BITKRAFT Summit 2023: Market Outlook -Zig when others Zag - Full Video

[Music] [Music] our next topic of conversation brings three speakers onto this stage so please put your hands together and welcome the former Riot games president and CEO of guena and partner at bitcraze

[Music] thank you so much um today we're going to do something a little bit different at the bdcraft summit we haven't really done a fully fledged Market Outlook before at the summit and we're going to take you through a little bit of the way we think about things at brickcraft and give you a taste of how we uh view the world particularly with a focus on the gaming industry I'm going to be speaking about the macroeconomic environment and its impact on public markets my colleague JY is going to talk about the downstream impact that has in Venture markets particularly in the gaming space and Jonathan's going to take us through some select Trends in gaming that we find uh quite interesting so we're going to move from the macro all the way down to the micro we're going to go from an investor Center view of the world to a

product Centric view of the world so a recap of 2023 what happened it was a really tricky year for Market participants uh we saw the FED funds rate increase to levels we haven't seen in a very long time but particularly interesting was the rate of acceleration the velocity with which the US Federal Reserve increased interest rates equities markets responded as if the worst is perhaps over uh the S&P 500 is up roughly about 20% on the year but what doesn't tell the full picture there is that these returns were largely driven by a handful of names the proverbial Magnificent Seven names like Nvidia where a lot of Market participants were putting their money behind quote unquote safe names writing the large language models wave or the AI wave as it were similarly if we look at crypto as a I guess proxy for risk that

was also up about 40% but again doesn't really tell the full picture this was really a story about IL liquidity about liquidity moving into safer Havens and thin order books causing a lot of volatility in these markets and this is going to be a theme of this presentation where really you're seeing market indicators that look at sort of face value like we're recovering of some kind of bottom but actually it doesn't we're not really sure if we're just out the woods just yet so let's walk through why that is over on this slide what you'll see is some polling done on the Philadelphia Federal Reserve where they asked you know for the past 50 odd years they've asked uh uh the Federal Reserve what their probability is of a recession in the next four quarters and what you can see from the graph is that this rate has never been higher they've never been more certain that a recession is coming in the next four years and so what is the consensus view the the consensus

view is that this is going to force the federal reserve's hand to cut rat but we're not so sure and the reason for that is that if we look at this it's a bit small but this sort of stunning chart that we see uh over here is what this does is plot the Futures curve of the federal interest rate over successes successive time periods and what's interesting is that throughout the 2020s up to 2022 we saw that uh the F the market was not expecting the interest rate to rise for some time as we moved into a rate hiking cycle uh expectations changed and when we got to the middle of that cycle roughly the expectation was that rates would remain at roughly between 2 to 3% but of course we know that the market got that stunningly wrong and so we ask a question now that we're at the presumed peak of the cycle and as you can see the Futures curve sort of trending downward quite uh rapidly we ask a question of is is the

market underestimating inflation once again is this time really different and the reason we think that is because of a macroeconomic indicator we look at quite a lot that is a reasonably good proxy for economic growth out of the oil price you can see that the price has climbed about 30% since July uh while implied crude demand at the US gas pumps has never been higher and you know what this is really showing is that there's perhaps this undercurrent of strong demand that's not really being reported on uh effectively or understood or appreciated by the markets at the same time you have Supply on the oil side uh Supply continuing to fall where on the on the left hand side you'll see that OPEC supplies Fallen since about 2016 while us uh crude oil production hasn't reached its 2020 Peak so again there's some structural issues that are also not shown in the slide

things like a lack of Refinery capacity for diesel you know the life flood of Commerce and Industry that we can have sort of a long longer discussion about after this call as well as the Biden Administration depleting the Strategic petroleum Reserve uh levels which I think they believe I believe that they sit at about 14 weeks left of oil uh in the spr and this was being used as a way to kind of combat inflation so it doesn't hit the US consumer uh as hard so a lot of structural things pointing to a lack of oil supply in the market there's also some indicators that are remaining pretty stubborn labor markets are remaining sort of quite strong on the left hand chart you'll see that unemployment insurance is down since unemployment insurance claims are down since about February while inflation is just remaining stubbornly High I think there was a print an inflation print while we were here at this conference that seems to point that inflation is accelerating once again

so what does this mean Wall Street is just divided on what's going to happen in the market and you can see on the chart on the left that the uh difference from Wall Street anal uh Wall Street analysts between the top end of where the S&P 500 is going to be to the bottom end is never been higher and so it's just a really difficult Market to operate in and there's a lot lot of uncertainty out there so what does it mean you know the economies that we like to look at at bit craft uh typically revolve around game economies and virtual economies um we do think that rates are going to remain higher for longer we think that there's structural issues around inflation that are being underappreciated by the market and this is going to have an impact a downstream impact on the Venture markets particularly in this in uh the gaming industry that my colleague JY is going to talk about further thank you

who got the keys to the Jeep I'm driving to the beach hi everyone uh my name is Jin o I'm a partner with bdcraft leading the Asia Pacific practice so what I'm going to talk about is the state of investment in games so I'm going to start off with the bigger Market let's start with a macro The Venture Market has really Fallen recently right so if you look at the graph what's happened is that during the pandemic years the Investments went up and the blue bar graph shows the dollars that went in the line graph shows you the number of deals but tells the same story right peaked during the pandemic years and it came down uh in 2023 but what's interesting is that it's at similar levels as the prepandemic years right so it's not all gloom and

doom it looks like so now that we talked about the overall Market let's zoom in on video games so this is number of dollars that actually went into video games if you look at the pattern very similar to the overall market right and also if you look at the level it is today in 23 it's actually slightly higher uh pre-pandemic levels this is number of deals very similar pattern right so we're sharing a similar story where it Peak and it came down right I'm going to Sidetrack a little bit here to share uh a story about a very exciting region a region that I'm really passionate about was which is Asia if you look at the graphs here it tells a very similar pattern as what we've seen in the overall gaming Market but why I'm excited is the fact that the investment deal uh value in

Asia is about half of all Investments that go into gaming I don't know if you knew that and even number of deals in Asia is about half of all the deals globally which is pretty incredible and also in fact interesting enough about 75% of the gamers are in Asia Pacific as well now I mentioned this because I think bit craft now really has footprint in the asia-pacific region with myself and John were really building out that practice right so we've really become a truly Global firm um and by the way uh there's a session tomorrow morning where we talk about our investment thesis in Asia and our strategy so if you're interested I really encourage you to join us tomorrow morning so we talked about equity and some of you guys are wondering what about crypto right so of the consumer application investments in crypto

significant portion went into games by a mile as you could tell here so so far we talked about the Investments how it really peaked during the pandemic years came down a little bit so what does this mean in terms of gaming uh in gaming Investments uh overall they it's it's tough and a lot of the startups here I know you guys are feeling it right uh the climate has changed the sentiment has changed and with sort of the perception of potentially a recession looming in our backgrounds it is really impacting how these startups are getting investment I want to show you some interesting facts here uh I want to qualify by saying this is from CA so it's not comprehensive of all the data but it is directionally very relevant right the chart on the your left shows you the the number of startups that actually shut down so from

22 to currently you see this increasing in fact compared to 21 it really doubled right and this is primarily driven by the fact that it's really darn hard to get funding right so what's what's happening right what are startups doing it's so they're going after Bridge rounds right so this chart on your right shows the number of bridge the percentage of bridge rounds that are happening so you see that going up north right so that's what's happening right now you think you're thinking okay it's a relief to even get funding but that doesn't tell the whole story if you did get funding we're seeing a lot more down RS right to your left this is the the percentage of um companies that are actually getting down rounds so from 22 up to 23 you're seeing a upward movement right so right now

what's happening according to this data from Carta one out of five companies are actually getting a down run which is really tough right and if you're an investor in those uh deals it's also tough now with every story there is also the other side of the coin right what does this mean for the investment climate now it's actually pretty friendly so if you look at the the graph on your right it's it's pretty favorable now it's it's an ey chart but whether that is liquidation preferences participation cumulative dividends it tells a story where for the investors that are investing now it's actually not bad interesting graph here this is a chart of the US IPOs per year now I'm going to use a sort of a sort of a farming analogy if you will um if you look look at the the round red uh Circle

there what that shows is those are fallow years right and then it's followed by years of harvest fow years and then years of harvest so these are cyclical we see a pattern here right take a look at 22 what does that look like to you to me it looks like a fall year right so if history is an indication of the future what that tells me is that in the not too distant future we could potentially see Harvest years right so I'm going to summarize all this um so investments in gaming and overall have increased 2122 came down to 23 generally at the simal level as pre pandemic years right and now this is The Tale of Two Cities right like anything else it's tough for startups and some of the Investments we made as investors but on the other side we see some

favorable conditions so what's the so what right in the immediate term and potentially some years to come we could possibly see some of the strongest vintage years as investors that concludes my section I'm going to call on my colleague John thank [Applause] you hello hello hello hello hola H hola uh hi everybody uh bu if you didn't understand why I just said it's fine that makes with two of us um but with my skillful use of Google translate I now have all your attention I wanted to give everybody a warm welcome again so this been I know it's been a long day um with many meetings I wanted to keep this like a presentation

light-hearted um so in the next segment of the presentation um I'm going to keep it fairly short and sweet uh keep it fairly interactive feel free to interact with me um and if you enjoyed the presentation please sing my praises to the GPS if you don't enjoy the presentation please keep it to yourself uh without further Ado Let's uh begin with the presentation so the state of video gaming I only have 15 minutes um to talk about the entire state of video gaming CU I always a lot of time cracking jokes um but uh so we wanted to just highlight that we will not be able to talk about every single thing that's happening within video gaming it's just not realistic um but there are two things um that we want to talk about the first thing is a framework as to how to think about video gaming um and the way we think about it is very broadly you can consider the gaming industry to be comprised of three primary participants on the demand side we have the users on the supply side we have the people creating games the companies and on top of that is a capital Market layer that dictates the capital flow uh into what

is actually being innovated on what are the opportunities they get to get funded now my colleagues Jin and Justin have spent a considerable time talking about a capital Market Slayer so in this next segment uh I really wanted to talk about despite all this financial turbulence and uncertainty what exactly is happening on the ground do people still play video games what are some kinds of Innovations that's happening if we spend if you want to talk about all the Innovations that's been happening in video gaming we would probably take another eight hours I would have to come up with many more jokes so I will only be highlighting two interesting Trends um within video gaming today but before we get there let's go into what exactly is happening with end users now many research sources and data uh have been highlighting how you know people have been worried that post pandemic we are actually going to see engagement come off uh due to the covid induced ties that brought in a lot of people into gaming due to Greater disposable time um and that was a primary worry over the past couple of years but I just wanted to remind

everyone that engagement which tends to lead monetization uh has basically remained fairly flat uh post the pandemic and since engagement leads monetization it is perhaps not surprising um that many of the consumers still continue to expect spending more um within technology and media spend categories and obviously with gaming is um one of the main platforms there why exactly is this happening the pandemic essentially has resulted in a slight Rebrand of video gaming for many people that were own B into video gaming 20 years ago when I told my friends that I was ging uh that I loved gaming the general response I go was um today it's slightly more cool I think and more importantly with the younger generation they're starting to view gaming more than just gaming per se um but is actually incredibly resembles more like a social network if you consider what was happening over the past 2 years many many people stayed at homes they were were Sheltering Place

Arrangements they couldn't go out and meet their friends um but with video gaming that was like a primary source of socialization for many children myself included and we're starting to see gaming and uh mainstream pop culture uh movies that were based on video games were not popular 5 10 15 20 years ago but increasingly we see them getting tremendous traction um in the box office and finally we just wanted to touch very quick on the web free side of things uh although nfts have received a tremendous amount of flack uh from people who have thought that nfts are primarily investment vehicles what is interesting is that awareness and participants of nfts have both increased and if you look at the next page I think this is the one that's most interesting to me the people uh who actually perceive nfts as an investment has come down by about 25 basis points uh and more interestingly like non-endemic use cases for for nfts such as the display of digital items items collection of digital items support for favor creators

are starting to grow so that is like the segment on what's actually happening on the user side and I think it's very clear that the circular Tailwinds for user growth is growing fairly robustly and for a long time um on the next two two segments I think I'll talk quickly about AI um which you know there are plenty of panels today and and today and tomorrow that will be talking about AI so I won't cover everything it's impossible um I just want to highlight some things that we at bigcraft think is fairly interesting so I think when AI first emerg as a tool to supercharge gaming the mainstream opinion was that hey you know AI is really going to democratize content creation you're going to be able to do more with less um as much as that is a fascinating and important um developmental Point uh the idealist in me wanted to see more with AI and what really excites me is the fact that AI is able to enable new types of games and push the Frontier of possibilities of the kind of games that we can play um

what are some of these examples uh so this is a great time to talk about our portfolio company in world so in world is uh innovating on the AI digital agents for NPCs as all of you here know NPCs generally have the same thing the same script that they say you know they don't change the behavior that much uh but within what what they're what they're doing is that you can increasingly and in the picture on the right you can see if that's a screenshot from Skyrim uh is that you can actually interact um with these NPCs and these NPCs will actually have different personalities and character um based on what you assign to them they will have memory of what you have as them and this all makes for a fairly novel way of consuming entertainment in the world of video gaming you often see people the completionists among us look for alternate endings within video games so that's why you see that screenshot of the ghost of ghosts of sushima secret ending um but with AI this could be a thing of the past past now consider that if you play a solo RPG and a thousand

people play a single RPG you'll find exactly one ending if there were no alternate endings but in the future with the Advent of AI what is potentially going to happen is one person playing one RPG can find a thousand different endings um and you know having alternate endings will be increasingly be a thing of the past that's what we've covered on adaptive gameplay and under Adaptive Difficulty now why this is important is because a big part of ensuring that your Gamers remain engaged and enjoy um the uh the the video gaming experience is that you keep them in a state of flow and a state of flow is when the level of difficulty in the game um matches a skill level now there are many many masochists amongst us in bigcraft that enjoy getting tortured in the Elden ring indu games uh but for the broader public in general being able to keep users in a state of flow is incredibly incredibly important uh capability of AI so once again I I can't talk about everything in AI um this is a work that we we have this is a topic that we have done a ton of work on um you can see a

short summary of some of the ways which we think AI is going to affect areas within gaming and what are the implications um feel free to grab any of us um uh if you see us around and we'll be happy to have a deeper conversation with you now VR and AR so we were there was actually a panel on AR and VR prior to this so I'm not sure how many of you were here and listen to everything um but why we wanted to highlight AR and VR is that you know I I used to work at tamask doing TMT growth Equity investing and ever since I was there the general consensus the worry from many people that doubted the future of AR was that hey VR AR has been the next big thing for the past 30 years like why why why should it be the next big thing now why we want to highlight this is the importance of innovation within gaming despite Financial turbulence despite Financial uncertainty and most importantly we're starting to see VR AR is achieving many critical milestones um in in the VR flywheel most important of

which and I know there's a lot of words there but just focus on the final point at the bottom is that Apple has also entered VR I I I've named it as XR you know extended reality but let's just keep it simple and and refer to this as VR but entry Apple's entry uh as well as big Tech players entry into new platforms and new tech generally has led the mainstream adoption of users and you we see it right here so despite all the uh negative sentiment that VR gets uh we have seen a ton of money being invested into VR we are all familiar that meta has been a very big uh investor into VR technology Apple has come in as well so as Google Sony Microsoft bite Dan um and despite the uncertainty you can see on the chart on the right um the sustained growth in VI Investments is very clear and undeniable which which is why this is resulting in newu estimating that the install base is growing faster than ever uh and revenues within the space is expected to double um within the next 3

years now obviously there are still many many issues that VR has to overcome in order to achieve mainstream adoption but one of like the more interesting um learnings that we have had starting VR is non-gaming use cases for VR have actually been growing so if you consider the perception of VR as an headset maybe 5 years ago the primary honey pod for new users into VR is I want to play VR games and what's interesting is many people who have ended up uh buy VR headsets are increasingly finding that there are many non-gaming use cases that the VR headset um is very suitable for um and with this increase in the in the use cases that are non-gaming related uh we potentially um are getting closer to Bridging the chasm um between the early adopters um and the early majority and as we all know that is usually when a new technology achieves ask velocity so that's all I had today um the toway was really I want to have a more positive take on what's actually actually happening in in in gaming

despite all the financial uncertainty uh I'm like the Positive Vibes guy uh so long-term circular tnds are still intact on on all three layers on on the users um on the founders on the businesses and the technology that's being innovated on um and regardless of the market conditions we continue to see very strong Innovations across many aspects in gaming and for that reason you know we continue to believe that gaming will only continue to increase and become more important part of our lives uh over the next 5 10 15 Years thank you [Applause] everyone