With A $600 Million Fund And A Deal With A Twitch Cofounder, It’s Game On At Andreessen Horowitz

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People were bored during shutdowns. They feared a mysterious plague. The idea of escaping into virtual worlds didn’t sound too bad.

That’s one theory for why consumer spending on video games surged during the pandemic: Americans spent $56.9 billion in the space in 2020, according to market researcher NPD Group, up 27% from the year prior. That figure topped $60 billion in 2021, up another 8%.

There are signs that rapid growth is already slowing: Spending was down 8% during the first quarter of 2022. But Andreessen Horowitz believes something has changed for good—that the video game industry “has entered a new era.” And so this week, the Silicon Valley giant launched its inaugural games fund, a $600 million vehicle that will back game studios, gaming-focused consumer startups and other companies building technology and infrastructure for the broader gaming ecosystem.

Andreessen also announced a notable deal in the space this week, leading a $24 million Series A investment in Metatheory. A blockchain-based gaming startup led by Twitch cofounder Kevin Lin, Metatheory focuses on franchise games with intellectual property that can be used to create NFTs and other digital content. So far, a title called DuskBreakers is its biggest success. Also drawing participation from notable crypto investors like Pantera Capital and FTX Ventures, this deal melds Andreessen’s gaming strategy with its belief in the potential of Web3.

It’s no surprise investors bullish on Web3 and the metaverse are also intrigued by the potential of video games. If vast, immersive online worlds are indeed the future of entertainment and consumerism, then it stands to reason that the gaming industry—which has more experience than anyone in building those types of worlds—will play a key role. As Metatheory demonstrates, games can also be an attractive area for NFTs and other digital products and transactions that are key parts of the Web3 vision.

Andreessen tabbed three general partners to lead its new games fund. Jonathan Lai previously invested in the industry at Tencent, and before that he worked at Riot Games, best known as the developer of League of Legends. James Gwertzman once founded his own game studio and most recently led the game industry vertical at Microsoft

MSFT
. And Andrew Chen worked on the growth team at Uber

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before joining Andreessen as an investor in consumer tech.

While this fund may be new, it doesn’t come out of the blue. Mixed in with Andreessen’s steady stream of recent investments has been a notable number of gaming startups. Last week, the firm led a $6.5 million seed investment in StartPlaying, a site that hosts tabletop role-playing games like Dungeons & Dragons. Earlier in May, it led a $40 million investment in Irreverent Labs, the maker of MechaFightClub, a blockchain-based game that involves robotic fighting roosters. Other recent investments include One More Game, an online game developer, and Sky Mavis, creator of the blockchain-based game Axie Infinity.

I don’t think I’ll be signing up for MechaFightClub any time soon. When it comes to video games, I’m a simple man—some might say out of touch. I still play Peggle. But that’s part of growing up: Pop culture passes you by. Investors like Andreessen are doing their best to stay forever young.

A warning for private equity

Jonathan Kanter, the top antitrust enforcement official at the U.S. Justice Department, sent a shot across the bow of the private equity industry in an interview this week with the Financial Times, warning that a regulatory crackdown on buyouts could be in the offing.

One of Kanter’s main concerns seems to be add-ons, where firms use one portfolio company as a platform to acquire and consolidate several other players across an industry. The prominence of these deals on the PE landscape has been steadily growing. Add-ons made up 72.4% of all U.S. buyout activity in 2021, per PitchBook, up from 54.5% back in 2010.

“Sometimes [the motive of a private equity firm is] designed to hollow out or roll up an industry and essentially cash out,” Kanter told the FT. “That business model is often very much at odds with the law, and very much at odds with the competition we’re trying to protect.”

Kanter made some other comments that could raise blood pressures up and down Wall Street. Here’s the full piece.

What goes up…

Klarna is in talks to raise new funds that could reduce its valuation from $46 billion to somewhere in the low-$30-billion range, per a report in the Wall Street Journal, the latest sign that the venture market’s go-go funding days of 2021 have come to an end.

The pandemic surge in e-commerce was a boon for Klarna and other companies in the buy now, pay later space, spurring a spree of high-priced deals, including Square’s $29 billion acquisition of Afterpay. In August 2019, Klarna raised funding at a $5.5 billion valuation; that figure climbed nearly ninefold in less than two years.

But now, a wave of layoffs is sweeping across the startup landscape. The prospect of more down rounds is looming. Instead of growth at all costs, many investors have grown more interested in the bottom line. And the boundless optimism that surrounded the tech sector earlier in the pandemic has abated.

For Klarna in particular, regulatory scrutiny is another headwind. The Swedish startups as one of five companies ordered to share information with the Consumer Financial Protection Bureau as part of an inquiry into the buy now, pay later space.

Still, for companies like Klarna and Instacart—which in March reduced its valuation from $39 billion to $24 billion—this still looks much more like a correction than a collapse. A lot of early investors and employees will still be very happy with a $30 billion-plus valuation—just not quite as happy as they were at $40 billion-plus.

Clearlake’s big leap

Only a select few private equity firms have ever raised more than $10 billion for a single fund. Clearlake Capital joined the club this week, bringing in $14.1 billion for its seventh flagship vehicle.

From its headquarters in Santa Monica, Clearlake has rapidly established itself as a force to be reckoned with on the fundraising landscape. It was only seven years ago that the firm raised its first $1 billion vehicle. But it has scaled up significantly since, thanks to a track record of successful bets in the tech, industrials and consumer sectors. An example: In 2018, Clearlake bought healthcare IT company Provation Medical for $180 million. In December, it agreed to sell Provation to Fortive for $1.4 billion.

Earlier this month, Clearlake inked its highest-profile deal yet, playing a key role in a group that agreed to buy Chelsea FC in a deal worth £4.25 billion ($5.3 billion). I wrote in some more detail earlier this week about how, between that deal and this new fund, Clearlake might be ready for its closeup.

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