Rick Thompson has made a lot of good investments over time which have generated around $6 billion in returns, roughly speaking. He is knowledgeable about games, as he is the former chairman of Playdom, which Disney bought for $763 million in 2010. And his partner Sunny Dhillon has also specialized in game investments and he is now carving out time looking at virtual reality and augmented reality startups.

While Thompson and Dhillon are bullish on games for the long term, they see the wisdom of investing during the right part of the cycle. Right now, it’s pretty hard to invest in mobile games because it takes so much advertising spending to stand out. That’s why they’ve followed the patterns of many game developers themselves and looked for “blue ocean” opportunities, where the waters aren’t bloody with too much competition.

Signia recently raised a second fund — $85 million worth — and the team expects to put a lot of it into virtual reality startups. But the firm will also put money into startups that fit its themes of mobility, like self-driving cars and data analysis. I recently sat down with Thompson and Dhillon for an extended conversation about investing in games and VR.

Here’s an edited transcript of our conversation.

The team at Signia Venture Partners. Left to right. Top: Zaw Thet, Ed Cluss, Sunny Dhillon, Rick Thompson. Bottom: Anagha Raje, Linus Liang, Gina Domizio.

Above: The team at Signia Venture Partners. Left to right. Top: Zaw Thet, Ed Cluss, Sunny Dhillon, Rick Thompson. Bottom: Anagha Raje, Linus Liang, Gina Domizio.

Image Credit: Signia Venture Partners

Rick Thompson: There are windows of opportunity in new platforms, which is pretty exciting, either as an entrepreneur or as an investor. Picking those platforms is important. Facebook, we were very lucky that Disney liked us. I don’t think we would have survived another year, frankly.

GamesBeat: Because of that transition to mobile?

Thompson: With Facebook it was really a deathtrap. Fortunately mobile allowed a lot of people another escape route, another chance. For those who were able to make it. Some of the Flash programmers and people who were really stuck on Canvas, they had a tough time with it. Obviously Zynga suffered for a long time with legacy Facebook business.

Every turn of the technology crank, there’s a new center of gravity, where things seem to be able to give lift to new businesses. Sunny was smart in thinking about VR a couple of years ago. “This is something that’s going to be important for the long term.” He built his brand, essentially, with that as a cornerstone. It’s not only VR, but I think he’s going to make a 10 to 15 year career on VR as a focus. That was a good choice.

Sunny Dhillon: We’ve seen VR, AR, MR, all the different acronyms you’ve written about, that we hear about at conferences, that we write about ourselves, that we’ve seen — we’ve seen the speed of progress between first, second, to present-day iterations, and it’s been really impressive.

An interesting opportunity that we wrote about with you was what Pokemon Go was and wasn’t. It was commonly lauded as the first major iteration of AR. I argued otherwise, saying there was no real-time environmental depth mapping to make intelligent insinuations as to where Pokemon should be relatively in the real world, outside of location-based premises. What it did was open people’s eyes to using their mobile device as a window for digital overlay into the real world. That is pretty significant.

Educating the population en masse that using mobile devices for viewing, especially when it comes to depth-sensing cameras becoming commonplace, it’s cool to — you’d be able to put this over Rick’s table now and see an animation of cyclists from the Tour de France or whatever. You and I could sit here and have a live Jedi battle on this table. Whatever the use case might be, this is a very interesting near-term monetizable opportunity using AR on mobile devices. This is a particular area of interest right now, which I think is particularly relevant for you and I given our Pokemon Go discussions.

Taking over the world.

Above: Taking over the world.

Image Credit: amirraizat / Shutterstock.com

GamesBeat: Some people were thinking that if you still target the mobile market, you can have an outsized success compared to going early into VR and targeting a smaller base. If they had a chance for a billion users and they got that….

Thompson: Your answer is probably “have your cake and eat it too.” The VR companies we talk to have a mobile strategy, a piece to it that is mobile.

GamesBeat: Like the Gear VR strategy?

Dhillon: Amongst others — Daydream, Gear VR, Xiaomi. Whoever’s coming out with the latest thing. Mobile is part of it.

Thompson: It has to be part of the customer acquisition, at the very least.

Dhillon: Having cross-platform play, especially for multiplayer — all these companies — not to knock them, because everyone out there pushing the boat out to sea for VR, I’m a big fan — companies that raised significant venture dollars trying to own social as a stand-alone product, whether trying to re-create Second Life or re-create a basic hangout experience — this year at Oculus Connect, there’s a legitimate threat from the platform disintermediating them, making them obsolete with avatar systems and other social functionality.

GamesBeat: Facebook’s doing it.

Dhillon: High fidelity VR chat, all that other stuff from companies in the same space. The point I’m making, when it comes to having cross-platform, mobile has to be part of that play, but even within PlayStation VR, eventually Xbox, Rift, and Vive, having cross-platform is important for social. Including mobile being a part of that.

Thompson: There’s almost no technology work to do that. It just means you don’t sign exclusive deals with platforms.

The Oculus Touch controls let you navigate independently with each hand in VR.

Above: The Oculus Touch controls let you navigate independently with each hand in VR.

Image Credit: Oculus

GamesBeat: What is your view of games themselves? My view has been — I write about games. I cover them. They always change. They move from one platform to the next. I cover old platforms and new platforms too. And yet I always feel like, whatever happens to platforms, games will continue. Games will still be an interesting market to write about and focus on. I’ve detected a different view among traditional VCs, where they viewed games as a finite opportunity in time. Maybe social games and then mobile games, but now games are done. Let’s move on to something else like Uber or whatever unicorn of the moment. It feels to me like a lot of people came into games, saw the value, and then left.

Thompson: They’ll be back. They push through business cycles. It’s hard to make money on mobile now. Almost no value is tangible beyond the duration of the hit, which is unfortunate. Multiples of EBITDA — we were selling companies for seven times EBITDA. Okay, this is a hit, it has a lifespan. Basically it’s almost pricing it to discounted cash flow. That’s not a good place to invest. I couldn’t believe — with Cie Games, we were at seven times EBITDA and we had to take terms that included risk of holding stock and all those things. We did the deal. That was our best offer.

GamesBeat: In that case, have you encountered times when the smart move is to get out and stay away for a while?

Thompson: Or go quiet. Particularly with regards to specific platforms. But the times to get in are when there’s something disruptive happening, in terms of new technology, new platform, new areas that existing players don’t understand. EA was fortunate that they didn’t really understand Facebook. [laughs] By the time they got it the party was over. Good for them.

Dhillon: Similarly — you and I have also discussed this, maybe a year or so ago. When we’re seeing as much licensed IP out there, games rising to the top of the charts with existing branded content as the hook, the user acquisition hook, you’re splitting royalties the same way you’d be splitting something with a publisher in the past. When it gets to that phase in any platform for games – where licensed IP is a representation of maturity — when we’re talking early stage VCs, not the big giant Sandhill guys, it’s a sign that it’s time to start looking elsewhere.

GamesBeat: It means it’s more of a big company’s market than a startup’s market.

Dhillon: Yeah. They’re the ones that can pay the up-fronts.

Thompson: The problem with console in the ‘90s was a EA and a few other people controlling the endcaps. That’s what’s happened now with the App Store. It’s hard to crack into that without relationships.

Dhillon: Are you going to download an Avengers app with Marvel IP or a random ninja thing?

Thompson: Will you even see random ninja? It’s just invisible.

Dhillon: Using mobile games as part of a larger trans-media strategy for major intellectual property is what we continue to see right now.

Thompson: I don’t know that I would invest in a mobile game as much as video and chat and excitement and events and watchability.