Deal focus: Chiratae sees 43x return on gaming start-up

Chiratae Ventures was the first investor in PlaySimple in 2014, when the Bengaluru-based game studio had only one game to its credit and $500 of total accumulated revenue. The founding team learned the game industry ropes by popularizing titles for Zynga, a US-based studio, but had no experience running the show themselves. Chiratae, then known as IDG Ventures India, paid $500,000 for a 13% stake.

In the first 18 months, a couple more games were produced, but most of the traction was in establishing internal systems to improve efficiency and professionalize operations. By 2016, SAIF Partners – now Elevation Capital – was confident enough to invest $3.2 million. Chiratae re-upped with another $800,000, taking its stake to 15%. That was PlaySimple's last investment, bringing its total funding to $4.5 million.

Their faith has paid off dramatically with Swedish gaming heavyweight Modern Times Group's (MTG) recent acquisition of the company for about $360 million. Both Elevation and Chiratae exited, with the latter achieving a net return of 43x. Transaction costs amounted to about 5% of the proceeds. Of Chiratae's 38 exits to date, this is the largest by multiple and the third largest by quantum.

It was also the first independent investment by Karthik Prabhakar, an executive director at Chiratae, who at the time was a senior associate only three years out of studies at Indian Institute of Management Bangalore.

"I keep asking myself, how do I repeat it. It's so hard, I would be fooling myself if I said I know the trick. In hindsight, what works is having a product thesis. The gaming industry is fairly acquisitive in nature, so that played into it. And, it sounds cliché, but the most important thing is betting on the team," says Prabhakar.

"The team did not have established skills of building a new game and scaling that up, which is very different from scaling an existing game. They did demonstrate a plan as to how they would go about it. So, it was more about interactions and engagement to understand how thoughtful their approach was. Whether it's right or wrong, nobody knows. It was a leap of faith."

The early years of the investment were an exercise in patience and honing an analytical approach to an industry often characterized by scattershot strategies that hope to deliver surprise hits among many misses.

Much of this work involved creating modular game design and marketing architecture to ensure that new products can be launched and audience-tested at lower costs, both in terms of time and capital. The data generated by this approach not only informed more efficient product creation but became an asset of proprietary industry insight all its own.

"Although there were very tough times when the business was kind of stagnant, the team took a conscious decision to build a very solid foundation, get the team in place and make sure it was well trained with internal tools to handle rapid scale," says Prabhakar. "They built those foundational blocks strong, which helped when they started pressing the accelerator."

Things started clicking around late-2018 to 2019, when PlaySimple hit an ongoing streak of 100% year-on-year growth. A number of would-be investors approached the company during this period, but the founders were adamant about not diluting their ownership or unnecessarily flooding operational budgets. Excessive spending on advertising despite meager practical returns is an all-too-common pitfall in the gaming space.

Revenue is said to have improved 144% during the 2020 calendar year to about $83 million, while adjusted EBITDA reached $18 million. For the first half of 2021, revenue and EBITDA are projected to be $60-64 million and $17-18 million, respectively, amounting to year-on-year gains of 82% and 140%. By the time of MTG's acquisition, the company had achieved 75 million installs and had 1.9 million daily active users.

For MTG, PlaySimple's appeal was rooted in access to the massive Indian gaming market and the chance to make a unique complementary addition to its existing social-casual portfolio. PlaySimple specializes in English-language word games with successful titles including the likes of Daily Theme Crossword, Word Trip, and Word Wars. About 80% of the user base is female. There are plans to branch into card games, with two of four pipeline developments in that category.

For Chiratae, the deal materializes an endgame that was contemplated as early as 2010, when the VC firm invested in Sourcebits, a third-party mobile app developer for gaming studio clients. Sourcebits was contemplating developing a game studio itself – a long favored niche for Chiratae – but the start-up experienced some setbacks and was eventually exited to Globo, a London-listed strategic, in 2014.

"If you can build products as an outsource agency to an international player that is able to demonstrate growth, and the outsource business has buyers, what if you did a full stack, building your own products and a business that creates a profitable cash cow," says Prabhakar. "Then there are clearly buyers in the international market for such an asset. That was the investment thesis."

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• Topics
• South Asia
• Consumer
• Media
• Exits
• Trade sale
• India
• Chiratae Ventures
• SAIF Partners
• gaming