Founders Playbook: Lessons from Riot, Discord, & More

0:00Right now we're in the sakura toad any of the gaming brothers thoughts. We'll see gaming ultimately dominate and become the primary entertainment medium for the future. I love the intersection of tech and art and psychology and design and how they interact. It's just the coolest industry in the world. Over the past few decades, Gaming has undergone a radical transformation. from one -off experiences that came on a disc to viral mobile games, to now intricate, seemingly never -ending online universities that actually feel like they have more in common with movies or social media than the video games we might remember in the 90s.

0:43Esports tournaments fill stadiums, games inspire major TV series, and the money spent on gaming content alone is five times what is spent on the movie box office. So with all that said, leveling up as a game company should be a breeze, right? Well, it's not that easy. With intense competition, distribution challenges, and high production costs, gaming startups are used to playing on hard mode. But they're also pioneers of innovation, leading the pack when it comes to the adoption of everything from smartphones, to virtual reality, and these hard -won lessons offer insights that can help startups across the tech industry to power up and advance to the next level.

1:25So that's why we brought in some of the Titans of the game industry. And today, you'll hear them discuss everything from the state of the gaming industry today. How to survive a bear market. The strategies that start -ups can leverage to build and market products that stand out in a busy crowd and the potential impact of AI. These conversations were all recorded during speedrun, a 16z extensive games accelerator. So ready? Set? Game on. As a reminder, the content here is for informational purposes only. Should not be taken as legal, business, tax, or investment advice, or be used to evaluate any investment or security, and is not directed at any investors or potential investors in any A16z fund.

2:07Please note that A16z and its affiliates may also maintain investments in the company's discussed in this podcast. For more details including a link to our investments, please see A16z .com slash Disclosures.

2:25I'm very excited because I legitimately believe that right now we're in the suck with the third inning of a gaming Brothers' thoughts. That was Jonathan Lai, General Partner and Founding Investor of A16Z Games. John previously worked at Riot Games where he shipped the Riot Games API before the company was acquired by Tencent. You might also recognize Riot as the creators of League of Legends, a game which sees 15 million players on average every day. If you're studying the game company, there's never been more tools and new technology to help you build games. There's never been more sources of funding under more players of games that have ever been before.

3:06There's three bound gamers around the world, like Southeast Asia, Africa, India, all of these emerging markets that come online in the same time, like we have more distribution platforms that are hungry for content, like Netflix is getting into games. I just heard that Walmart and Verizon last month are like really excited about games. Apple Arcade, Steam is at all time highs. There's just never been more demand for great content. Gaming has long been overlooked as an industry, but it continues to evolve. One of its next phase shifts has been its influence on Hollywood. Here's Andrew Chen, also general partner at A16Z Games.

3:43A lot of Hollywood are intensely interested in the games industry, because they've just seen in the last year, not just the Mario movie, not just what's happened with Hogwarts Legacy, last of us. I've had a ton of meetings with everyone from the team around JJ Abrams, the Bat Robot people, the Eisner family, who were in Disney for many years, the folks around Ridley Scott, and Riot has obviously been pushing from the gaming side. And it really feels like there's a tremendous boom that's happened. In the same way that Marvel and the superhero franchises sort of became the core IP that then unlocked.

4:20Basically, the last, I don't know, 10 years of films. What you're really seeing is just an aging out of the population of folks that grew up watching two hour movies and that's their primary method of entertainment. And as that group ages out, I think what we'll see is we'll see gaming ultimately dominate and become the primary entertainment medium for the future. And it's inevitable just based on consumer watch time and engagement time if you just measured in minutes and hours and monetization. I think the folks on the business side are starting to really understand that gaming is actually larger than film, TV, books, magazines, radio, combines.

4:59And you can actually build and monetize your IP and have daily interaction in a way that you wouldn't otherwise. And it's not just Hollywood that's taking notice. It started a fortnight. A smash that everyone in the globe was talking about for years. where after Fortnite you had a magas, which almost made the pandemic livable, then you had games like Elden being followed by Hogwarts Legacy, followed by now Power World. And so now it feels like every year you have like one or two games such as like Cuses, like the Cultural Fabric, and just becomes this thing that everyone talks about, which I find is like really amazing and the sign that games has come into its own right as a piece of culture.

5:41If you need any convincing, Remember that viral dance move, Flossing? Well, part of its popularity came from the ability to buy it as an E -Mote for your character in Fortnite. And while this pop culture breakthrough is great news for the industry, every quest still has its challenges. Like much of the technology sector, Games Industry Investment stole last year, following to less than a quarter of its post -pandemic peak. But, at least according to one industry veteran, a bear market can bring its own advantages. When we were pitching what we codename Fellowship, this open world co -op free to play game, there were a lot of people who were telling us like there are dozens of these, they're so expensive, no one's going to want to fund this, it's going to be ridiculous.

6:26And I think if you look at the market two years ago, all that pushback was totally right. That was Steven Snow, a four time gaming studio founder and one of the creators behind games like League of Legends, Dungeons Siege, and Total Annihilation. I think when you look at the market today, there's less than 10 of these product pitches still live, meaning like as the economy's kind of gotten more condensed, and I heard everybody talking earlier today about how there are founders who prefer to operate in a more financially constrained market because it makes it kind of easier to ignore a lot of the riff -riff and the noise.

6:59I don't just agree with that. In fact, I would say that we now find ourselves in a very interesting situation where we're one of a few, whereas of three years ago, we were one of so many it wasn't worth doing. The current economic climate offers another potential advantage to gaming startups in the form of talent. As margins narrow, we've seen a wave of mass layoffs from major gaming studios. What's happened to us and our overall applicant pipelines over the last 60 days is we are flooded. We are seeing heads of studios apply for like based tier leadership jobs. Trust me, if you guys are not checking your email inboxes right now, you're making a huge mistake.

7:39Everybody's emailing everyone trying to find a job, and some of these people don't need to. They're just looking to get out of the studio that handled their, I won't name any names, but they handled their folks very poorly. And so if you have cash, just figure out how you want to focus because there'll be so many people who are trying to get in. But even a market full of big name talent can present its own challenges. The mistake I see so many startups make is go hire that person from EA, you know, go hire that person from Xbox. Like they get really rude by the resume at the early stage. Eris Rosmini is an angel investor and former CMO at Discord.

8:22And there are some amazing people at those two companies. Don't get me wrong. They really are, but the resume alone is not what is actually going to help you be successful as a startup. And you can waste a lot of time, a lot of money. These people are expensive often. Sometimes they're seeking the same salary they got of Xbox. And the thing is they're probably really great in those environments, but when you're a team of 10 or less, 20 or less, 50 or less, it's a completely different ballgame. So all that amazing experience, all the knowledge that they have, all the skills that they have, Don't necessarily apply to the early stage.

8:58Now this is just one of the ways that companies are trying to stand out in this sea of stiff competition. And it's truly a worldwide game. Here is Jonathan Leif. Competition is seeing nothing games, even beyond the competition that we see here in the West. Most of the Asian game companies call it the Heria Concert Netties. They're actually all moving west, and this has been an effort that has been going on for some time, but I think it's really a celebrated recently, you know, at the crackdown that China has had, you know, gotcha boxes and regulatory playtime and so on and so forth. Just to give you an example of me, Harry, or I think it's opening the Wii U of 4 offices, like here in the west coast for my own, and hiring a massive number of people.

9:41And so something to think about is if you are starting a game studio today, and having the potentially compete against developers that can field massive workforces that are working around the clock and have very, very deep understanding of like monetization, how to run free -to -play economies and so on. I think it's hard to compete with one of these larger guys, just purely on like a content production sort of treadmill. It's like what are the levers that we can pull to basically compete against in a company in your space? So let's dive into exactly that. The tools and strategies that gaming companies are putting into action to get their products onto the leaderboard, starting with listening to fans.

10:23It used to be that back in the day, marketing was this combination of PR, conferences and events, and building case studies with your customers and doing field marketing. And it was sort of this very repeatable playbook. Like a whole industry is getting foundationally disrupted. It's shifting really towards the idea of a lot of B to B founders actually, instead talking directly to their audience, building direct channels with their customers, building in public, building a sense of a buzz around the work that you're doing. And we certainly see that a ton in AI where the primary hunting ground for acquiring customers, for attracting funding, for recruiting employees actually has been Twitter and LinkedIn and Discord and some of these other platforms.

11:09and I would certainly encourage anybody that's kind of working in a B2B context to really consider the same. Steven Snow learned the power of this approach when him and his team at Riot stepped away from their screens and set up a stall at the gaming industry's largest convention. When League of Legends made its big announce, we went to E3 and I had a booth at the end of the end of a row in Kentia Hall. We told our community if you want to do resume reviews, come by, all we had was our community and no one knew who we were. We were a 45 person studio at the time, but everybody else thought we were 380 at Seneca Rage, right?

11:48The day started super sad. It was just me and a couple others in the booth and within a few minutes people are showing up. They'd usually just wanted to talk about the game and I was like, I'll talk to you about the game, but I have one commitment. Before I talk to you about the game, you have to tell me something that completely sucks about League of Legends. And it's a qualitative question. It doesn't matter what their answer is. I'm just gonna source with them like, oh, is it a friction related to matchmaking? They might say like, oh, it takes me forever to find a friend. It's like, okay, cool.

12:17Is that a matchmaking problem? Is that like a friend'sless problem? But I'd go through and pull it all out. I did it for three days straight, and it was horrible. And they're just abyscerating the product right there. Like just right in front of everybody. And the whole thing I just kept doing was writing down their feedback, writing it down. And by the time I got back to the office after that kentia hall debacle, I had a punch list that was more effective for the overall trajectory of League of Legends than if I'd tried to sit in a room with our top designers. At the end of the day, it's not personal.

12:48They are as angry and as furious about the state of the game because they care. Right like that is the secret sauce right there. It got to the point on League of Legends release notes. I was putting in parentheses next to the big beats, and we would give them credit for giving us the feedback. There's another detail that's going to sound completely insane, but when we had about 50 all the way up until about 250 ,000 monthly active players, I would meet with the top tier players, and it was first come for a serve in a ventrilo server. It was capped at 200 and I would just go every Sunday starting at 4pm.

13:29I would just go down the line of the 199 other people and ask them what sucked. And that was what fed the release notes. Direct user engagement can be a game changer for any technology product. And the team at Riot takes their player -focused approach a step further by putting players at the heart of everything they do. Here's Michael Chao, Steven's former colleague at Riot. The holy grail is the customer and you just obsess about the customer. And when I showed up at Riot, I used to call our customers users, because that's what everybody in consumer technology calls users. They call them users.

14:08I didn't realize how much I hated that until I started calling them players. And when you think of them that way and you start using things which like that and you envision what they do with the thing that you're trying to give them. It just changes everything about how you can make great products. And so that for me was like, that was a huge inflection point is just becoming really explicitly customer obsessed. You don't make your dream game, you make players dream game. And I think that is a very helpful way of thinking about it. I think there are basically two kinds of game developers in the world.

14:44There are people who are the consumer tech companies who got into games, Mark Pinkis, who was here yesterday, was by Boss. I love him deeply. He has passion for the gaming space, but he's not a game developer by trade. He is a consumer internet technology product developer. So that's one kind. And then the other kind is what I would call real games company. He's our real game developers. Both are actually really important. But I think the highest level feedback or suggestion I give to any of you is figure out which of those two things you are. And then just do the other thing. If you consider yourself a consumer internet tech person, you think more about what is the market saying, and you're thinking about the customer, which is nice actually, that's good.

15:25You really need to tap into the internal part of you that has very strong sense of inspiration and taste making. Whatever is the product that you're making, really immerse yourself in it. Conversely, if you are a game developer, and don't think of yourself at all as the consumer tech person, you mostly go inside out from your own inspiration and intuition into shipping it out into the world. This is like Hideyoko -jima is my least favorite example of this kind of developer. All he wants to do is make what he wants. And if you like it, then great, but it doesn't matter. It's about him. That's also a noble way of being.

16:00But if that's your way, do the other thing. Learn to be obsessive about the customer and the market and work backwards from their needs, rather than your own inspiration. Over at Discord, Eros and his team are focused on talking directly to their users as well. But in their early growth stages, they paid extra special attention to an important subset of fans. Now you're in a world where you've got your first 100 ,000, 10 ,000, 50 ,000 user. The question you have to ask yourselves is within those groups who are your super fans and what are you doing to encourage their behavior? That's the thing I actually think works best for growth.

16:37Something we did phenomenally well at Discord. If you were a Discord superfan and we saw you, you knew that we saw you. You just knew it. You could tell that we were loving you right back. And I remember Stan would always say, so Stan's a CTO at Discord. Stan would always say, my favorite thing to do is to get out of writing code and go to Pax and talk to the people about the code I'm writing. And he loved it and he would always insist on being there and ask questions and take feedback. And he went about his phone and show some new feature he was thinking about and get feedback and he just really got into that.

17:12And then of course, on Twitter, same day, someone was like, I just spoke to Stan at Discord and he'd like, show me this cool thing and like there was a social love and then our social team would be like, thank you so much for hanging out with us and it was just as like just a few sort of love feel. And so the reason I say this, the reason why, Those people are your most important asset from day zero to the end of year one. Your most important asset. They're the ones that are going to tell you what you're doing right and what you're doing wrong. Probably before the world sees it because they're using the product so much, so intently, so passionately, that they'll know bugs that you don't know about.

17:53So embrace them. Now, there is another way to reach your superfans. There's some of the most influential people in the gaming world, streamers. What we noticed was a number of streamers on Twitch trying to figure out how to better manage their communities. It was very clear that there wasn't a great tool for them. They were patching it together with everything from ventrilo to team speak to other sort of pseudo discord -like solutions. We decided after we saw some sort of small uptick from some smaller streamers to just invest and that a little bit. We thought, hey, if we could show them that our tool is really good at what it does, we could provide them with some stuff that is streamer -specific, creator -specific, and we could get them to use Discord while they're gaming with their friends.

18:43It will literally show the world what our product is intended to do. And Discord was really intended for you and your 10 friends to hang out. It was never intended to have hundreds of thousands of people on it, even though that happens now. The original attempt was like bring people together through games, hang out, build your small community. So we built a few things. We helped them link their subscriber sort of status to special roles and Discord automatically. We handled some of the payment gateway pieces related to that. We just sort of made Discord a better tool for them. And anyone who sort of watched Discord grow up and was also watching Twitch at the time could see it.

19:18It was obvious. Like all the big streamers were using it. And the funny thing is the first few that talked about Discord, we didn't pay them. So when we met Lyric at like a Twitch con and we were just like, Hey, here's our really cool thing. And like we can't pay, we don't have money, but we think we built something cool and we love just to get your feedback on our product. That was the conversation. A week later, he gets on stream and says, This is the best built piece of software for what I do that I've ever seen. And you can just see the Lyric spike. Boom, right? And that was a nice way to sort of validate that we should write the Twitch rate because there are people on that platform that think the way we do which is like let's make great products and let them speak for themselves.

20:01Clearly, Player Feedback is a cheat code for identifying opportunities building great products and finding customers. But a focus on player preferences is also key to tackling one of the biggest challenges in the industry. Distribution. Here is Michael. The industry is in a tremendous amount of flux about channels for receiving your content than channels for paying for your games. I don't think we know how it's going to resolve. Specifically, the regulatory environment, the diaspora of platforms right now is pretty frustrating. Like, if you want to watch a television show right now, it's your guess as to whether or not it's on Netflix or Prime or Hulu or Disney Plus, which is now kind of Hulu, but not yet Hulu or Crunchyroll or Peacock or whatever.

20:45And I think that players don't really want that in their games. I think they're much more discerning as players in games and they're also more religious, which is why you see the divide between Steam and the Epic Games store. And I think that you got to rewind backwards from what the players want. Despite players being siloed in their chosen platforms and floods of content being available, there may just be one major wave that could disrupt it all, artificial intelligence. AI is already capable of helping us write stories, create artwork, and build software, some the core components of game development.

21:19But it also presents a host of new opportunities, like more personalized narratives and custom virtual goods, or AI players that can help test games, and even tools for analyzing player activity. Here is John's take. The way we think about AI and games that there's currently a sort of two waves of innovation, And so the first wave is making the same games that we have today, but just faster, cheaper, like at greater scale than before. And I think there will be valuable companies that do that and do that well. But I think long -term, the incumbents are actually the most likely to capture value from the faster, better, cheaper, rather than the game development.

21:58And then the second wave, which we are even more excited about, is the potential for AI to create entirely new markets. And so this is like new types of gameplay experiences, new social experiences involved in the agents, new types of genres that use AI as part of its core game that we haven't seen yet. But I think ultimately, you can create the most value here because if you're successful, you're bringing in that new players, right? Like you're not trying to cannibalize, call a duty of the legends and say, hey, come over here and play this game instead. You're actually appealing potentially that the people who don't self -identify as gamers today, but they might see something, say, Carimder AI.

22:33So, hey, that sucks to be really compelling. That's what I think that's the long -term promise that they've been doing that we're very excited about. And we probably have no conception of the innovation that's on our doorstep. People often talk about how if you knew that cars were gonna be invented, you could extrapolate that gas stations would be a thing, right, because that's kind of the first order. And by the way, you know, in a world of like horses, like, yeah, you need stopping stations for your horse to have water, whatever, so you're like, okay, well, and cars gonna like that. It is really, really hard to go from that and saying, you know, Walmart can exist because of the car.

23:09You know, we're a city like LA can exist because it really is something that the urban sprawl kind of requires, you know, the invention of a car to support. That's the second degree aspect, I think, is really difficult. I think that is why a lot of the, what we can imagine is just taking things that exist today and just doing it a little bit better. But the reality is, I think we're gonna see people compete in a bunch of different avenues that they wouldn't have, you know, previously. You know, maybe when it turns out that we decide as a country we're gonna have Trump be Biden again, somebody that evening is gonna spin up like a mean game.

23:43And people are gonna play it for like 30 minutes that evening and then they're gonna throw it away, but it was instantly easy to build. Today you talk about markets, you say, oh, I'm gonna build this, you know, experience, and it's gotta address a market of, you know, millions of gamers, and that's the only way we would possibly do it. Well, you know, again, if it's super easy, the same way that you would make a little mean to make fun of someone in your office or whatever not that we'd ever do that. Then maybe you would build a little game that's for an audience of 20 people that's just a free -for -all, you know, like thing with the A16Z partners like, you know, shooting at each other and maybe that would be fun.

24:19When it comes to AI and gaming, there's still a lot of uncertainty. But the gaming community has always been quick to embrace new tools and technologies. So given his track record, other industries would be smart to learn from these pioneers. The KEMS industry is this really special force within tech, because you look at how the PC came into the consumer household, how GPUs came to be, how 3D came to be, how VR is happening right now. The KEMS industry has really been this sort of like alpha nerd, kind of early adopter set of technologies that then comes to actually ultimately revolutionize the rest of the tech industry.

25:03All right, that's all for now. Whether you're building directly in games or not, or be quick to remind you that the industry has long been on the frontier. And we hope this gives you a glimpse into how they're solving some universal challenges and progressing the next level. If you liked this episode, if you made it this far, help us grow the show, share with a friend, or if you're feeling really ambitious, you can leave us a review at ratethispodcast .com slash a succeed. You know candidly producing a podcast can sometimes feel like you're just talking into avoid and so if you did like this episode if you liked any of our episodes please let us know.