Skillz | IPO Filing / Felipe's Notes
Team / Owner - thoughts
The company was founded and is managed by Andrew Paradise, which is actually quite a public figure. He is a serial entrepreneur with a track record of selling two companies previously to founding Skillz, the most well known being sold for 70-100mn dollars to Intuit (it was a Square mobile payments competitor). Under his reign, the company has been growing tremendously, from 9 million users registered in 2016 and 3000 developers to 30 million users and 20k developers. He is an okay communicator (from our evaluation by watching his interviews - he feels cocky), and his long-term vision, is not as exciting or as well articulated as the likes of Jeff Lawson, Jack Dorsey etc. His initial wish was actually for the company to be public one day → not for it to have 200 million players etc. He has previously set targets publicly saying they would have +100mn users in 2 years back in 2018 and that is yet far from reality. The company has also published large revenue numbers and when the real numbers went public, we realized those were probably "misdirected" towards GMV to look much larger.
Glassdoor, despite being tough to evaluate, variates between only 5 star reviews, and 1 star reviews, with the 1 star reviews mentioning that Skillz is one of the worst companies to possibly work for, and that management is a huge micromanager + feels like Big Brother is always watching employees. There are lots of reviews mentioning huge bureaucracy and turnover rates.
Still, the company has been successfully growing (although still a bit far from profitability, is about to go public and has been reinvesting a lot on sales & marketing to support growth.)
One thing we are growing skeptical and don't like is that this has gambling vibes, and management strictly sells it as videogames / esports - probably due to the regulatory restrictions → but still, the TAM doesn't seem to be the regular gaming market honestly, and visibility becomes much lower IMO.
Is it an exceptional Business
The company is by itself in its market (one clear competitor died along the way), and has been growing at >100% CAGR in the past. Supposedly, although the very large investments in S&M, they are highly efficient → with LTV/CAC expected at 4.7x for 3 years, and payback period averaging 4 mos. ****One thing that caught our attention is that they barely invest in R&D, at <9% of revenues, as if their platform was already very good? We don't see as much technical advantages as they suggest on their S-4, and believe they are playing 1v0 because of their specific niche (gaming/gambling in second tier casual games).
The business revolves around a flywheel of developers and their games, driving more engagement through Skillz competitive engine, and thus driving more players and more player engagement (minutes of game-play on paying users [62] + cross-sell between games given users play 10+ games), which increases the amount of interested developers and so on... We're skeptical on this due to claims of fraudulent behavior, the company is liked by whoever makes money, hated by those who lose (or even helps developers and hurts users?), it is tough determining whether the games are truly fair and if the matchmaking system isn't made in order for money just to keep switching hands and Skillz to gain its share (which is quite large at 14%). They are also highly concentrated with the top 2 developers generating >85% of their revenues.
We didn't see much product velocity, although that could be due to the limited amount of public information available. Does not look at all like a 2nd or 3rd act story as well.
Tailwind / Secular trend
We are uncertain on which secular trend we should be evaluating Skillz under. Of course mobile gaming in all ways is growing and will continue to grow for a long time, although we believe the market already expects that in a way. Still, we think Skillz might be more similar to an online gambling player, rather than a real mobile gaming market. In terms of the other gaming services it provides, as well as the potential to include better games in its platform - we see that as a bit limited and highly competitive against large game studios, and other live ops providers like Unity, Amazon and Azure, and we don't see the mobile gaming sector simply shifting from in-game items to real-cash competitive play, also due to the fact that many people don't want to bet on their performances.
A real-cash competitive engine for regular play (good games like COD mobile), is probably much stronger coming from Unity as well.
The addressable market seems to need to come from within Skillz, and its top developers of Skillz games. Investing in propaganda to drive spending inside the system. ****
International seems more limited due to regulation, which is a bit blurry → would need to check
Long-term competitive advantage / MOAT
We are doubtful of a potential entrance in the real gaming market, with high quality games like Free Fire, COD, and even large indies that sustain the test of time. Still, in their niche they clearly lead and we are not sure yet if they would invite competition over time → although take-rate and low complexity makes us think it should.
As we argument below ("Strengths" section), we are skeptical of some of their publicly advertised advantages.
We have tons of questions to further conduct analysis, if we find necessary:
https://seekingalpha.com/article/4377658-skillz-coming-spac-ipo-disrupt-gatekeepers-of-video-game-esports-sector
https://seekingalpha.com/article/4378054-flying-eagle-acquisition-skillz-to-win-game
Just how popular are social casino games on the App Store top grossing charts?
Google Play prohibits real money games, why does Apple Store allow it?
"Please be aware that cash tournaments will not be enabled in games on Google Play as this is in accordance with Google's Developer Terms of Service. We will continue working to get this supported in the future."
Ads has potential to reach 2.3MAUs that don't play for real cash. But this is in the Unity scope as well.
THERE ARE 200+ decent growth companies → INVEST ONLY IN THE BEST ONES