Roblox Venture Capital Investment Memo by Greylock
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Tl;dr: VC invested $50m in Roblox at the series-F round in 2018. They shared their investment memorandum 2021 when Roblox had their IPO. Read to understand how a venture capital investor thinks about investing in a company and how they communicate it to their partners and potentially their limited partners.
About the VC investment memo
This was shared by David Sze at Greylock in March 2021 on the company blog when Roblox had its IPO.
David wrote:
Congrats to Dave Baszucki and the entire Roblox team for today’s incredible milestone.
The Roblox mission is “to build a human co-experience platform that enables shared experiences among billions of users.”
At Greylock, we’ve been fortunate to be early-stage investors in many networks that bring people together (ex: Facebook, Instagram, Airbnb, LinkedIn, Discord, Nextdoor). Roblox has built just that – a community. Roblox was founded in 2004 by Dave Baszucki and Erik Cassel, who at that time had the foresight to imagine “human co-experience,” a new form of social interaction. Today, community is one of the core reasons many people continue to spend time in Roblox. Players can play (or simply hang out) with existing friends and build new relationships while discovering new games and experiences. As players become more engaged, more developers build for the platform, which in turn creates more game variety and more users.
Our original diligence was focused on uncovering cues to understand the depth of the Roblox community. Through user interviews, we found a core set of people who said “Roblox is [their] whole life, [they] play every day and meet new friends.” In fact, many social norms have emerged, including veteran players buying custom avatar clothes for “noobs” to help them fit-in, or 8+ year friendships formed and continued through online hangouts in Roblox worlds.
It’s been inspiring to see Dave’s perseverance and commitment to the principles he believed in for Roblox users and developers. Key decisions that Dave made early, and importantly, stuck with for 15 years — such as being developer-first, and building a virtual world that mirrored the physics of the real world — have created a strong core that is only possible with the patience of a mission-driven founder/CEO.
Roblox is powered by millions of creative developers for 10s of millions of players. That means that when the world changes suddenly, Roblox naturally adapts. Roblox has evolved into a hub for virtual experiences beyond gaming: users are coming to the platform to host large-scale events such as charity fundraisers and concerts, and we truly believe this is only scratching the surface of what’s possible with the engine Roblox has created.
We are also sharing a summarized version of the investment memo reviewed by the Greylock partnership. In the memo, we advocated that we write one of the largest first-money checks in the firm’s history. Empowering the creativity of developers and the exploration of users is at the core of everything they do, and we are grateful to be a part of this new world that Roblox is building for players and creators alike.
About Roblox
Roblox is an online gaming and entertainment platform for a shared digital experience that brings people together through play.
It enables anyone to imagine, create, and have fun with friends as they explore interactive 3D experiences produced by developers using their desktop design tool, Roblox Studio. The company is backed by Altimeter Capital, Dragoneer Investment Group, Investment Group of Santa Barbara, and Warner Music Group.
The San Mateo, California-based company was established by Erik Cassel and David Baszucki in 2004.
They raised $855.7m in total
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| Jan 6, 2021 |
Series H – Roblox
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7 | $520M | Altimeter Capital, Dragoneer Investment Group |
| Feb 26, 2020 |
Series G – Roblox
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6 | $150M | Andreessen Horowitz |
| Jul 16, 2018 |
Series F – Roblox
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5 | $150M | Greylock, Tiger Global Management |
| Jan 24, 2017 |
Series E – Roblox
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2 | $25M | Index Ventures, Meritech Capital Partners |
| May 11, 2011 |
Series D – Roblox
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2 | $4M | Altos Ventures, First Round Capital |
| Aug 14, 2009 |
Series D – Roblox
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2 | $2.2M | Altos Ventures, First Round Capital |
| Jan 29, 2008 |
Series C – Roblox
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1 | $2.9M | Altos Ventures |
| Aug 2, 2006 |
Series B – Roblox
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— | $1.1M | — |
| Jan 7, 2005 |
Series A – Roblox
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— | $560K | — |
About Greylock
Greylock Partners invests in entrepreneurs that focus on consumer and enterprise software companies. The firm invests in companies that define new markets, including Airbnb, AppDynamics, Apptio, Arista Networks (NYSE: ANET), Cloudera, Docker, Dropbox, Facebook (Nasdaq: FB), LinkedIn (NYSE: LNKD), Medium, Nextdoor, Palo Alto Networks (NYSE: PANW), Pandora (NYSE: P), Pure Storage, and Workday (NYSE: WDAY).
It was founded in 1965 and headquartered in Menlo Park, California
Usual caveats
No investment memo made voluntarily public will ever be 100% as it was. The pressure is just too high for VCs to look smarter, and not make founders uncomfortable, etc. I highly praise the VCs that share their thought leadership so we can all learn.
If you’re learning to make a VC investment memo, don’t assume the memos are what you exactly need to do. Information will be redacted. Assume anything “delicate” or sensitive is not in the memos.
The only memo that is 1 to 1 is the Youtube memo because it was in a lawsuit.
Roblox Venture Capital Investment Memo
ROBLOX INVESTMENT MEMO
To: Greylock Partnership
From: David Sze, Seth Rosenberg
Date: July, 2018
Re: Roblox
Summary
We have an opportunity to invest up to $50M in Roblox alongside an additional lead investor.
Roblox has found an alternative way to win in gaming by empowering indie developers to create games and engage users through a social network. Through user interviews, we found a core set of people where “Roblox is [their] whole life, [they] play every day and meet new friends”. In fact, many social norms have emerged, including veteran players buying custom avatar clothes for “noobs” to help them fit-in, or 8+ year friendships formed and continued through online hangouts in Roblox worlds.
If successful, Roblox has an opportunity to experience growth and engagement more like a content marketplace (YouTube) or social network (Facebook) with the monetization of a game publisher.
Structurally, Roblox’s model has many advantages including efficient content spend, as they only pay developers for games that are successful, game variety to escape a hit-driven model, localization through a global network of developers, free user acquisition through WOM and influencers, increased engagement through social, and a network that reinforces itself as more people interact with more friends, which in turn attracts more developers.
From our analysis including calls with industry experts, user interviews, management meetings and our own model, we believe Roblox is a unique property that has the potential to continue executing well for a base return, with an outlier upside scenario to create a new category at the intersection of social, media and gaming.
Investment Thesis
- The gaming sector is large and growing, with the ubiquity of mobile and mobile payments and growing cultural relevance of eSports. It is expected to reach $116bn globally in 2018, with mobile growing at 15% YoY to $40bn.
- Roblox has a unique business model that can capture a significant portion of the gaming market and has the potential to grow and sustain more like a content marketplace (YouTube) or social network (Facebook) with the monetization engine of a game publisher.
- Efficient content spend: Roblox only pays developers when the game is successful.
- Escape hit-driven model: Millions of active developers reduce risk to create a hit. Game variety is key for players, who play on average 15 unique titles/month, out of the thousands of games available on Roblox
- Global opportunity: local developers can customize content to local regions and trends
- Virality & engagement through social: it is very rare for a game to grow organically with almost no CAC – this is a significant advantage for scale and margins. Further, the social network, identity/avatar and chat functionality keep players active and engaged better than traditional mobile games.
- Content Network: as more players are more engaged through social features and game variety, more developers build for the platform, which in turn creates more game variety, more users, and better developer monetization. Eventually, it becomes very difficult to replicate.
- Great traction with clear wins in near-term roadmap.
Gaming Sector
Historically, investing in the gaming sector has been difficult, with companies plagued with hit-driven, transactional revenue streams with high development costs, expensive distribution and low margins. This was reflected in low multiples, with companies like King trading at 6-7x EBITDA and eventually acquired by Activision for 6x cash flow.
Over the last 2 years, things have changed. Publishers have found ways to extend monetization of their franchise IP through in-app purchases and the rise of eSports. Margins have improved as sales have shifted to digital, and the addressable market has increased significantly with near ubiquity of graphic-rich smartphones. The winners so far are companies like Activision, which are following a Disney/Netflix playbook of masterfully monetizing, extending and creating high-quality IP and controlling distribution channels. Activision now trades at 19x forward EBITDA and 7x forward revenue at a $50bn market cap. The global gaming market is expected to reach $116bn this year, with mobile growing at 15% YoY to $40bn in 2018.
Product
Roblox users can play any one of thousands of games published on the platform. Players discover new games through the Roblox app or desktop site. Roblox surfaces game recommendations based on games a user has played, game ratings on the platform, and the number of players actively playing games. Roblox also lets users add friends, which allows them to interact and play games together. Improving game recommendations and strengthening relationships on the platform are key priorities on the company’s roadmap.
Users play games with others on different servers. Once inside a game, users can chat with other players via a public chat tool and can directly message friends. Each game can also have its own set of competitive incentives including public achievement badges and virtual goods that improve gameplay. These incentives reward players for continuing to play games, which drives repeat engagement with the platform.
Game Creation
Creators build games using Roblox Studio, a desktop development environment. It lets users take template game environments and add features and game mechanics. The tool is simple and intuitive yet offers creators infinite flexibility to create and customize games. Once a creator has completed a game in Roblox Studio they can publish directly to all platforms. This is unique and valuable for casual developers.
Social Network
User interviews suggest that Roblox is a place to make friends and spend time with them in the digital world. In fact, it’s the core reason many people decide to stay. For example, in our user interviews, [player], 38, spends most of her Robux buying clothes for noobs to make new friends, and constantly maintains 198 out of the maximum 200 friends, so she can still evaluate new friend requests. [Player 2], 18, has been playing for over 10 years, and it’s the only way she can hang out with her friend who lives in Arizona, who she met on Roblox.
The data also supports the importance of social.
Developer Platform
The game engine is part of the magic of Roblox. Roblox is in an enviable position in the gaming industry as they unlocked a market of indie developers who create content that people love. These devs are considered additive to the core gaming developer community, similar to YouTube creators vs. TV producers.
Developers earn money when players spend Robux to either buy access to the game (rare) or in-app purchases within the game.
Next steps for the developer platform are focused on enabling developers to manage their business by sharing analytics, leaderboards and best practices; improving game quality by releasing high quality, reference, open source games; and adding localization.
With data, we attempted to understand a) the importance of the developer platform to players and b) the breadth and health of the developer ecosystem.
Depth of developer engagement is important to understand. Many developers are becoming more professional, forming mini-studios and working with teams to create quality games. Game quality is clearly important, but even more so as Roblox attracts the +13yr old demo.
Monetization & Margins
Roblox’s business model is primarily driven by users buying “Robux” to spend on in-app purchases, games, and avatar customizations. Robux are also recycled in the system as developers use earned Robux to further advertise their games.
The model is profitable as Roblox benefits from very low user acquisition costs and efficient content development costs.
There are many positive characteristics of Roblox monetization behavior. As users age, more convert to paying users, and they spend more over time. Once a user becomes a paying user, they are significantly better retained as players, and also continue purchasing at a very steady rate.
Team
Roblox was founded in 2005 by David Baszucki. David is a mission-driven CEO who has nurtured the Roblox community from the early days. Prior to Roblox, Baszucki was the Founder & CEO of Knowledge Revolution, a 2D and 3D motion simulation software developer and distributor. In 1999, the MacNeal-Schwendler Corporation (MSC) acquired Knowledge Revolution for $19 million, and Baszucki became a VP & General Manager. After a few years at MSC he left to become an angel investor (most notably dealix.com and friendster.com) before founding Roblox. Early in his career David was a Software Engineer at ROLM Corporation and a Product Manager at Communication Intelligence Corporation. He has a BSEE in Electrical Engineering from Stanford University.
Summary
We recommend investing $50M into Roblox. From our analysis, including calls with industry experts, user interviews, management meetings and our own model, we believe Roblox is a unique property that has the potential to continue executing well for a base return, with an outlier upside scenario to create a new category at the intersection of social, media and gaming.
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