not totally aligned. We’re very careful to structure deals and growth that also take care of early and leader employees, to make sure that they’re well treated. That’s largely where our next-generation deals come from — people who know us through our working relationships with their previous companies that they helped build.
Vorhaus: I see on this list of companies one or two that look like they may be data companies. Where do you see big data, and how much are you in that space?
Thompson: We work now with somewhere between a half-dozen and a dozen companies that provide live services, and analytics and optimization are important to virtually all of them. In order to implement analytics and optimization, that requires a fairly large team and a complex infrastructure of servers. The realtime analytics and optimization, we see that as a 30-year investment thesis, where that’s going to continue to improve and be more successful now until they get Google and Yahoo … . I think Microsoft can do it. But over the next few years, that becomes more accessible and in demand for more customers. We’re actively investing in that space.
Vorhaus: As you know, thanks to the fourth estate, Zynga and Facebook got slammed pretty bad. I recall you have some applied physics in your background. Is there going to be an equal and opposite reaction? Will we see a potential swing back toward Zynga? God knows we’ve seen it this month from Facebook.
Thompson: I never fully appreciated or understood the Facebook/Zynga relationship. At one point, the platform on Facebook was called the Zynga platform. They dominate with something like 14 of the 15 top apps. I suspect that relationship is not serving either company very well, with Zynga dominating Facebook and Zynga constrained by Facebook. They’re clearly going their separate ways. Zynga needs to get into mobile. They’re probably using their Facebook properties as a cash cow and not reinvesting. For Facebook, that means they need to create an ecosystem for developers and create some diversity and some innovation on the platform.
Vorhaus: Are we in a mobile bubble or not?
Thompson: In the long term, no. Things may be exaggerated in the near term. Maybe there’s overinvestment for the moment. But mobile is clearly where everything is headed. We have four platforms now: the web, a walled garden called Apple, Google, and then Amazon trying to create their own walled garden. It’ll be interesting to see how that plays out. Ultimately, I’m a believer in open systems. I think those gardens will crack. How exactly they’ll crack I don’t think anyone can say, but in terms of two, three, four years down the timeline, we’ll see an opportunity within mobile that presents itself in the way that the open web did for e-commerce and for free browsing.