Bomb Has Been Planted: Why The Indian Gaming Sector is Set to Explode (Part II)
The second part of an attempted deep-dive into the fast growing gaming sector in India
In part I of this series, we looked at what was driving the massive growth in the sector. In this second and final part, we will attempt to build on it further by looking at the players — both those who are building, and those who are funding. And for the sake of completeness, we’ll throw in some examples of successful gaming companies globally. Will India see the type of scale found in European/US markets? For that, let’s dive into the numbers.
Most Popular Mobile Games in India (basis downloads)
While the above games are from multiple categories, the key missing segment is Real-Money Gaming (RMG). RMG games are not available on Google Play or the Apple App Store due to local and state laws and thus need to be downloaded directly from their individual websites on to the underlying device. Cricket-crazy India has given rise to multiple fantasy sports platforms like Dream11, MPL and Halaplay. While the suspension of sporting events affected these apps in the initial period of the lockdown, the gradual resumption of sports tournaments has set them back on the path of recovery and growth.
The other popular categories within RMG are card games like Poker, Rummy and Teen Patti, the latter two being popular due to the familiarity Indians already have with them. This category is amongst the most widely played and downloaded in India but numbers are difficult to triangulate due to their presence on individual websites rather than distribution platforms like Play / Apple stores.
India’s Competitive Landscape & Key Players
The above numbers throw up an interesting trend — it appears that RMG and Fantasy Sports companies potentially scale faster and have higher revenues than casual game companies. Venture Monk wonders if this has to do with significantly easier monetisation due to an upfront fee pool being directly taken by the platform. The rise of the sole unicorn in the Indian gaming space (Dream11) certainly hints at the same.
At scale, these platforms must generate significant cashflows, with incremental capital expenditures being limited to upgrade of IT infrastructure making them an attractive bet for VC firms even with the associated regulatory overhang.
Are there commonly used metrics and frameworks for analysing these companies? Similar to Software-as-a-Service (SaaS) companies, any digital first company could be analysed by at least some of the same metrics. Some of the key ones that Venture Monk thinks are useful are enumerated below.
- Daily Active Users (DAU) — It is the total number of unique users who engage with your product/service/game in a 24 hour period.
- Monthly Active Users (MAU) — It is the total number of unique users who engage with your product/service/game in a 30 day period.
- DAU / MAU Ratio — Putting the above two together gives you the DAU/MAU ratio that shows the percentage of your monthly users who are active daily. What’s a good DAU/MAU ratio? Sequoia used to think the standard was 10–20% while anything above 50% was great. Admittedly, this was for social networks and not games.
- Retention Rate — This is the percentage of players that return to play after the first day of playing/downloading the game (called Day 0).
Venture Monk tip: The time period when a company states retention varies from company to company. Thus, it is important to ask for cohorts across time periods such as Day 7, Day 15, Day 30 when analysing retention. Needless to say, a higher percentage at “D30" indicates true engagement and user stickiness.
5. Churn Rate — (1-Retention Rate) and this tracks lost users within a period.
6. ARPU — The Average Revenue Per User is the total revenue divided by your total user base and indicates the monetisation per user. This is one of the most important metrics to track and key to a gaming company’s success.
7. CAC — The Customer Acquisition Costs are the marketing/sales/promotion and other costs to onboard users. Customer acquisition channels for mobile gaming companies may include social media, Google etc.
8. LTV — Lifetime Value represents the total amount of revenue (adjusted for direct expenses) a user is expected to spend in your game or on your products, during their lifetime on your game/service/product.
9. LTV/CAC Ratio — The LTV/CAC ratio compares the value of a user over its lifetime relative to the cost of acquiring said user. As a quick rule of thumb, if the LTV/CAC is <1.0 the company is losing value from the user and if it is >1.0, it is gaining value.
Venture Monk tip: Avoid vanity metrics such as “total downloads” or “total reviews” or “awards won.” These, while not completely insignificant, more often than not are publicised as they are easier to market. Remember, they are called “vanity metrics” for a reason.
Level up — Indian gaming sector had its moment when Dream11 became its maiden unicorn in August 2019. Since then, the sector has seen a flurry of funding activity as mobile engagements soared as India hunkered down for the pandemic and turned to mobile phones for entertainment. According to Venture Intelligence data, VC investments in online gaming start-ups rose 114% to $376Mn in 2020.
So who is doing the funding and where is it all going? The below table captures some of the recent deals in 2H21.
Sequoia, Kalaari Capital and Tiger Global have historically been the most active in this sector in India. USA & Europe have multiple funds which are dedicated to gaming & entertainment such as Makers Fund, Bitcraft, MTG, LVP etc. 2020 also saw the emergence of India’s first fund dedicated to gaming in the form of Lumikai.
Exit Perspectives: The money is in, but how will it get out?
FY21 has been an interesting year for the M&A landscape in gaming. Averaging almost one deal a month, the second half of FY21 saw companies getting acquired as well as PE funds exiting their investments, as evidenced by Westbridge’s exit from their long-held portfolio firm Nazara. Stillfront’s inorganic entry into India is another sign that these deals could be the first of a much-awaited exit cycle in the industry.
The other path to exiting an investment is the holy grail of public listing or IPO. Some of the successful, listed gaming companies are given below (as promised, “for the sake of completeness”). Unity Software, which provides technology to video game developers, recently listed with a 48% gain on its debut trading day. Instead of leaving the pricing of its shares to bankers and a handful of investors, Unity used an unconventional listing process where it had solicited bids — with prices — through an online system managed by Goldman Sachs. At the end of that process, Unity priced the offering above its expected range, allocating shares by hand to all investors that had expressed interest at that level.
While there are no examples (yet!) of listed pure gaming companies, the IPO of Nazara Technologies will hopefully change that soon. Nazara might just kick off the year of Indian tech IPOs, with the likes of Zomato, Nykaa, Delhivery, and PolicyBazaar expected to go public in 2021. A gaming company at the helm of a blizzard of tech IPOs? We certainly hope so!
Venture Monk’s view is that this is India’s big moment. The sector’s prospects are brighter now than ever before. How India develops will remain a very interesting case study for global firms. The ecosystem will keep evolving as gaming companies iterate for product-market fit. As for gaming itself, newer emerging technologies such as cloud gaming, artificial intelligence, augmented and virtual reality are the future. India has a distinct cost advantage in terms of both development and server costs. This makes it a perfect location for foreign firms seeking to tap a raw market while simultaneously building games for a global audience. With over 400 gaming companies and counting, India’s gaming journey is just beginning!
Make a note though — sectors that saw cyclical headwinds during 2020 (restaurants, travel, ride share etc.) should accelerate during 2021 as recovery sets in and fears of the virus recede. Building on that, the sectors that saw a cyclical tailwind during 2020 (e-commerce, online games, food delivery etc.) could potentially decelerate as people resume work/travel/school etc. Yet, ultimately, this pandemic has been net positive for the sector.
We hope you enjoyed this series! You can read Part I here.
