Looking for Love in All the Wrong Places
Looking for Love in All the Wrong Places
Lessons in game investing from the hit indie game "Palworld"
By now, most readers must have heard of the runaway success of a recently released game called Palworld. Developed by Pocketpair (a little-known Japanese indie studio), Palworld sold 12M copies ($300M+) in under two weeks - on track to sell 20M+ copies in the first year alone and becoming the #1 most played game on Steam at launch ahead of AAA stalwarts such as Counter-Strike, PUBG, and Call of Duty. Time will tell if the game has longevity, but regardless, Palworld is the largest new IP launch in gaming since 2020’s Cyberpunk 20771.
While we are used to dark horse hits in gaming, what’s surprising is that it was created by an independent studio on a very low budget (est. $7-10M) with no VC or publisher financing. The scale of Palworld would have easily cost a AAA developer $50M+, and may not even have been greenlit due to a range of risks. In moments like these, we find it essential to evaluate the success of industry outliers such as Palworld to derive insights that can improve our content investment strategy.
What is Palworld?
Palworld is a creature-collection sandbox game with elements of action RPG, survival, and simulation games. Coined “Pokemon with guns”, the game takes great liberty in blending gameplay from a range of prior hits such as Ark: Survival Evolved, Legend of Zelda: Breath of the Wild, and of course, the aforementioned Pokemon franchise. Our team spent dozens of hours playtesting the game; it’s a great game, but it’s easy to point to predecessors who have pioneered the gameplay mechanics.
Where Palworld differs from its predecessors is in its mature tone, breaking unspoken rules in a genre that has historically catered to kids (allowing the player to use lethal force against the pet-like “pals” in the game, putting them to work in farms and factories). Given its similarity with Pokemon and the potential for public backlash over its tone, it’s unlikely this game would have been released by a major publisher
Unsurprisingly, the game’s success has been met with a fair bit of backlash, from Twitter fervor over its alleged use of artificial intelligence in game development and a potential investigation by Nintendo into copyright infringement. Despite all this, players have voted with their wallets and their time. Palworld currently sits at 94% positive rating on Steam, well within the top 1% of games ever released on the platform.
An unexpected hit?
Palword’s success, though seemingly obvious in hindsight, was anything but that from the traditional game financing framework. This is what we imagine the pitch to investors and publishers must have sounded like:
Go after a niche genre that’s dominated (perhaps even defined) by a single IP
Built by a little-known indie developer who will need to scale up an entirely new team to build the game
Spend as much on the whole game as most would spend on a vertical slice
Introduce risky gameplay that may result in public outcry
Do not spend on marketing
Despite breaking almost all the rules in game publishing, Pocketpair announced Palworld in July 2021 (trailer), and the game gradually amassed a small but dedicated community. By December 2023, a month prior to its early access release, Palworld hit #3 on Steam’s most wish-listed games. Signs pointed to a successful launch, but Palworld’s overwhelming success likely blew even the most optimistic projections out of the water.
The story is as old as time (or at least Silicon Valley). A young upstart breaks the rules and seizes an opportunity to disrupt a dominant company. In this case, Palworld’s outperformance would not have been possible without a gap in the market left by Game Freak, the developer of the Pokémon franchise2. Pokémon was not the first “creature collection” game3, but it defined the genre for the mass audience, becoming so dominant that to this day, other games in the genre are known as “Pokemon clones”.
Pocketpair’s first achievement was identifying a gap in the market. By combining nostalgia-inducing “pals” with a chaotic blend of modern gameplay, the game successfully appealed to Pokémon fans who have since “aged-up”. In fact, many players commented that this was a better Pokémon game than any from Game Freak in recent years. With a core audience secured, post-launch publicity and word-of-mouth helped spread it to the broader “core gaming” community, who feel right at home with the blend of survival and sandbox mechanics.
Pocketpair’s second (and arguably more impressive) achievement is in its development and execution. Founded in 2015 by serial entrepreneur Takuro Mizobe, Pocketpair previously released four games, including Craftopia (2020), a moderately successful survival/crafting game that showcased many of the core mechanics used in Palworld4. By building upon an established foundation, Pocketpair could iterate on a bigger (and better) new title. Development also started small; while maintaining Craftopia, Pocketpair initially allocated 4 developers to work on Palworld before gradually scaling the team to 40+ (including outsourced developers in Hong Kong and Vietnam) over a three-year period. One key hire was actually a 20-year-old convenience store clerk that Mizobe found on Twitter (link). Pocketpair’s unconventional approach allowed the Palworld team to remain agile, conserve resources, and iterate quickly.
Lessons for content investing:
1. Focus on asymmetric outcomes
In recent years, many successful new IP launches share a commonality with Palworld: they created by founders from outside the AAA gaming ecosystem. This is largely due to the vastly differing risk appetite between established AAA and independent game developers.
Over the past decade, AAA gaming has become a business of ever bigger sequels (for premium titles) and ever more content updates (for free-to-play titles), not dissimilar to what has occurred in the film industry over the past 20 years. To grow each franchise year after year, AAA games need to target the widest possible audience with ever bigger worlds, better graphics, and more reasons to stick around - resulting in ballooning budgets that are easily $200M+ for top AAA titles today. This is probably the right strategy at scale but unsuitable for a venture-backed startup.
Meanwhile, the last five to seven years have seen an influx of VC capital into gaming content, primarily to fund former AAA developers looking to start their own studios. Having worked with many of the most active VCs and strategic investors in gaming, we know how difficult it is to approve a deal without a superstar AAA founder or founding team, and we value the experience that AAA developers bring - we have funded many in the past.
Still, that expertise must be paired with the right goals and balance of risk and reward. While AAA publishers can deploy capital and develop resources at scale for proven franchises, VC investors need to focus on asymmetric outcomes, where the worst outcome is that a relatively small investment goes to zero, but the best outcome is a giant success that goes to the moon.
To develop a global phenomenon like Palworld, developers must be willing to take risks and embrace deviation. While some may shy away breaking the rules, this is precisely what makes Palworld so appealing.
2. Focus on leadership
When evaluating a studio, we recognize that successful founders can come from varying backgrounds but often lean towards entrepreneurialism - be it incubating new IPs, tackling new markets, or seeking crowdfunding when traditional financing fails them. Our focus remains on the founder's vision, ambition, execution capability, and market awareness. These unique founders often bring a refreshing vision to the gaming landscape, the determination to succeed, and a deep understanding of player demands.
Pocketpair was founded by Takuro Mizobe, a 35-year-old serial entrepreneur. After working at JPMorgan out of college, Takuro left the salaryman life and launched three companies by age 26, spanning various industries, including media and cryptocurrency, before starting Pocketpair. Mizobe’s background represents a significant deviation from the typical founders that VCs have supported over the past decade - prioritizing blue-chip logos over entrepreneurial experience. While we love AAA games and have a tremendous respect for the creative foundations of the industry, the startup life is not for everyone.
3. Focus on capital efficiency
Like Pocketpair, many of the most successful gaming companies that emerged over the past few decades started off as low-budget independent studios. Riot Games developed League of Legends for less than $10M, and Minecraft was created by a team of 10 with a budget of under $1M. More recently, 2023’s breakout hit Lethal Company (sold 10M copies on PC alone) was created by a solo developer who previously made games on Roblox (perhaps ex. Roblox may be the next theme after ex. AAA…).
Capital efficiency also brings another benefit to founders: more shots on goal. Oftentimes during development it may become apparent that the original thesis needs to change, whether due to competition, early audience feedback, or a change in the market environment. By staying lean, studios can afford to pivot - there’s nothing more demoralizing to the team than to be building a bridge to nowhere.
One of the unintended effects of digital distribution is that developers everywhere compete with developers everywhere. With the high quality games now being developed in lower cost areas in Asia and Eastern Europe (Palworld, Metro: Exodus and Genshin Impact being only a few examples), developers need to be aware that competition is not just with the AAA studio next door; you’re also competing with studios on the other side of the world operating at 1/3 the cost.
Perhaps even more important, capital efficiency is becoming a necessity in light of the recent dearth of growth-stage funding in gaming. Founders need to plan around 1 or 2 rounds at most before launching a product to market. There are many great ideas for games, but if it requires a larger ($15M+) budget, it’s probably a better fit for a publisher than for a VC.
Making games is hard. Palworld’s runaway success illustrates the enormous potential upside in game development (the game generated 20x its budget in its first week). At the same time, content investing is risky and not for the faint of heart. But TIRTA, in partnership with our portfolio companies, constantly works to stack the odds in our favor through insight, expertise, and experience.
There are always exceptions, but as a rule of thumb, TIRTA Ventures invest in game studios that are:
Disruptive: disruption come come in many forms, but may include building in a genre that has seen little innovation, or expanding niche but promising gameplay into new audiences or platforms.
Ambitious: led by founders who embrace the risk and reward of building as the underdog; understanding that those who start a fire are not often the same as those who maintain/grow it (same but better is fine for an established franchise, but often not enough for a startup).
Capital efficient: we recommend founders to stay lean until they “find the fun”, and to scale teams away from high-cost development centers (if the game requires substantial manpower).
Even more surprising, Palworld is still in “early access”, with many features still incomplete.
The Pokémon franchise is jointly-owned by Game Freak, Nintendo, and Creatures, with Gamefreak responsible for development, Nintendo for publishing/distribution, and Creatures responsible for the trading card game and merchandising.
The Pokémon franchise is jointly-owned by Game Freak, Nintendo, and Creatures, with Gamefreak responsible for development, Nintendo for publishing/distribution, and Creatures responsible for the trading card game and merchandising.
Craftopia (2020) sold ~800K units on PC as of January 2024. Source: Steamspy.