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How the pre-teen sensation Roblox became a business one, too

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Roblox, the video game platform which has become wildly popular among preteens, raked in close to $1.2bn from selling virtual currency to its users in the first nine months of the year, as activity surged under lockdown.

The figure was included in a share prospectus for the company published on Thursday evening, where the company laid out its case for investors ahead of an initial public offering.

What the company labels “bookings” — sales activity that is not yet fully recorded as revenue — was almost entirely composed of virtual currency purchases in Roblox and the $1.2bn total represented a 171 per cent increase from the same period in 2019.

Roblox recognises revenue from sales of the digital currencies, known as Robux, over the average lifetime of a playing user, which it currently estimates at 23 months.

Even during a coronavirus pandemic boom for gaming companies, Roblox has had conspicuous success, coupled with concern from some parent groups about its potentially addictive nature and the existence of offensive content on the platform.

Roblox listed its ability to “provide a safe online environment for children” as a risk factor in the prospectus.

In the first nine months this year, the company boasted 31.1m daily active users spending 22.2bn hours on its platform. This year it overtook Minecraft, the video game acquired by Microsoft in 2014, in active monthly users.

Yet its losses have been expanding along with revenues. The Roblox prospectus reports net losses of $203m in the nine months to 30 September, on revenues of $589m, compared with losses of $46m on revenues of $350m in the same period last year.

Roblox said it would raise as much as $1bn in its public offering, likely a place holder number, with Goldman Sachs, Morgan Stanley and JPMorgan acting as lead underwriters.

The start-up was most recently valued at $4bn when it raised a $150m funding round led by the venture capital group Andreessen Horowitz in February.


$209.2m


Amount earned by Roblux developers in the first nine months of 2020

Roblox’s success was rooted in its model as the “YouTube of the gaming world”, said Matthew Warneford, founder of children’s digital consultancy Dubit. Rather than creating games, it offers developers tools to build their own game worlds.

“That allows for innovation in a way that can’t exist [in traditional gaming] because of the cost it takes to compete,” he said. “All the big studios are . . . investing tens of millions into a game, hopefully having a big success . . . [whereas] it costs Roblox nothing to bring a new game on board.”

The 18m “experiences” available on the platform stretch across genres, ranging from unofficial versions of other titles, recreated with Roblox’s signature blocky characters, to digital pet adoption simulators, to virtual cities where young users can build homes, earn livelihoods and hang out.

While a subset of most popular games capture the bulk of players on the platform, there is still potential for new games to go viral, said Mr Warnefood. Survival horror game Piggy was created only in January but has been played more than 6.5bn times, making it the fourth-most popular game on the platform, according to data from Dubit.

The 18m ‘experiences’ available on Roblox range from unofficial versions of famous games to virtual cities where young users can build homes, earn livelihoods and hang out © REUTERS

Developers can earn money by selling in-game items, such as pets or guns, for the platform’s digital currency, Robux, bought with real money. Almost one-half of the earnings are split evenly between Robux and developers, with the remainder spent on platform costs such as hosting and app store and payment processing fees.

Roblox said developers had earned $209.2m up to the end of September this year, compared to $72.2m during the same period in 2019.

“I wouldn’t say it’s mainly been successful [in encouraging innovation and retaining creators] because of developers being able to make money, but I do think it plays a role,” said Tom Wijman, senior analyst at market research group Newzoo.

John Poelking, senior gaming analyst at Mintel, added that young gamers were spending more of their own money on small in-game purchases, with data from pocket money app RoosterMoney showing that Robux is one of the top products which children are saving for this Christmas.

Mr Wijman emphasised that Roblox’s appeal, like that of Epic Games’ Fortnite, had transcended the pure gaming space. “It’s becoming an alternative place to hang out with friends . . . like another form of social media or perhaps even replacing social media,” he said, with popular games such as MeepCity boasting social role-play experiences similar to Second Life or Club Penguin.

Roblox’s status as a public square had been heightened by events such as virtual performances by rapper Lil Nas X’s concerts in November, which was viewed 33m times, according to the company. In April, a similar event by fellow musician Travis Scott on Fortnite was viewed more than 45m times.

Mr Warneford said that while Roblox still lacked polish in a number of areas, including its developer tools, these were “low-hanging fruit” for the company. “All of that is solvable [given] they managed to get [more than] 150m players every month without professionals making the games.”

The demand Roblox had received during the pandemic was also unlikely to evaporate, said Mr Wijman, based on data coming out of markets in Asia that have left or are leaving lockdown. “Perhaps the level of engagement . . . will fall a little when there are other things to do,” he said, “but we don’t expect a large decline when the world goes back to normal.”



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Rocket Lab/Spire Global: Spacs, the final frontier

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Life sometimes imitates emojis. Social media stock tipsters are fond of littering posts with rocket symbols. Rocket Lab, which is floating at a $4.1bn enterprise value, makes the real thing. It was one of two space-related businesses to join the market via special purpose acquisition companies (Spac) on Monday, as the surge in these listings continued.

Just two months into the new year and Wall Street has raised a staggering $58bn through 188 blank cheque vehicles, according to Refinitiv. With hot money appearing to outweigh the supply of merger candidates, sponsors are howling to the moon for deals.

Rocket Lab launches smaller satellites into space. Its celestial twin was Spire Global, a satellite data group that is combining with a Spac at a $1.6bn equity valuation.

Like many recent Spac companies, Rocket Lab and Spire are justifying their valuations with lofty sales and earnings growth projections. Rocket Lab, which generated $35m in revenues last year, said it expected to pull in more than $1.1bn in 2026 and become cash flow positive in 2024. Spire, with just $28m in sales in 2020, is forecasting $900m in revenue by 2025 and positive cash flow in three years’ time.

Tesla founder Elon Musk and his SpaceX rocket company have reignited investor interest in US space companies. Annual revenues from space-related business — at present worth $350bn — could almost triple in size by 2040, according to Morgan Stanley.

SpaceX was reportedly valued at $74bn by its latest private funding. Shares in Virgin Galactic, Richard Branson’s space tourism company, have almost doubled since last September to give it a $9bn valuation, even as the group reported a $273m loss in 2020.

Space companies are a moonshot borne aloft by the rocket fuel of cheap money. That momentum trade has more to recommend than some others, such as fledgling electric vehicle companies. Both Rocket Lab and Spire have proven technologies to accomplish highly demanding tasks. This really is rocket science. But like space exploration itself, these investments are only for the brave.

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Coinbase’s offering docs have just dropped [Update]

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Just when you thought you’d seen it all in SEC filings, along comes the Coinbase prospectus. Which is really a direct listing. But who can tell during these days of ICOs and ITOs what a public offering even is.

The cryptocurrency platform which aims to “create an open financial system” is planning to go public via a Direct Listing on the Nasdaq in the near future. The docs dropped an hour ago.

While we dig through the paperwork, we thought we’d just share this gem from the “Definitions” page — the section of an IPO prospectus dedicated to those terms erstwhile investors might not have heard of.

Won’t you look at that:

Hodl: A term used in the crypto community for holding a crypto asset through ups and downs, rather than selling it.

There’s also an excellent use case (with our emphasis):

Borrow & Lend. We allow our U.S. retail users to borrow against and lend their crypto asset portfolios. Our first product is a portfolio-backed loan: a flexible, non-purpose 12-month term loan that allows retail users to borrow U.S. dollars using their crypto assets as collateral. Secured by their investment portfolio, customers can use the line of credit to access U.S. dollars while maintaining a “hodl” investing strategy. Over time, we plan to offer our retail users the ability to opt into lending their crypto assets to earn a passive return on their long term investments.

This is otherwise known in the real financial world as . . . a basis trade.

Meanwhile, Izzy has been pointing out some other curiosities on Twitter:

We’d also add this, which Preston Byrne on Twitter pointed out:

Satoshi as a risk factor, who’d have thought?

More tomorrow, we’ve not even got to the financials yet.





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Coinbase files to become first listed major US cryptocurrency exchange

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Coinbase, the largest US-based cryptocurrency exchange, revealed the scale of its business for the first time in paperwork for a long-awaited public listing that comes during a booming market for bitcoin and other digital coins.

Coinbase generated $1.3bn in revenue last year, up from $534m the year prior, enabling the company to turn a profit of $322m in 2020 after losing $30m in 2019, according to a filing with US securities regulators.

The company’s public debut, the first for a large US cryptocurrency exchange, is likely to rank as one of this year’s largest new tech listings and would mark a milestone for backers of the emerging sector. Coinbase is aiming to list in late March, said one person familiar with the company’s thinking.

Public investors have recently bought up shares in new market entrants such as Airbnb and DoorDash, fuelling a surge in public listings that has drawn comparisons to the 2000 dotcom bubble.

Coinbase filed for a direct listing rather than a traditional initial public offering, meaning it will not raise additional capital when it goes public.

Brian Armstrong, chief executive of Coinbase, warned that prospective investors should expect volatility in the company’s financials.

“We may earn a profit when revenues are high, and we may lose money when revenues are low, but our goal is to roughly operate the company at break even, smoothed out over time, for the time being,” Armstrong wrote in a letter attached to the filing.

Almost all of Coinbase’s revenue came from transaction fees last year, it said in the filing, underlining the company’s dependence on cryptocurrency trading fees.

Shares in the company have recently changed hands in private markets at prices that would give it a roughly $100bn valuation, according to people briefed on the trades, up from $8bn less than three years ago.

Coinbase could use those trades, in addition to input from public investors and its financial advisers, to determine its opening price on public markets.

Coinbase quickly grew into a favoured destination for cryptocurrency traders after it emerged from the Y Combinator start-up programme in 2012. It has recently touted services designed for large institutional investors and a series of acquisitions expanding its reach into software products for cryptocurrency developers.

The company said institutional activity made up almost two-thirds of its total trading volume in the fourth quarter, when transaction revenues jumped more than 70 per cent from the previous quarter to $476m. It said it had 2.8m monthly transacting users in 2020, almost tripling from the year prior.

Coinbase said it oversaw about $90bn in total assets stored on the platform, representing more than 11 per cent of the total market for cryptocurrencies at the end of last year. It has also made venture capital investments in more than 100 companies.

As trading volumes exploded this and last year, the cryptocurrency market has attracted increasing scrutiny from lawmakers and regulators, including over concerns about digital coins being used for money laundering.

In its filing, Coinbase noted the “extensive and highly evolving regulatory landscape” was a risk factor, and that its obligations to comply with various regulations would only increase as the exchange continued to expand internationally.

Among the company’s biggest investors, controlling more than 5 per cent of stock each, are Andreessen Horowitz, Paradigm, Ribbit Capital, Tiger Global Management, and Union Square Ventures.

Goldman Sachs, JPMorgan, Allen & Co and Citigroup are advising Coinbase on the direct listing.



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