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Epic Games, the creator of Fortnite, banked a $3 billion profit in 2018
Epic Games had as good a year in 2018 as any company in tech. Fortnite became the world’s most popular game, growing the company’s valuation to $15 billion, but it has helped the company pile up cash, too. Epic grossed a $3 billion profit for this year fueled by the continued success of Fortnite, a source with knowledge of the business told TechCrunch.
Epic did not respond to a request for comment.
Fortnite, which is free to play but makes money selling digital items, has popularized the battle royale category — think Lord of the Flies meets Hunger Games — almost single-handedly, and it has been the standout title for the U.S.-based game publisher.
Founded way back in 1991, Epic hasn’t given revenue figures for its smash hit — which has 125 million players — but this new profit milestone, combined with other pieces of data, gives an idea of the success the company is seeing as a result of a prescient change in strategy made six years ago.
This past September, Epic commanded a valuation of nearly $15 billion, according to The Wall Street Journal, as marquee investors like KKR, Kleiner Perkins and Lightspeed piled on in a $1.25 billion round to grab a slice of the red-hot development firm. However, the investment cards haven’t always been stacked in Epic’s favor.
China’s Tencent, the maker of blockbuster chat app WeChat and a prolific games firm in its own right, became the first outside investor in Epic’s business back in 2012 when it injected $330 million in exchange for a 40 percent stake in the business.
Back then, Epic was best known for Unreal Engine, the third-party development platform that it still operates today, and top-selling titles like Gears of War.
Why would a proven company give up such a huge slice of its business? Executives believed that Epic, as it was, was living on borrowed time. They sensed a change in the way games were headed based on diminishing returns and growing budgets for console games, the increase of “live” games like League of Legends and the emerging role of smartphones.
Speaking to Polygon about the Tencent deal, Epic CEO Tim Sweeney explained that the investment money from Tencent allowed the company to go down the route of freemium games rather than big box titles. That’s a strategy Sweeney called “Epic 4.0.”
“We realized that the business really needed to change its approach quite significantly. We were seeing some of the best games in the industry being built and operated as live games over time rather than big retail releases. We recognized that the ideal role for Epic in the industry is to drive that, and so we began the transition of being a fairly narrow console developer focused on Xbox to being a multi-platform game developer and self publisher, and indie on a larger scale,” he explained.
Tencent, Sweeney added, has provided “an enormous amount of useful advice,” while the capital enabled Epic to “make this huge leap without the immediate fear of money.”
LOS ANGELES, CA – JUNE 12: Gamers ‘Ninja’ (L) and ‘Marshmello’ compete in the Epic Games Fortnite E3 Tournament at the Banc of California Stadium on June 12, 2018 in Los Angeles, California. (Photo by Christian Petersen/Getty Images)
Epic never had a problem making money — Sweeney told Polygon the first Gear of Wars release grossed $100 million on a $12 million development budget. But with Fortnite, the company has redefined modern gaming, both by making true cross-platform experiences possible and by pulling in vast amounts of money.
As a private company, Epic keeps its financials closely guarded. But digging beyond the $3 billion figure — which, to be clear, is annual profit not revenue — there are clues as to just how big a money-spinner Fortnite is. Certainly, there’s room to wonder whether analyst predictions this summer that Fortnite would gross $2 billion this year were too conservative.
The most recent data comes from November when Sensor Tower estimates that iOS users alone were spending $1.23 million per day. That helped the game bank $37 million in the month and take its total earnings within Apple’s iOS platform to more than $385 million.
But, as mentioned, Fortnite is a cross-platform title that supports PlayStation, Xbox, Switch, PC, Mac, Android and iOS. Aggregating revenue across those platforms isn’t easy, and the only real estimate comes from earlier this year when Super Data Research concluded that the game made $318 million in May across all platforms.
That is, of course, when Fortnite was fresh on iOS, non-existent on Android and with fewer overall players.
We can deduce from Sensor Tower’s November estimate that iOS pulled in $385 million over eight months — between April and November — which is around $48 million per month on average. Android is harder to calculate since Epic skipped Google’s Play Store by distributing its own launcher. While it quickly picked up 15 million Android users within the first month, tracking that spending off-platform is a huge challenge. Some estimates predicted that Google would miss out on around $50 million in lost earnings this year because in-app purchases on Android would not cross its services.
There are a few factors to add further uncertainty.
Fortnite spending tends to spike around the release of new seasons — updated versions of the game — since users are encouraged to buy specific packages at the start. The latest, Season 7, dropped early this month with a range of tweaks for the Christmas period. Given the increased velocity at which Fortnite is picking up players and the appeal of the festive period, this could have been its biggest revenue generator to date, but there’s not yet any indicator of how it performed.
More broadly, Fortnite has undoubtedly lost out on revenue in China, which froze new game licenses nine months ago, thereby preventing any publishers from monetizing new titles over that period.
Tencent, which publishes Fortnite in China, did release the game in the country but it hasn’t been able to draw revenue from it yet. The Chinese government announced last week that it is close to approving its first batch of new titles, but it isn’t clear which games are included and when the process will be done.
Already, the effects have been felt.
Games are forecast to generate nearly $40 billion in revenue in China this year, according to market researcher Newzoo. However, the industry saw its slowest growth over the last 10 years as it grew 5.4 percent year-over-year during the first half of 2018, according to a report by Beijing-based research firm GPC and China’s official gaming association CNG.
Fortnite and PUBG — another battle royale title backed by Tencent — have perhaps suffered the most since they are universally popular worldwide but unable to monetize in China. It seems almost certain that those two titles will receive a major marketing push if, as and when they receive the license and, if Epic can keep the game competitive as Sweeney believed it could back in 2012, then it could go on and make even more money in 2019.
Epic Games is taking on Steam with its own digital game store, which includes higher take-home revenue rates for developers.
But Epic isn’t relying solely on Fortnite.
A more low-key but significant launch this month was the opening of the Epic Games store, which is aimed squarely at Steam, the leader in digital game sales.
While Fortnite is its most prolific release, Epic also makes money from other games, Unreal Engine and a recently launched online game store that rivals Steam. Epic’s big differentiator for the store is that it gives developers 88 percent of their revenue, as opposed to Value — the firm behind Steam — which keeps 30 percent, although it has added varying rates for more successful titles. Customers are promised a free title every two weeks.
Either way, Epic is betting that it can do a lot more than Fortnite, which could mean that its profit margin will be even higher come this time next year.
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Lightspeed is raising its largest China fund yet
Lightspeed China Partners, the China-focused affiliate of Silicon Valley-based Lightspeed Venture Partners, has set a $360 million target for its fourth flagship venture fund, according to a document filed with the U.S. Securities and Exchange Commission today.
If the target is reached, the fund will be Lightspeed China’s largest yet, per PitchBook. Lightspeed China’s previous two funds each closed on $260 million. The VC raised $168 million for its debut fund in 2013.
Lightspeed China is led by David Mi (pictured). Mi, an investor in multiple billion-dollar Chinese companies, was previously the director of corporate development at Google, where he helped lead the search giant’s investment in Baidu. He joined Lightspeed in 2008 and established the firm’s China presence in 2011. Yan Han, a long-time Lightspeed investor and a founding partner of the firm’s Chinese branch, is also listed on the filing.
Lightspeed China has backed e-commerce platform Pingduoduo and loan provider Rong360, a pair of Chinese “unicorns” that both completed U.S. initial public offerings since 2017. Typically, the firm makes early-stage investments in the internet, mobile and enterprise spaces.
Earlier this year, Lightspeed Venture Partners filed to raise a record $1.8 billion in new capital commitments. This month, it tacked five new partners onto its consumer and enterprise investment teams, including Slack’s former head of growth and Twitter’s former vice president of global business development.
Lightspeed didn’t immediately respond to a request for comment.
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Distinguished VCs back wholesale marketplace Faire with $100M at a $535M valuation
A slew of venture capitalists known for high-profile exits — Kirsten Green of Forerunner Ventures, Keith Rabois of Khosla Ventures, Alfred Lin of Sequoia Capital and Alex Taussig of Lightspeed Venture Partners — have invested in Faire (formerly known as Indigo Fair), a 2-year-old wholesale marketplace for artisanal products.
A quick glance at Faire suggests it’s a combination of Pinterest and Etsy, complete with trendy, pastel stationery, soap, baby products and more, all made by independent artisans and sold to retailers. Faire has today announced a $100 million fundraise across two financing rounds: a $40 million Series B led by Taussig at Lightspeed and a $60 million Series C led by Y Combinator’s Continuity fund. New investors Founders Fund, the venture firm founded by Peter Thiel, and DST Global also participated. The business has previously brought in a total of $16 million.
The latest financing values Faire at $535 million, according to a source familiar with the deal.
If you’re feeling a little bit of déjà vu, that’s because a similar startup also raised a sizeable round of venture capital funding, announced today. That’s Minted . The 10-year-old company, best known for its wide assortment of wedding invitations and stationery, raised $208 million led by Permira, with participation from T. Rowe Price. Though Minted is first and foremost a consumer-facing marketplace, it plans to double down on its wholesale business with its latest infusion of capital, setting it up to be among Faire’s biggest competitors.
Like Minted, Faire leverages artificial intelligence and predictive analytics to forecast which products will fly off its virtual shelves in order to to source and manage inventory as efficiently as possible. The approach appears to be working; Faire says it has 15,000 retailers actively purchasing from its platform, including Walgreens, Walmart, Sephora and Nordstrom — a 3,140 percent year-over-year increase. It’s completed 2,000 orders to date, garnering $100 million in run rate sales, and has expanded its community of artists 445 percent YoY, to 2,000.
The company, headquartered in San Francisco, with offices in Ontario and Waterloo, was founded by three former Square employees: chief executive officer Max Rhodes, who was product manager on a variety of strategic initiatives, including Square Capital and Square Cash; chief information officer Daniele Perito, who led risk and security for Square Cash; and chief technology officer Marcelo Cortes, a former engineering lead for Square Cash.
“Our mission at Faire is to empower entrepreneurs to chase their dreams,” Rhodes wrote in a blog post this morning. “We believe entrepreneurship is a calling. Starting a business provides a level of autonomy and fulfillment that’s become difficult to find for many elsewhere in the economy. With this in mind, we built Faire to help entrepreneurs on both sides of our marketplace succeed.”
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Foxconn or Foxgone? Tariffs, Wisconsin and iPhone fires
First some notes on SoftBank’s rumored expansion into China and its weird fund math, then Foxconn and then quick notes on tech depression, Huawei and more.
TechCrunch is experimenting with new content forms. This is a rough draft of something new — provide your feedback directly to the author (Danny at danny@techcrunch.com) if you like or hate something here.
SoftBank has fund visions (and a Vision Fund) for China? That, and more money
Kane Wu at Reuters reported overnight that SoftBank is looking to open an office and hire an investment team in China, which Wu says will be based in Shanghai. That’s following the fund’s recent global expansion with new targeted offices in Saudi Arabia and India.
When I saw this, I sort of did a double-take: SoftBank doesn’t have a presence in China? The fund has reportedly been seeking investments in some of China’s leading unicorn stars, including controversial face recognition startup SenseTime, and leading edtech startup Zuoyebang (作业帮, which literally translates as “school assignment help”). (Hat-tips to Selina Wang at Bloomberg, who seems to just be sitting in Vision Fund partner meetings). And of course, it dumped a pretty penny into WeWork China, where it was part of a $500 million syndicate, and is a huge investor in Didi.
It’s sort of obvious that SoftBank would expand to China. What will be interesting though is to see how the fund structures itself long-term. As far as I know, the Vision Fund is a singular “fund” that invests worldwide (send me an email if I am wrong on this count). China has a thicket of regulations on funds and companies, which is one of several reasons we see specifically China-focused vehicles (such as Lightspeed and Lightspeed China or Sequoia and Sequoia China). If the Vision Fund continues to be a unified fund, that would be a notable strategy shift that might be cloned by other trans-Pacific funds.
Aside: SoftBank Vision Fund math is complicated
Rajeev Misra, board director of SoftBank Group and CEO of SoftBank Investment Advisors. Photo by Drew Angerer/Getty Images.
When it first closed the Vision Fund, SoftBank explained they had raised just over $93 billion in committed capital or, more precisely, around $93.15-$93.2 billion, according to the initial investor presentations and its annual Form D filings. In those docs, SoftBank said that the fund was financed with $28 billion from SoftBank and $65 billion from third-party investors.
On top of the $93 billion raised for the Vision Fund, SoftBank detailed that it had committed $4.5 billion of its own capital to a separate “Delta Fund,” which was used to alleviate conflicts around SoftBank’s Didi investment. Thus, SoftBank’s total VC funding aggregates to around $97.7 billion.
To add a complication, SoftBank later shifted $1.6 billion of the Vision Fund’s previously disclosed $65 billion in third-party capital over to the Delta Fund. In current disclosures, SoftBank shows $91.7 billion of committed capital for the Vision Fund ($28.1 billion from SoftBank and $63.6 billion from third-party investors). For the Delta Fund, SoftBank shows $6 billion in committed capital ($4.5 billion SoftBank contribution and $1.6 billion from third-party investors).
Here is where it gets even more complicated. In its latest filings, SoftBank also notes that it completed the interim closing of an additional $5 billion for the Vision Fund in mid-October, “intended for the installment of an incentive scheme for operations of SoftBank Vision Fund.” That additional cash would bring Vision Fund’s total committed capital to $96.7 billion, and $102.7 billion together with the Delta Fund.
While it wouldn’t be included in the committed equity capital total, SoftBank is also rumored to be raising a $4 billion credit facility to help finance additional acquisitions.
So, it’s probably best to say that the Vision Fund — as constituted right now — is $97 billion or $96.7 billion with precision, assuming this $5 billion reaches a final close.
SoftBank IPO
We have, of course, covered SoftBank quite obsessively, particularly its debt situation (Part 1, Part 2, Part 3, Part 4 and Part 5). What we haven’t covered more recently are the latest developments in SoftBank’s IPO, which is slated for December 19th and expected to bring in a haul of $21 billion. More to come on that front in the coming days.
Foxconn or Foxgone?
U.S. President Donald Trump and Foxconn Chairman Terry Gou. BRENDAN SMIALOWSKI/AFP/Getty Images
The South China Morning Post reported yesterday that Foxconn is investigating expanding its factories to Vietnam in order to avoid tariffs. Makes sense, and I have some calls this week and next trying to suss out how much hardware supply chains have really changed in response to the trade conflict.
That decision though isn’t just about the trade conflict, but also about the quickly increasing wages of Chinese laborers, as well as political interference from Beijing. The Trump administration’s trade policies are just the excuse Foxconn needs to (at least partially) extricate itself from China, while saving face in the process.
What’s interesting is that Foxconn is also dealing with a massive brush fire in Wisconsin, where it received one of the largest economic development incentives ever offered by an American government, a whopping $3 billion package that was expected to drive manufacturing employment in the state.
Overnight, Republicans in the state legislature passed a bill that would place large restrictions on incoming Democratic governor Tony Evers. Jessie Opoien for the (Madison) Cap Times:
Under the bill, legislators would have increased influence over the Wisconsin Economic Development Corporation, and the WEDC board, not the governor, would appoint the job creation agency’s CEO. However, the governor’s power to appoint a CEO would be restored in September 2019.
That is the agency that provided the Foxconn funding, which has become a political football in Wisconsin politics. Republicans are trying to protect one of the major economic legacies of outgoing governor Scott Walker, as well as what they believe is the future direction of manufacturing work in the state. Democrats smell a boondoggle in the making.
If that wasn’t all, rumored skimpy sales for iPhones is putting enormous pressure on Foxconn’s bottom line. Debby Wu at Bloomberg reported two weeks ago that:
The contract manufacturer aims to cut 20 billion yuan ($2.9 billion) from expenses in 2019 as it faces “a very difficult and competitive year,” according to an internal document obtained by Bloomberg. The company’s spending in the past 12 months is about NT$206 billion ($6.7 billion).
Foxconn is a very dynamic organization that has weathered repeated crises over the years. It is pretty much unique in what it does today: very few other companies can scale up and down hundreds of thousands of workers to meet iPhone and other device demands with such alacrity.
But, the fundamentals of the mobile device market have apparently changed dramatically this year, and Foxconn is likely to be the company most harmed as the assembler of those devices. That could destroy not just the Chinese dream of leading in manufacturing, but also the Vietnam and Wisconsin dreams as well.
Also: If you haven’t read it, this poetry by a Foxconn worker who committed suicide really resonated with me. Foxconn’s suicide problem is well-documented, but we often don’t hear from the individuals themselves.
Quick bites
Which big tech companies are most depressed?
Blind, the anonymous enterprise chatting app that has taken the tech world by storm, published survey results asking tech employees “I believe I am depressed.” Roughly 40 percent of employees responded yes. Interestingly, there wasn’t too much variation between companies. Amazon had the highest rate at 43 percent and Apple had the lowest rate at 30 percent. It’s an informal survey, probably without high scientific validation, but it is a reminder for all of us in the community that mental health and burnout is very real in the startup and tech ecosystems and we should be vigilant in helping each other when times are rough.
More bad news for Huawei as British Telecom bans its equipment
This is one of those stories that we are just going to keep hearing about. After bans in Australia and New Zealand, British Telecom has announced they will not just ban Huawei’s 5G equipment, but also its 3G and 4G equipment. Britain, like Aus/NZ, Canada and the U.S., is part of the Five Eyes intelligence network, and national security officials have been leading the crusade against Huawei infrastructure. What’s interesting is not just the rapidity of the bans, but also that the bans haven’t (from what I have seen) migrated outside the Five Eyes community yet.
Pendo commits to hometown of Raleigh
Raleigh skyline. Photo by James Willamor used under Creative Commons via Flickr.
Pendo is a digital product management platform that has had quite a bit of success with customers and has raised more than $100 million in VC funding, most recently a Series D from Sapphire. The company announced that they have received a grant from home state North Carolina’s economic development department to grow in the Raleigh region. Pendo is committing $34.5 million to its headquarters (with the potential of creating 590 jobs), while the state will offer around $8.8 million in potential reimbursements over the next 12 years.
Given what I wrote yesterday about Wes McKinney leaving NYC and heading to Nashville and the work Chattanooga is doing to aid startups, it’s great to see other hotspots like Raleigh, NC invest to build out their ecosystems in a compelling way.
Todd Olson, CEO of Pendo, explained to me by email that, “Office rents in our downtown are a fraction of the cost of operating in other cities, and the cost of living is appealing to our employees. They can afford to buy a house here. In some markets around the country, that is becoming more difficult. It’s also just a nice place to live and work.”
Creative work is increasingly going to have to find a lower-cost home.
What’s next
I am still obsessing about next-gen semiconductors. If you have thoughts there, give me a ring: danny@techcrunch.com.
Thoughts on articles
The LP Anti-Portfolio – Great short read. Lindel Eakman, former managing director at UTIMCO, the University of Texas/Texas A&M endowment, gives a list of funds that he passed on that he now regrets. Unfortunately, this is pretty rare coming from an LP, albeit a former one. It would be great to get more public discussion on which funds were missed and why by LP investors.
Hopefully more reading time tomorrow.
Reading docket
What I’m reading (or at least, trying to read)
- Huge long list of articles on next-gen semiconductors. More to come shortly.
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PlushCare nabs $8M Series A to prove telehealth can go mainstream
Today, PlushCare, a telehealth service, is announcing an $8 million Series A led by GGV Capital with participation from Lightspeed Venture Partners and Exponent. Telehealth is anything but new, Teladoc, now public, was founded in the early 2000s to provide remote care over video conference, but PlushCare aims to accomplish what others have thus far been unable to do — actually get… Read More
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