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Competitive mobile game maker Skillz will do a quick IPO at $3.5 billion valuation

From Venture Beat 9/2/2020 

Skillz today announced it’s going public through a quick initial public offering process, raising an estimated $849 million in cash from investors at a $3.5 billion pre-money valuation. This valuation is 6.3 times the company’s projected revenue for 2022.

The San Francisco startup launched in 2012 with a very simple proposition and stuck to it, said Skillz CEO Andrew Paradise in an interview with GamesBeat. Skillz provides a platform to turn any mobile game on iOS and Android into one you can play with friends or strangers for cash, prizes, or points. And it enables esports tournaments for games that integrate its platform.

“Everyone wants to compete, right? And that was the premise of the company, the one simple belief,” Paradise said. “We’re building out the competition layer of the internet. Everyone everywhere wants to unleash their inner champion in competition. We’re really excited about this next milestone.”

Going public

Skillz is going public this fall on the New York Stock Exchange through a special public acquisition company (SPAC). This has become a popular way for fast-moving companies to go public without all the hassle of a traditional IPO. SPACs are set up by managers who raise money in a blind shell company, and the investors don’t know what they’re putting their money into.

In this case, a SPAC called Flying Eagle Acquisition, headed by Bethesda owner ZeniMax and DraftKings SPAC veteran Harry Sloan, raised $690 million as a publicly traded entity. It will acquire Skillz, at which point the public shell company will essentially become Skillz. On top of that, institutional investors put money into the new company using private investments in a public company (PIPE). In this case, institutions invested $159 million in PIPEs, giving Skillz access to even more money.

Above: Skillz players will play 2 billion matches in 2020.

Image Credit: Skillz

At the end of the transaction, Skillz will have roughly $250 million in cash and the public company investors will own around $849 million of the resulting $3.6 billion post-money valuation of the company, or roughly 25% of it. After the deal closes, PIPE investors Wellington, Fidelity, Franklin Templeton, and Neuberger Berman will hold stakes in the company. Skillz stockholders, the top executives, and Flying Eagle investors have agreed to not sell their stock for 24 months.

“We’re getting the best institutions in the world that we want to partner with for many years,” Paradise said.

It’s not a bad bet for investors. Most game companies are enjoying record profits during the pandemic as people turn to games while sheltering in place. “Our second quarter was the best in the history of the company,” Paradise said.

A long journey

Above: Andrew Paradise is CEO of Skillz.

Image Credit: Skillz

Paradise is a serial entrepreneur who began as an inventor. He started web media and advertising company Double Picture in 2008 and later sold it to MPA. In 2010, he founded AisleBuyer, a virtual shopping assistant that created a mobile self-checkout system. He sold that to Intuit in 2012 for an estimated $80 million to $100 million. Then he teamed up with Casey Chafkin to cofound Skillz. They brought in some engineers who took big pay cuts to build the platform.

“We learned about what it means to build an independent company because I didn’t want to sell again,” Paradise said. “I sold twice before. I really wanted to build a long-term independent company, not something where it would be consumed again by someone else’s company and I’d see all my work go away and just be left with this pile of money.” He saw that companies often took eight to 12 years to get to an IPO and prepared for that journey.

“We’re right on track to achieve our goals going public. So it feels really good to have that long-range plan and to get there,” he said.

There were some “near-death experiences” along the way, Paradise acknowledged. Many people were initially skeptical since conventional wisdom was that esports would do best on hardcore platforms such as PCs and consoles. Mobile seemed too casual to support the passion esports generates.

But mobile esports caught on in a huge way. Skillz took a cut of the transactions on its platform and made ad revenue as well. It took more than 36 months for the company to generate its first $50 million annual run rate or the money it generated in the trailing 12 months. But it took just eight more months to hit a $100 million run rate in May 2017.

Earlier this year, Skillz announced that the top 10 mobile esports athletes earned $33 million in prizes in a decade, and 70% of those players were women. The platform now operates many tournaments a day, and it helps indie game developers generate a new source of revenue beyond the difficult business models of premium payments or free-to-play games. Skillz estimates it will power over 2 billion casual esports tournaments in 2020 and facilitate $1.6 billion in paid entry fees for games hosted on its platform.

“We’re a democratizing factor of the mobile gaming industry, where small independent developers can build real businesses alongside the giants,” Paradise said. “Most of the businesses on the platform have really grown with us. One started as a husband-and-wife business, and now they have a 20-person company and double-digit millions in revenue. We were the first company to believe in mobile esports. We run the infrastructure for the developers, and they focus on what they do best, which is to make great games.”

In some ways, Skillz is offering visibility into the larger game industry, which has become bigger than movies, music, and books. There are more than 2.7 billion gamers playing monthly and 10 million developers. Mobile is the fastest-growing part of the market, expected to grow from $68 billion in 2019 to $150 billion by 2025, according to market researcher Newzoo.

Gaining traction

Above: Skillz will have $250 million in the bank after its SPAC transaction.

Image Credit: Skillz

By 2018, Skillz had hit a $400 million run rate. Rivals like Sony and Amazon took Skillz on, but they faltered. Skillz continued to grow, and it now has more than 200 employees.

Skillz said in 2019 the No. 1 player in the world for its mobile esports platform was Jennifer “HestiaX” Tu. She ranks sixth on the list of the world’s top-earning esports players across the entire industry. She won $3.96 million in 2019 and $5.33 million over the past decade in mobile esports. Players like Tu have paved the way for additional growth, as a lot of people saw her success and wanted to cash in too.

Paradise said the company is projecting 2022 revenue of $555 million, a 57% compound annual growth rate from expected 2020 revenues of about $225 million (which would be up about 88% from 2019). Paradise and Chafkin will continue to lead the company.

Paradise said about 10 different SPACs were pursuing the Skillz deal, but he has known Sloan and his team (Jeff Sagansky and Eli Baker) for a while. In 1999, Sloan was a founding investor and board member at ZeniMax Media, which went on to become a huge company with Bethesda Game Studios, owner of the Skyrim and Doom franchises, among other games. Sloan’s team took fantasy sports betting company DraftKings public through a SPAC in April.

“Harry has been in media and entertainment for a long time,” Paradise said.

Skillz plans to use the proceeds to accelerate growth in domestic and international markets, support marketing efforts, and provide additional working capital. The transaction is expected to close in the fall of 2020.

LionTree Advisors and Jefferies are acting as financial advisors to Skillz, and Winston & Strawn is acting as a legal advisor. Goldman Sachs is acting as financial advisor to Flying Eagle and the exclusive placement agent for the PIPE. White & Case is acting as a legal advisor to Flying Eagle.

Early shareholders, including venture capitalists who backed the company, are selling shares for this deal. When the transaction closes, Paradise, who has a controlling voting interest in Skillz, will hold a controlling voting interest in the combined company.

“I just really loved video games,” he said. “I learned how to program for games. It was really amazing to be a part of this industry. It’s pretty awesome to be here and at a place where I think we can really try and help solve the problem” of helping developers monetize.

Updated at 7:50 a.m. Pacific with corrected information on post-money valuation.