Josh Chapman is a Co-Founder and Partner at Konvoy Ventures, a Denver-based venture firm with a focus on early-stage companies in the video gaming industry. Before founding Konvoy, Josh built a career in banking as a Product Analyst for BlackRock and then as a Sales and Trading professional at Morgan Stanley. To date, Konvoy has invested in 17 companies from its $10.8M Fund I.
Most recently, Konvoy Ventures led a Seed round in Lootcakes, a network allowing gamers to sell their gaming preferences and purchasing data in exchange for rewards and in-game currency.
You can find Josh on LinkedIn here.
You can follow Josh’s weekly newsletter dedicated to developments in the video gaming industry here.
KEY THEMES:
Investing in eSports and video gaming
Investing in eSports and video gaming isn't as centralized as B2B SaaS in San Francisco or finance in New York City.
Some of the largest gaming companies (picks and shovels) are located across the country in places like Raleigh, Portland, Austin, and Seattle.
Picking founders
The key to identifying outstanding talent in the video gaming industry is to find the founders and operators that live and breathe video games.
“The truth of the matter is that many of the fundamentals of investing don't change no matter what industry you’re in. A founder’s ability to execute is where the alpha is truly created.”
Investing across all geographies
One of the greatest drivers of higher valuations in larger cities is higher costs that put pressure on burn and pressure on the speed (and scale) of execution.
Geography is becoming less important as distributed teams and remote work become ubiquitous.
“If your product is truly better, it doesn’t matter if your startup is headquartered in Cupertino or not. A founder can always jump on a flight to speak with venture investors in the Bay.”
The future of video gaming
Video gaming is the key to the future of digital communities. People are coming to gaming for content, entertainment, influence, and community.
People are now socializing through video games the same way they would at a bar, a park, or a basketball court.
Important lessons
Like most other emerging industries, venture capital is characterized by a cycle of growth, a cleanse, then further maturation. The cycle repeats as the industry continues to mature.
A well maintained personal CRM can be extremely useful when first starting in the venture capital industry.
Want to stay up to date with all Non-Target interviews? Subscribe below!
Can you tell me a little bit about Konvoy Ventures?
I’m one of the founding partners here at Konvoy Ventures. We’re on Fund I, writing $250K to $500K checks and we’ve made a total of 17 investments so far. When making investments, we have led about 40% of the deals we have done.
Within the venture space, there are typically three different approaches you can take as an investor: There’s regional focused, stage focused, and industry focused. We are industry and stage focused, but not region focused. We don't have any investments in Colorado, yet. We're still waiting for the right one. Most of our portfolio companies reside in North America with 4 in Europe and Israel. Our investment focus is centered on video gaming, specifically the technology and infrastructure side (i.e. not game studios or esports teams).
There are three different ways to invest in video gaming: You can invest into video games directly in hopes of financing the next Halo, League of Legends, or Counter-Strike. Fortnight and dozens of other video games have proven that this model does work. But, we don’t focus on this part of the market given the capital intensity and risks involved. The second way to invest in this space is by investing in an esports team, similar to investing in the Denver Broncos. These teams include ones like FaZe Clan, Cloud9, or Team Liquid. This is also not our focus given the high valuations in this part of the market. The third way is to invest in the infrastructure “picks and shovels”, and that’s what we do. We’re looking to invest in the next generation of gaming startups that mimic businesses like Unity, Unreal, Twitch, or Discord.
Gaming is the fastest growing area of entertainment. At ~$152B, the video gaming market is more than twice the size of music ($42B) and film ($20B) combined. Video gaming is also growing faster than gambling. Right now, there are 2.6 billion gamers around the world. COVID has now added hundreds of millions of gamers to the ecosystem across mobile, console, and PC.
How did you get involved in venture investing?
Before getting into venture, I was a lifelong gamer with a career in finance at BlackRock and Morgan Stanley. I wanted to find a way to merge my professional expertise with my passion for the gaming industry. To that end, several years ago, I started working on launching my own firm. It took a lot of work to launch Fund I, yet I’m grateful for where we are today. I started the firm with my brother (Jason Chapman) and a good friend from middle school (Jackson Vaughan).
What made you choose Denver as the place to start Konvoy?
If I was going to take the risk to start my own firm, I was going to do it in a city that I enjoyed. Thankfully, video gaming is a very geographically decentralized industry. It's happening all over. In fact, some of the largest gaming companies are in cities like Raleigh, Portland, Austin, Seattle, and many other places around the globe. Therefore, being an investor in the space isn't as centralized as perhaps B2B SaaS in Silicon Valley, or FinTech in New York City, or Hollywood in Los Angeles. I used the decentralized nature of the industry as an opportunity to live where I wanted to live. It also helps that I like to ski and play golf.
What was it like raising a fund as a first time manager?
It was certainly challenging. The way we approached the fundraising process for the first fund was to be incredibly transparent and clear about who we were, what our strategy was, and what we planned to do with the capital. This remains very important to us and critical to building a firm for the long term.
To that end, we were clear that this was our first fund, no track record, and we didn’t have 20+ years of experience working at a top tier VC firm. This transparency resonated with many LPs. Then on the back of that, we would explain that we have industry expertise and a differentiated thesis. Very few firms are exclusively focused on our segment of the gaming market. And counterintuitively, being a little bit younger than the average GP in venture is actually an asset in our industry. That’s incredibly unique to our industry of focus. If I was launching a multifamily real estate fund, that would make less sense. But in video gaming, it's an emerging, fast-growing industry that skews younger. Therefore, being a little bit younger as an investment manager is actually an asset.
As a team, we all actively play games on a weekly basis with our friends and as a team. As an investor in the space, it’s important that we live and breathe the industry. We set out to professionally manage a venture fund that focused on an industry that we know very well. It was crucial that we properly conveyed that.
Do you think that your specific vertical was an asset when pitching LPs?
Absolutely. Having an industry focus was paramount to us raising capital, we would not have been able to do it without it.
Is there anything you immediately look for in a company or founder? Do you have a 10-second gut check?
As is true of any fast-growing industry, there are lots of tourist investors and tourist founders. So one of the things we look for immediately has to do with whether the founder has an authentic interest in the video gaming industry. It’s also a huge plus if they come directly from the video gaming industry, though it’s not always necessary. That can simply be a mix of professional and personal involvement. So, for example, if I talk about something like Counter-Strike and they don't know what I'm talking about, that's an immediate red flag. That's a very quick one, especially in this space.
We talk a lot about the complexities and the intricacies of the video gaming industry, and how it takes a long time to understand. Yet the truth of the matter is that many of the fundamentals of investing don't change no matter what industry you’re in. A founder’s ability to execute is where the alpha is truly created. We often ask ourselves questions like, “Do they really know gaming?”, “Are they really from this industry?”, “Are they passionate enough about this business to put it all on the line?”, and “Do they have what it takes to build an amazing enterprise?”
We have invested in 17 companies in the last 18 months. We’re thrilled to be partnered with these founders as they continue to build and grow.
How do you source investments located outside the United States? What does that process look like?
We receive deal flow from our founder network, LP network, industry relationships, and cold outreach as a result of the content we put out. We're fortunate enough to have a group of LPs and advisors that are very well connected in the video gaming space. So, we see deals from across the world, many of which find us. Ultimately, the best founders are looking for the most helpful capital, and we have an edge by being industry focused. So, that gives us the opportunity to be as helpful as possible while having conversations with founders from around the world.
From those conversations and the investments we’ve made so far, I learned that there are pockets of incredible talent everywhere. We see impressive talent in places like Israel, the Nordics, Vancouver, Seattle, LA, and Austin.
As a geography-agnostic firm, do you notice a large difference in valuations between regions?
Valuations are typically higher in places like SF, NYC, or LA. One positive effect over recent months is that valuations have come down at the Seed stage around 30% to 50% across the board. So, yes, valuations can be all over the board when investing irrespective of location. It certainly affects our investment decision process.
Frankly, if we're looking at two deals that are competing in the same space, they both might have great teams and great traction. If one is valued at $4M pre-money and the other is valued at $9M pre-money, you better believe I'm taking a very hard look at the valuation. After all, if I underwrite each of these investments at a minimum of 10X, one is going to get there a lot faster (better for my IRR). But that's the case with any investment, right? Yet sometimes companies are priced higher because they are truly more valuable.
Despite everything that’s happening with valuations in the public and private markets at the moment, I believe in the free market and its process. In the long run, I believe that things price out accurately based on the laws of supply and demand, as well as the principles of macro and micro economics.
Do you believe that the geography, context, or “intangibles” about a startup community can make a difference?
I would say in more expensive cities, you have more expensive costs. That puts pressure on burn and pressure on execution. In less expensive cities, you have lower costs which allows for additional runway. There are a couple reasons why many of the largest cities are so expensive [higher costs and valuations]: For one, in bigger hubs, a higher volume of talent is spinning out of bigger and (sometimes) better companies. So your question about the power of geography is very valid. I think that, in a digitally-connected world where remote work is more prevalent, your market isn’t going to matter as much. Geography will never be completely insignificant, but it will certainly matter less than it has in the past.
For example, if you were to look back at the tech industry in 1995, almost all the major tech companies were located in San Francisco. Fast forward to 2005, most tech companies were located in San Francisco, with a few being built in New York City. Then, if you look at the period of time between 2010 and 2015, all of the sudden you have all these other markets. Techstars started accelerating companies in metro areas around the country and YCombinator became really hot. Things began spinning out to different markets like Denver, Seattle, and Chicago. Now, in 2020, we have emerging markets all over the country.
I believe there’s a big push towards distributed communities. For example, a venture firm in San Antonio might have the funds and the expertise to help a local SaaS company in a different region reach $50M ARR. Because, if your product is truly better, it doesn’t matter if your startup is headquartered in Cupertino or not. A founder can always jump on a flight to speak with venture investors in the Bay.
That’s one of the things that we get asked a lot as Denver-based investors, “Does that impact deal flow?” And, it really doesn’t. As a firm, we’ve never seen a deal, wanted to invest, and not been able to. Have there been deals that we haven’t seen? Absolutely. That will forever be the case. The thought of missing the next billion-dollar startup without even having the chance to say “no”; that's what keeps every VC up at night. That’s why one of the biggest parts of being a venture investor is making the deal sourcing process as efficient and broad as possible. You want to give yourself every chance possible at a shot on goal.
But, I also think it’s important to look at what’s happening in the venture market as the VC asset class matures. People forget that this is still one of the newest asset classes on the planet, alongside only a few other things like ETFs or some exotic derivative securities. As one of the newer asset classes, VC is still maturing and I think it’s getting to a great point. In 2005, about $10B in venture capital investments were made per quarter. Now, it’s at about $60B per quarter. With this increase in capital invested, the VC asset class has become more efficient, more distributed, and more professional. At the same time, we’re ironing out a lot of the bad practices and pushing out bad actors. That’s true of any new industry, right? There’s always a growth phase, then a cleanse, then further maturation, and the cycle repeats. That’s not only a reflection of human behavior, but also of capital markets behavior.
How do you see the gaming space evolving over the next decade?
That’s a big question. Video gaming is a key tenant of the future of entertainment, period. It's twice as big as the music and film industries, combined. It’s been growing at a rate of 9-10% a year for the past 12 years. During the last two recessions, video gaming thrived. And it will continue to thrive. There’s an incredible amount of data proving the success of the industry today.
However, this doesn’t only pertain to digital entertainment. We're filling stadiums. We're filling amusement parks. We’ve got LAN centers. We’ve got TwitchCon and BlizzCon. Video gaming is an in-person and digital entertainment medium.
As we get closer to a Ready Player One world, video gaming has a key role to play. What I find really interesting is that video gaming is attracting attention and talent from sports, entertainment, media, movies, influencers, and more. People are coming to gaming for content, for entertainment, for influence, and for community. And that’s one of the most important points — video gaming is key to the future of digital communities.
Right now, people already participate in communities through things like Instagram or Facebook. This is phase one of the metaverse. Phase two is what’s happening in gaming right now. Games like Grand Theft Auto, Call of Duty: Warzone, and Fortnight are the settings for communities to form. Yes they’re video games, but they’re so much more than that. You have people playing video games with four friends, three times a week, for four hours at a time. That’s now their park, their bar, or their soccer field. That’s now a key part of their community.
For example, I have several friends that have bought consoles and gaming PCs in the past six months. And, these are the same friends who used to roll their eyes when I would tell them that I was planning to play video games on a Friday night. After a full week, I would much rather relax at home, play three hours of video games with my close friends, and hopefully win in Warzone. That’s an amazing night.
Where do you think the monetization of content is going?
There are going to be quite a few opportunities for monetization. On the consumer side, it's going to be by way of subscription services, in-app purchases, [in-game] cosmetic items, elite club memberships, tournaments, betting, and live events. On the commercial side, (which is our focus) monetization is going to come from things like API and SDK services, B2B enterprise products, anti-cheat software, cloud infrastructure, internet connectivity, and much more.
I don’t think people should be looking to the gaming industry to find new ways of monetizing products and content. If anything, I think that many people in the gaming industry understand that there’s no need to revolutionize pricing. They monetize the same ways that every other business vertical employs pricing — time spent, one-time purchases, value subscriptions, monthly subscriptions, annual renewing subscriptions, etc. That's enough right there. Consumers understand this and as long as they see value, they’ll pay for it. So when people ask how gaming is going to monetize, my response is always that it’s monetizing a lot better than film and music are at the moment. Obviously gaming is doing something right.
My point is that there’s no need to create a new playbook. There are a lot of smart people that already know how to make money in this industry. They’re just going to keep doing what they're doing. Keep in mind that the video game industry is over 50 years old at this point.
What's one thing about venture you wish you knew when you first started out?
That's an interesting question. I wish I'd done a better job in the beginning at building my own CRM. I think over time, it's hard to keep track of all the relationships and connections. At this point, we've talked to hundreds and hundreds of firms. I just wish I had taken better notes early on.
What’s your favorite video game right now?
My favorite video game right now is definitely Call of Duty: Warzone. I am absolutely loving that game. Regardless of what my friends say about my skill-level in Warzone, I think I’m doing incredible at that game [laughs].