Xbox vet Ed Fries on blockchain, life as a venture capitalist and the run of extraordinary gaming deals

GW: That was something I got a kick out of, watching all the Xbox 20^th anniversary celebrations last year. So many of them looked like Halo trailers.

EF: It’s interesting to speculate where we would be today if that one game didn’t happen.

GW: I can honestly say I have no idea.

EF: Exactly. It’s hard to predict the future, even in the past tense.

GW: What’s the effect that you see crypto and Web 3.0 having on the industry?

EF: It’s bringing in a whole new class of venture funds, for one thing. New funders are coming in, and some of the existing venture funds are raising special crypto funds. You’re getting this crossover between the game and crypto investors, and then you have a bunch of crypto-specific funds that are looking at gaming as a way to invest. It’s all getting blended together, and that’s causing more startups to happen.

Some of those startups are very crypto-focused and are kind of learning how to make a game. Those don’t tend to be the ones that we lean towards. We lean more towards, if we’re gonna make a crypto investment, we want to see a team that’s game developers first, which has a lot of experience making games and wants to make a game first. The crypto stuff is the icing on the cake rather than being the cake itself.

GW: Like those “play-to-earn” guys that were in the news late last year.

EF: There have been a lot of those. I see them in the pitches I get, especially the unsolicited pitches that come into the website. They’ve gone from almost no crypto to almost all crypto in the last six months.

GW: Most of those have seemed really scummy to me.

EF: [laughter] I hear you. It’s the Wild West, and we tread very carefully in that space. One of the good things about having a big portfolio is that you can do a little of everything. The investment we just completed today, which is unannounced, is in a local company that’s focused on Roblox. It’s one of a handful of Roblox-specific investments that we’ve made.

We have a handful of companies that either we invested in because they’re doing some crypto stuff, or more likely, we invested in them before they started to do crypto stuff.

GW: Are you bullish on crypto? 

EF: I’ve learned over the years that predicting the future is really hard. What I have seen is that gaming adopts whatever technologies are hot, and sometimes that works and sometimes it doesn’t. 

If you go back in time a few years ago, investors were super excited about VR. The VR market is actually growing quite well, but it’s still very small compared to our core market. I did see a thing about how they sold more Oculus Quests last year, I think, than Xboxes. I think VR is probably sneaking up on people who dismissed it.

It’s like that with these Web 3.0 crypto technologies. Games go into all technologies and figure out how to use them for entertainment. There are some core ideas when people are building crypto games that I think are really interesting.

One is around object ownership, and in some sense, this has been around for a while. If you look at gun skins in Counter-Strike: Global Offensive, there’s a multi-billion-dollar market of people selling those skins, which are basically textures that apply to guns in Valve’s game. It just wasn’t built before the crypto technologies, but it could just as easily have been built on the blockchain and people could buy and sell them.

Even back in World of Warcraft, there were gold farmers and sellers. People would build powerful characters and sell the accounts they were on. Typically that was frowned on by the companies that ran games like that, but Valve embraced it for CS:GO. I think that’s one reason it’s been so popular, and the blockchain does enable those kinds of things in a more general way. I do think that’s an example of a technology that makes sense in games.

You mentioned “play-to-earn” earlier, which you can see as kind of a natural evolution from games costing $50 to games being “free-to-play,” in quotes, to actually being paid to play games. I think that’s also an area that’s potentially interesting, and there are some core ideas there that can make sense for the games industry to adopt.

GW: Most of my exposure to the general idea so far has been derision from traditional game developers. Making a comparison between WoW account trading and items on the blockchain isn’t a thought I’d arrived at.

EF: It’s a very polarizing element right now, and part of the reason is that it has attracted a scammy element to it. That’s unfortunate.

I also think it’s a complicated thing to understand. It’s got the cryptography, the ledgers, and the mining, but the core ideas that it brings to games aren’t necessarily new.

I’m trying to chart a middle ground here, and support fun games. If crypto adds things that are good for game developers and good for their customers, I think we should pursue them.

GW: What’s the strategy that you pursue at 1Up when you’re choosing a project to invest in?

EF: A little over three years ago, I was approached by one of the big Korean game companies, the makers of the game PUBG [PlayerUnknown’s Battlegrounds]. They were looking for ways to get connected to developers in the West and they thought starting a venture fund might be a good way to do it. They were looking for someone to run that fund and they were willing to put the first funding into it, so they approached me about that.

I had been thinking a lot about [a sense of] community in the game business and about how game developers are often willing to help each other. It’s a super competitive business, but not among game developers, right? The marketplace is competitive, but that breeds kind of a camaraderie among game developers. It’s them against the difficulty of the market and the challenge of making these products rather than against each other.

I was thinking about what PUBG‘s goals were, about wanting to reach a lot of developers. My own thoughts were, three years ago, people were pretty nervous about investing in the game business at that time. A lot of people called it a hit-driven business and talked about how risky it was. I know from my time running Microsoft’s game business that one way to address that is to have a pretty big portfolio and make a lot of investments.

I combined those things together and said, “Why don’t we focus on making a lot of relatively small investments, $500,000 each, and we’re going to make 50 of them.” The idea was that we find 50 great game companies around the world and we focus on building a community among the founders, where we connect them together, and we really try to facilitate communication and sharing among those founders.

GW: With criticism rising about poor work practices in the AAA space, do you think smaller teams working remotely will become the norm in game development?

EF: There’s a lot more flexibility in the market now around price points that there wasn’t in the past, when we were doing these giant AAA games that had to be in big boxes and go on store shelves all over the world.

Once you have digital distribution, you get more flexible pricing, and you can make games of any size with any team. Also, you know, there’s a lot more technology available now. Most people build on top of game engines, which gives them a big head start. They don’t necessarily need to reinvent the wheel every time they make a game, and that helps keep the team size smaller too.

GW: As somebody who invests in the space, is that somewhere you think the games industry might be going, towards those smaller projects?

EF: If you looked at where we were 10 years ago, it was actually kind of a scary place, where teams were getting bigger and bigger and less games were getting funded every year. It was kind of like the movie business, where you only had the blockbusters.

A lot of things have changed in the market since then. It’s much more international than it was. Digital distribution and the growth of the mobile gaming business have been huge. The engine technology that I mentioned, and other things… there have been a lot of structural changes. What that means is now you’ve got teams of lots of different sizes. A small team can target a niche market and do really well.

It’s still important that we have the big blockbuster hits, like the latest version of Halo that just came out. I think it’s more about filling in that spectrum than it is saying, “Well, we’re gonna get a lot more little teams.”

GW: How does that affect your portfolio?

EF: If you look at the investments we’ve made at 1Up, we’re trying to think that way too. One of the things that was really important for Kelly and I was to focus on diversity with the fund. I mean that in every sense of the word. We definitely want to support making the industry itself more diverse, and we’ve really focused on founding female-founded or co-founded companies. About a third of all our portfolio companies are female-founded right now, which is way higher than the industry average.

We think that’s part of building a healthy community, both for what we want to create among game founders, but also in the products that they create. Everyone’s a gamer now, and we want to support teams that are making games for everyone.

GW: How do you go about finding companies that you’d like to invest in?

EF: When we were starting out, a lot of it had to do with connections that Kelly and I both brought. I have a long history in the AAA space, and I know this local market pretty well.

Kelly was much more connected with the indie space, and it helps she’s 20 years younger than I am. She just reaches a different sort of group than I do.

We started out just leveraging the connections we have and the people we know. As we moved forward, an interesting thing about our model is that we’re trying to do a lot of investments and they’re relatively small by game industry standards. What that means is that we typically need to team up with other venture funds to complete an investment.

We got to know the larger game funds that are out there pretty well. We started co-investing in deals with them where they would act as the lead investor., and then we would bring the community that we provide into the mix.

Now, I’d say that more of my investments come through recommendations, from either people within the community, which I love, especially from companies that we’ve already invested in. They know friends who are splitting off from Riot or Blizzard or you name it. Sometimes, it’s from these other venture funds that say, “Hey, we’re already going to lead on this, and this seems like the kind of company you like to invest in. Do you want to take a look?” That’s a really good source of deals for us these days.

GW: In the last couple of years, it seems like it’s become much more widespread for people to park their money in video games.

EF: Yeah. It’s kind of funny. When I started three years ago, I said, “Hey, I’m only going to invest in video game companies. It’s the thing that I know best. I’m not investing in tools, platforms, services, and technologies. I’m only going for companies that make and sell video games.”

Some people thought I was crazy. “That’s the riskiest part of the business. Why would you do that?”

Sitting here three years later, it’s become really common. There are funds that I saw get set up to focus mostly on the infrastructure part of the business, that are now investing in game companies, too.

GW: Why do you think more venture funds are investing in games?

EF: Part of it, of course, was the pandemic. That was very good for the game business, to have more people spend more time online and at home. The business grew 20% in the first year of the pandemic. That was one of the drivers.

Also, we’ve seen increased acquisitions in this space, and I think that’s encouraged more investors to get involved. If they think that companies are going to be acquired, they can see a chance to get their money back out of investing in those companies.

It’s been a combination of factors. When I first sat down to make a list of game venture funds, I thought there were probably 30 in the world that would invest in a game company. Now my list is over 100 and I’m learning about new ones every day, especially with what’s going on with crypto and Web 3.0, and the effect that’s having on the business.