Transcend Fund debuted in 2020 as a game-focused venture capital fund, and it has turned out to be one of the top performers among funds created that year, according to Pitchbook.
The San Francisco-based fund is doubling down on games and benefiting from the rise in games in popular culture and the growth of game platforms and their monetization opportunities. Transcend has already closed on a second fund and 100% of the LPs in Transcend I signed on to Transcend II.
And recent reports from McKinsey, Goldman Sachs, Morgan Stanley, and Citibank underscore the key role of games in the multi-trillion-dollar potential of the metaverse.
Transcend Fund I scored in the top quartile of returns for all 2020 vintage venture funds, according to both Pitchbook and Cambridge Associates. And the debut fund’s invested rate of return exceeded the top 5% benchmarks for Q1 2022. That’s encouraging considering it is a scary time for VCs.
Back in August, the digital entertainment-focused venture firm added Brett Krause as managing director. He was the former chief investment officer for FunPlus. Krause was also the former president of JPMorgan Chase China and managing director of the early-stage venture capital firm PurpleSky Capital. Krause is based in Zug, Switzerland.
“The performance of our fund has been exemplary,” said Shanti Bergel, managing director and founder of the fund. “It has done extremely well. We have done in the upper 5% for funds that started in 2020. We’re very pleased.”
Krause has invested in streaming platforms at Funplus and he focused on strategic investments like helping build studios and licensing intellectual property.
“I’m much more interested in being involved in this type of business,” Krause said. “I like helping and watching and supporting portfolio companies. The advantage this fund has is all of the partners have experience running game companies and building games.”
Last year, Andrew Sheppard, former president of Kabam Studios, joined Transcend Fund as a managing director. Sheppard has more than 20 years of experience in game companies such as Electronic Arts, Gamespot, Gree, and Rakuten Games.
That means that all of Transcend Fund’s leaders have experience operating game companies, Bergel said. Bergel, a 30-year veteran of gaming, founded the fund in 2020 with a focus on teaming up with accomplished entrepreneurs to transcend the boundaries of video games and digital media.
He noted that some analysts estimate the video game industry will generate over $500 billion by 2028 and recent reports from McKinsey and Goldman Sachs note the key role of games in the multi-trillion dollar potential of the metaverse.
According to Pitchbook data, Transcend’s first fund is already in the top quartile of returns for all 2020vintage venture funds. In two years, Transcend has built an industry-leading portfolio of nearly 30 companies including one unicorn and the creators of several of the most hotly anticipated titles in thespace.
Transcend also employs finance director Andrew Crankshaw, who served for 12 years as finance director at Atomico, one of the largest venture capital funds in Europe; senior associate Sikander Chahal, who has a background in competitive gaming as well as finance, M&A, and game development advisory; Lirui Ding, a former esports professional and consultant who worked at the strategy and corporate development department at Activision Blizzard; and Naheda Noori, an expert in mobile app services who formerly worked at Miniclip.
“The past two years have been incredible,” Sheppard said. “It is deeply satisfying to see the firm’s focus on founders, team building, and fund operations really paying off. Our performance to date speaks for itself and we are only getting started in our second Fund. As investors that have spent decades building game companies, we are very excited for the next chapter.”
The fund has invested in Thatgamecompany, Possibility Space, Polygon, Singularity 6, Laguna Games,Gardens, Roboto, Venly, IndiGG, Big Run, C2X, Nifty Games, Treehouse Games, Stress Level Zero,Maestro, Fun Country, Arcadia, Trioscope, Bunch, Heroic Story, Kings of Games, Spatial, Goss, Ruckus andseveral unannounced new ventures. Thatgamecompany, headed by Journey co-creator Jenova Chen, raised $160 million recently.
Weak macroeconomic outlook
Cambridge Associates noted that new VC firms are consistently among the top 10 performers in the asset class.
Of course, the funding environment has slowed down with the onset of a global downturn, a crypto winter, an NFT price crash, a stock market crash, the war in Ukraine and high inflation.
“It was hot then and it’s less hot now. That’s obvious. What does it mean?” Bergel said. “If you pull all the way back, there are larger cycles at play. There are financial cycles, hardware cycles, and the things that impact the actual opportunity space that games play in. There are a lot of growth factors that are on a long upward trajectory.”
Games are becoming the dominant form of entertainment, he said, and more investors are turning to the games sector.
“Games and the economy operate on the same vector sometimes, but not always,” Bergel said. “The overall core of the business is monstrously strong. We’re just as excited today to be investing in games and digital entertainment. I don’t think there are many places that grow at this rate. Games are arguably at the intersection of culture and technology.”
The net result, he said, is Bergel’s enthusiasm for games hasn’t subsided.
Krause agreed all of the long-term growth trajectories are still intact.
“All the things which are headwinds for the global economy over the next 18 months have imminent impact for a fresh startup,” Krause said. “We can’t be complacent. It could last longer than we expect. But there are great opportunities that we shouldn’t miss in the next 18 months.”
As for sectors, Bergel said esports is interesting as a cultural trend that is helping to drive games forward.
“Esports has been a phenomenon, no doubt,” he said. “But as we look at it today, some of the opportunities that might have been attractive five years ago, such as investing in esports teams, are only accessible in a time machine. It’s a harder business to break into at that level.”
Bergel said his team gets more excited about cross-platform franchise development, as is being done at Singularity 6, a Los Angeles startup that came out of Riot Games.
Bergel is also optimistic about VR companies like Stress Level Zero, maker of the Bonelab game that just debuted.
“If you can find the next League of Legends or the next Valorant, that’s the most interesting thing in the esports space,” Krause said. “I don’t think the terms have exciting growth paths for the time being. If you’re a great player, you can make interesting money. But the lifespan of that is pretty short. The only thing that makes interesting money is long-term franchises.”
The war for talent and regional advantages
Just a few months ago, we saw a huge war for talent in the game industry.
On a macro level, Bergel said the trend is for companies to cut back on staff now rather than pursue lots of scarce game developers. Certain kinds of engineers are still at a premium, and the metaverse category will remain hot in terms of the talent wars. But that is going to happen at the same time we see massive layoffs, he said.
As for the hot regions like Turkey and Finland, Bergel said that the appreciation for good local talent is high.
Some years ago, Sheppard was flying around the world to set up studios for Kabam in the hottest regions for game development.
It’s not just about outsourcing or finding areas for low costs anymore, Bergel said. Places like India, Southeast Asia, and Latin America have become real talent bases and real markets in their own right, Bergel said. Mobile is strong in Finland. Social casino games are hot in Israel. And so on.
“The regional variation of the industry is very interesting,” Bergel said.
Krause said that Southeast Asia is definitely interesting. Places like Vietnam, Indonesia, and Malaysia are all seriously competing with each other to dive into the hot game development trends first.
“There is definitely a lot of innovation happening in regions, and we have to learn how to prioritize,” Krause said.
The metaverse and blockchain
I also asked Bergel about the metaverse and blockchain investments. Here’s what he said in an email.
Transcend is known as an audience-first fund. The audience is the one true compass in all of entertainment. Our approach is rooted in decades of direct experience in the games industry reading that compass and building for those audiences. Billions in revenue experience across defining franchises and entertainment companies informs our first principles approach to early stage investing in general, including the sectors you mention.The metaverse has recently become a powerful narrative that blends some existing industry dynamics such as social gameplay and UGC with longer term visions like interoperability. Our investment thesis however is driven by what audiences care about and will dedicate time to. Transcend works with entrepreneurs intent on creating something distinct and momentous for a passionate global audience. So, while we welcome big visions and ambition, it is always with an eye to how it plays against the larger backdrop of audience growth and change. For us, the democratization of participation brought about by innovation in technology, community, and interaction models are the engine. The metaverse is just one of the possible destinations but, along the way, we expect to see an increasing number of game communities in our portfolio become significant platforms unto themselves.Blockchain is an interesting tool that, in the hands of talented craftspeople, can be used to explore new use cases. Independently verifiable ownership brings with it the promise of potentially disruptive economic and interaction models. It is early days however and our investments in the sector have tended toward the infrastructure necessary to create experiences smooth and enjoyable enough to build an audience sizable enough to fulfill the promise.– Shanti Bergel