Exploring the Company Behind Fortnite
Investing in a company before they list publicly can deliver exciting results. It is a chance to get a slice of proven innovation before the scramble of an oversubscribed IPO. Late-stage, high-quality opportunities to invest in mature startups with an established concept can deliver a portfolio boost to investors. As the technology world begins to build an open, interconnected metaverse with its myriad opportunities, the astute investor would be wise to watch significant players within the sector. Epic Games is one such company. Here’s why Stableton is keeping Epic Games on the radar and why investors should, too. Introducing Epic Games If you haven’t heard of Epic Games, you’ve undoubtedly heard of its flagship product – the wildly successful, immersive computer game Fortnite. Fortnite is arguably the most popular game globally with more than 350 million players and is estimated to generate more than USD2 billion in annual revenue. Epic Games is the creator, distributor, and engine powering Fortnite and many other successful games, including Infinity Blade and Gears of War. The Gaming Market – And Its 3 Billion Players Many factors have contributed to the recent turbo-charged growth of the gaming industry. Currently worth more than USD190 billion a year, the gaming industry is set to grow more than 12% CAGR in the next five years. First, the pandemic forced people to stay at home and, for many, connecting virtually was the only way to engage with others. As a result, socializing moved online, and the gaming industry facilitated this, with their 3D virtual worlds. At the end of 2020, there were 2.7 billion gamers worldwide – and that number looks set to exceed 3 billion by the end of this year. Technology Has Changed The Game The gaming experience has improved immeasurably in recent years. The adoption of 5G infrastructure has created better multiplayer experiences. Cloud-based gaming, free-to-play gaming, and augmented reality games have reduced the cost of playing by minimizing the need to purchase expensive consoles and devices. And advances in VR technology, especially wearables, make in-game experiences increasingly more straightforward and realistic. These developments have brought a slew of new gamers into the market who are as likely to socialize within these games as they are to compete. The metaverse looks set to fuel this growth further. Constructing The Metaverse In simple terms, the metaverse is a version of the internet that we can inhabit, that we are “inside,” and that we experience using an avatar representation of ourselves. It has been described as a 3D construct – unlike today’s 2D, linear internet that we simply look at. For this reason, the games companies are uniquely positioned to play a lead role in constructing the metaverse, having already created multiple, increasingly realistic, 3D immersive worlds. Big tech and social media have also started to invest heavily in the metaverse development; Facebook is spending USD10 billion a year on it for the next decade and has now rebranded as Meta. Microsoft is aligning with Meta on its business social network product and is actively looking to buy in 3D and virtual expertise by acquiring gaming companies. Apple, Google and Amazon are all exploring metaverse possibilities and many of the big gaming brands are charging ahead, hosting events, experiences and sponsorships in their virtual worlds. The Epic Games Story Epic MegaGames was founded in 1991 by Tim Sweeney. Sweeney was a game-obsessed child but preferred to dissect and understand a game’s workings and how it was programmed. By 15, he had become an impressive programmer. After graduating from the University of Maryland as a mechanical engineer, Sweeney realized he could program his own games, and he created a text-mode game called ZZT. Sweeney built the game engine and editor first and then created the actual gaming worlds within it. ZZT had a free built-in game editor, allowing anyone to create their own games within the engine. Epic MegaGames is now called Epic Games and, today, employs 3,200 staff, but the “shareware” philosophy remains the same. Their leading Unreal Engine product is an environment for software development, used by Epic Games and many other businesses and industries to build video games and entertainment experiences. This ethos has proved highly successful and continues to drive today’s revenue model. 3 Components Of Epic’s Revenue Model Epic Games has three verticals: The Unreal Engine This is the rich game engine and real-time graphics environment on which Epic’s games are built. It is also a highly successful 3D platform licensed out to other companies. Epic then earns royalties on games developed using its platform. Outside of gaming, 35% of Unreal’s client base are film and TV businesses (indicating the high quality of their 3D production). Epic Game Store (EGS) EGS is a digital storefront holding more than 650 games built into the Epic Games launcher application. EGS commits to giving developers a generous-for-the-sector 88% of their game sales, retaining 12% for operating costs and profit. Indeed, Epic Games challenged Apple and Google’s revenue-sharing cut and restrictive in-app practices. Although the lawsuit wasn’t wholly successful, it did prompt Apple and Google to reduce their commission for smaller app developers significantly. Proprietary video game development Developing games is its third revenue stream with many gaming franchises in its fold, including Infinity Blade, Gears of War, and the phenomenon that is Fortnite. Here, Epic Games flipped the traditional game-sales model on its head. Instead of selling a console at cost and profiting from game sales, Epic Games made the games themselves free and then upsold within the game itself – an example of a freemium model. This was extremely efficient at distributing games (Fortnite, in particular) to a vast audience. The Future Of Epic Games Last year, Epic Games acquired several businesses, including the following: Harmonix is an immersive music experience company. As Epic Games “works to build the metaverse”, Harmonix will provide the expertise to “reimagine how music is experienced, created and distributed”. ArtStation is a platform for games, media, and entertainment creators to develop and share their portfolios, sell their art, post, and discover job opportunities. In addition, ArtStation will help Epic Games to grow the creator community faster. SketchFab is the world’s largest 3D content site. This acquisition will help Epic Games meet the demand for 3D content, particularly by opening up AR and VR content. With the most popular immersive video game in the world and the 3D capabilities of the Unreal Engine, Epic Games seems extremely well-placed to become a driving force in the emerging metaverse. Tim Sweeney recently stated, “Over the coming decades, the metaverse has the potential to become a multitrillion-dollar part of the world economy. So the next three years will be critical for all of the metaverse-aspiring companies like Epic, Roblox, Microsoft, Facebook. It’s a race to get to a billion users. Whoever brings on a billion users first would be the presumed leader in setting the standards.” An Epic Opportunity? Epic Games enjoys a multi-strand income model, created and honed over many years. It has created revenue from licensing its gaming engine, creating the games themselves, and distributing games – whether proprietary games or third-party ones or giving them away for free but upselling from within the games. Investors have been impressed with Epic’s success and its plans. To date, the company has secured funding totaling USD5.1 billion from prominent investors, including BlackRock, Sony, Disney Accelerator and Tencent, and their last round valuation was USD28.7 billion. All the signs are that Epic Games is preparing for IPO. Brownstone Research has described epic Games as “one of the most valuable private companies globally”. With 350 million users, an addressable gaming market predicted to reach 3 billion users this year and the fluid but colossal opportunity presented by the metaverse, Epic Games looks likely to live up to that description. Contact Stableton Or Sign Up To Explore Our Investment Opportunities In the past, accessing the opportunities such as Epic Games presents meant seeking early access through venture capital funds (which, once well-established, might not even be interested in your commitment). In addition, it involved high investment minimums, cumbersome paperwork, scarce information (often not even knowing what you will be investing in), and long holding periods. Today, there is an alternative. Accessing promising businesses via late-stage investment and pre-IPO investments is increasingly popular. For one, investors know the name of the company they are investing in. Secondly, as in the case of Epic Games as a disruptor in the metaverse, the product-market fit has already been established, and the path to profitability is clear. To hop on an investment at this stage means a lot of upside potential, while the risk level stays relatively moderate. Stableton is Switzerland’s leading provider for access to late-stage venture capital & pre-IPO Investments to smaller qualified investors. Our mission is to help investors get access to the otherwise secluded private investment market. With a minimum of CHF 10’000, this type of investing should be considered as part of a portfolio. This article only scratches the surface of the opportunities late-stage VC and pre-IPO investing present. Contact your Stableton representative now to learn more and find out about opportunities that exist right now.
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