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GungHo Stock’s 4000% Run -- What it Means for Game Studios and Investors
by Charles Huang on 05/21/13 12:13:00 pm   Expert Blogs   Featured Blogs

The following blog post, unless otherwise noted, was written by a member of Gamasutra’s community.
The thoughts and opinions expressed are those of the writer and not Gamasutra or its parent company.


“Games are hit driven businesses and we can’t invest in hit driven businesses”. VCs told us that back in September 2005, when my brother Kai and I tried to raise $3M from VCs to fund the launch of our first Guitar Hero game on PS2. By the time we hit the fundraising circuit, Guitar Hero was already racking up nominations for GOTY (Game of the Year). The previous year our company, RedOctane, had generated $9 million in sales AND $3 million in profit. We raised exactly ZERO dollars from VCs. Investor sentiment at the time was very negative against game content.  

Guitar Hero set

Left with no other choice, Kai and I self-funded the launch of Guitar Hero. We took out second mortgages on our homes, borrowed money on our credit cards and whatever we could from banks to pay for the initial launch inventory. The rest is history. RedOctane was acquired by Activision in June 2006 and Guitar Hero went on to generate more than $4 billion in cumulative sales. It became the second game in the history of the industry to cross $1 billion annual sales (after World of Warcraft). 

Between 2009-2012, investor sentiment swung the other way and game studios became fashionable investments. New emerging game companies like Zynga, Trion, and Kabam raised massive amounts of VC funding to build game content for new emerging platforms. White hot user growth on social networks and smartphones generated a frenzy in social and mobile game investments. A subtle (but key) difference with these companies is that investors often perceived them (right or wrong) as platforms, and not content. I would argue this perception was just a way for investors to justify their investment thesis. 

Now in 2013, there has definitely been another shift in investor sentiment back against investing in game studios or content. Almost every VC investor I speak with is saying (again), “Games are a hit-driven business. Gaming is a tough industry to invest.”  A lot of this negativity is driven by the performance of Zynga stock post IPO. When the highest “comp” for a game company was worth $10 billion (at their IPO), it was a great time to invest in other game companies. Now that Zynga is worth “only” $2.5 billion, investors are losing faith in game content again. 

Negative investor sentiment in games does not necessarily match what we’re seeing in the macroeconomics of games. Some categories, like mobile games, continue to see strong growth. And the winners in mobile games are doing very well financially and have little trouble attracting lots of VC investment. Supercell’s recent round of $130 million on a valuation of $770 million is an example of incredible success in content for a relatively young company. By the way, can someone explain to me how the Finns became a sudden global gaming powerhouse? 

While Supercell’s valuation is stunning, nothing compares to the phenomenon of GungHo Online Entertainment in Japan.  

GungHo logo

GungHo is best known as the publisher / developer of the monster / match 3 game called Puzzle & Dragons, a “supernova” in the mobile gaming world. In March 2013, App Annie’s data shows Puzzle & Dragons was the #1 highest grossing game in the world on BOTH iOS and Android. Amazingly, most consumers and investors outside Japan haven’t even heard of this game, at least not until recently when its profitability and skyrocketing market cap reached our shores.

 Puzzle & Dragons logo

GungHo Online Entertainment is a public company trading on JASDAQ (symbol  3765:JP). . A quick glance on Bloomberg shows the 12 month return on GungHo stock to be an astronomical 4000%. There may not be a hotter stock anywhere in the universe.   

The current valuation of GungHo is USD $15.1 billion (as of May 13, 2013). At this rate, GungHo will eventually have highest market cap of any pure play video game company on the planet. Activision is #1 at $16 billion. This surpasses Nintendo, after suffering through a couple nasty years of decline on the Wii and DS, now worth $15 billion. Netease, the Chinese online gaming company that operates WOW and many internally-developed MMO titles, is worth $7 billion. Nexon, the Korean online gaming giant (also listed in Japan) and venerable Electronic Arts are both worth about $6 billion.

What does GungHo’s 4000% run mean for private game companies and investors? 

Investors in games today like “platform” companies and not content. One of the classic tech investor axioms is, “Don’t invest in companies digging for gold, invest in the companies selling them picks and shovels.” If you are a game studio, you’re probably trying to reposition yourself as a “platform” in order to get investors to hear your pitch or just to satisfy their demands.

Meanwhile, one of the best financial returns for ANY company in ANY industry on the planet is coming from GungHo, a games content company. Investors are certainly right, that investments in games may depend on hits, but those hits reap incredible rewards. GungHo shows that the games content business can still be enormously profitable and offer great investor returns, and the few investors out there with an eye for great games and a talented team will be well positioned for success in the future. 

This is maybe the most exciting time ever in the game industry, and the best opportunities are still in making great games. GREAT GAMES MATTER. Just ask the folks at GungHo.  

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Susan Cummings
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I couldn't agree more Charles. I also think that one of the issues in the game industry versus, for example, internet technology companies, is that the game industry doesn't have the same tradition of angel investors. When internet companies get sold (granted, typically for much more than a game company would), the founders tend to begin angel investing in other tech companies. You don't see that very frequently with owners of game companies which get acquired. I think this is one of the reasons why many of the successful people right now in mobile / f2p gaming came from outside the game industry. When the opportunities arose, they had better access to capital than people from within games.

jeremy liew
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The issue is not that content drive companies can't be successful. They clearly can. The issue is that the average VC (me included) isn't very good at picking the successes from the failures a priori. We don't have that skill. That's why publishers, who do this and only this, all the time, are better positioned to finance new game studios. They know what they are doing, or at least more than a VC does.

This changes when you have a new platform come along, especially one where development costs are really low, because then NO ONE knows more than anyone else, and VCs can make modest investments that can pay off well in a succes case.

Rodolfo Rosini
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you are indeed more knowledgeable than most (heck, a tier 1 VC commenting on Gamasutra? not sure how many there are) but I find ironic that the VC business *is* a hit driven business, so some of the feedback that comes from the industry is disingenuous and driven by the fact that it's harder to flip a company to EA than to Google if you pick a dud.

Additionally investment-to-traction ratio is higher than other tech startups and that's another reason why it's harder to raise money.

Arturo Nereu
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Thanks for sharing Charles. Indeed, it seems that it is the best time to invest in video games, as in game studios not a single product.

Still, many VCs we have talked to think it is not.

Raul Aliaga
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Another factor is that to be smarter investing in games requires in-depth involvement that most investors are unwilling to do, specially given their opportunity cost of learning about more "traditional" industries like energy, media, hardware, among others.

As for the question about Finland, here's a handy deck for you

Essentially, a good ecosystem powered by great education, a legacy of entrepreneurial leadership from Nokia, Sulake, Rovio and other companies; and cultural/financial support to start such ventures (and not get too damaged when failing).

Nicholas Lovell
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I couldn't disagree more, Charles. Your example shows that if an investor got a lucky in predicting which game would suddenly get popular in Japan, they would make a lot of money.

As they would if they had predicted Angry Birds. Or (in another medium) Star Wars.

Investors already have a portfolio approach to risk: their investment portfolio. Multiplying that risk by adding creative risk doens't fit the risk profile of pretty well any traditional investor. It has always been possible to make lots of money by getting lucky in games. "Getting lucky" is a pretty poor investment strategy.

Susan Cummings
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I think the issue with VCs purely investing in publishers as opposed to also investing in developers is that by and large, most of the innovation is coming from the independent community as it always has. The most creative of developers are not seeing enough of a value add from the publishers in this new market. I was a part of the console publisher community for many years where the value add was very clear (if frustrating to the developers). Now, the traditional models no longer make sense when the cost of development has come down so far, when distribution is no longer an issue (it isn't, discovery is the issue), and where a talented and creative entrepreneur can go it alone. Most of the success stories of the last couple of years have come from the most unlikely places.

What would be amazing to see would be the VC community dedicating some capital to this innovation -- bring in some knowledge of the space who have the knowledge to pick potential hits -- and spread the risk over a portfolio. This would empower the developers to keep more control over their content (IP in particular). Gone are the days of this meaning risking multi millions trying to pick hits, f2p games are inexpensive and quick to market..

Rodolfo Rosini
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"GREAT GAMES MATTER" yes but great games or great products do not build great companies and generate necessary returns to justify VC funding. As Jeremy Liew hinted before, great companies are built by those who offer products at a time of shifts in consumption.

I recommend all commenters to read this