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

Skillz has announced it is 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 kicked off in 2012 with a very simple proposition and stuck to it, said Skillz CEO Andrew Paradise in an interview with GamesBeat. Skillz provided 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 enabled 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 in 2020 without all the hassle of a traditional IPO. SPACs are set up by managers who raise money in a blind shell company, where 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 a private investment in a public company (PIPE). In this case, institutions invested $159 million in PIPEs into Skillz, giving it access to even more money than was in the SPAC.

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

At the end of the transaction, Skillz will have roughly $250 million in cash and the public company investors will own around $600 million of the resulting $4.3 billion post-money valuation of the company, or roughly 14% of it. After the deal closes, the PIPE investors who will hold stakes in Skillz are Wellington, Fidelity, Franklin Templeton, and Neuberger Berman funds. Skillz stockholders, the top executives, and Flying Eagle investors have agreed to not sell their stock in the company 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.

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.” And he saw that companies often took eight to 12 years to get to an IPO.

“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 weren’t believers, as the conventional wisdom was that esports would have the most enthusiasm on hardcore platforms such as the PC and the consoles. Mobile felt like it was too casual to support the passion of esports.

Unexpectedly, mobile esports caught on in a huge way. Skillz took a cut of the transactions and it 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. And it took just eight more months after that to hit a $100 million run rate in May  2017.

Earlier this year, San Francisco-based 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 lots of 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 two 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.

Getting traction

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

By 2018, Skillz hit a $400 million run rate. Rivals such as Sony and Amazon took on Skillz, but they faltered. Skillz grew, and it now has more than 200 employees.

Skillz said that the No. 1 player in the world for its mobile esports platform in 2019 is Jennifer “HestiaX” Tu. She ranks sixth on the list of the world’s top-earning esports players across the entire esports industry. She won $3.96 million in 2019 and $5.33 million during the past decade in mobile esports. Players like Tu were the foundation for further 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 founder and chief revenue officer Casey Chafkin will continue to lead the company. As for 2020 revenue, Paradise said that growth is good compared to 2019.

Paradise said there were perhaps 10 different SPACs pursuing the Skillz deal, but he has known Sloan and his team (Jeff Sagansky and Eli Baker) for a while. Sloan was a founding investor and board member of ZeniMax Media in 1999, 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 DraftKings, the fantasy sports betting company, public through a SPAC in April.

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

The company expects to use the proceeds to accelerate Skillz’s growth in both 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. Winston & Strawn is acting as legal advisor to Skillz. Goldman Sachs & Co. is acting as financial advisor to Flying Eagle as well as the exclusive placement agent for the PIPE. White & Case is acting as legal advisor to Flying Eagle.

So who’s selling the stakes in Skillz? Early shareholders including venture capitalists who backed the company are selling their stakes. Upon the closing of the transaction, Paradise, who holds 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.”

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