The runaway success of hit games created on user-generation platforms, chiefly Roblox, is increasingly attracting investment from venture capital and publishers who previously backed PC and console games, says investment firm Double Black Capital, who say that major publishers won’t be far behind.
The firm has worked on a series of deals around Roblox, Unreal Engine Fortnite (UEFN) and Minecraft, with the former representing the lion’s share. While buyers are lead by growing Roblox-native developer/publishers like Voldex, Do Big and GameFam, there is increasing investment with private equity investors and what Double Black co-founder and partner Andrew Porat describes as “mid-market publishers”, like Germany’s GameForge, who are “looking for value, and finding it in the UGC space” rather than the conventional titles they’ve backed before.
Dealmaking in Roblox has picked up pace in the last few years, the firm says, as investors swallow their concerns over the platform. “The platform risk is extraordinary, which is what kept a lot of them from coming in the first place,” says Managing Partner Brogan Keane, adding that investors didn’t want to get “Facebook Gaming’d”. “But it’s gotten so big that they’re rationalizing: well, if we put it up against the UEFN and we put it up against the PlayStation and everything else in PC, we can balance the risk out. They just couldn’t ignore it anymore.”
“Four or five years ago, when we spoke to the AAA publishers, they were just a hard no on anything UGC,” says Porat. “Now they’re in ‘Let’s take a look’ mode. They’re going to the Roblox Developer Conference. It’s only a matter of time before somebody like Electronic Arts, Take-Two or Scopely does one of these bigger Roblox acquisitions and makes a big splash.”
For now, the main buyers are big UGC firms, private equity and investors, although Keane says the latter initially struggle to grasp the fact that Roblox games pay 70% of their revenue to the platform, rather than the 30% standard on Steam or the App Store.
“It’s only a matter of time before somebody like Electronic Arts, Take-Two or Scopely does one of these bigger Roblox acquisitions”
“The 70% clip on your revenue is kind of crazy,” he says. “It’s also crazy that there’s even a business after starting with a 30% gross margin. But when your costs are non-existent, really, it’s still just wildly profitable. When you’re an investor, you’re like: ‘Wait, so you have 30% gross margin to start with. How is that going to be a business that can scale? But it’s a better business model than just about anything in traditional gaming.”
“You’re building a product that’s generating, call it $10 million plus in revenue annually that you built for under $50,000. That to me is like a Roblox classic, That’s just insane, those numbers.”
Double Black became involved in the scene “mostly through luck”, says Porat, when a lawyer for a 20-something Roblox developer reached out saying that he was looking to sell. “He took all of the Zoom meetings in a robe from his house and he wanted to sell us games. He had been on the platform at that time as a developer for 13 years.” The firm did the deal, and the seller referred them to others he knew in the Roblox development scene. Five years later, the work has not stopped coming.
The firm ended up navigating deals between hard-bitten private equity lawyers with billions of dollars under management, and teenagers represented by strip-mall lawyers with no M&A experience. It’s been a learning experience for both parties. Private equity, says Keane, “come in with these crazy hard business tactics that would never work with a teenager who’s living with his mom, doing management meetings from his bed. That doesn’t work.”
“Their contract for due diligence was a screenshot of a Discord message that said ‘Do you agree to this?’ and the other person replying saying ‘Yes'”
The teens, meanwhile, were not set up to sell. “It was hard to get a deal done early on because people just weren’t set up to transact as companies,” says Keane. “A lot of these are kids building these games. There was no use of lawyers in most cases. They ran everything through a checking account. There were no LLCs and C corps being created. It was just complete craziness.” One deal fell apart at the last minute when the seller realised how much of the proceeds would be lost to capital gains tax.
Then came the compliance issues: “One of the largest Roblox companies, their contract for due diligence was a screenshot of a Discord message that said: ‘Do you agree to this?’ and the other person replied saying ‘Yes’,” says Porat. “That was their contract.” Since then things have professionalised somewhat, though Porat says there is still “room for growth”. While UGC creators have wised up and started using lawyers, they’re “using their local attorney, not paying up for the larger firm or a real specialist firm,” he says. “That has been quite a roadblock for the M&A landscape because if you are looking to raise money or sell your company to somebody who’s quite sophisticated, who’s done M&A as a core competency, and you’re going in with your local regional attorney who doesn’t know about the games industry, doesn’t know about M&A. It’s bringing a knife to a gunfight.”
Rules of negotiation aside, UGC acquisitions move a lot faster than the traditional PC or console industry. To start with, the deal timelines are quick – one-to-two months, compared to the six-to-eight months it typically takes for fundraising or acquisition talks in the broader games space – and usually involve only the game, rather than the team behind it.
“In nearly all of the Roblox deals that we’ve seen, they’re game sales more than studio sales,” Porat says. “They sell the game, they do a transition where they help out, they might keep a percentage of the game, but it’s not the same as a typical M&A acquisition where you buy the team, they stay on and work on the next project.” Acquirers increasingly have teams lined up to take over development and management.
“”In PC, console or mobile, a shorter earnout is probably two or three years. In Roblox, it’s two or three months”
Earnout periods go a lot faster, too. “The traditional earnout structure doesn’t work for when you can make a game for $40,000 and make $10 million a year from it,” Porat says. The traditional earnout structure of the investor offering funding and support for the next title doesn’t appeal to Roblox devs when “the buyer probably doesn’t know as much as you about Roblox, and you don’t really need their money.” Keane adds: “In PC, console or mobile, a shorter earnout is probably two or three years. In Roblox, it’s like two or three months. It’s so different.”
He continues: “Part of the delay in private equity getting involved is that their assumption was always that they’d support the developers, they would start to build it, give them all the resources. But the developers don’t need the resources. Only native developers have been successful in the platform. There’s really not much [investors] could give them. There’s no reason for them to stick around for a longer term earnout and get the resources of a bigger entity.”
Are investors worried that Roblox’s huge youth audience will leave the platform as they age? Porat doesn’t see it. “If you look at the number one game on PlayStation, it’s Roblox,” he says. “The thesis we have is that you go from playing Roblox on your phone or your iPad as a kid to playing PlayStation or Xbox. I look at that as a pretty interesting data point to suggest that those people who are aging up still want to play on Roblox.”
Plus, he points out, buyers are getting huge communities attached to each game. “Some of these Discord servers are just beyond massive,” he says. “One of our clients right now in the Roblox space is one of the top 20 Discord servers, period. It’s just for their game that they made a year ago. Think about that in terms of scale. When you build communities around these games, maybe they’re not ten-year IPs, but there’s not a lot of those anyway, in anything.”
“The way investors are looking at it is, they’re not paying for a ten-year IP. They’re paying for a two to five year investment return period. A lot of folks who are doing these acquisitions are seeing the value of bringing their expertise because most of these UGC companies are founded by teenagers or 20-year-olds. When you add to the mix 20 or 30 years of experience, you would think that product would get better and not worse.”
Investors are not concerned with Roblox’s well-publicised issues with moderation and ongoing litigation over child safety, either, says Porat, who stresses that he’s “not minimising” concerns over the platform but that the negative public perception “creates an opportunity for those who are actually going to look deep here.”
“Minecraft is starting to come up because there’s some people who are hungry in the Minecraft space and they’re seeing the Roblox story”
For those creators who want to sell, Keane’s advice is to go pro and set up a company. “If you really are serious about building businesses, you need to create a foundational business, just create a legal entity and get help, especially legal help to make sure you set it up correctly” – with the caveat that vanishingly few UGC games get big enough to attract buyer interest. Those best of that do, though, can expect to get offers of “four to six times profit/revenue”, says Porat, with mid-tier titles getting half of that or less.
It’s not just Roblox, either. “Minecraft is starting to come up because there’s some people who are hungry in the Minecraft space and they’re seeing the Roblox story,” says Porat. “We’re working on a deal in Minecraft for a debt raise and acquisition. We’re working with a UEFN studio interested in selling. We’re working with a GTA UGC company who’s raising a seed round and looking to make acquisitions.”
The pair say that an increasing number of investors are coming to them looking for UGC deals, drawn by the intoxicating promise of huge revenue and very low operating cost. Mid-sized publishers, meanwhile, see the space as an easier bet than the PC and console games they would previously have invested in. “A lot of mid-market publishers who are looking at the space seriously, they’re saying they can acquire studios in this space, or games, for low single digit multiples, and put a small team on it, operate it and have a cash flowing business,” says Porat. “They can hopefully grow or keep it the same, and make more money than if [they] invested that in a new IP or a new project.”
