The reckoning may be still to come for various other Softbank-backed companies. Will just take a while for them to run out of cash.
For example, Improbable also got 500M from Softbank a few years ago, and makes 500k (!) revenue at a loss of 50M [0] and cost of revenue of 10M. It's insane.
There's nothing wrong in theory with a VC making a large investment into a company which has a long R&D road ahead of it with effectively zero revenue before they launch a revolutionary product.
It's amazing if moonshot companies with all-star teams can raise a lot of money on good terms so they can get to work on solving hard problems which have great long-term fundamentals.
A gaming engine just really doesn't seem to fit that mold.
And for most problems you really can split up the roadmap to be able to launch earlier, make more incremental progress toward your overarching goal, reduce the size of the initial raise, and ensure you are iterating and learning along the way through actual customer contact, not working away in a dark room disconnected from the market realities.
> A gaming engine just really doesn't seem to fit that mold
Even more to your point, Improbable doesn't make a full game engine...they make SpatialOS.
"SpatialOS is a cloud platform that provides hosting, online services, tools and a multiserver networking stack for developing and operating your multiplayer game, using any engine."
Also several projects using SpatialOS have folded recently
The gaming engine is their current bread and butter but they're betting their future on lots of general simulation contracts, particularly in the defence sector.
In other words, it's a big money play to scam the government for Military-Industrial Complex pork, bankrolled by foreign investors because it's the 21st Century and nothing has to make sense anymore.
As a long time critic of military spending, at least I would call it. A plus that most of that spending is receipts to some other US business no matter how regressive those transfers may be.
But once it can be arbitraged by international capital, and leeching of foreign governments who can't control their own spending becomes a business we have hit full insanity.
Those are bad examples because they didn't need huge unprofitable upfront investments. Unreal engine, for example, was a side benefit of creating a game that was itself profitable, and then they realized they could make additional money from licensing the engine, and did so. It simply doesn't take massive upfront independent investment to develop game engines, and the market is already crowded with all sorts of good options some of which are even developed on a volunteer basis (like Minecraft which originally used the open source LWJGL).
This comment doesn't really make sense to me. To me, (paraphrasing heavily), the comment two tiers above you is trying to say, "The upside is not high enough as typical moonshot companies to raise as much as they did. Plus, they could have probably broken the problem down further."
The guy above you responds: "But these game engines had very high upside."
And you respond: "But those game engines didn't need high upfront investment. And none really do, you can make them cheaply."
That wasn't the point of the guy above. His point is, "There may be enough upside to building a really good game engine." The hypothesis of this company is by spending a lot of money building a really good game engine, they can get upside like Unreal. Whether or not that hypothesis makes sense is entirely a different discussion than: "Is there enough upside to justify this hypothesis", the question at hand.
That's not what the poster you're responding to said.
Ruby on Rails was extracted from the creation of a website, basecamp. Once they were done creating it they realized they could extract a new framework out of it and did so.
This has multiple benefits.
1. profitable from the get go
2. design geared towards solving actual problems
What the person above you is saying is that the Unreal Engine was created in the same manner, whereas SpatialOS was not. And because of that, the risk was much lower.
I agree with you, but why was the person above me commenting on risk?
While it is true that those things happened with Unreal Engine, it was sideways from the discussion that was occurring, but presented as a refutation. Risk has nothing to do with the comment two tier above me. I'm just pointing that out.
The idea that risk isn't a part of the discussion about why a company is laying off 40% of its work force doesn't seem like it has much merit.
The responses made sense, and they've been explained to you. You're just casting about trying to come up with some way to dismiss the other persons point while intellectualizing it for the HN audience. If we were on reddit your tone would be some passive aggressive wiffle waffle about experience or intelligence.
The tone might change based upon the site, but the inaneness of the person behind them doesn't.
Hey man, I still don't think you are understanding my point. This comment is actually pretty interesting:
> if it had been unity or unreal engine, would you have changed your opinion?
To me (again, to me. You could have a different interpretation, that's fine), the conversation was no longer about Improbable. It's about VC. The guy above him is arguing that a game engine does not have long term payoffs to justify the investments Fair got. But if they had made Unreal Engine, maybe it would have been worth it. It's not a bad comparison at all- Unreal Engine was made in a non-risky way, but if they HAD made it in a risky way, it might have been worth it to do.
> The idea that risk isn't a part of the discussion about why a company is laying off 40% of its work force doesn't seem like it has much merit.
When I commented, we were three degrees of separation away from Fair. So while this happened on a post about Fair, I just didn't get why it was relevant. But I see how my tone could have came off as dismissive. In truth I would rather have seen people debate the quoted comment, which is interesting, but the discussion got sidetracked, and I was trying to bring it back to the main point- I see how it could have been seen as dismissive for sure.
Your comment kind of bugs me. It's one line of content and four of person attacks. You've said that the responses have been explained, but you spent way more time insulting me than explaining. You said my tone would have been condescending if we were on Reddit, but you directly insulted me multiple times, and we're not on Reddit. Read your comment back to yourself. How would you feel if you received that? Are you proud of saying that to someone? I seriously don't think I said anything pointless. Even if it was pointless, there are way more respectful ways to say it, I was feeling down today and you made me feel worse.
How does it make sense to take massive risks when doing so is simply not necessary? That's very rarely going to be the correct play. It does not take a massive risk (i.e. huge upfront financial investment) to make a game engine, so why in the world would you do so? And why would anyone give you the money to do so?
Contrast with something like self-driving cars, which do require unbelievably massive upfront investments and still aren't solved satisfactorily yet, despite the investment of untold tens of billions of dollars that no one has yet recouped a cent of.
It never ceases to amaze me the depth of the world economy, and how seemingly small niches can add up to billion dollar markets.
But $500mm is a tremendous amount of money to raise pre-revenue, which would really only be appropriate in an area with tremendous barriers to entry. Gaming physics, AI, map generation, etc. all seem like exactly the kind of thing that you can break apart into smaller pieces to get to market quickly and iteratively.
It's not like a molecule that needs to through Phase 3 trials, or a rocket which needs to make orbit, or something with a huge CapEx component. Even rockets can scale up from computer models, to scale models, to rough prototypes, etc.
I wouldn't go as far as to say the Improbable deal made sense, but your analysis here is pretty shallow.
SpatialOS isn't really something that can be built as a series of libraries a la carte and individually proven. It's an opinionated and tightly integrated approach to solving a very difficult problem, and the entire point is the turnkey platform. Either it's ready to build notable games on, or it's not.
Further, Improbable wants developers to pull the trigger on spending millions or even tens of millions developing titles for the platform. Investing this much in a platform that fails is an existential crisis for a games company. There's no way your half built SpatialOS game can run anywhere else.
Therefore, confidence is key, and raising an eye watering amount of money is basically table stakes to be taken seriously.
Whether it's worth solving a problem that can't be broken down in viable independent chunks is another matter (I have no interest in that personally). I'm not saying I'd invest at that valuation either. But it's certainly not as straight forward as you seem to be claiming.
Actually I saw a presentation about pharmacy companies already aquiring startups at Phase 1 or even after pre-clinical trials, so VC money isn't needed post Phase 1 generally.
IBM didn't see MS coming, MS didn't see Google coming, Google didn't see FB coming, etc.
The beauty of this is that things look done and then someone see a new niche and it turns out it wasn't a niche, but something millions of people wanted.
I don’t think so, because game engines shouldn’t need $500 million to prove themselves. If you could make the case that the software was irreducibly complex, then maybe.
More generally, just because Unity and Epic are worth more now, doesn’t mean it would have been a good idea to pour money in back then. Hindsight isn’t an actionable heuristic.
SpatialOS isn't building a 'game engine' though, it's something that plugs into Unity/Epic, with a service whose revenue model extends beyond the initial game development to support services for the whole lifespan of the game.
As far as I can tell, throwing 500m at either Unity nor the Unreal Engine wouldn’t be a good allocation of money either, although better than staying in Softbank’s hands.
Ultimately investors in some of these research projects don't recoup their money. They used to do it because it was the prevailing culture of the day, e.g. see Xerox PARC or Bell Labs. Today it seems they have to get tricked into it.
Recently I've heard/read the Softbank guru described as addicted to risk. He was backed by $45bil in Saudi money after a 45 minute meeting, so maybe he is convincing or knows what he's about, but the risk factor is clear. Maybe one of the investments takes off long term but there are billions gone already.
Hah. I have wondered about this particular one a fair bit.
First, it seems there is just not market for their product that could possibly support the valuation in the near future. Second, by virtue of already being so large a company, there is no room for evaluation of new small projects that would change direction. Anything must immediately have enough potential to generate millions in revenue.
Runway is maybe 5 years, so they got until then to produce enough revenue to raise more funding or become profitable. IIRC they sold approximately 50% of the company for the 500M round. Maybe I got this one completely wrong, but I just don't see how this can go well. What an incredibly inefficient allocation of capital for the ecosystem. Imagine giving 100 teams 5M each instead.
Respectfully it may have been above their risk tolerance, and of course you being successful with it doesn't make it a prudent investment. That's the "I won the lottery so everyone should have played the lottery" thing.
Hmm, don’t they also have an enterprise/Defence sector? I imagine that would generate more stable revenue
It seems natural that they video games business is pretty spikey in terms of revenue, although it’s worrying there isn’t a AAA game that’s using their technology yet, seems still unproven.
> While investment rose, Improbable’s turnover dived from £7.8m in 2017 to just £579,859 the next year.
> “Our revenue will be driven by games built on SpatialOS entering the market,” the Improbable spokesperson said. “As such, our commercial progress is not reflected by our revenues. Spikes in revenue will occur along the way related to specific contracts, but our core business is connected to game releases.”
> Despite mounting losses and falling revenues, Improbable is in no danger of running into trouble, thanks to the huge cash injection from SoftBank. Improbable had £255.4m of cash in the bank at the end of the accounting period and £360m of assets, including a £97m portfolio of bonds and treasury notes.
This isn't totally unexpected is it? Their revenue is tied to future game development being done using their platform.
The drop could easily have been due to Unity changing the terms to exclude SpatialOS, which has now been resolved...
The only thing that would be concerning if there were signs no games were using it or didn't need it. Not that revenue isn't hundreds of millions during the R&D phase.
If Unity ToS and compatability is a like 90% revenue killer, how sustainable is this model? Are they that big a deal that new development will shift to their platform?
For example, Improbable also got 500M from Softbank a few years ago, and makes 500k (!) revenue at a loss of 50M [0] and cost of revenue of 10M. It's insane.
[0] https://uk.finance.yahoo.com/news/softbank-backed-gaming-sta...?
edit: for anyone interested in the details, look at the most recent group accounts file here: https://beta.companieshouse.gov.uk/company/08070525/filing-h...