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Andreessen Horowitz is one of Silicon Valley’s biggest venture capital firms, investing in both early-stage startups and established growth companies. Its investments run the gamut of software industries, and lately, it has also been investing in games.
Started in 2009 by Netscape founder Marc Andreessen and entrepreneur Ben Horowitz, Andreessen Horowitz has backed companies such as Skype, Airbnb, Lytro, GitHub, Ripple, Oculus VR, BuzzFeed, and CryptoKitties. The firm, also known as a16z, has more than $12 billion in assets under management across multiple funds.
It has also begun making more investments in game companies and threw its weight behind the user-generated gaming world of Roblox, which raised $150 million in February in a deal led by Andreessen Horowitz. This interest is a validation of gaming’s mainstream growth, as the number of gamers in the world reaches billions and industry revenues top $160 billion.
Andrew Chen, a partner at Andreessen Horowitz, has a lot to do with the firm’s interest in games and consumer products. Along with games specialist Jonathan Lai, Chen and the partners at a16z have put money into such game startups as Singularity6, Forte, SandboxVR, Mainframe, Improbable, Elodie Games, and CodeCombat. Chen writes regularly about gaming and consumer trends, and he balances his enthusiasm for games with interests in the wider tech arena.
I spoke with Chen about these trends and why he thinks gaming could be the source of some of the biggest venture returns in the future. We also talked about social unrest and how the company can help through its existing cultural leadership investment fund and its new Talent x Opportunity Fund.
Here’s an edited transcript of our interview.
GamesBeat: Tell me about your background. Why did you decide to join Andreessen Horowitz?
Andrew Chen: I’ll give a super-quick summary. I grew up in Seattle. I worked in startups and ended up in the Bay Area, where I was starting my own company, which was seed-funded by Marc and Ben back when they were angel investors. During that time I was doing a lot of blogging about the intersection of product design and social products, how you grow products from zero. I’ve been writing for a long time, which has been fun. I soft landed the startup at Uber, so I was running a bunch of the growth games at Uber, primarily on the rider side of the product. All the tens of millions of new users that have popped into Uber all the last few years go through experiences that I worked on, which is cool.
Then I joined Andreessen Horowitz a bit over two years ago. It’s been cool. Part of the reason why we’re talking is because I’ve had a lifelong passion for games, going all the way back to playing BBS door games, early online multiplayer games. Then the NES, and then playing a lot of the early massively multiplayer games. I started to see a convergence of a lot of things I was interested in, all at one go. I got super excited about that. I’ve been investing in games, probably spending half my time there. The core of it is investing in game studios. We have a bunch of studio investments. I’ve also been interested in tech companies related to games. You can imagine that as the next set of companies like Sleeper, which we just announced, with chat and communication around games. Whatever will become the next Discord. We’re in Caffeine, a Twitch competitor. We’re very excited about all those adjacent things.
Frankly, we’re just seeing a lot of life in game design ideas and features entering mainstream products, which is exciting. Everything from avatars to looking at virtual points and currencies and microtransactions. I spend half my time there, and then I spend the other half of it working on my background in marketplaces and Uber, thinking about the next set of marketplace companies and ways for people to make money online. Those are companies like Substack.
GamesBeat: Did you come in with an investment thesis? And if so, have you stuck to it?
Chen: I was lucky to be very interested in what’s the next general of social networks early on. I always thought that there would be more beyond–obviously you have TikTok and Twitch and products like that, which are successful and continue to grow. But then also thinking about what’s next. Part of what we’ve talked about on this, and how it intersects with games, is that one of the easiest ways to pick out the next set of social products–what are young people using?
You quickly see that if you’re a kid, one of the first things you do is spend all your time playing with your friends in Roblox. You use it like a social network. You hang out with your friends there and talk with them. You build a persistent identity. You might play Roblox and Minecraft and Fortnite and some of these other games for years before you’re allowed to have a “social network” account. Even though that’s really your social network. I’ve become interested in that, the idea that these multiplayer game experiences are the next social networks. That’s been a key part of my thesis.
Another thesis that’s been interesting to me, and that has stuck all the way through, has been the fact that there’s ways to—when I grew up, my mom would say, “You can be a doctor or an engineer. Pick one or the other.” It’s amazing to me now that being a YouTuber or being a game streamer is an actual profession you can take on. The other big area that intersects with games, that you’ve also followed very closely, is the idea that as a content creator, an influencer, there are a lot of new ways to be able to create work in the economy.
If you build a platform that enables that, that’s one of the big areas we’ve gotten excited about recently. There’s a whole sector of marketplaces that allow gamers to find other gamers, like pro gamers or companions, to play games with them. This is a model that’s worked well in China. There are a couple companies floating around, like Legion Farm and EPal and others that are all very interesting. That’s one model. Obviously there’s the streaming model. A bunch of people are making great livings for themselves by building tutorials and reviews, doing that for strategy gamers and some of the superstar games on YouTube, creating a living that way. That’s an interesting trend, and one I’ve followed very closely.
GamesBeat: Given the firm’s history with the likes of Oculus and Roblox, how much do you feel like this desire to a get to a metaverse is guiding you in some of these investments? Eventually, this universe of virtual worlds that are all connected is where we’re going to wind up.
Chen: It’s an interesting question. I don’t think it’s come up very much in our investment criteria. The parts where we share a lot of interest with what people have articulated as the metaverse is, number one, when you think of a metaverse you think of the idea that there’s other people. Intrinsically, it’s a social product. There are other people you’re interacting with, as opposed to the next triple-A first-person narrative-driven thing. We’re not in the business of funding those. I don’t think the metaverse will come out of those.
The other part of the metaverse that’s compelling is that you would be willing, maybe, to put in a lot of different types of content there. You might imagine part of the metaverse would have very science-fiction stuff, or very fantasy-oriented stuff. We like the idea of user-generated content or moddable platforms as part of our investment thesis, because it lets users participate in creating their own worlds. That’s very interesting.
Another big part of it is just the concept of a persistent identity you care about. Part of the metaverse idea is that you might spend as much time there as in real life. That’s an interesting thing. People are already gaming, obviously, for many hours a week. That’s almost already available. That’s shared.
What we haven’t done, though—in our conversations, I haven’t thought that there will be one metaverse, for example. If we’re lucky, it will look more like the internet, where there’s a shared set of protocols and standards, but everyone can build their own piece, and users have a lot of ability to choose, versus the Oasis construct in Ready Player One. That’s a bit funny in that it’s this monolithic thing owned by one company.
GamesBeat: That feels like the most unrealistic outcome, just one company dominating.
Chen: Yeah, yeah. It’s kind of a dystopian outcome. I’m more excited about the idea that instead of having “the” metaverse, we all move further and further toward a world where there’s a set of standards and we view that–there’s going to be identity and avatars and a payment processing layer. Blockchain gaming is obviously very interesting too. We backed Kevin Chou’s company. We also have the CryptoKitties investment. That’s what you would need in order for different games to be able to interoperate with each other, something like a blockchain to intermediate it.
There are a lot of trends that potentially point toward that. But today, in my personal view, that might be a decade or two or more in the longer term. Today what I’m more interested in–the fact is, more and more people are playing games than ever. It’s a huge industry. And then just the talent level, the talent that’s spinning out of Riot Games, Valve, Blizzard, starting to spin out of Epic. The fact that you can build a game startup–I mean, Riot showed that you could build a very valuable game startup. Supercell also showed that. It makes it all of a sudden very attractive to start a studio from scratch using venture capital dollars rather than publisher money. All of that unlocks a new generation of entrepreneurs, which we’re very excited to back.
GamesBeat: It looks like a half-dozen or so investments in games is where you are now. Is that about right?
Chen: We have a couple that are unannounced. The number is slightly bigger than that. But that’s about right.
GamesBeat: Are there some that you want to talk about here, where you’re calling out particular trends that guided the investment?
Chen: Let’s talk about two in particular, and then we can dive into some others if you’d like. Mainframe is worth talking about. That’s very much the core type of company that we love to back again and again. You have some of the EVE Online co-founders from CCP, just an amazing team that’s built a real game that touched millions of people. Looking at the cloud gaming trend on the horizon, the fact that now, for the first time, it’s technically feasible to stream games. That’s very exciting. Thinking about what new game mechanics and new game designs that this enables, and putting together a group of people that are both from the mobile side of the house, as well as from the PC and console side, to build this new game. They’re early in the process, but they’ve unveiled some details.
What we love about this is that it’s a solid team intersecting with this incredible technology trend in cloud gaming. As a consumer, there’s nothing better than to get rid of the 30-gig download and patch updates and all that stuff. The idea of being able to watch someone stream on Twitch, when they’re in the middle of some amazing boss fight, and you just click on it and all of a sudden you’re in the game, is an incredible idea. Being able to jump right in and have that right at your fingertips. We think that we’ve backed the highest-end triple-A team to go after this new platform, and we’re very excited about it in that regard.
As you know, when you have either a new console or a new mobile platform, a new computing platform, if you’re early on the platform, magical things can happen. We think that this is going to be the team that makes this happen in cloud gaming. That’s one I wanted to highlight.
GamesBeat: In that space, the fact that Microsoft will have xCloud soon, and Google launching Stadia, how does that affect your thinking about Mainframe’s opportunities? With Stadia in particular, it looks like they’ve had a mixed launch. More things have to happen before that particular kind of cloud gaming is going to be a success.
Chen: That’s right. That was a big part of our investment discussion. When you’re betting on a platform, you want to know how likely it is that these folks are going to continue investing. I think it’ll turn out that cloud gaming is–my prediction would be that they’re not going to nail it in year one. It might take an iteration or two to get there. I view smartphones as a nice metaphor, where for iOS, it wasn’t the first smartphone. Blackberry had already existed for years. What you needed was one company to come up with a version that worked for people, and then off we went. Then the growth is explosive, because the experience is that much better.
My personal view, as someone who’s spent a fair amount of time playing with it–certainly being able to load instantly and being able to move from one load state to another quickly is pretty magical. The obvious thing they need to do is build out their exclusive content library. That will make studios like Mainframe even more attractive to partner with.
The second one, there’s a bit less about it, so I might let the team describe it in more detail. But I wanted to also mention Singularity 6. Singularity 6 is working on—they’ve described it, in their launch press, as experimenting with building a virtual society. The way I think of it, there’s a lot of games right now, and a lot of metaverse aspirants, where their basis is in shooters. They’re competitive in nature. That’s why a lot of people are spending time with it. What’s really cool, and we saw this with Animal Crossing this year in particular, is that there are many different kinds of non-competitive gameplay, social and cooperative gameplay, that people love. There are huge markets for it. People will spend hundreds or thousands of hours on those games as well.
Singularity 6 is a team that spun out of Riot. There’s a bunch of great Riot teams right now. They’re tackling that type of gameplay, cooperative social gameplay. They’re thinking a lot about Animal Crossing and The Sims, trying to unlock the basis for this hangout experience that isn’t fundamentally about shooting and competition. That’ll be great in the sense that it unlocks a lot more demographics.
GamesBeat: You mentioned teams a few times. At our conference, [March Capital Partners’] Gregory Milken pointed out that he likes to invest in teams as well, but during the pandemic, he hasn’t been able to go out and meet these teams. It’s slowed down the process of trying to vet investments, because it’s harder to do that assessment of whether a team really likes working together or not. How do you try to address that?
Chen: There’s a couple of ways that we’ve been addressing that at the firm. One is that there’s a team internally at Andreessen Horowitz, folks that are deeply interested in games. We have folks that are ex-Riot working with us, ex-Tencent, ex-Electronic Arts. We have a mix of folks that are from mobile gaming as well as desktop gaming and PC gaming. That helps a lot in terms of–we’ve made multiple investments in the alumni of the Blizzards and Riots of the world. We hope to do more. That’s one way of triangulating the talent, from that standpoint.
The other one is, we’ve wanted to spend our time primarily with folks that have built and shipped major products. In that case, we’re just here to–they’re well-known in the community. We want to assemble not necessarily the largest portfolio of game studios, but we want to assemble the very best set of people who want to build big games. That’s been the focus.
It’s harder to get to know people via Zoom, but a lot of what we’re doing with some of our CEOs that we’ve met–for example, we just did an unannounced investment, but one thing we did was a bunch of folks in our team played Teamfight Tactics with the other team, for hours and hours, as part of the getting-to-know-you process. That was a great way to get to know them. It’s been observed that if you’re calm under pressure while you play TFT or League or StarCraft or whatever, you’re probably pretty good at startups as well. I would bet that the two correlate.
GamesBeat: There’s another big thing in front of us with the challenges around Black Lives Matter. A lot of people are looking at what they can do to help here. I wonder if you’ve thought about this. I know that black-owned startups and game companies are very rare. They haven’t always had luck getting funding.
Chen: We just announced a new fund called the Talent Opportunity Fund, where we’re trying to reach people that maybe wouldn’t typically be able to get VC financing. Before that, Chris Lyons heads up our Cultural Leadership Fund, which we announced two years ago. But the firm is definitely making some inroads. CLF is actually almost three years old now. We’ve been working on this for a while.
For almost all of the game studios that we’ve invested in, we have been–step one is, through the Cultural Leadership Fund, we’ve had quite a few African-American investors join as co-investors with us in these game studios. That’s been fantastic. Sleeper, which is fantasy sports, we have quite a few folks from music and sports and different parts of the ecosystem joining us as co-investors. That’s what happens at the very beginning of the relationship, which has been great. They have often then been bringing users and using social media to bring attention to the companies that they’ve invested in. That’s been great. In many cases they’ve also referred employees and new team members for companies. This is a whole area we can follow up on, but it’s an important one for us to address.
GamesBeat: Are there other gaming trends that you’re interested in? I remember talking with you about esports and how it was hard to come up with the kind of company you’re interested in.
Chen: I’ll give you two or three trends that are interesting. We can start with esports. It’s also interesting to talk about modding and user-generated content, so I’ll spend some time there, and then we can talk about new demographics as well. On esports, it’s obviously very exciting. We’ve been less oriented around investing in teams, just because we want to go to the place where the software is built. We’ve leaned in on studios more than anything else. However, it’s clear that esports is a key part of every one of these game studios and their go-to-market plan. They have to think about influencers. They have to think about Twitch streamers. They have to think about esports. They have to think about team owners and how to work with them. Those are all very interesting.
There are quite a few companies that we’ve admired from afar and not invested in, but they’re doing things in tools and platforms for esports. Player performance and that kind of thing. Those are interesting. We continue to follow them. PlayVS is a very interesting company. The high school esports angle is interesting. We want to continue following that. But we’ve been more focused on the studios themselves.
On the modding front, you know this, but so many of the biggest games over the last several years have originally been developed as mods. DotA leads into League of Legends. You have the whole succession of games before Fortnite, PUBG and DayZ and all that stuff turning into battle royale. We’re interested in how you create games that are moddable, and how you take these–they’re almost no-code developers. They’re very amateur software engineers who are building games under these platforms. How do you reward them? I’ve been very interested in that.
I’m fascinated with what Manticore is doing. We have a big investment in Roblox for that same reason. The kinds of games that people are able to develop in Roblox are just incredible, and the kind of revenue that these small studios are already seeing is impressive. That’s been a big area of focus.
The third thing I mentioned was new demographics. This is a bit related to what I was saying about Animal Crossing. After battle royale took off, every single game needed battle royale. As you know, battle royale is such a niche thing. Only a certain type of person is going to be into it. If the goals of building the new metaverse-like social hangout, virtual spot, whatever you might call it–I think the basis of that may not be a shooter. It may be something that looks more like Animal Crossing at its core. You build up from there.
If you think about Stardew Valley, one of the cool things about that game–at first glance it’s a farming simulation, but all of a sudden, oh, there are caves. You can explore these caves. There are bad guys in the caves. You’re able to layer on more and more. It could be that, similar to what Epic is seeing with Fortnite’s creative mode, you maybe have to get to something that feels more like a social hangout in order to unlock a broader audience for this.
For a long time, people used to ask things like, “Why do I need a Facebook profile? Why do I need a website?” Eventually people realized that they did need one. A lot of people right now maybe don’t feel like they need a Fortnite profile. But give it 10 or 20 years and all of a sudden maybe everyone has one. Maybe it becomes as important as having a social network profile. If the historical trends persist, that’s what’s going to happen.
GamesBeat: There was a broader question about whether to invest in gaming because you believe that’s where the next big companies are going to be, or to invest in things outside of it, in things like consumer, because that’s where you find the next Uber, the next gigantic platform. How do you balance what you’re interested in based on the size of the opportunity? Maybe you won’t get the world’s biggest IPO out of gaming, but maybe this is an interest-driven thing.
Chen: I think it has to be both. If you invest robotically, without a passion for the kinds of products you look into–we invest in teams and entrepreneurs at our core. If we can’t relate to the entrepreneurs, if we can’t get excited about what they’re building, then the reality is that we’re not going to do a very good job. I’m not going to do a very good job. I have to be passionate about the things I’m investing in. Luckily, gaming is something that’s easy to get excited about. That’s great, number one.
The second thing is that I do think the whole ecosystem has changed. In the past decade, we’ve seen that you can build a multi-billion-dollar venture-backed game company. You see that in Riot’s case directly, which was VC-backed, and Supercell and some others. But you also see it in games that got to huge scale. Minecraft got to huge scale. Although it’s taken some time, obviously Epic is now worth quite a lot. Each one of these companies that I could mention would be very formidable tech companies, if you just view them as part of the overall consumer tech landscape. I’m very excited about that.
Not only am I excited about that, but if you go out to the next adjacent set of categories–if Twitch were an independent company right now, how much would that be worth? You could speculate, but it would probably be more than $10 billion. That’s a pretty incredible property just on its own. Discord and Roblox and a bunch of these companies have also done really well. For the first time, a lot of these companies are truly venture-backable, and I think that’s the most important thing. It allows and enables these brand new teams that are spinning out of these companies to be able to take the risks and start something.
When we talk to a lot of these teams coming out of the Riots and Blizzards and so on, the traditional way to do it would be to finance their game using publisher money. As you know, the whole problem with publisher money is that by the end of it, they’ve funded a game, but they own all your IP. They have the crown jewels. Number two, if they don’t like the creative direction you’re taking–they have a lot of creative control over what you might be building. And number three, they sit in between the game company and their customers.
One of the interesting things that bringing tech investing into the games industry will allow–I certainly hope that it’s not just us. It’s hopefully many of our venture capital peers, many of our seed investors and angel investors, as we continue to try to bring new people into the games ecosystem. But it allows young teams with a lot of hustle, teams with a lot of creative vision and impact, to be able to build the games that they want on their terms and bring them to market directly, where they have a direct relationship with their customers. Then they can build it into potentially a multi-billion-dollar outcome. That’s what everyone wants.
The more of this type of risk-taking, creative risk-taking, that investors like us and others would hopefully enable, the better it is for consumers. These are hopefully the games I want to play and my friends want to play. As you can tell from how I talk about this, it’s something I think is a good business opportunity, but it also comes from a place of passion from many of the folks on the Andreessen Horowitz team.
I wanted to also mention a couple of short things about the current environment, things I’m excited about. We may see in-home VR making a comeback. Obviously with sheltering at home and the success of the Oculus Quest, I’m hopeful that a lot of the game studios that put their VR plans on hold end up re-engaging in that world. If you do the research on how many units are being sold, it’s pretty impressive.
The other interesting thing about games right now is that there’s a lot of industries that have been negatively impacted by COVID, but one of the most interesting things about the games industry across the last couple of months–there’s even more engagement. So many products are at all-time highs. The desire for us to back teams continues to be very strong.