Why Gigi Levy Weiss is eying NFT gaming with his $450M NFX fund

Gigi Levy Weiss has been a fixture in Israeli investments in tech companies for years. He has also invested in game companies such as Plarium, Playtika, Moon Active, Beach Bum, AI Dungeon, and Papaya Gaming.

And now that he has a new $450 million NFX fund, he’s looking to both broaden his investment horizon and stay connected with game investments. I talked to him about his interest in games and found that nonfungible tokens (NFTs) and crytpo games are pretty high on his list for potential investments.

But one thing he is looking for in those investments is good gameplay and great teams — the ingredients of successful game companies. Levy Weiss is one of the veterans in game investing, which has surpassed an unparalleled $71 billion in the first nine months of 2021, according to a report by investment bank Drake Star Partners.

With pandemic lockdowns shifting people from other activities into games and investors seeking havens, gaming has blossomed during a time when many other industries have been wrecked. And nine months into the year, the amount of money going into game acquisitions, investments, and public offerings is still growing at a record rate.

NFX recently announced a process for very quick investment in a few fields — including crypto gaming. And one of his most recent investments is in MonkeyBall, a crypto startup building a play-to-earn NFT game based on the Solana blockchain.

Here’s an edited transcript of our interview.

Above: Gigi Levy Weiss is one of the creators of the NFX fund.

Image Credit: NFX

GamesBeat: Tell me about your new fund.

Gigi Levy-Weiss: We just raised a $450 million fund. We don’t have an allocation for gaming, but in every one of our previous funds we’ve done a few game investments. The most successful ones before the fund have been Moon Active, Playtika, and Beach Bum. But of the two more successful ones in the fund, one is called Papaya Gaming, a bootstrapped private company, and another called Superplay, which has been doing very well.

We’ve been looking at the field of crypto gaming, play-to-earn, NFT gaming and so on. Our thesis is that we’re in the first stage of this. We’re seeing the crypto people coming in and trying to make games. But when we analyze this, the biggest issue is that these are really bad games. You can come in to this play-to-earn and try to make money and that’s perfectly fine. But if you really want to play a game, it doesn’t work.

For us, the concept is that the minute people understand they can make money in the game, it’ll all collapse immediately, because there’s no game excitement keeping them in the game. On the other hand, we do think that the games built in the many studios we’ve been involved with — basically they had NFT-like elements in them already for years. You could buy skins and guns and things like that. You could trade them and sell them.

Above: NFX is set up to invest quickly in crypto games.

Image Credit: NFX

What we’re trying to see is how we can attract game founders rather than crypto founders. This isn’t to say we have anything against crypto founders. But how can we attract game founders into taking the good things from NFT gaming and play-to-earn — the mechanisms that can make a good game even better — and develop the best new games that take the principles in games like Axie Infinity and implement them alongside the excitement of a truly great game. This is our big thesis for the new fund.

We have this thing called FAST. The FAST is a process where what we’re trying to do is get companies to come in and apply in a very structured way. We promise an investment within nine days and an initial reply within four days. FAST stands for Founder-friendly Application-driven Software-enabled and Transparent. But nobody really cares about that. It’s just called FAST. You can come in, submit the deck, answer a few questions, and that allows us to give you a quick initial reply. Then we promise a check in the bank in nine days.

We’re constantly doing these in the new fund, and the one we decided to put almost on top is one around crypto gaming. If you take good gameplay and you put that on top of the Web3 elements, you can create games that will be more profitable and that will have another meta-layer of gaming, that potential to make money. But it’s going to be balanced by the fact that the game is going to be great. Even if the token goes down or the prices of your creatures go down, that doesn’t matter, because you’re still committed to the game. You’re committed to your clan, to the league, to the leaderboards, to all the other things that are just part of good games and that have helped retain customers for years.

GamesBeat: Do you see some kind of parallel to free-to-play and mobile user acquisition early on, where it was sometimes hard to get game developers in sync with the monetization people or the user acquisition people, the free-to-play experts? Those people were odd matches at the time, in the same way that crypto people and game developers might be now.

Levy-Weiss: I think you hit it on the head. We’ve seen a bunch of these discrepancies over the years. Many times we’ve seen real money gaming people try to come into video games and they don’t understand that once you remove the element of making money, the game needs to be something completely different. When you do a poker game or a slots game, if the upside is to make money, then people are a lot more forgiving about the user experience, about the level of entertainment you give them, because they’re not playing for entertainment. They’re playing to make money.

Above: Zynga Poker

Image Credit: Zynga

That’s why, when you look at the good old days of Zynga Poker, and compare that to companies that did real-money poker, the gambling guys had the software. They had the knowledge. But still Zynga took it all away, and the reason was because these people were missing the point that the level of excitement comes from risking money. The minute you take that away, if the game isn’t fun, if the user experience isn’t perfect, if you don’t have a meta-game that keeps people engaged, if you’re not constantly thinking about how to keep people excited — if you look at social poker, in-app purchases with no real money at stake, the level of product innovation was 10 times what you saw in the real-money poker. Real-money poker didn’t change for years, because it didn’t need to. That was the disconnect between the real-money people and the gaming people.

I see the same disconnect right now between the people that are basically treating this — again, I don’t mean to undermine anybody. But they treat play-to-earn a bit like they treated ICOs a few years ago. It’s all working because people think it’s going to appreciate. When you think that what people want is just an asset that will appreciate, then everything you do is geared toward making them believe the asset will appreciate, and giving them tools to potentially make it appreciate. But when this is the main driver, who cares about the user experience? Who cares about a battle system or whether your character looks how you want or having funny dialogue or any of these things?

Kids think they’re going to make a salary by grinding in Axie Infinity and selling stuff. They don’t actually want to play it. They didn’t come there for the game. This is version one, and I think that the crypto people who understand the crypto economy don’t care about user experience. As my mother used to say, this will all end in tears, and it’s not going to be me crying. These games where making money is all anyone cares about will end up with a problem when the price of their goods doesn’t grow. What we’re looking for is the people who want to merge this understanding with great gameplay.

GamesBeat: There’s a contrast between people who have an intrinsic motivation to play and an extrinsic motivation to just make money.

Levy-Weiss: Exactly. And then there’s also the same conflict between founders who focus on making people believe that they’ll make money and founders that are focused on creating a great gaming experience. In a great gaming experience, you exchange money for entertainment. At a very high level, you pay for something — whether by buying a game outright or through in-app purchases — and what you get is entertainment. The next level of this has to be people that understand both of these things. The basic building blocks have to be great customer experiences and great gaming experiences. Then any game can increase its potential if it also understands how to employ these principles, but in a way that doesn’t undermine the need, first and foremost, to create an amazing game.

GamesBeat: It’s not clear to me where the best game-makers for this new era are going to be. Some companies like Forte have formed themselves so that they can enable the big game companies to come into this market, the NFT market. But the big game companies have different concerns.

Levy-Weiss: They have lawyers. They have compliance.

Above: NFX invested in AI Dungeon, which uses AI to generate dungeons.

Image Credit: NFX

GamesBeat: They also, I think, look down on some of this as “not real games.” It almost feels you need someone more like Zynga for this to take off.

Weiss: My thesis is that there’s going to be a new wave of companies, yes. There are very few companies that managed to go from desktop to mobile. Most of the successful mobile companies were either mobile first or almost mobile first, starting just before mobile took off. It’s very likely that these games — they even require different repositories. You can’t really put them on Steam right now. Apple and Google are still debating what they’ll do here. They’re trying to define whether there’s a real money element here, whether there’s a gambling element. These will stay browser games for a while, which means that companies that are used to marketing in the app stores, or marketing on Facebook to the app stores, will have a tougher time.

The best teams I’ve seen so far are people that come from the game companies that build games in the genres that are best for this market. Genres like RPG, maybe MOBA, maybe some core strategy games. Games where you have lots of assets and these assets can appreciate over time in different ways. You grind them out to be better and so on.

The next thing I want to see is an amazing RPG game team saying, “We’re going to build the best RPG around, and it’s going to have a layer of NFTs. It’s going to have a layer of play-to-earn. If you want to just play the game it will be almost transparent, but if you want to take advantage of this additional layer, it will always be available.” Any game like that is going to get a significant boost beyond just being a good traditional game.

On the other hand, we’re going to see many, many pure crypto games coming out in the next few months. I’m already aware of hundreds that are on the way out. Getting the appreciation up just by being there — that worked for the first few games, but it’s going to be much tougher. The concept of play-to-earn for its own sake will be under a lot of pressure in the next six to 12 months.

Above: SuperPlay is one of NFX’s investments.

Image Credit: NFX

GamesBeat: NFX itself seems like a pretty big company at 45 people.

Levy-Weiss: We have 50 people building software altogether. All of our internal CRM is built in-house. We also have a system that ranks every company that we get in. We have a machine learning algorithm. That’s how we look at thousands of companies every month. It’s the only way that would be possible. We also put out systems that people use on the outside. Every founder can use them.

We have something called Signal, for instance, that connects your team and builds your social graph, telling you how to get to the best investors through different contacts. We have BriefLink, which is like DocSend, only better for startups. That’s always going to be free. Hundreds of thousands people use the software we’ve put out. We don’t look at the data. It’s possible that every once in a while, when a great founder refers to one of these BriefLinks, there will be a popup that says, “Hey, would you also like to send this to an NFX partner?” But if they say no, we don’t look at the data. The team of 50 software people is doing all of this.

We have a content team doing lots of manuals for founders, how-to stuff. We’re operators, so we write a lot about practical stuff for founders. Then we have the operational team and the platform team, which helps our companies. We’re building it like a startup.

GamesBeat: Are there parameters around what you’ll invest in? I just talked to Jens Hilgers about this new token fund that Bitkraft created. Is that something you guys can do as well, or do you stay away from token investments?

Levy-Weiss: We don’t invest in projects when they’re public already, when everybody can buy in. But our fund, from day one, we built it in such a way that we can invest in tokens as well. Quite a few of our investments are in tokens. When we look at how we can do investments, we have James Currier, my partner. He was the founder of a company called Wonderhill that was sold to Kabam. He created Dragons of Atlantis. He’s a gaming guy. We have Morgan Beller, the founder of Libra at Facebook. She’s one of the top crypto investors in the world. She’s leading crypto. I did a bit of games at Playtika and Moon Active and a bunch of others.

We kind of triple-team on these different fields to try to find the best combination. We’ll invest in equity. We’ll invest in tokens. We’ll invest very early. With the right team we’ll invest when there’s only a deck. We’re very flexible on that. We’re trying to push the game people to look at this more seriously, rather than just leaving this to the crypto people who don’t know how to build games.

GamesBeat: If you think about the $450 million here, is all of that going to go into games, or are there other tech startups that may also be interesting?

Levy-Weiss: No, it’s definitely not all going into games. There are a few areas we invest in more, and games is one of them. Crypto is another one. The third is bio. We have a partner who was very senior in Twist Bioscience, and before they had a company that we invested in and sold to Twist Bioscience. He’s doing synthetic biology, which is the extreme opposite of crypto gaming, if you will. But other than that, there will be tens of millions of dollars dedicated to games, if not more.

GamesBeat: Did you say you already have some investments here, or was that more with the previous funds?

Levy-Weiss: No, we just made the first investment from this new fund last week. That one is not in games. But we’re about to close a game investment, hopefully by the end of this week.

GamesBeat: At the opposite end of the funnel, where there are IPOs and SPACs, there’s market volatility now. If there’s a slowdown there, does it come back and affect seed investing at some point?

Levy-Weiss: Generally speaking, in games the last few years have been nuts. We just had a company — not a game company, but a SaaS company — that raised close to a $3 billion valuation on $75 million revenues. I remember that when one of my first companies crossed a billion-dollar valuation, they had to have more than $100 million in revenue just to go that far. In a few years, your revenue to reach a billion-dollar valuation went down, what is that, 60 percent? That’s crazy. That impacts the seeds and the As and the Bs.

But what we’ve seen is that the impact of the craziness of valuation is probably the least in seeds. It’s not that investing in two kids with an idea at a $10 million valuation isn’t crazy. I know people that work all their lives and nothing they do is worth $10 million. A $10 million valuation is nuts to start with. But when you look at the craziness around us, seed is the one staying the most reasonable amongst all of it. I don’t think it’s that huge of a bubble.

Above: M&A in Q3 2021 in games.

Image Credit: Drake Star Partners

The interesting thing is that gaming has always suffered from much lower industry investment than SaaS companies or any other kind of technology companies. In the last few years, because people started understanding that the industry is much more scientific than they thought — taking a step backward, the way I look at it is, up to around five years ago, most investors thought of games the same way they think about movies. “It’s a hit-driven business. Either you hit or miss. It’s hard to invest in creative talent.” But with the emergence of companies like Playtika and Moon Active and others, the data-driven approach to building games is a lot more predictable than the creative-driven approach.

Now, of course you need both. I’m not saying you only need one of the two. But in the creative-driven approach, the companies where their main muscle is creative, it’s sometimes tough to predict what’s going to work and what’s not. In companies where the forte is creating a good game and then optimizing it, using data science and AI and analytics, that’s more predictable. That’s one reason why a lot of investors who got away from this industry are getting back into it. It’s a lot more scientific and predictable than they thought it was.

With this, the interesting thing that happens is that the gap in funding between game companies and other companies that’s always existed, it’s going away. Right now a good game founder is getting the same valuation at an early stage that a good SaaS founder is getting.

GamesBeat: Is there some difficulty you have to deal with in your valuations as far as how high the seed valuations will be for game companies now? There’s a lot of competition among funds now.

Levy-Weiss: We’ve seen the emergence of tens of new game funds in the last couple of years. What’s even worse is that we’ve seen so many non-game funds that suddenly love games. I feel like standing up and saying, “Where were you a few years ago when invested in everything and held the industry up almost alone?” That worked out pretty well for me financially, but where were you all these years? Now everybody loves games. Everybody wants to do a game company.

Yes, there’s a lot of competition. Yes, some people are throwing around really good valuations. But the flip side is that there are very few people who can really help founders when it comes to building a game company. It’s very much unlike the story when you go to build a SaaS company. Many more people can help you build a SaaS company than can help you build a game company. We still have a competitive edge. I don’t think we’ve lost a game deal since we started a fund.

It’s still more competitive. But many competing offers are still coming from people where the founder looks at them and says, “How are they going to help me build a company? How are they going to help me scale? How are they going to help me find the right people? How are they going to help me with Apple and Google?” We’re focused on creating the best resources for our founders and working with them hand-in-hand. You can’t just win on price. That’s going to be very painful.

GamesBeat: Do you see more activity in any particular region, in Israel or anywhere else?

Levy-Weiss: With the previous fund, the way the partnership broke out, we were about one-third Israel and one-third United States. We added another partner to make it about half Israel and half United States. It’s always been a lot of Israel. In games we did a lot more in Israel than the United States.

The way I think about it — I wouldn’t call this a depressed view, but the reality is that games are a lot about shots on goal. Sometimes you get something just right, Flappy Bird or something, but in 99 percent of cases it’s about trying again and again, more and more. When your engineers in Silicon Valley cost you $200,000 each, they leave you all the time for Facebook and Google, and you’re still raising the same amount of seed, the outcome is you get maybe two or three shots on goal. With the same money in Israel you get 10 shots on goal. Your chances of getting there are much higher.

Similarly, this is one of the reasons why eastern Europe, aside from just the culture of gaming there, has become such a major power. All these people have been outsourcing for other companies for years. Now they can start companies like Playrix, which is an amazing company. Then, for the same money, if we have 10 shots on goal in Israel, they have 25 shots on goal in Ukraine. The outcome is that building a game company in the United States right now is really tough.

Above: The biggest game investors and acquirers of 2021.

Image Credit: Drake Star Partners

We’ve invested in a few in the United States. The ones we liked, though, were mostly those that were sitting on trends that didn’t reach elsewhere. I’ll give a couple of examples. One of them is a company called Latitude, which is the first GPT-3 AI-driven game company. They have a game called AI Dungeon. We’ve seeded that. That’s something that I don’t think would grow outside of the United States. The proximity to OpenAI and the people that understand the field is important. The second is a company called Volley, which is the number one company in voice gaming. They do gaming on Alexa and Google Voice. Again, they need to be close to the platforms, to be very friendly with the people on the platforms. It was difficult to distribute at the beginning. But now they have millions of people a day playing their games.

These are two companies that could probably only be in the United States, or at least they’re much easier to build in the United States, because they’re at the forefront of new technology where the basis of that technology comes from the United States. But when it comes to building another casual game company or another strategy game company, there’s an inherent advantage right now to teams that sit in lower-cost regions with less competition for talent compared to Silicon Valley.

GamesBeat: We’re in a very interesting market right now.

Levy-Weiss: A very interesting market. I love it. It still gets me that I can sit at home and play video games with my kids and tell my wife that it’s work. When they were a bit younger, she said, “Yeah, but why do you need the kids?” Now that they’re a bit older I can say, “They’re test users! I need to see how they respond to our games!”