Salone Sehgal, General Partner at Lumikai was featured in Naavik’s Metacast podcast discussing the rise of specialized VCs in gaming, India's gaming market and key macro trends across the gaming industry.
Listen to the full episode here: https://naavik.co/interviews/salone-sehgal
Episode Transcript
Intro + The Nuances of Investing in Gaming
Welcome to the Metacast interviews. In this episode, I have the pleasure of speaking to Salone who's the GP of Lumikai Fund, an interactive media fund based out of India. Salone, welcome to the podcast. The reason I first reached out was to better understand your perspective around a viral LinkedIn post you shared, which is “Why gaming needs more sector-focused VC funds.” Can you chat about that post?
That post stemmed from a question that came when we were launching the fund and there were a lot of LP conversations that we were having. A lot of investors and LPs were asking us, "What's so special about gaming? Why is gaming even an asset class? Why does gaming require a sector-focused strategy?"
Over my years of being in the business, and I've been in it for over 15 years, I've seen the sector as an investment banker, a games entrepreneur, and a VC, I've recognized the fact that games investing is very different from consumer or generalist investing. It requires specialist insights because magic happens in gaming at the perfect intersection of art, culture, technology, and media. Only as gaming has now become mainstream, we saw the much-needed rise of sector specialist funds because of the very unique nature of the asset class, which are a couple of things.
The first is a common criticism about the asset class, that it's a hit-driven business. When you have a hit-driven business, and people say that about venture capital, you need to have a portfolio approach for it. Previously investors evaluated the gaming industry as a monolithic entity or made speculative bets, or bets on a single sector via a single company. But now that understanding has been challenged because we know that the sector has depth and breadth.
By that, I mean that there are various genres which you can invest in, various demographics and audiences, there's breath in the form of tools, tech, infrastructure. The IPOs and the public markets in the last eight months have made it amply clear that there's value creation opportunity in every sub-sector and sub-vertical. We've seen Unity, Huuuge Games, AppLovin, Nazara Games. These are companies across this value spectrum, which explains why you need to have a portfolio approach in gaming. In order to be able to spot that, you need sector specialists.
Another very basic nuance of game investing is that the problem-solution approach doesn't work. Most VCs will ask entrepreneurs, "What's the problem that you’re solving?" But there's no inherent problem when it comes to gaming because you're dealing with entertainment products. Does the world really need another Match 3 kind of game, another hyper-casual game, another RPG title?
But every two years genres get redefined, games will get innovated upon, and new games will emerge. Keeping an eye out for that requires constant sector mapping and unbound monitoring. If you're not entrenched in the sector, it's very difficult to be able to pick those winners out.
There are other nuances that emerge. A lot of investors, particularly generalist investors, often tell portfolio companies, "You need to chase large addressable markets." But many times that's not necessary in games because it's very difficult to predict large addressable markets. Nobody expected Angry Birds to be as big as it did; nobody expected Love Nikki to be as big as it did; Free Fire, if you played it the first time around, nobody expected it to be a global success. In the west people still don't play the game, but it's a massive success in emerging markets.
Then there are other nuances. You need to enter early. This is a sector which is highly acquisitive and largely driven by M&A. Nearly 90% of exits in gaming happens via M&A. You need to have the right strategic connections and networks to be able to facilitate those exits and conversations. Thus, there are these nuances of investing in gaming which are different from investing in any other sectors. Trends change very rapidly also, so it's very dynamic. Hence, sector specialization is incredibly important. That's why a sector-focused VC fund is so important.
The Creation of Lumikai
That's a great segue into setting the stage for Lumikai, why you started it, what investments you've done, why now, what does it mean to establish a new brand and build a global presence in an increasingly global investment landscape for gaming.
The word "Lumikai" in itself is very special for us. The word is a genesis of two words. It's the Latin word for light combined with the Japanese word for tribe. When my co-GP, Justin, and I decided to embark on the vision for setting up Lumikai for the India market, we recognized early on that India's interactive and gaming market was entering a golden age. We wanted to set up a lighthouse VC fund that would catalyze India's gaming and interactive media industries, which we felt were ripe for disruption.
I firmly believe that the best time to invest in a sector is when it violates a certain narrative. When we ideated Lumikai Fund, we heard many narratives, many criticisms, the fact that "India's a DAU farm,” “India doesn't pay for games,” “There's no depth in the market in terms of pay flow,” “There's no gaming talent,” “Indians won't monetize,” “India's a net importer for games,” “You can't have a sector-focused VC strategy."
We heard all of these things, but given our experience in the global markets and what we were seeing at the local market, we saw key inflection points. I think we were contrarians when we were entering the market at that time, and we were able to trace some of those markers of what we'd seen in China or the Turkish market. That entrenched our belief that it was the right time for us to launch the fund.
We launched the fund last year. Since then, we have seen the market explode. There's always the right time for investing. You can get all your pieces right, but if the timing is wrong, it doesn't matter how tight your investment is. I think we've been very fortunate that those markers played out very well for us.
India's pandemic was horrific in terms of the lockdown and the macroeconomic reality of the unemployment and the economic shock that ensued, but what it did was that there was a digital revolution that happened, that accelerated India's transformation in terms of moving forward gaming and adoption of gaming as a mainstream entertainment media.
India now has 450 million gamers. An Indian consumes 12GB of data a month on average. This year Indians are on track for consuming 10 billion gaming apps and India now constitutes nearly 20% of mobile gaming downloads. We recently launched a research report which showed us the actual market size of the Indian market. The macro reality is that India is a $2.2B market that is expected to grow 3x, and we're going to hit $7B by 2026. Indians are monetizing. 27% to 30% of the current market size comes from in-app purchases.
All of these market realities, which we previously heard weren't going to be possible, were actually happening on the ground. So in the last year we did a lot of ecosystem building because there was a lot of misinformation in the market about what gaming was and entails. There were certain kind of initiatives that we took in the market, to be able to talk about gaming and how to make gaming mainstream. That was very much part of the mandate.
What we recognized was that there were pockets of growth and opportunity. Those are the kind of category leaders that we could catalyze, and those are the opportunities that we could back. For example, we made an investment in a company called Loco, which is now India's leading game streaming platform. It’s mobile-first and India's equivalent of Twitch. These guys are on a phenomenal trajectory. They've seen 50,000 to 100,000 concurrent users on single streams, an incredible amount of creators. They've built a community of game streamers from the ground-up who are revolutionizing the way Indians are now adopting game streaming, and they’re seeing early signs of virtual gifting and tipping, and they're hitting peak WAUs of 2-3 million. Just incredible traction on the platform.
We've also done bets like Eloelo, which is a post-led, creator, live, social gaming platform. These are targeting Tier 2 and Tier 3 audiences, where a majority of their creators are women. They’ve already seen 10M game plays on their platform.
Then we’ve got companies like Bombay Play which are building for India and for the world. These guys are building a hyper social innovation factory of cross-platform, instant games. Again, 4M MAUs. An amazing growth trajectory. The company has been profitable within 9 months, with revenue growth of 30% quarter-on-quarter.
This is the kind of talent that we back in the ecosystem, with very bold ambitions and visions of what they want to build for the future. That's what’s exciting us.
What do you feel is important to get right as an entrepreneur? Building this ecosystem, what mindshare do you occupy and how do you start getting there?
It's incredibly important for founders who are building for the India market to understand the nuances of building for India. You have to understand the Indian consumer, the medium and sociology of the Indian consumer: the Indian gamer, unlike the western gamer, didn't have the linear trajectory of a western gamer, they didn't go through the arcade-console-mobile game generation, the various business models of paid games, free-to-play games, subscription games. Everything exploded at the same time for the Indian gamer. They were exposed to video chat, audio chat, messaging, all at the very same time.
So the Indian gamer is inherently multiplayer, social and mobile-first. Many of them are first-time smartphone users, so the way you design the first-time user experience, the interface, the UI/UX, payments, monetization, has to be taking into consideration the very unique digital sociology of this gamer.
When we did our research, what we found is that there's a very deep desire for Indian gamers seeking more culture touchstones and touchpoints in the entertainment that they're seeking, whether it's language or cultural themes. This is why, even with Loco, they have a thriving community of local language-speaking streamers, streamers who stream in Hindi or other local languages. Similarly, we're seeing a rising demand of Indians seeking games with cultural themes around Indian mythology and history. So all of those become very important.
The Concept of “Digital Decolonization”
One of the concepts you bring up is digital decolonization. Could you chat a little bit about that and why it matters? Then we could talk about the regulatory scene in India, what implications that has, moving forward.
What we're seeing is the rise of techno-nationalism, to some extent. When we wrote about digital decolonization, it's very much in line with what we saw back in China in 2006-2008, which was symbolically accompanied by the Chinese Communist Youth League, where they employed gamers platforms to generate national spirit amongst young players by a high level of advocacy for self-reliance and domestic development for technology.
In 2020 in India there was a rallying cry for what was called Atmanirbhar Bharat, or self-reliant India, with a very clear mandate from the Indian government to build apps and games for India and the world by Indians. That has been accompanied by what at Lumikai we call digital decolonization. We're seeing more and more Indians reclaiming their digital identities and decoupling from the west. Rather than copying from the west, Indians are happy to chart their own path by clearly embracing their own identities, languages and cultural quirks. This is evidenced by the rise of regional content.
Now 95% of content consumed on YouTube in India is in regional languages. There's a rise of Hindi-speaking streamers and influencers, a rise of “made in India by India” sentiment. For the first time Indian-made goods have beaten Chinese-made goods. This was a massive stat around the consumer goods industry. This has also largely been led by Tier 2 and Tier 3 audiences becoming digital natives. Consumers in Tier 2 and Tier 3 towns are more exposed to Indian and regional influences than their Tier 1 counterparts. As a result, their digital interactions are likely to be in more regional languages and driven by more Indian teams.
All of these factors have led to the development of a new market of consumers who have to be catered to in different ways than the westernized audience which has traditionally been the more vociferous, louder and more visible. But the Tier 2 and Tier 3 audience is now becoming more visible. That's the digital decolonization that we're seeing.
I can think of UGC and the consumer Zeitgeists around that being net beneficial for these regional languages, for these creators and game developers who are attempting to develop for a very specific niche audience and being able to monetize for them. On the flipside, I also see the macro trend of PUBG creating their own India-based studio and being very successful at that. I'd be curious to get your thoughts on what that means overall for the industry in India and how you see it fitting into your investment thesis.
I think that's a natural evolution of the market developing. As a market, we've traditionally been the back office of the world. You had the Ubisofts, Zynga, Glu. You heard all of these companies who had set up back offices, and you had teams which were running live ops of their games. It was only a matter of time when all of those teams were going to start develop their own games.
As the ecosystem and talent develop, we've seen an infusion of capital, a mainstreaming of gaming, and over $1.5B of capital has been infused into the gaming industry. By mainstreaming of gaming, there has been visible interest, from a government perspective, where governments are now setting up center of excellence where the IT bomb is now teaching courses on game design, there is a thriving esports scene. We're now seeing more and more VCs wanting to invest in games, we're seeing the government push for game design.
Gaming is now becoming accepted as a career path. We've now seen exits happen in gaming. You have the MTG Group acquire PlaySimple Games for $500M and Stillfront acquired Moonnfrog. I only a matter of time until global strategics start to pay attention to the Indian market. Indi has always had a very deep bench of technical talent, art talent, VFX and animation. With global transference, knowledge and remote working, you have these large strategics who are now setting up shop.
Building games from India is a natural evolution of the market. We saw this in the early days of China as well, when in 2007 half the companies went public, and we've seen this now even with Nazara Games going public. We saw a similar pattern happen in 2007. Domestic gaming companies went public, like Giant, Perfect World, and Dragon. The same year Glu Mobile acquired MIG, Vivendi acquired a studio in Shanghai, Walt Disney did a partnership with Shanda Games.
Once you start having these global strategics tying up with local partners, that kind of synergies and those osmoses of knowledge, capital and talent start to move into the country, and it automatically catalyzes the industry. That ended up bringing best practices, and that will drive the growth.
It's been amazing to see these acquisitions happen. We often think about the deprecation of the IDFA as a bad thing, but it has catalyzed a lot of these disparate acquisitions and synergistic moves. One of the byproducts of that is more talent flowing into this space because they see it as a lucrative opportunity, as a chance to get into the limelight. I'd love to understand how you see Lumikai playing into this and what your role is amid this changing landscape.
Our role is to act as a catalyst. We're deep believers in the potential of the India market. We're long-term patient capital. Our thesis is that in the future India will be a formidable gaming market. There are 2.5 billion gamers in the world. The next billion are in India. There's no denying the fact that gaming usage, adoption, monetization and infrastructure are converging in a manner never seen before in India.
If you're a founder in India, there's never been a better time in the history of the Indian games industry to start a gaming company. As a fund for pushing that industry, we're there to help catalyze those founders. That's the role that we see ourselves playing.
The Potential of India’s Gaming Industry
The next question is about low ARPUs and how you typically respond back to this critique. I think it's something that is probably on your mind, as you think about the external and strategic interest in India, but also as a VC investing in this space.
That was something that we often heard a lot. While everybody would talk about the potential of the India market, there wasn't a lot of data around market size, monetization, willingness to pay ARPUs. All of that still remained a black box. That was why we decided to undertake a very comprehensive research and deep dive of the Indian gaming market. We leveraged insights from India's gaming ecosystem leaders, we got together knowledge partners, we put together proprietary insights gained from conversations with 500 founders from India’s gaming sector, and then we did primary research as well.
What we found really surprised us. Monetization has always been a billion-dollar question. What we found was that India, for two years running, has seen the highest proportion of first-time paying users, over 50% year-on-year, out of any country in the world.
This means that for the very first time we also quantified how Indian users are paying for games. It was estimated that about 100 million Indian users are forecasted to pay for games in 2021. These are expected to increase 3x in the next 5 years. We also discovered that 50% of new midcore and hardcore gamers are paying between $7 to $14 per month on games. The average spend per paying user is about $77 a year. These are never before discovered facts. That's incredible.
The biggest criticism of the market was that Indians don't pay. These were facts that we disputed through primary research. We also discovered that virtual gifting and tipping is a reality. 17% of the surveyed gamers were actually engaging in virtual gifting and tipping already in the Indian market. When we started to uncover these facts, business models like Loco or Eloelo, all these platforms that we met early on, started to get validated.
Now we can explain that traction because we're seeing those early fruits of that start to make sense because we're seeing that on-ground reality. This is across demographics, across Tier 1, Tier 2, across genders. 20% of the surveyed gamers are paying for games at the moment. It correlates very well to when we spoke to our knowledge partners as well. While there’s a lot of noise around real money gaming in India, what we discovered was that in-app purchases are forecasted to outstrip RNG and add monetization through 2025 and beyond. Those were really incredible findings for us, and they exceeded our expectations.
The Promise and Risks of Blockchain and The Metaverse
A lot of people these days are interested in the potential blockchain gaming. Lumikai recently released a blockchain gaming primer. Why does this matter to you and to the Indian gaming market?
The promise of new technology and new paradigms is incredibly seductive. We're seeing founders rush to put blockchain gaming, NFTs and tokenization into their pitches. As you speak to them, you're seeing them start with one pitch and end up with NFTs, just to throw it into the pitch at the end. Sometimes you end up confused as to where the founders started and where they ended up.
When you read the primer, what we've tried to layout is the opportunity. Our perspective is that there are certain use cases for blockchain gaming and certain promise for what that technology entails. But we also have to exercise some caution because we have seen these cycles before. For example, digital tokenization, digital assets, digital IP. This is a 40-year-old concept in gaming, so is play-to-earn. In Second Life there was a proprietary currency that could be exchanged for real money. In 2015 that economy was rumored to be 500 million dollars.
If you've been in the games industry long enough, none of these use cases are new. We've seen these bull runs in gaming before. We saw social Facebook games, the VR hype, the esports gold rush. Now we're seeing this NFT promise. We've seen these hype cycles come and go.
The problem becomes when there's a lot of capital that rushes into opportunistic bets, but those risks aren't hedged, calibrated or well-informed. There's a lot of hot money which rushes into this space, which means that founders who are very well-deserving or experienced, who genuinely are innovating in this space, they are unable to raise capital when that hot money flows out in a down cycle. I think that's the risk that we face.
If you were to look philosophically about where play-to-earn or the Metaverse was to go, in 2016 Edward Castronova predicted and said that, when you had the Industrial Revolution, there was creative disruption where you move from agricultural jobs to industrial jobs, there was a complete erosion of old jobs to new jobs. In the same way, when you now have the digital age, we'll move away from most skilled work, and one will start to play games to earn a living. We're seeing that, for example, with Axie Infinity. 40% of Axie Infinity user cohorts are in the Philippines, low income workers who are making a living off the proceeds from the game.
But there are certain structural, financial, and environmental barriers when it comes to blockchain gaming. There are isolated user cohorts, there's a very specialized talent skill set required to build these kinds of games. I feel those are the pain points which we're not talking about as much. That's really important to talk about.
Even when it comes to the Metaverse, most definitions of the Metaverse sound like dystopian nightmares and the imperialist dreams of large, corporate, digital colonizers, which is the complete antithesis of what the Metaverse should be. For example, if we choose to suspend our apprehension and assume that the Metaverse is a world that's going to happen, and is a digital social world, then the economic system needs to be established, and NFTs make sense for that.
But we're still a long way off on that. Our view is that there's a tremendous theoretical promise, but we need to be careful, we need to exercise caution, and there need to be genuine use cases beyond pure speculation. I love the quote of Warren Buffett: "Only when the tide goes out, you'll discover who's been swimming naked." That's where we've ended up. We want to see founders come up with sustainable, high-value use cases in this space, and not somebody who's put the word “NFT” or “Metaverse” just because it's a hot timeline at the moment.
As we wrap up this conversation, could you leave us with a couple of tidbits on why India, why now, and where can people reach you.
We're super accessible, so LinkedIn, Twitter, email, everything works. Just drop us a note. Why now? India's time is now. We're at an incredible point of time in the world. We're just seeing this incredible digital transformation happen in the market at the moment. When we look at the future of the world, we have this incredible bench of talent, we have the perfect recipe for success in this country, we've got a robust talent pool, the right set of capital, the right infrastructures now in place, digital payments which are thriving, and you've got the perfect recipe for success. There's never been a better time to set up a business.