Mobile esports company Skillz has begun trading on the New York Stock Exchange, becoming the latest company to take advantage a boom in the game industry.
Skillz will have a multibillion-dollar valuation. It went public through a quick initial public offering process known as a special purpose 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.
Skillz is technically merging with Flying Eagle Acquisition, which is led by the same financial team that brought DraftKings public through a SPAC. The company’s market value at the outset of trading was $3.5 billion, and it has risen to close to $7 billion, with shares starting at $10 a share and hitting $19.84 at the moment.
It’s a big day for founder CEO Andrew Paradise. He launched the San Francisco startup launched in 2012 with a simple proposition and stuck to it, Paradise said in an earlier 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 into its platform.
In its most recent third quarter ended September 30, the company reported revenues of $60 million, and it has reported higher engagement thanks to the pandemic, much like the rest of the game industry.
Skillz has a relatively small base of 2.7 million monthly active users, but the keyword on that is active. Paradise pointed out that this is a tiny fraction of the 2.7 billion gamers in the world, and so there is a lot of time to grow. In 2020, Skillz expects to power more than 2 billion tournaments, including 500 million paid entry tournaments, and facilitate $1.6 billion in paid entry fees generating $225 million in revenue. The average revenue per user is $6.93.
“The incredible reception has been so humbling,” said Paradise. “We’re so excited. And since we announced the merger, we have transitioned more than half of the investor base from hedge funds to fund investors with long-term outlooks” such as Franklin Templeton.
The 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 is acquiring 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 more money in PIPEs, giving Skillz access to even more money.
The company raised $848 million through the SPAC, and of that amount about $608 million went to the early-stage investors such as venture investors. Neither Chafkin nor Paradise sold any of their stock. The net proceeds for the company are about $240 million, and it will have no debt. About $690 million came from the SPAC, while follow-investors (via a PIPES transaction) put in another $158 million.
“The SPAC gave us more opportunity and we met with more than 100 investor groups in the process,” Paradise said. “The competition between SPACs was hotly contested and only slightly more expensive than a traditional IPO.”
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.
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.
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.
By 2018, Skillz had hit a $400 million run rate. Rivals like Sony and Amazon took Skillz on, but they faltered.
Skillz plans to use the proceeds to accelerate growth in domestic and international markets, support marketing efforts, and provide additional working capital.
Paradise said in an interview that the company has forecast 87% growth for 2020, and each quarter so far this year has exceeded expectations, with the most recent September 30 quarter exceeding revenues of $60 million by 35% from the previous quarter. The company has more than 200 employees, and employees were able to sell 60% of their shares today.
Updated: 11:34 a.m. Pacific on 12/17/20 with interview and other details.
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