The Future of Gaming: Game Economies, New Business Models, Gamification, Blockchain Technology & AI Innovation with Brian Cho, Co-Founder of Patron

0:00I think it's actually really hard to have cross currency games. you know the reason why big gaming companies do that is so there is no leakage meaning like hey if you're going to spend a hundred dollars on virtual currency you want them to spend those like you know quote-unquote tokens inside of your ecosystem right you don't want any leakages and people like trading that or selling it to other places so i think for a very long time you're just going to see more of the centralized model where people care more about just like having everyone in their walled ecosystem and walled gardens and not having that kind of escape you might see more games in the future just be more open towards that kind of philosophy.

0:39And mostly it's to basically give flexibility to the users rather than try to control the economy, which I think a lot of big companies have always done with their digital currencies. Hello, I'm your host, Mike Gelb, and this is The Consumer VC, where we discuss the intersection of venture capital and consumer innovation. This show is brought to you by Propeller Industries, the leading strategic finance and accounting partner for venture stage companies. Now, I know this is free content, but it doesn't mean I don't have a favor to ask you. If you're enjoying the show, please subscribe on YouTube or whichever channel you're listening from.

1:12And if you love the world of emerging consumer, I highly recommend checking out our newsletter at the consumer bc.com, where we send a weekly digest of all the consumer deals that are happening, all the product launches and expansions that are happening in the world of consumer. And you'll be the first to know when a new episode drops. So sign up today at theconsumervc.com. All content episodes are for informational and entertainment purposes only and is not investment advice. Our guest today is Brian Cho, who is the co-founder and general partner at Patron. Patron is an early stage venture capital firm that invests in the future shaped by games.

1:53Previously, he was a founding member of A16Z's investment team and held senior leadership positions at Riot Games. We discuss business model innovation within games, the impact of generative AI on games, when blockchain makes sense, and his learnings from Chris Dixon when he was at Indreason Horowitz. Without further ado, here's Brian.

2:21Brian, thanks so much for joining me here today. How are you? Good. How's it going, Mike? Thanks for having me. Thanks so much for coming on. I really, really appreciate it. So let's start from, I guess, the beginning. What in your mind is the difference between, I know that you're very focused on gaming and your career has been a focus on gaming and also consumer technology, consumer innovation. What is different about gaming versus other forms of entertainment in your mind? What actually makes a game a game? Yeah. Well, gaming is highly interactive, right? I think if you think about just the history of media format, it's been very much focused on consuming.

2:59So in the case of books, radio, television, movies, music, it's very much focused on consumption. And when you think about gaming, it adds the layer of interactivity. So now you can actually be part of the experience. There's certainly sense of input. So when you're actually playing a game, you're putting in inputs that actually control the character, what's happening in the game. And I think the most interesting thing about gaming is there is a mastery that's baked into the experience as well. So when you're playing a game, you progress with the game. In the case of games like Super Mario and some of these other things that have been historically defined as a game, you kind of progress through the game and you end up leveling up and there's a sense of mastery and progression.

3:38And I think those are some of the key attributes that differentiates a product like a game from your typical mass consumption media experience. Do you consider social media a version of gaming? I think so. You know, I think, I mean, if you break down life, like you can probably argue that there's elements of gaming, right? If you think about how we go about our day to day and, you know, a lot of ways. I think Paki McCormick wrote this great story about how the internet's a giant game. You know, a lot of people are just leveraging the internet to like level up and you think about how we go about just creating our lives and the economy there.

4:15But I think with social media, there's elements of it that certainly taps into this. I think one layer is certainly around like the mastery component potentially, right? So you think about a lot of people, you know, like even like a podcaster yourself, I'm sure when you first started, you had like tens of hundreds of followers. And then now you're like one of the most successful podcasters out there in the vertical that you focus on. And it took time, right? It's certainly like, I'm sure you've leveled up in terms of your skills and how you built the audience. um so i think there's that component you know with social like the ability to get followers and build out like a community um there's something that is parallel to video game and then i think from more of a social media perspective you think about just like the feed on instagram and tiktok and i think you can argue that a lot of the experiences there are similar to like a loot box where you kind of don't know what you're going to get right and maybe that's some of the darker side of social media but there's that mechanic where you don't know what you're going to discover next and you've seen a lot of this mechanics that's been highlighted in games where there's the randomness and that rng and randomness creates a lot of fun so i think you can't argue that there is components of games that certainly show up on social media and um and vice versa i think a lot of games are turning out to be more like social social media platforms yeah that's a fair point that that that's a really fair point in terms of also just how games there are becoming I mean, also social media platforms, even, you know, social media platforms around gaming as well has become such a big business.

5:45Right. What when you look at what's what's gone on with, you know, Discord or what have you? Yeah, exactly. Roblox. Exactly. Great, great, great examples. How from from an investor lens? I mean, I guess going back, what what got you really curious about gaming? and as well as kind of, I know when you were at Andreessen, you sourced Oculus and we kind of very, very focused on games, but what was that drive or what was the reason what attracted you to the category itself? Yeah, I think, you know, for me, I've been a lifelong gamer. I was fortunate enough to be raised in South Korea during like the late 90s and early 2000s.

6:29And this was a time when like the government was investing a lot into the internet infrastructure. And if you recall, Korea actually had one of the first online, massively played online games called Lineage. And because they had T1 internet in this really populated city, Seoul versus everyone else, they were able to build that experience out. So I got to spend a lot of my childhood playing online games. And that was my, I would say, introduction into software and internet in general. It was through that lens. And if you think about gaming, it's always been a great... Games have always created a great early consumer adoption experience.

7:07You think about things like the mobile phone, social networks, certainly the internet. It's one of the first usual consumer applications that gets built out and gets a lot of people to try. and in the case of Andreessen you know I think a lot of the we never when I started this was like around fund two, fund three it was during the early years working closely with Chris Dixon we didn't have a good gaming fund as we do now a lot of the focus was on general consumer and enterprise and in the case of Oculus like that wasn't necessarily a gaming investment we saw that as a new competing platform for what VR and AR could be and gaming was certainly one of the use cases initial use cases but you know I think you can argue that some of the most valuable companies today, they initially started off as a gaming company, right?

7:50I think NVIDIA is like the prime example where they started building GPUs for gamers and graphic designers. And now it's something that's obviously a lot bigger. And I would say like, that's how we look at a lot of consumer companies. It's less about like, hey, is this like a fun game? But are they using mechanics from games that could become really interesting venture-scale companies? Or is gaming the right wedge to start? I think one last example I'll give is Tencent. I don't know if you're familiar with the Chinese internet company, but they were the parent company of the company that I used to work for.

8:23Yeah, WeChat, Riot Games was actually fully acquired by Tencent. And gaming was one of the biggest initial wedges that they leveraged to build out their massive empire and business. Can you, are you able to give us some examples in terms of, I love what you say, what you said about how it doesn't necessarily have to be a game itself to be interesting. It's more so about the mechanics of games that actually could be interesting in terms of building, maybe building reality, building people to achieve mass adoption or to actually just honestly build a pretty big business that's interesting. Can you talk to me a little about some of the mechanics of gaming that you find quite interesting that could be applied to other circles?

9:07I think one of the most interesting companies in the last 10, 20 years that have gotten built out is Duolingo. So, you know, prior to Duolingo, you had like learning language was not fun, right? You had the Rosetta Stone and like you had to hire like language instructors. And there was nothing about it that made you want to come back and just it felt like a chore in a lot of ways. And Duolingo flipped that on its head, right? And, you know, like debatable on like how good the efficacy has been. I think people have certainly learned like new languages and certainly have probably got more out of that and got them to practice.

9:46But I think the point is that's like a great product where it has actually helped people learn a new skill set. And the thing about games is like no one wants to learn a new language. But when you put a mobile game in front of them, and I think Duolingo is probably a closer comp to a Candy Crush in terms of the user experience. If you ever tried Duolingo, it's like these bite-sized kind of quests, daily quests that you have to do, right? And you see that in other games like Candy Crush and some of the Clash of Clans type of products. The sessions are super short. And there's instant feedback that you get, you know, in terms of when you actually complete like a Duolingo lesson.

10:21You're able to see that you're progressing. There's like a map. So I think they use a lot of the mechanics that you find in games to make that product more compelling. And I think in other verticals and fitness, like that's probably another great example, like products like Strava, as an example, one of the most popular consumer fitness apps today, it turns running into a multiplayer game. And it's not just about the leaderboards and achievements and badges. I think gamification, it implies a very, I would say, surface level adoption of game mechanics, not necessarily something that goes deep.

10:54And in the case of Strava, if you see the product, it's one of the most highly engaged products. And it turns something mundane as running into more of a competition. You can see how fast you've done in a segment. And the last thing I'll talk about more recently is, I don't know if you've been following what's been happening with Pokemon Sleep. But Pokemon Company put out the sleep product that helps people go to sleep, right? And in its first year, it did$100 million in revenues, which is pretty insane to think about in terms of the business traction and how well that product's doing. So, yeah, there are certainly applications of games that goes into other verticals that I think people are sleeping on today, no pun intended.

11:32When you realize a company, how also do you think about IP? You mentioned Pokemon, for example, and maybe there's a company out there that actually could leverage current IP to actually create new games or new experiences, rather, or actually generate their own IP in order to create new games. Is there a preference in terms of what actually is interesting to you versus when it comes to actually creating your own IP versus using other IP when it comes to actually making new games? yeah i think if you're building a game studio um there's there's games that have certainly gotten like really big without a very strong ip like an example of that would be like um you can argue something like counter-strike right where like when you play the game there isn't necessarily like characters and deep universes with like a lot of the character players that you play in many cases fortnite i think that's been helpful that they're more of a platform that's free of like a central ip like a counter to that would be something like a league of legends or like blizzard games where there's like very deep lore in ip i think it just depends on what type of gaming company you're building but that's the beauty of investing into more of a game studio and game startup is aside from like the technology and the user base you can actually build a massive company from ip in the case of pokemon i mean we just talked about this um i didn't realize this but they're actually the most valuable ip in terms of dollars generated in terms of revenue it's like double the size of Disney in terms of like Mickey Mouse and Marvel.

13:01Yeah. Number one IP in the world is a video game IP, right? You would think it's actually Star Wars or some of like Disney characters and princesses. But despite having started in the 90s, it's generated more revenue than many of those properties, lifetime revenue. And it also goes to reach. Like in the case of Riot, where I worked, a lot of people, especially in China, were more familiar with our ip like the legal legend champions than the marvel characters like they actually knew more about our characters and than some of the stuff that you would find in the west so um i think it does it does play a lot into the value of like some of these companies and why that's important when since you worked at obviously since you were to riot for for a while and they obviously invented their own ip they had their own characters that you know became in in in some parts of the world more popular than, than, than maybe Disney characters or other characters.

13:57What did that, and, and, and now since you're back to being a, you know, a investor with, and, and starting your own fund, what did that experience teach you in terms of how to actually analyze IP and actually characters and see if these are actually could be compelling characters or ip that could actually could actually catch on and be and and and become uh uh interesting or or valuable yeah i think a lot of um gaming companies start off not just thinking too much about the ip they think more about the gameplay and like you know the just the single game that they're making and i think that's fine to a certain extent because like who would have thought like super mario like you know like uh like a plumber well or like pokemon right would become what it is today right like if you if you pitch somebody that today you would just basically call them like pretty insane in terms of like would it actually resonate with users and what have you so i think until you have a hit game is generally pretty hard to tell now i think what nintendo and riot and blizzard like what they've done really well is actually they cared a lot about IP in terms of like what it represents.

15:11They cared a lot about not diluting their IP, meaning that they weren't willing to like throw their IP and every other game out there, do a bunch of collaborations. And more importantly, we were as a league of legends was like, you know, scaling and doing really well. We had opportunity to actually like bring in other characters from very popular other movies and TV shows into the game. but we decided not to because we cared more about growing and posturing our IP. So to answer your question, I think it depends on the company, but I would say that for startups, it is very important to think, even from like the earliest days, you know, if you actually, this game ends up being a hit, what are you going to do with IP?

15:51And I think generally companies that do well are the ones that think a lot about protecting their IP. And that doesn't necessarily mean like, you know, you go after with like every copyright type of thing, but like, how do you build out? because League of Legends, by the way, when we started, it wasn't like we thought about creating the IP on day one. We actually had a hodgepodge of random universes and characters and fantasies. But eventually it got to a point where it made sense for us to hire a team that focused a lot around building the IP. So yeah, I would say it does matter. But for a startup, maybe not so much.

16:24I think it's more about how thoughtful you are from the onset. How also do you think about for games? because of course games they take a long time to build and you have no idea really if they're going to be successful i had on uh one of the most recent episodes was with uh vanessa larco who's an investor at at nea and she spent time at uh xbox and also at playdom uh and and she said i actually don't even though she comes from a gaming background she doesn't invest in games because it's so hard to actually know if if if a game will go viral if it will actually catch on it It could be the most well-produced game.

17:01It could be incredible. But of course, if you have a hit, oh my gosh, is it lucrative? Oh my gosh, is it incredible? How, from an investor perspective, from an operator perspective, how do you also analyze companies, especially at the very early stages? Because you don't know. I mean, obviously no one has a crystal ball here for anything, but it's really hard to know if it will actually take off and actually become, go viral and actually become, turn into a big business. Yeah. Totally. Yeah. I think for that reason, we don't underwrite IP or like game ideas. I think it's really hard to invest that way.

17:46I think the thing that we think about a lot is trying to answer the question of why now. And if you think about some of the biggest gaming companies in the last 10 years, whether it's like Riot, Supercell, even in the case of like Zynga, like companies that have gone public and have done well. Like, I think the secret there was they started at a time when they were doing something that was counterculture. You know, in the case of Riot, like no one was building free-to-play games when we first started. You know, the idea of free-to-play was actually seen as kind of, if you're like a talented game developer, you were working on Xbox and, you know, Playstations.

18:22You were not on PC. You're not building on mobile or social, right? So I think for us, we think about like, what are these companies and new consumer behaviors that are getting built out that a company can go build on top of? And is it like the right time? Are they thinking about the right way? Do they have it? Like Riot was actually a lot of people labeled it as like an e-sports and free-to-play company. But in many cases, it became big because it figured out direct-to-consumer distribution. Like before Riot, there wasn't any company that was doing that where they were going straight to the consumers.

18:52They typically have to sell a box product, be on Best Buy, on Circuit City, and what have you. To answer your question, I think we think a lot about what are the things that are enabling this startup to get created today? And then also, is the team building a game or are they building a company? They're very different things. So we don't actually underwrite single games also. Meaning you might be able to start off as a game and that's the initial wedge, but there needs to be something that goes much beyond that. and i think that's why riot ended up doing really well right riot had one game league of legends on the surface but if you looked under the hood we had multiple business lines that scaled way beyond that including we traded on sports around esports um we had like a merchandise and licensing business uh we certainly spent a lot of time around tv and movies as well that was very successful and then we had multiple IPs it just wasn't league so um i think that's an example of a company that scaled beyond just the gaming but uh i think it is important to time the market very very well so in the case of riot you you obviously in terms of timing you had this new monetization um uh way to monetize with you know free to play not that there hasn't been you know past uh past companies that that did free to play but riot games were the first one that kind of made it made it um made it made it big and a lot of people i'm sure questioned if free to play and actually purchasing skins, if that could actually be a real business model.

20:19I know that there's obviously, as you said, there's other lines of businesses too with it, but free to play. How does, when you're looking at a company, does it have to be a business model innovation like Riot was or not really? It can be other innovations too. It can be a technology innovation, right? I think in the case of AI, you're certainly seeing new types of companies, new experiences that weren't possible before some of the introduction of stuff that we're seeing today. Certainly in crypto, things that we saw during the last cycle, which again, I think timing-wise, we got a little bit ahead of the skis, but a lot of the experiences in crypto were not possible prior to the last cycle.

21:02So I think it just depends on what type of games that you're building and i just think that usually the biggest outcomes every cycle in games that ends up being like a startup to a public outcome it doesn't look like anything that it came before it and and that's you know many cases why we don't invest in companies that are going to directly compete with like a riot and supercell what we just think that's um it's very hard to compete in that red ocean so you have to basically put bet on blue ocean opportunities for these startups in the game. So how, how do you think, I didn't mention crypto and you have a few, you know, crypto web three investments.

21:39How do you think it seems like the hype cycle of crypto, if it's fair to say it's, it kind of came and went. Obviously crypto is still around, blockchain is still around and there's folks building blockchain. There's just, it's just in terms of maybe valuations for many of them, they really weren't, aren't valued maybe as they once were. How do you think about crypto and blockchain and maybe part of that hype cycle and what you get in hype cycle and not just by the way, crypto or blockchain, this happens and, you know, every, anytime there's a hype cycle, but you get a lot of use cases that aren't really use cases, right.

22:10And actually ended up, you actually maybe don't need blockchain technology in order to create what you're trying to create. How do you assess for crypto blockchain, if it actually makes sense for a company to actually use that as a base to actually build a gaming or consumer company on top of? It goes back to the user experience and what kind of company they want to build. I think generally speaking, we've passed on a lot of companies that were trying to launch a token really quickly and monetize off that token and basically built on an economy where it felt like a house of cards. It wasn't sustainable.

22:45It was clear even from evaluation. but on the flip side like you know in in the physical world there's been games that have lasted 20 30 years that's built around collecting and ownership i think the two games that come to the least my mind is magic the gathering and what pokemon company has done with their trading cards right like in that case ownership makes sense and there is some speculation built into pack opening sure like there's that analogy but i think there should be more experiences like that that get built out. Now, I think going back to the free-to-play example, I think there's some analogy there where if you remember a lot of the free-to-play games that got funded and failed, they were games where they were punishing users for free-to-play.

23:26So basically, to progress in a game, you had to keep paying money. And a lot of these early free-to-play games, especially the social games that existed, if you remember on Facebook, some of the platforms were super spammy. It was not a great consumer experience. The companies that did really well in free-to-play were companies that had a long view. And that was the case of Riot, right? For us, like, we explicitly did not try to squeeze every penny and dollar from every one of our users. In fact, you could play League of Legends for free as long as you wanted and have this exact same experience.

23:56And skins were optional, by the way. Like, you actually didn't have to pay for it at all to actually enjoy the game. And it ended up being, like, one of the most profitable and highly engaged businesses because what we cared about, our metric wasn't actually about monetization at Riot. It was about engagement. and how long are these folks actually staying on? And are they going to, you know, it's less about like LTV, right? It's like, are they going to be a player that's going to play league for the next 10 years? And, you know, how do we service these type of players and audience? So going back to your blockchain question, I think those are the companies that excite us or folks that are thinking long-term about the application of crypto that's less built on, like, I would say building a casino and more around how do you actually build a new type of user experience that adds benefit to the players that is sustainable and not going to be a spike.

24:45How also, I know we mentioned free-to-play a lot. Also, we've certainly had maybe another innovation with free-to-earn. And of course, I think of Axis Infinity, for example, is probably the big name that gets thrown around when it comes to free-to-earn. What do you think about maybe the future as well in terms of that format when it comes to game monetizations? for gaming monetization? I just believe that, because again, it's already happening, right? There's a lot of people that already play video games for a living. And today, one case of that is the game streamers where you stream for views and then you get paid on Twitch.

25:28There's a lot of these people that actually do the work inside of an online game. Unfortunately, they're called boosters, which in League of Legends, you would actually get someone to, you would pay someone to boost your account. meaning someone that's more skilled than you would come in, play on your account, and you would actually get a higher ranking, right? I mean, a lot of, I think, like kids did this, and you would go in your social circle and tell people like, hey, I'm like a really highly skilled player type of thing, which sounds ridiculous, but that was kind of this economy in its own.

25:57And then in the case of MMO, it's like, wow, people were like farming gold, and that was a huge industry. So the point I'm trying to make is like, I also think, you know, when you think about the future of work and how that's going to happen in the internet like there will be a future where we spend just a lot more time you know not going into the office but we're going to be you know probably the next evolution of zoom and maybe that's going to look more like a virtual world where it's not just like video but um again i just think the timing was like way too early but this the concept of eventually like something like a metaverse i don't think that's like the right term but something like that should exist in the future and i think in that world where we spend more time virtually, where we're spending just a lot of our working hours connected to the internet, there should be a better way to earn money and potentially earn digital objects and virtual objects.

26:50And I think in that reality, that's when the idea of ownership through blockchain makes sense. But it's hard for me to predict that too. I think as VCs, our job is less about trying to predict the future. It's like understanding what's happening today very clearly, right? I think Matt Kohler actually said that from Benchmark, but it's one of these things where we care a lot about what's happening now. And the blockchain bets that we have made are folks that are thinking long-term, but they also understand what is working today and what consumers care about today. This episode is brought to you by Propeller Industries.

27:25If you run a high growth business and you're focused on profitability, extending your runway and improving your operational efficiency, you probably need a finance and accounting whiz that will grow with you. Well, instead of hiring someone full time, what would be cost effective is working with Propeller Industries. Propeller Industries is a leading strategic finance and accounting partner for venture stage companies and has partnered with over a thousand startups and high growth businesses across consumer products, consumer tech, and enterprise. Some of the brands that they've worked with are Liquid Death, Olipop, Hims, Farmer's Dog, Away, MoviePass, and Giphy.

28:00Propeller also provides specialized support for fundraising and M &A with transaction advisory services. Propeller's TA team of former investment bankers and investors can step in on more of a project basis when pursuing full-scale financing and M &A. There's a link to Propeller Industries in the show notes if you want to learn more information. so could we talk about a bit about platform too because you know thinking about of course you're early investor in oculus think about you know the vr headset for example and how vr went what you know was interesting then it wasn't interesting and kind of went down and then and then and then and maybe oculus maybe it was was was one of the companies that that reignited some interest and as well as obviously what um obviously apple as well with with their headset how do you how do you talk to me a little bit about what you think about a bit about the future of VR when it comes to, I mean, we can call it metaverse or just more, but more experiential, I would say, relation in terms of being connected and also really into gaming.