Roblox – IPO Note 3 (It’s Direct Listing!)

[January 10th, 2021]

Roblox announced few days ago that it raised $520 million in new Series H funding at $29.5 billion valuation and planned to pursue an IPO via direct listing in early February 2021.

It’s management team’s job to maximize the valuation for existing stockholders. By withdrawing from IPO and then raising a private round, Roblox as a company got the liquidity it wanted and its existing shareholders got a valuation they thought satisfactory. In addition, direct listing will increase the likelihood that existing shareholders can timely capture the attractive valuation since none of their shareholders are party to any contractual lock-up agreement or other contractual restrictions on transfer.

No doubt this setup is great for selling shareholders. The series of transactions will be considered as one of the best trades in this run and be written as case study. As a potential buyside of the share in the first trade, you are providing liquidity at a valuation with interesting trajectory to existing shareholders who are long-term, savvy and informative.

In current environment, it’s unwise to suggest avoiding any stock. That being said, you can avoid the disadvantage setup by not being the first trade. Sometimes patience and discipline pay off but stonks might only go up. I don’t know ¯\_(ツ)_/¯.

Roblox – IPO Note 2

[December 16th, 2020]

Background

Roblox Corp. delayed its planned IPO after company officials decided that the gravity-defying performance this week of Airbnb Inc. and DoorDash Inc. made it too difficult to determine the right price for the videogame company’s shares.

Dec. 11, 2020 WSJ

Affirm Holdings Inc. is postponing its initial public offering, according to people familiar with the matter, the second company in as many days to pull back from the red-hot IPO market.

The move comes just a day after The Wall Street Journal reported that videogame company Roblox Corp., which was on a similar IPO timetable, put its listing on pause until early next year.

Dec. 12, 2020 WSJ

Note

It’s very common that hot IPOs have massive pop at their debut. The pros and cons between different going public mechanisms have been widely discussed and it’s understandable that companies decided to do last minute market timing for their stakeholders’ interests.

The impact on sentiment from these signaling might change the price behavior of certain “high-valuation” stock. It might take time to digest the impact or the impact might be permanent for those already listed stocks. It will be very interesting to see how these market timing activities end up (how successful they capture the money left on the table? don’t worry, there will be someone to do the math lol).

The moment you think your stock is underpriced, participants start thinking your stock is overpriced. The sentiment might stay for an extended period after listing. The setup becomes not very attractive at the moment.

Rival Peak – Initial Thoughts

Background of Rival Peak

Below is how Facebook describes Rival Peak and its trailer:

Rival Peak is an experimental competition reality show, featuring artificially intelligent contestants whose fate is controlled by YOU, the viewing audience. You can interact with the real-time experience through an instant game right on Facebook.

Rival Peak Official Website

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Initial Thoughts

Do you think the experience presented in the trailer above interesting?

The interactive experience will be launched later today so apparently I get my impression from the trailer. I know it’s totally subjective but at the moment I don’t think the experience is interesting or engaging enough to retain a level of audience / players that Facebook expects.

While I don’t watch reality shows and seldom play role-playing games, my first questions for this interactive experience are:

  • What’s the core experience for a reality show?
  • What’s the core gameplay for a role-playing game?

This experiment blends observing element in reality show (watching someone interacting with others) with immersive element in role-playing game (playing the role of someone) and adds some UGC element (audience decides some parts of the show / game) to create a new category / genre. This new experience feels confusing to me. I hope Facebook finds ways to make the experience enjoyable otherwise this will be just… an experiment where you blend two things together hoping to enjoy both but it turns out you get non.

Nobody cares about the cloud computing or AI stuff in cloud gaming. They are like new capabilities that people expect to have so that the gameplay will be more enjoyable or engaging…

In terms of IP, I think it’s not going to be long lasting. Again, very subjective, maybe it’s due to art style… Developers might further expand the IP during the show / game but I see limited potential overall.

Since it’s a reality show and a game played real time, live ops might be the only place that this experiment can have optionality. At glance, the setup is not very favorable but strong live ops that have quick iteration and creative operation / coordination might be able to turn things around.

It’s difficult to say an experiment is a flop (well it’s an experiment!) and the fact that the show / game is being distributed on a 2B+ social graph guarantees it will have some impressive metrics like peak concurrent viewer / players… That said, given my impression above, I expect retention will be weak even though Facebook might design various loops in the experience to maintain engagement.

People will talk about 2B+ build-in social graph cannot guarantee the success of a confusing experience and that the cloud gaming in this iteration is not what they expect (they’re not surprised or amazed by the experience).

I expect there will be other iterations on the tech but no season 2 for Rival Peak. Maybe I will change my mind after trying the experience.

Wish Rival Peak has a great launch!

Roblox – IPO Note 1

I just skimmed Roblox S-1. As there will be many S-1 teardown and takes on the internet, I only write down high-level thoughts that I still remember without checking the document again. I might put together a simple model and charts later.

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[November 22nd, 2020]

What is Roblox?

Roblox is a User-Generated Content (UGC) platform holder that provides proprietary tools for developers/creators to design, build, distribute/publish, operate, monetize, and analyze applications (called experiences)/digital items compatible to the platform. Roblox is a multi-sided platform that connects users, creators/developers and other stakeholders (influencers, brands… the scope of this depends on the future development of the platform).

With social features, the platform and the experiences on top of it have the potential to enjoy direct network effect. In terms of relationship between users and developers/creators, the platform might have indirect network effect. I have a feeling that those network effects are kicking in but still in the very early stage because the growth is not exponential enough and it’s driven by extreme external event. In addition, we don’t have enough time to confirm the pattern. Even if we confirm the platform is enjoying network effects, its growth pattern might be different from those of carefully selected comps because platforms are not created equal and dynamics nature play important role in real world.

Roblox runs on top of several device-OS-App Store platforms like iPhone-iOS-App Store platform.

Focus on the Supply Side

Since Roblox is a UGC platform, its success is aligned with third party developers/creators. Technology trajectory will follow sustaining technology path. Everything is to assure that it’s easier for developers/creators to thrive on the platform. Investment in supply side ecosystem is indispensable. These investments in technology and supply side ecosystem is like content creation that will eventually attract users so it’s relatively difficult to distinguish this investment from user acquisition cost. Roblox claims their growth primarily comes from organic channel, earned channels and word of mouth. I didn’t notice they mention other additional user acquisition initiatives in the prospectus so I would assume their go-to-market will be as-is.

There’s no contractual restrictions that prevent developers/creators from multi-homing but even if they can make their experience/content cross-platform, their experience/content might not be economically viable as a standalone application outside of Roblox platform. In terms of content distribution, Roblox owns large enough dedicated user base for its developers/creators.

However, if developers/creators can create a well-recognized IP, then it might be easier to make the IP reach other platforms.

It is Roblox that is partially cross-platform (it’s not on Sony PlayStation or Nintendo Switch probably because Roblox doesn’t have much audience on console), not the experience or content on the Roblox platform.

The Business Model

Roblox in aggregate monetizes users via microtransaction on digital content at this moment. Users need to purchase virtual currency, Robux, from Roblox to spend on experiences, enhancements in those experiences or other digital items sold by developers/creators. Users can purchase Robux via one-time purchase or via monthly subscription. Roblox takes a cut when developers/creators exchange Robux for real money with Roblox. The time difference between Robux purchased, spent and exchanged might generate cashflow for Roblox. Generally speaking, this type of business generates attractive cashflow at scale especially when there’s no large spending on user acquisition.

From developers’ perspective, the monetization is not limited to microtransaction. They can adopt other monetization methods depending on the business model of their experience. One interesting thing is that while Roblox takes a cut on digital item transaction but it might not rake monetization method like advertising within experience.

Power law applies to both user side and supply side on Roblox platform. The conversion rate of user base by my estimation is around 1.0%-1.5% and roughly 0.14% of developers/creators earned more than 10K on Roblox platform for the twelve months ended September 30, 2020.

Growth Opportunity

Apparently, expansion in age demographic and international markets are most attractive sources of growth. The user base looks relatively small compared to other leading global social utility providers. If the vision of Roblox is to become a utility, infrastructure or metaverse, then it has a very long runway. However, Roblox doesn’t disclose much information about go-to-market. Roblox has a JV with a subsidiary of Tencent in China but I don’t expect this initiative to take off even though they must spend lots of effort on how to moderate UGC. Roblox reports its doing well in South Korea so maybe Roblox can try more in Japan. I remember Minecraft does quite will on Nintendo Switch in Japan (over one million physical sell-through).

Improvement in monetization is another way to create growth in financial. It can come from improvement in conversion, average booking per DAU, average revenue per DAU (this means Roblox find other revenue streams such as ads…) or collaboration with brands, merchandize…

Competition

Everyone company that competing for users’ time and developers/creators is Roblox’s competitor. Therefore, Roblox lists many well-known companies as its competitors. This indicates it has very large TAM (maybe so large that Roblox doesn’t even mention it in S-1).

Other Thoughts

Simply put, I would say Roblox platform is a combination of software operating system and digital app store (storefront/marketplace) dedicated to a specific category (Roblox calls it human co-experience) on top of existing device-os-app platforms.

If you look at competitive landscape, there are many “games” trying to become a social platform or metaverse. It seems the space is getting more crowed but there’s always a room for an experience platform that successfully leverages cultural or art style stuff (for example anime).

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Slides below might be relevant to this topic.

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