Earlier this month, we had the chance to sit down with Moritz Baier-Lentz, Partner at BITKRAFT Ventures. BITKRAFT is one of gaming’s top venture firms, investing in notable companies like Epic Games, Manticore, & Yield Guild Games. In this conversation, Moritz discusses his history with esports, starting up Goldman Sachs’s gaming arm, growing trends in gaming, and BITKRAFT’s approach to investing — enjoy!
On Esports & Life Before BITKRAFT
Nicolas Vereecke: Let's start our conversation at the beginning. At a young age, in the early days of modern esports, you became an esports athlete in the Blizzard game Diablo 2. Can you tell us about how that was, and how that experience impacted the way you look at the gaming industry today?
Moritz Baier-Lentz: This was in the early '00s. I genuinely believe that early exposure to esports and competitive gaming not only shaped my perspectives on the gaming industry but life as a whole. I grew up in a town in Germany that only got connected to the internet in 2001. As soon as that happened, the digital world was so much more exciting than my physical surroundings. Also, it was very easy to make a case to dive into this 6-8 hours a day, pretty much every day for a couple of years.
Apart from the fact that I learned the fundamentals of the English language, economics, and a bunch of other interesting topics from this video game, I think it also instilled in me the perspective that there's so much opportunity and so many things you can do in the digital world. The ways in which you can express yourself in this very open, almost limitless options universe that was Diablo 2, transferred me also into the physical realm. It got me thinking more broadly about what are all the interesting things you can do in your life.
With regards to gaming and investing in gaming, Diablo 2 was a great example of how important it is to build a game that can be, and remain, interesting over such a long time. I think a lot of this was around getting the balancing right, getting the character design right, and getting the incentive design right. Those are still key elements for game developers today. Even though games might look very different, these are still incredibly important factors to nail.
Earlier in your career, you built and co-led Goldman Sach’s’s global gaming and esports practice. Can you tell the story about how that came to be?
When I entered Goldman, I was asked to do tech transactions. Goldman aggregates tech, media, and telecom under their TMT brand, and I actually said, "I don't want to do media or telecom."
I was sitting there and thinking about what I could put my own stamp on. I came back to my teenager days and my passion around gaming, and I was looking at market data. It was pretty obvious at the time that gaming was about to become the number one media category. It is today. It surpassed linear TV recently. This is now a $200 billion industry. I think it used to be around $150 billion in 2016, when I took a closer look.
We had done big gaming deals at Goldman, but we didn't have a formal practice, there were no industry thought pieces, there was no coherent client coverage, and we weren't positioning ourselves for what seemed like a slate of upcoming interesting deals and opportunities. So I raised my hand and, together with my now partner, founded, and then co-led the gaming and esports practice over the last four years of my ten years at Goldman. I basically became Goldman's gaming and esports guy during this time, which is also the context in which I got introduced to Jens and the BITKRAFT team. It was very hard spending time at the intersection of gaming and finance and not continuously running into BITKRAFT.
How important was the esports part of that practice?
If you compare gaming and esports just by the numbers, you'll very quickly see that esports is a small fraction. The $200 billion headline number is PC, mobile, console, and a few other device content formats. Esports now stands at $1.1 billion or so. It's a question of where you draw the line.
For us at Goldman, however, it was huge. Even though it was such a small industry, we were the first ones to publish a Goldman-branded 50-page report on the ecosystem and the business of esports. A primer like that didn't exist at the time, and it actually circulated quite nicely through the industry. There was no other bank focused on it, and there was no other consulting company focused on it, so we got an early footing.
Then in 2017 professional, franchised leagues started forming around League of Legends and Overwatch. Suddenly there was a lot of institutional interest. Investing in these teams and securing (increasingly city-based) franchise slots now required $20 million buy-ins. Suddenly esports in 2017 was all over the place, and leaning into this in 2016 proved to be quite important.
Ultimately, a lot of our esports thought leadership translated into just being perceived as a leader in gaming, which resulted in us being mandated on some of the key gaming transactions. This Goldman franchise, during my time (and also after I left), led so many IPOs, including Corsair, Unity, Roblox, plus the ZeniMax sale to Microsoft. Even though esports is small, for a lot of institutional capital, gaming and esports went hand in hand. It was a very valuable asset.
On Joining the BITKRAFT Team
Beginning of last year, you decided to go on a new adventure. You went from helping and advising the world's largest corporations to doing the same for the smallest ones. What was the catalyst for this switch? And how was it to go from working for such a huge corporation to a small distributed team of less than 20?
By the way, we were eight people at BITKRAFT at the time. Now we’re 16, plus an advisory board. Mentally, I always thought of the Goldman stint as a five-year career move. I just wanted to keep myself honest and try to make sure I left after five years and not to get "stuck" there for 20 years. It's a fun, rewarding experience, and it's very easy to stay.
There are obviously other incentives, too. However, the itch and the desire to build something, and dedicate 100% of my time — not just 50% of my time — to an industry that I was so passionate about was an attractive value proposition. I actually left Goldman in the summer of 2019, without having a plan — simply cruising, looking, and being open to opportunities. BITKRAFT happened very shortly thereafter. It was a bit of a natural transition.
When you go to BITKRAFT's website, you see "Let's build a synthetic reality." Could you take some time to unpack what you mean by this and how this influences your investment strategy?
Synthetic reality is a term we coined for the increasing convergence between the physical and the digital worlds. We took some time as a team to look at all the things that excite us about gaming, esports, and interactive media. We're trying to tease out the larger, overarching trend that's going on. We don't just invest in game studios. We also invest in platforms, as well as in horizontal technologies — AR, VR, spatial audio, haptics, volumetric video, blockchain technology, things that "power" the Metaverse or drive the interaction between the Metaverse and users.
I'm using the loaded term "Metaverse" here. It's probably one that many listeners have heard. When we say synthetic reality, the broader trend that we saw across all these was, as humans, we just spend more and more time in the digital realm. In many cases the lines between the physical and digital are becoming pretty blurry. Gaming and esports are spearheads of this trend — the most immersive, most exciting, most social forays of humanity into virtual worlds. That's what we mean by synthetic reality — this blending of the physical and digital, from a content and platform perspective. We also want to enable the technologies that make it happen.
BITKRAFT is often considered to be a top venture firm in the gaming industry. Could you tell us a bit more about how decision-making works at BITKRAFT?
Leveling up in venture capital is a function of collaborative and critical discussions, plus intellectual humility. As a team we try to explore opportunities from various angles and tease out both the merits and the concerns, together.
We're actually pretty diverse in our prior backgrounds, the way we work, the formal education that we might have received, and then obviously the entrepreneurial experiences that we've had… or for some of us haven't. That's the beauty of a good decision-making process: to have these mechanisms in place but then ultimately also have a system that can make decisions and drive actions, even when sometimes it means bypassing a consensus decision.
We have an investment team of ten. All of us screen new deals and opportunities. Everyone in the team, no matter the role or the tenure with BITKRAFT, can bring interesting opportunities to the investment team. We speak about these opportunities very regularly. Despite what some might expect, we genuinely look at everything that finds its way to us through the website, the team network, and LinkedIn.
There’s a system in place where we actually screen and look at everything that reaches us. If anyone finds something they like, they have full leeway to take a founder call, a second call, and explore the opportunity. Once they've built enough conviction around this, it's something we discuss as an investment team.
How it goes from there, what the criteria are, and how our investment committee works, that's maybe a little bit too private for this conversation, but I hope that gives everyone the idea that we take a hard, genuine look, and analyze a lot of the great things that could be future BITKRAFT portfolio companies.
On Emerging Trends in Games
You talked a bit about your investment strategy. I'm curious to know what are two or three emerging trends in the gaming industry that get you personally very excited.
As a fund, we're definitely leaning into the intersection of blockchain and gaming. That’s one that definitely keeps us entertained right now. It just makes a lot of sense that as these worlds become more expensive, immersive, and more social, users will care more and more about digital identity, digital ownership, and digital assets. If I, as a player, were to invest time, energy, and money in these virtual worlds, I would want to make sure that who I am, what I have, and what I own is secured and truly mine.
From my perspective, gaming is a natural fit with blockchain technology, which is the best technology that we have for a truly democratized and decentralized way of insuring these things. We see early successes with play-to-earn games, but there are also interesting effects of blockchain technology that affect not just players but also how creators can monetize content that they contribute to these environments. This will ultimately be the way in which you build the largest and most interesting worlds. But you need to have reward systems in place, and I think blockchain tech is super interesting for that as well.
It brings me to our second interesting topic, which is the creator economy and user-generated content. That's obviously a big topic right now that touches gaming and beyond. We see many interesting companies in this space. We have our own successful, scaled bet with Manticore, which is building AAA UGC experiences and is also a super compelling platform play.
The third trend is AR/VR. We had the first wave a couple of years ago, where excitement followed the standard hype cycle and faltered a bit. Today, we're definitely out of this trough of disillusionment, so to speak. I think AR/VR is going to be a really exciting opportunity over the next five years. This is something that will find its way to mass scale with consumers over the next couple of years.
You talked about Manticore, which is still early but looking promising in the UGC space. What companies do you have in your portfolio that are taking advantage of the other emerging trends that we discussed?
On the VR/AR side, we just announced an investment in Resolution Games, one of the leading, if not the leading, publisher for VR games. Tilt Five is another super interesting one in the AR environment, which will bring AR to consumers homes.
In the blockchain space we have a couple of bets. We announced Yield Guild, which is a very interesting proxy play on play-to-earn economies, including Axie Infinity. That's an investment that's moon-bound, as it stands, and we're watching it with excitement. We'll all be a lot smarter about play-to-earn a couple of months from now. I think that's definitely one to watch and a beautiful platform play on this idea of player-owned assets and players taking their own financial and creative freedom into a truly decentralized world that's actually fun to play. Blockchain games still need to be fun games. Just putting them on the blockchain won't do the trick.
Around UGC and the creator economy, Manticore is one play. Another interesting one to watch is Koji — a flexible UGC, low-code platform that has found strong product market fit, with link-in-bios, that really are a lot more than just "a collection of links.” They are comprehensive (and monetizable) mini-apps inside a link tree that almost looks like a creator app store without actually having to install anything on your phone.
Is there anything significant that you've changed your mind about in the gaming space and industry recently?
Public perception has changed quite a bit over the course of 2020 in a very positive way. For those of us who grew up with games and spend a lot of time thinking about games, we always saw the positive benefits of gaming. We always looked at it through a lens of affection, even when much of the world often negatively and unfairly made criticisms about certain types of games, certain genres, and even screen time.
I think the pandemic helped create new, shared mainstream enthusiasm for how games can actually be beneficial, especially as a means of socializing. A lot of the startups we're looking at right now are taking these learnings and this newfound societal appreciation for games to heart and are leaning into enabling socialization more.
Another positive change is that more industries are asking, "can we be more like games?" Think of Peloton that gamifies sport, or Duolingo gamifying language learning, or Robinhood as gamified investing and wealth management.
I don't necessarily like the term gamification. We at BITKRAFT prefer to look at it as applied game mechanics — not force-fitting things to be games, but applying learnings from best practices in how to steer users, how to reward users, how to keep them engaged, how to leverage these insights, and how to implement them in the world.
In the end, everything we do can be categorized into either play or work as humans. If you really want to be philosophical about it, play is safe experimentation without the immediate fear of death, and work, hopefully, there's no immediate fear of death either. Otherwise, maybe you should think about a career change. Work is, really, just the application of what you've learned during play, exploiting the skills you've acquired during those moments of safe exploration. This is a little bit theoretical and philosophical, but play is really ingrained in the human being and the human learning process. I think we'll see a lot more play where we won't expect it.
I came to a huge realization during the Corona lockdown. My grandma, who lives alone, used to play bridge with a bunch of friends every weekend for a few hours. During the lockdown, suddenly there was the threat of becoming super lonely, because she couldn't see anyone. Now what she does every morning for two hours is play bridge with that group of friends on her computer, and she has her phone with WhatsApp on, where she's calling and seeing the people that she plays with. At that point I realized that we're all going to be gamers in the future. This can really be a way for us to overcome physical limitations and just play together.
You make another great point that I want to hone in on, which is we'll all be gamers. We're so convinced, and what keeps us probably most excited about the industry we’re in right now, is the fact that you have this huge generational tailwind. Everyone growing up today grows up a gamer. We maybe were among the first generation to grow up as gamers, and we'll always be gamers.
It's a misconception to think that gaming is for the young. Gaming is for people who grew up as gamers, and everyone now grows up to be a gamer. You can also abstract gaming to interactive media. I don't think any of us in this transition from linear media to on-demand media will go back to linear media. With the exception of sports or other live events, why have anyone dictate our schedules? For the 30 minutes you want to spend at home after work, and maybe get your mind wandering, at least I, and I think many others, resort to Netflix versus cable TV. Interactive media is on-demand, but it's also something where you can partake in the media experience and enjoy it together with your friends.
I think people will just expect that and more from their media experiences. That's where gaming comes in. That's how I look at it. Will I be gaming when I'm 90 years old? 100%. I probably won’t be Grand Champ, and maybe no longer Champ, in Rocket League, because that's maybe a little bit too motorically demanding at that age, but there are endless options.
On Mistakes & Opportunities
If you ask a VC what their biggest mistakes are, it’s usually mistakes of omission, where they passed on a company that later went on to become a unicorn. You haven’t been at BITKRAFT for that long, but have you already passed on deals that you regret today?
Our team had a similar discussion recently where we came up with a lost of our recent omissions. I think we'll unfortunately have to say that Axie would be one of them. We're very happy to at least get a proxy play with Yield Guild.
The quality of the decision-making process, we like to believe, increases your hit rate. That's something you can say with conviction. It doesn't save you from making a lot of bets that won’t probably result in successes. It'll also not save you from missing things that will become standout successes, as we saw.
I think there'll be many more examples, going forward. It's always fun to construct this anti-portfolio. We're now a 50-portofolio company in the BITKRAFT umbrella. We're super excited about them, and we have some early breakout successes already. It's fun to go through this exercise, but it's important to help the ones you actually invested in.
Regarding the teams that you back, what do you look for in founders and entrepreneurs?
It differs a little bit by category. We invest in games studios, platforms, and tech. For game studios, the two important pieces that overarch all of these categories is the quality of the team and the quality of the concept. Those are probably the two most important elements, and that's true for everything we look at.
For the founder team, who are you? What's your background? What have you done and accomplished in the past? What qualifies you uniquely to take on the challenge you're after right now in this pitch or in your presentation?
Concept is important, too. We've seen founders with stellar experiences but without concepts that we could really rally behind. Being an amazing founder team is fantastic, and we love those; it's a necessary criteria, it's not in itself sufficient.
For platforms and technologies, the questions include: what's your competitive angle vis-à-vis others that are trying to do this? It can be relationships with IP holders and game studios, or even content creators in this space. It's always something to explore, because it affects monetization and the business model. Anything that speaks to, even in the early days, an unfair advantage for technologies — like patents — is also ideal. But it can be softer than that, too. For example, it can be an unfair advantage that's based on expertise or niche insights.
When you look at the gaming space today, what are some voids that not enough people or companies are looking at?
In general, I'm surprised by the wealth of game studios versus platforms and technology. It's obviously fun to build games, but a love for games can translate into many other things that are important assets for the gaming industry, too. Just because we have Twitch and Discord, which are fantastic platforms, it doesn't mean everything is figured out from a platform perspective. There are still so many offerings that are emerging.
For example, in-game advertising is a massive, still mostly white space, that one of our companies, Anzu, is tackling. Google and Facebook have built large businesses around the idea of showing people relevant ads where the eyeballs are. A lot of eyeballs are now in gaming, so why are we not seeing more of that?
There's still a lot to get right around the interaction of gamers, especially when these virtual worlds increasingly become fundamental to our self-image and existence. If we do live in a truly synthetic reality where the physical and the digital almost blend, you’ll increasingly think of how you’re represented in digital worlds as much as how you represent yourself in the “real world.” This has been somewhat true for years, and there's a lot to still figure out and improve.
We have, for example, with GGWP (Good Game Well Played), a platform that helps fight toxicity in online environments, which is also a great example of a platform and an approach that needs not only to span games but also span IPs. There's no single publisher that can figure that out by themselves. It needs to be an effort that goes across the entire ecosystem. This is also another great example of being very deliberate in how you design your interaction with those content and rights holders, while being a platform that offers value across them.
On Advice & The Future Of Games
Over the past years, especially months, we've seen big changes in the gaming VC and M&A realm: bigger funds, more specialized funds, higher valuations, more M&A, etc. How do you think the gaming VC industry will evolve from here? And how do you think BITKRAFT is a part of that story?
Hopefully, we'll continue to play a leading part in this story. As the gaming industry grows — keep in mind there are north of three billion gamers, and games are the number one media category — it obviously draws attention not just from the general public but also from institutional capital.
We've seen a lot of specialized gaming funds rise over the course of the last 4-5 years, roughly. We're also seeing generalists become increasingly active in gaming deals. Usually that happens a little bit more in the mid stage and late stage VC landscape, compared to the early stage landscape, simply because, to get this right with founders and early stage founders, they genuinely care about finding the right partner that truly understands the industry and brings a valuable network plus operational expertise. I personally have a hard time seeing that change.
Will this be an environment with more startup activity, increased capital inflow, institutional interest, and more funds? I'd be surprised if not. That makes a lot of logical sense to me as the industry grows as a whole.
I can imagine that there's a number of aspiring entrepreneurs in the games industry that are listening to this podcast. What will you say to them? What would they need to do to have the best chance of getting backed by BITKRAFT?
First of all, don't be shy to reach out. Get to a point where you've honed in your thesis, have your team, and know your concept. When you do reach out, you want to make a good, strong case. That doesn’t mean that when you come back six months later, we won't look at it again. We certainly do. We're very explicit about that, too. Even if we pass on that transaction, we oftentimes do it because it's just a little bit early for us in certain cases. We love to keep the door open and reevaluate it at a later point in time.
Think about your partners that you're embarking with on this journey. You probably don't want to do it alone. Assemble a team that can be your partners for the next few years as you build your game studio, your platform, or your tech company. This is the next best thing to a marriage that you have, and you want to be wise about who you'll go through inevitably be highs and lows with.
I think the same applies to your external investors if that's a route that you want to go down, especially early stage investors. If it's a significant funding round, they'll often take an active role in helping you shape what it is that you're trying to bring into existence. Make sure you pick partners that have the right expertise, are actually willing to roll up their sleeves, and also share the same values and culture that you would like to instill in what will, hopefully, become a scaled company.
What's the best piece of advice you've received about investing in the games industry?
Founders should really think hard about who it is they want to bring along for the journey, not just in their internal team but also as external partners. The way we work is very centered around being founder-friendly and enabling founders more than anything else. It reflects a lot of the philosophy our founding general partners — Jens, Malte, and Scott — have collected as entrepreneurs themselves over the last two decades.
In a discipline that's both a science and an art, which is certainly true for games, you want to find a capital partner that truly understands this, that can walk with you through tough times, and that can help you think through challenges (from game design decisions to monetization). It also involves finding the right strategic or distribution partner early. This is incredibly important, and it has a huge influence on your chances of success. Just as you should be extremely thoughtful about your team and your co-founders, you should be thoughtful about your investors.
I'm trying to make a tradition of asking everyone that comes on the show to give us a bold prediction. Moritz, please share with us any bold, spicy prediction.
I'll lean into AR and VR. 2024 might be the first year where we see more AR and VR devices being shipped than consoles. Right now we have about a 5 to 1 ratio in favor of consoles. 2020 and 2021 were and are big years for consoles, with PS5 and Xbox, but there's going to be a lot of interesting consumer devices, both on the VR and AR front.
Probably 2023 will be a bit of a turning point for AR, and maybe we'll have an "iPhone moment” for AR. We're all tapping a little bit in the dark here, but right now you see many estimates as high as roughly 50 million in shipments in 2024 for AR and VR. That would be roughly the level of where global console shipments are coming in today, which are more or less flat.
Moritz, this was very wonderful. Thank you for taking the time to speak to me.