A $1.8-Billion Exit Happened Last Week, What Can Startup Leaders Learn From That?
Updated: Jun 13, 2020
Last week, a startup called Peak Games made history in Turkey when it sold to Zynga for a whopping $1.8 Billion! (that’s almost a double unicorn, amirite?)
Many startup leaders of course yearn a similar result: for the riches, the fame, the validation of the impact they’ve had on business and society. But they’re not always sure of how to get there. Of course the exact path depends on myriad factors that are impossible to model in a concise blueprint. But we can get some useful, practical pointers by studying the Peak Games case.
One question I always get from startup leaders who are looking to raise funding is how they can persuade VCs to invest hundreds of thousands or maybe millions of dollars. Put more simply, “What do VCs want?”
VCs look for signs that you might be the next Peak Games. Here’s what the story of the real Peak Games can teach you about what those signs are.
A Big Bet
The $1.8 Billion ticket looks good, but in this story there’s a figure that looks even better. According to Crunchbase, Peak Games’s total funding prior to the acquisition was “only” $18 Million dollars. That’s a ridiculous ROI of 100x or 10,000% !!!
To put this in perspective, if you save just $10,000 and invest it at the same ROI, you’ll become a millionaire. But you know that an ROI like that is virtually impossible to achieve. And even if you could possibly achieve it through an investment, you’d have a really high risk of losing all your capital. That’s how the market works.
VCs know that, too. Their strategy is to risk big to win big. They must invest only in companies that have a shot at giving them a 10x return, or higher. That’s because they know that out of 10 investments they make, the spread will look like this:
4-5 of the startups will fail, losing all of the investment
the next 3-4 will probably just pay back the money of the investment
1 of them will generate a 10x ROI (returning the entire fund)
Of course, like the Peak Games story shows us, VCs can and will aim for higher ROI than 10x. But 10x is the minimum they will ever go for. So when you pitch to raise funding, unless your business plan shows at least a 10x ROI for the VC, the VC will simply lose interest. And that’s for the smaller VCs. Bigger VCs have deeper pockets and take an even bigger risk with their portfolio for a shot at a larger ROI, so if you’re shooting for the top ones, they will only invest if you have a compelling shot at a Billion dollar exit.
Frank Gibeau, Chief Executive Officer of Zynga said in a statement, “We are honored to welcome Sidar and team to Zynga. Peak is one of the world’s best puzzle game makers and we could not be more excited to add such creative and passionate talent to our company.”
All 100 employees of Peak Games will be retained. In fact, they’re one of the most important assets that Zynga sought to buy.
VCs know that the assets that drive big Exits are those that have a significant unfair advantage. The concept of unfair advantage tells the VC why you or your team are in the top percentile of candidates to build this particular company and win against imitators and competitors. Your unfair advantage can be:
Strong Brand Name
Large Client / User Base
While 4) - 5) are more important for later stage investment rounds or the Exit itself, you want to flaunt your strengths in 1) - 3) from the earliest Funding rounds.
So don’t just show that your funding team is super competent across technology and commercialisation - that’s great but not unique. Did you glean unique insights from your work at bigger companies or as part of academic research? Do you happen to have industry connections that it would take competitors years to build? Do you have a patent pending for your unique IP? Are there any other barriers to entry that you can raise to thwart potential competition?
According to TechCrunch, “If Zynga tried to buy the whole business two years ago, it might have been that Peak was reluctant to sell its remaining two titles — its own Candy Crush crushers — Toon Blast and Toy Blast for anything near $100 million. And with good reason, since (as Zynga itself pointed out) they went on to become some of the consistently highest-grossing games in all of the App Store.”
Early VCs can’t expect the world-leading traction of a unicorn like Peak Games (yet!), but they look for the signs that such traction is possible. For early stage companies, these signs hinge on the Minimum Viable Product (MVP) and initial customer engagement with the same.
For seed stage, a path to MVP might suffice, as long as it’s coupled with customer engagement. If you have a B2B startup, you should get positive feedback and interest from some enterprise clients, perhaps even collating specific requirements provided by these clients themselves — this is called “customer development” and it’s a central concept to wildly popular books such as “The Lean Startup”. If you have a B2C startup, you want bigger scale engagement and growth, which you can demonstrate via email signups or account creations (even if the MVP is “coming soon”).
For Series A, as you can guess, VCs typically expect the MVP to be built and to have customers that already use it. You might be ok if you’re pre-revenue, depending on the VC, your industry and product, but be ready to show a meaningful monetisation plan.
Sidar Sahin, founder and Chief Executive Officer of Peak Games, said in a statement. “Peak’s culture is rooted in relentless learning and progress, so as we embark on this new chapter in our journey together with Zynga, we remain as committed as ever to our unique culture. We’re very excited for our combined future and what we will accomplish together.”
VCs know that even the best founders don’t know everything. That’s why VCs look out for founders that can balance confidence in their vision with a plan to compensate for their weaknesses (by leveraging the funds and the knowledge of the VC, as well).
So the business plan that you pitch to VCs should present your thesis, highlight the opportunity to generate a 10x+ ROI for their investment, and your plan across people, product, and profits in order to get there. But also state the things you know and the things you don’t know. Make it clear that the journey is one of continuous improvement and product-market fit optimisation aimed to build a super successful and defensible business that will make you all very, very rich!