Venture Capital Private Equity investments in the Games Sector

1
Venture Capital / Private Equity investmentsin
the Games Sector

• GameConnect Asia Pacific
• Craig Blair Craig_at_netus.com.au
• November 2007

2

• Agenda
• Background to netus
• PE/VC landscape US Australia
• VC process how it works
• VC investment in the Games sector
• Opportunities in Games sector

3
netus

• Back by a team with extensive operational
  experience in running high growth technology
  media companies
• Daniel Petre, Alison Deans, Craig Blair
• Responsible for financing or launching many
  well-known, technology media businesses in
  Australia
• MSN, eBay, Expedia, Monster, Charles Schwab,
  Ticketek
• netus is funded by News Ltd
• Remains a separate entity but can access
  relationships within the News network of
  businesses
• netus has a very hands on investment model
• We like to work closely with the management teams
  of the businesses we are involved in

4
Venture Capital model investing behind strong
management teams with differentiated business
models
netus Investments

• Strategic partnership with Tantalus Interactive
  since May 2007
• Netus provides finance and business development
  support
• Netus providing capital for acquisitions
  organisational growth

• Netus took a 19.9 stake of travel.com.au in
  April 2006, which included a Board seat
• Netus provided operational marketing guidance
  expertise to improve business performance
• Netus divested their shares in October 2007 with
  an IRR of 90

5
Import model launching proven International
tech/media businesses in Australia
netus Investments

• Acquired local SEM business to jump-start agency
  expertise
• Launched Efficient Frontier in AU NZ, March
  2007
• Leveraged our business networks to build client
  base quickly

• Publisher of professional niche blog sites.
  Localises licensed content from the world leading
  blog networks eg Gawker network (Gizmodo, Kotaku,
  Defamer, LifeHacker) in AU
• Netus recruited the local editorial and sales
  teams

• JV with leading US provider - ReachLocal Inc - to
  provide online marketing solutions for SMEs
• Netus provides finance and business development
  support
• Netus providing capital for growth IP
  development

6

• Agenda
• Background to netus
• PE/VC landscape US Australia
• VC process how it works
• VC investment in the Games sector
• Opportunities in Games sector

7
Introduction to Private Equity Venture Capital
investing

• Private Equity An overview
• Broadly defined firms that make investments in
  companies on behalf of private investors
• Investments typically involve a transformational,
  value-added, active management strategy and are
  usually funded through debt equity
• Private Equity investments can be divided into
  three main categories
• Venture capital (Seed Early Stage) An
  investment to create a new company or invest in a
  start-up with strong growth potential (High
  Risk)
• Venture capital (Expansion or Late Stage) An
  investment to expand a small or nascent company
  with undeveloped or developing revenues (Med
  Risk)
• Buy-out Distressed Acquisition of a
  significant portion or a majority control in a
  more mature company that is under performing or
  distressed due to changes in market or business
  conditions. The acquisition normally entails a
  change of ownership (Low-Med Risk)

Source Wikipedia

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VC/PE Landscape - US
Source PwC Venture Capital Fundraising Press
Release, April 2007 Stuckincustoms.com Recent
venture capital deals in games Oct 2007

9
VC/PE Landscape - AUS

• Venture Capital Firms
• 10 VC firms (ave size 45M)
• Raised 40 1.8Bn since 99,
• Ave. size of funds has remained relatively
  constant
• Smaller local specialized differentiated firms
• Strong focus on technology, bio-tech, software
  internet cos
• Typical investment size 0.5M-10M
• Portfolios of local VCs include
• Hitwise
• Seek
• Tantalus Media
• Distra Payment software

• Private Equity Firms
• 45 PE firms (ave size 160M)
• Raised 13.7Bn since 99
• Ave. size of funds has grown from 50M to 400M
• Dominated by large domestic international firms
• Strong focus on retail, industrial, media and
  service cos
• Typical investment range of 20M-1Bn
• Recent deals include
• Qantas - 11.1Bn bid Macquarie Bank, Allco
  Equity Partners, TPG
• Myer Stores - 1.4Bn TPG-Newbridge Capital

10
VC/PE Landscape - AUS

• Venture Capital Firms
• 10 VC firms (ave size 45M)
• Raised 40 1.8Bn since 99,
• Ave. size of funds has remained relatively
  constant
• Smaller local specialized differentiated firms
• Strong focus on technology, bio-tech, software
  internet cos
• Typical investment size 0.5M-10M
• Portfolios of local VCs include
• Hitwise
• Seek
• Tantalus Media
• Distra Payment software

• Private Equity Firms
• 45 PE firms (ave size 160M)
• Raised 13.7Bn since 99
• Ave. size of funds has grown from 50M to 400M
• Dominated by large domestic international firms
• Strong focus on retail, industrial, media and
  service cos
• Typical investment range of 20M-1Bn
• Recent deals include
• Qantas - 11.1Bn bid Macquarie Bank, Allco
  Equity Partners, TPG
• Myer Stores - 1.4Bn TPG-Newbridge Capital

11

• Agenda
• Background to netus
• PE/VC landscape US Australia
• VC process how it works
• VC investment in the Games sector
• Opportunities in Games sector

12
VC in Australia How it works?
What do we look for

• Differentiated or innovative offerings
• Strong management team
• Proven traction in business or record of success
• Strong focus on growing developing business in
  Australia

Typical deal

• 2-6M investment for 20-60 of business
• No set time frame but typically 3-5 yr horizon

• Initial meeting discussion of business (1-2
  wks)
• Term sheet, bus. planning due diligence
  (6-8wks)
• Legal document completion investment (1-2wks)

Investment process

• Active, hands-on approach to management
• Work closely with management team to develop
  appropriate strategies to unlock business
  potential
• Assist with growth through capital investment in
  resources, infrastructure acquisitions

How do we work with our partners
13

• Agenda
• Background to netus
• PE/VC landscape US Australia
• VC process how it works
• VC investment in the Games sector
• Opportunities in Games sector

14
VC investment in games sector key considerations

• Market considerations
• Cyclical factors Point of the hardware/software
  release cycle
• Growth of non traditional games market casual,
  handheld mobile
• Growth of alternative dist. channels impact on
  publishers developers
• IP vs Fee for service Payments of milestones,
  royalties, license fees etc.
• Hit driven model Profitability driven by
  success of each game with users

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VC investment in games sector key considerations

• Business considerations
• Management team History of successful on-time
  delivery
• Quality of staff experience of senior
  management, developers creative team
• Scale Balancing of growth with creativity
  team dynamics
• Constraints to growth hiring / sales/
  publishers / culture
• Differentiation platforms, games, IP, publisher
  industry relationships
• Profitability Revenue streams, development
  costs cashflows

16

• Agenda
• Background to netus
• PE/VC landscape US Australia
• VC process how it works
• VC investment in the Games sector
• Opportunities in Games sector

17
Where netus sees the opportunity in games

• Invest into management teams
• Strong management team
• First class reputation with publishers for
  quality delivery
• Successful development commercialization of own
  IP
• We are very involved with our management teams to
  help achieve growth potential
• We spend time with publishers media companies
  to understand their views on Australian
  development
• Invest in people innovative hiring retention
• Ongoing staff training development
• Aim to make the business the organisation of
  choice to work in
• Netus are serious about adopting best of breed HR
  programs from other sectors eg. Software
  development

18
Where netus sees the opportunity in games

• Balance fee for service work with disciplined
  investment in own IP
• Consider licensing deals eg. Newscorp (Fox)
  establishing content partners
• Gain scale
• Allows better career opportunities
• Enables investment in gaming platforms QA
  environment
• Better publisher deals, more interesting projects
• Exit at scale to
• Public markets
• Publishers
• Media companies
• - netus have the experience, credibility
  relationships to orchestrate an IPO or media
  company exit at much higher valuation!
• - netus are actively investing in this space and
  are interested in talking to companies who fit
  these criteria!