a16z Podcast - Founders Playbook: Lessons from Riot, Discord, & More

Episode Date: July 25, 2024

Gaming is not just entertainment—it's a revolution reshaping our culture, technology, and economy. a16z’s Jonathan Lai and Andrew Chen dive into the current gaming renaissance and its future impact. Joining them are Michael Chow, CEO and Steven Snow, CPO of The Believer Company, and Eros Resmini, Founder and Managing Partner of The Mini Fund.They explore the intersection of tech, art, psychology, and design in gaming, discussing how startups can navigate intense competition, distribution challenges, and high production costs. With insights from these industry leaders, this episode covers the transformative potential of AI, the importance of player feedback, and strategies to stand out in a crowded market.Recorded during Speedrun, a16z’s extensive games accelerator, this episode offers a glimpse into the strategies and innovations driving the gaming industry forward. Resources: Find Steven on Twitter: https://twitter.com/StevenSnowFind Michael on LinkedIn: https://www.linkedin.com/in/believer-paladin/Find Eros on Twitter: https://twitter.com/erosresminiFind Jonathan on Twitter: https://twitter.com/TocelotFind Andrew on Twitter: https://twitter.com/andrewchenLearn more about Speedrun: https://a16z.com/games/speedrun/ Stay Updated: Let us know what you think: https://ratethispodcast.com/a16zFind a16z on Twitter: https://twitter.com/a16zFind a16z on LinkedIn: https://www.linkedin.com/company/a16zSubscribe on your favorite podcast app: https://a16z.simplecast.com/Follow our host: https://twitter.com/stephsmithioPlease note that the content here is for informational purposes only; should NOT be taken as legal, business, tax, or investment advice or be used to evaluate any investment or security; and is not directed at any investors or potential investors in any a16z fund. a16z and its affiliates may maintain investments in the companies discussed. For more details please see a16z.com/disclosures.

Right now, we're in the Sakkwik Tōreni, but gaming we'll see gaming ultimately dominate and become the primary entertainment medium for the future. I love the intersection of tech and art and psychology and design and how they interact. It's just the coolest industry in the world. Over the past few decades, gaming has undergone a radical transformation. from one-off experiences that came on a disc to viral mobile games to now intricate, seemingly never-ending online universes

that actually feel like they have more in common with movies or social media than the video games we might remember in the 90s. Esports tournaments fill stadiums, games inspire major TV series, and the money spent on gaming content alone is five times what is spent on the movie box office. So with all that said, leveling up as a game company should be a breeze, right? Well, it's not that easy.

With intense competition, distribution challenges, and high production costs, gaming startups are used to playing on hard mode. But they're also pioneers of innovation, leading the pack when it comes to the adoption of everything from smartphones to virtual reality. And these hard-won lessons offer insights that can help startups across the tech industry to power up and advance to the next level. So that's why we brought in some of the tech. Titans of the game industry.

And today, you'll hear them discuss everything from the state of the gaming industry today, how to survive a bare market, the strategies that startups can leverage to build and market products that stand out in a busy crowd, and the potential impact of AI. These conversations were all recorded during Speed Run, A16Z's extensive games accelerator. So ready, set, game on. As a reminder, the content here is for informational purposes only. should not be taken as legal, business, tax, or investment advice, or be used to evaluate any investment or security, and is not directed at any investors or potential investors in any A16C fund.

Please note that A16Z and its affiliates may also maintain investments in the companies discussed in this podcast. For more details, including a link to our investments, please see A16c.com slash disclosures. I'm very excited because I legitimately believe that right now we're in the second end of a gaming renaissance. That was Jonathan Lai, general partner and founding investor of A16Z Games. John previously worked at Riot Games

where he shipped the Riot Games API before the company was acquired by Tencent. You might also recognize Riot as the creators of League of Legends, a game which sees 15 million players, on average, every day. If you're starting to game company, there's never been more tools and new technology to help you build games. There's never been more sources of funding, and there's more players of games today than ever before. There's 3 million gamers around the world, like Southeast Asia, Africa, India, all of these emerging markets are coming online. At the same time, like we have more distribution platforms that are hungry for content, right?

Netflix is getting into games. I just heard that Walmart and Verizon last month are really excited about games. Apple Arcade, Steam is at all-time highs. There's just never been more demand for great content. Gaming has long been overlooked as an industry, but it continues to evolve. One of its next day shifts has been its influence on Hollywood.

Here's Andrew Chen, also general partner at A16Z Games. A lot of Hollywood are intensely interested in the games industry because they've just seen in the last year, not just the Mario movie, not just what's happened with Hogwarts Legacy, Last of Us. I've had a ton of meetings with everyone from the team around JJ Abrams, the bad robot people, the Eisner family who ran Disney for many years, the folks around Ridley Scott. And Riot has obviously been pushing from the gaming side. And it really feels like there's a tremendous boom that's happened in the same way

that Marvel and the superhero franchises sort of became the core IP that then unlocked basically the last, I don't know, 10 years of films. What you're really seeing is just an aging out of the population of folks that grew up watching two-hour movies, and that's their primary method of entertainment. And as that group ages out, I think what we'll see is we'll see gaming ultimately dominate

and become the primary entertainment medium for the future. And it's inevitable just based on consumer watch time and engagement time if you just measure it in, you know, minutes and hours and monetization. I think the folks on the business side are starting to really understand that gaming is actually larger than film, TV, books, magazines, radio combined. And you can actually build and monetize your IP and have daily interaction in a way that you wouldn't otherwise. And it's not just Hollywood that's taking notice. It started at Fortnite, a smash hit that everyone, in the globe was talking about for years.

Right after Fortnite, you had a mug guess, which almost made the pandemic livable. Then you had games like Eldon Green, followed by Hogwarts Legacy, followed by now Power World. And so now it feels like every mirror you'll have like one or two games, such as like curses, like the cultural fabric. It just becomes this thing that everyone talks about,

which I find is like really amazing and a sign that games has come into its own right as a piece of culture. If you need any convincing, remember that viral dance move flossing? Well, part of its popularity came from the ability to buy it as an emote for your character in Fortnite. And while this pop culture breakthrough is great news for the industry, every quest still has its challenges. Like much of the technology sector, games industry investment stalled last year, following to less than a quarter of its post-pandemic peak. But, at least according to one industry veteran, a bear market can bring its own advantages.

When we were pitching what we code-name fellowship, this open-world co-op free-to-play game, there were a lot of people who were telling us, like, there are dozens of these, they're so expensive, no one's going to want to fund this, it's going to be ridiculous. And I think if you look at the market two years ago, all that pushback was totally right. That was Steven Snow, a four-time gaming studio founder and one of the creators behind games like League of Legends, Dungeons Siege, and Total Annihilation. I think when you look at the market today, there's less than 10 of these product pitches still live. Meaning, like, as the economy's kind of gotten more condensed,

and I heard everybody talking earlier today about how there are founders who prefer to operate in a more financially constrained market because it makes it kind of easier to ignore a lot of the riffraff and the noise. I don't disagree with that. In fact, I would say that we now find ourselves in a very interesting situation where we're one of a few, whereas of three years ago, we were one of so many it wasn't worth doing. The current economic climate offers another potential advantage to gaming startups in the form of talent. As margins narrow, we've seen a wave of mass layoffs from major gaming studios. What's happened to us and our overall applicant pipelines over the last 60 days is we are flooded.

We are seeing heads of studios apply for like base tier leadership jobs. Trust me, if you guys are not checking your email inboxes right now, you're making a huge mistake. Everybody's emailing everyone trying to find a job. And some of these people don't need to. They're just looking to get out of the studio that handled their, I won't name any names, but they handled their folks very poorly. And so if you have cash, just figure out how you want to focus because there'll be so many people who are trying to get in.

But even a market full of big-name talent can present its own challenges. The mistake I see so many startups make is go hire that person from EA. You know, go hire that person from Xbox. Like, they get really wooed by the resume at the early stage. Erisorismini is an angel investor and former CMO at Discord. And there are some amazing people at those two companies. Don't get me wrong, they really are. But the resume alone is not what is actually going to help you be successful as a startup.

And you can waste a lot of time, a lot of money. These people are expensive often. Sometimes they're seeking the same salary they got of Xbox. And the thing is, they're probably really great in those environments, but when you're a team of 10 or less, 20 or less, 50 or less, it's a completely different ballgame. So all that amazing experience, all the knowledge that they have, all the skills that they have don't necessarily apply to the early stage.

Now, this is just one of the ways that companies are trying to stand out in this sea of stiff competition. And it's truly a worldwide game. Here is Jonathan Lye. Competition is seeded up in games, even beyond the competition that we see here in the West. Most of the Asian game companies, call it Mihairier, Tencent, Netis. They're actually all moving west. And this has been an effort that has been going on for some time.

But I think it's really accelerated recently. You know, the crackdown that China's had and, you know, gotcha boxes and regulatory playtime and so on and so forth. Just using an example of Meherier, I think, is opening three or four hours. offices, like here in the West Coast of learning and hiring up a massive number of people. And so something to think about is if you are starting a game studio today and having to potentially compete against developers that can feel massive workforces that are working around the clock and have very, very deep understanding of like monetization, how to run free-to-play economies and so on, I think it's hard to compete with one of these larger guys, just purely

in like a content production sort of treadmill. It's like, what are the levers that you can pull to basically compete against an incumbent in your space? So let's dive into exactly that. The tools and strategies that gaming companies are putting into action to get their products onto the leaderboard. Starting with, listening to fans. It used to be that back in the day, marketing was this combination of PR, conferences and events, and building case studies with your customers and doing field marketing. And it was sort of this like very repeatable playbook.

Like the whole industry is getting foundationally disrupted. It's shifting really towards the idea of a lot of B2B founders actually instead talking directly to their audience, building direct channels with their customers, building in public, building a sense of a buzz around the work that you're doing. And we certainly see that a ton in AI where the primary hunting ground for acquiring customers, for attracting funding funding, for recruiting, including employees actually has been Twitter and LinkedIn and Discord and some of these other platforms. And I would certainly encourage anybody that's kind of working in a B2B context to really consider the same. Steven Snow learned the power of this approach when him and his team at Riot stepped away

from their screens and set up a stall at the gaming industry's largest convention. When League of Legends made its big announce, we went to E3. And I had a booth at the end of the end of a row in Kentia Hall. We told our community if you want to do resume reviews, come by. All we had was our community and no one knew who we were. We were a 45-person studio at the time, but everybody else thought we were three idiots in a garage, right? The day started super sad. It's just me and a couple others in the booth. And within a few minutes, people are showing up. They usually just wanted to talk about the game. And I was like, I'll talk to you about the game, but I have one commitment. Before I talk to you about the game, you have to

tell me something that completely sucks about League of Legends. And it's a qualitative question. It doesn't matter what their answer is. I'm just going to source with them like, oh, is it a friction related to matchmaking? They might say like, oh, it takes me forever to find a friend. It's like, okay, cool, is that a matchmaking problem? Is that like a friend's list problem? But I'd go through and pull it all out.

I did it for three days straight, and it was horrible. And they're just abyserating the product right there, right? Like, just right in front of everybody. And the whole thing I just kept doing was writing down their feedback, writing it And by the time I got back to the office after that Kentia Hall debacle, I had a punch list that was more effective for the overall trajectory of League of Legends than if I'd tried to sit in a room with our top designers. At the end of the day, it's not personal.

They are as angry and as furious about the state of the game because they care. Right, like that is the secret sauce right there. It got to the point on League of Legends release notes. lease notes, I was putting in parentheses next to the big beats, and we would give them credit for giving us the feedback. There's another detail that's going to sound completely insane, but when we had about 50, all the way up until about 250,000 monthly active players, I would meet with the top tier players, and it was first come, first serve, and a ventrillo server, and it was capped at 200, and I would

just go every Sunday, starting at 4 p.m. I would just go down the line. of the 199 other people and ask them what sucked. And then that was what fed the release notes. Direct user engagement can be a game changer for any technology product. And the team at Riot takes their player-focused approach a step further by putting players at the heart of everything they do. Here's Michael Chow, Stevens' former colleague at Riot. The Holy Grail is the customer.

And you just obsess about the customer. And when I showed up at Riot, I used to call our customers users because that's what everybody in consumer technology calls users. They call them users. I didn't realize how much I hated that until I started calling them players. And when you think of them that way and you start using language like that and you envision what they do with the thing that you're trying to give them, it just changes everything about how you can make great products. And so that for me was like that was a huge inflection point is just becoming really explicitly customer-obsessed. You don't make your dream game,

you make players' dream game. And I think that is a very helpful way of thinking about it. I think there are basically two kinds of game developers in the world. There are people who are the consumer tech companies who got into games. Mark Pinkis, who was here yesterday, was my boss. I love him deeply. He has passion for the gaming space, but he's not a game developer by trade. He is a consumer internet technology product developer. So that's one kind. And then the other kind is what I would call real games companies or real game developers.

Both are actually really important. But I think the highest level feedback or suggestion I give to any of you is figure out which of those two things you are and then just do the other thing. If you consider yourself a consumer internet tech person, you think more about what is the market saying and you're thinking about the customer, which is nice, actually. That's good.

you really need to tap into the internal part of you that has very strong sense of inspiration and taste-making. Whatever is the product that you're making, really immerse yourself in it. Conversely, if you are a game developer and don't think of yourself at all as the consumer tech person, you mostly go inside out from your own inspiration and intuition into shipping it out into the world,

this is like Hideo-Kajima is my least favorite example of this kind of developer. All he wants to do is make what he wants, And if you like it, then great, but it doesn't matter. It's about him. That's also a noble way of being. But if that's your way, do the other thing. Learn to be obsessive about the customer and the market

and work backwards from their needs rather than your own inspiration. Over at Discord, Eros and his team are focused on talking directly to their users as well. But in their early growth stages, they paid extra special attention to an important subset of fans. Now you're in a world where you've got your first 100. thousand, 10,000, 50,000 users. The question you have to ask yourselves is within those groups, who are your superfans and what are you doing to encourage their behavior?

That's the thing I actually think works best for growth, something we did phenomenally well at Discord. If you were a Discord super fan and we saw you, you knew that we saw you. You just knew it. You could tell that we were loving you right back. And I remember Stan would always say, so Stan's the CTO at Discord.

Stan would always say, my favorite thing to do is to get out of writing code and go to Pax and talk to the people about the code I'm writing. And he loved it. And he would always insist on being there and ask questions and take feedback. And he whip out his phone and show some new feature he was thinking about and get feedback. And he just really got into that. And then of course, on Twitter, you know, same day, someone was like, I just spoke to a stand in Discord. And he like, show me this cool thing. And like, there was a social love. And then our social team would be like, thank you so much for hanging out with us. And it was just as like, just effusive sort of love feel. And so the reason I say

this, the reason why, those people are your most important asset from day zero to the end of year one, your most important asset. They're the ones that are going to tell you what you're doing right and what you're doing wrong, probably before the world sees it, because they're using the product so much, so intently, so passionately that they'll know bugs that you don't know about. So embrace them. Now, there is another way to reach your superfans through some of the most influential people in the gaming world, streamers. What we noticed was a number of streamers on Twitch trying to figure out how to better manage

their communities. It was very clear that there wasn't a great tool for them. They were patching it together with everything from Ventrillo to TeamSpeak to other sort of pseudo-discord-like solutions. and we decided after we saw some sort of small uptick from some smaller streamers, just invest in that a little bit. We thought, hey, if we could show them

that our tool is really good at what it does, we could provide them with some stuff that is streamer-specific, creator-specific, and we could get them to use Discord while they're gaming with their friends. It will literally show the world what our product is intended to do. Discord was really intended for, like, you and your 10 friends to hang out. It was never intended to have hundreds of thousands

of people on it, even though that happens now. The original attempt was like, bring people together through games, hang out, build your small community. So we built a few things. We helped them link their subscriber sort of status to special roles in Discord automatically. We handled some of the payment gateway pieces related to that.

We just sort of made Discord a better tool for them. And anyone who sort of watched Discord grow up and was also watching Twitch at the time could see it. It was obvious. Like all the big streamers were using it. And the funny thing is, the first few that talked about Discord, we didn't pay them. So we met Lyric at like a TwitchCon and we were just like, hey, here's our really cool thing. And like, we can't pay you.

We don't have money. But we think we've built something cool and we'd love just to get your feedback on our product. That was the conversation. A week later, he gets on stream and says, this is the best built piece of software for what I do that I've ever seen. And you can just see the lyric spike, boom, right? And that was a nice way to sort of validate that we should ride the Twitch rate. Because there are people on that platform that think the way we do, which is like, let's make great products and let them speak for themselves.

Clearly, player feedback is a cheat code for identifying opportunities, building great products, and finding customers. But a focus on player preferences is also key to tackling one of the biggest challenges in the industry. Distribution. Here is Michael. The industry is in a tremendous amount of flux about channels for receiving your content and channels for paying for your games. I don't think we know how it's going to resolve, specifically the regulatory environment.

The diaspora of platforms right now is pretty frustrating. Like if you want to watch a television show right now, it's your guess as to whether or not it's on Netflix or Prime or Hulu or Disney Plus, which is now kind of Hulu but not yet Hulu, or Crunchyroll or Peacock or whatever. And I think that players don't really want that in their games. I think they're much more discerning as players in games, and they're also more religious, which is why you see the divide between Steam and the Epic Game Store.

And I think that you've got to rewind backwards from what the players want. Despite players being siloed in their chosen platforms and floods of content being available, there may just be one major wave that could disrupt it all. Artificial Intelligence. AI is already capable of helping us write stories, create artwork, and build software, some of the core components of game development.

But it also presents a host of new opportunities, like more personalized narratives and custom virtual goods, or AI players that can help test games, and even tools for analyzing player activity. Here is John's take. The way we think about AI in games that there's going to be two waves of innovation. And so the first wave is making the same games that we have today,

but just faster, cheaper, like at greater scale, them before. And I think there will be valuable companies that do that and do that well. But I think long term, the incumbents are actually the most likely to capture value from the sort of faster, better, cheaper route the game development. And then so the second wave, which we are even more excited about, is the potential for AI to create entirely new markets. And so this is like new types of gameplay experiences, new social experiences involving

agents, new types of genres that use AI as part of its core game loop that we haven't seen yet. And I think ultimately, like, you can create the most value here because if you're successful, you're bringing in net new players, right? Like, you're not trying to cannibalize Call of Duty or League Legends and say, hey, like, come over here and play this game instead. You're actually appealing potentially to the people who don't self-identify as gamers today, but they might see something, say character AI, and say, hey, that's actually really compelling.

And so I think that's the long-term promise of AI in gaming that we're very excited about. And we probably have no conception of the innovation that's on our door. that. People often talk about how if you knew that cars were going to be invented, you could extrapolate that gas stations would be a thing, right? Because that's kind of the first order. And by the way, you know, in a world of like horses, like, yeah, you need stopping stations for your horse to have water or whatever. So you're like, okay, well, cars kind of like that. It is really, really hard to go from that and saying, you know, Walmart can exist because of the car. You know, where a city like L.A. can exist because it really is something that the urban sprawl kind of requires.

you know, the invention of a car to support. That's the second degree aspect, I think, is really difficult. I think that is why a lot of the, what we can imagine, is just taking things that exist today and just doing it a little bit better. But the reality is, I think we're going to see people compete in a bunch of different avenues that they wouldn't have, you know, previously.

You know, maybe when it turns out that we decide as a country we're going to have Trump be Biden again, somebody that evening is going to spin up like a meme game. And people are going to play it for like, 30 minutes that evening, and then they're going to throw it away. But it was instantly easy to build. Today, you talk about markets. You say, oh, well, I'm going to build this experience,

and it's got to address a market of millions of gamers, and that's the only way we would possibly do it. Well, again, if it's super easy, the same way that you would make a little meme to make fun of someone in your office or whatever or not that we'd ever do that, then maybe you would build a little game that's for an audience of 20 people

that's just a free-for-all, you know, like thing with the A16Z partners, like, you know, shooting at each other. Maybe that would be fun. When it comes to AI and gaming, there's still a lot of uncertainty. But the gaming community has always been quick to embrace new tools and technologies. So given his track record, other industries would be smart to learn from these pioneers. The games industry is this really special force within tech, because you look at how the PC came into the consumer household.

how GPUs came to be, how 3D came to be, how VR is happening right now. The games industry has really been this sort of like alpha-nerd kind of early adopter set of technologies that then comes to actually ultimately revolutionize the rest of the tech industry. All right, that's all for now. Whether you're building directly in games or not, I'll be quick to remind you that the industry has long been on the frontier. And we hope this gives you a glimpse into how their solvings will.

universal challenges and progressing the next level. If you like this episode, if you made it this far, help us grow the show. Share with a friend or if you're feeling really ambitious, you can leave us a review at rate thispodcast.com slash A16c. You know, candidly, producing a podcast can sometimes feel like you're just talking into a void. And so if you did like this episode, if you liked any of our episodes, please let us know. I'll see you next time.