Peak sale to Zynga drives 8.6x gross fund return for Hummingbird Ventures
On May 31st, Zynga acquired Peak for $1.8B, and we picked 10 reasons why Hummingbird’s Peak investment is a once-in-a-blue-moon outlier:
1/ Contrarian
We invested against VC consensus back in the days on the poor dynamics of casual gaming; too hit driven, low retention & short-lived marketing arbitrage, unsustainable and you name it…
Peak took a proven genre of puzzle games, which people assumed were at the end of an innovation lifecycle. They proved that it was only the beginning. They relentlessly used A/B testing on level design, monetization and performance marketing to broaden and deepen this category. Through infinite iterations, they were able to design games where you continue playing for a longer time than just about any other mobile game in the world. Peak’s extraordinary D90 retention is unheard of globally, in an industry where keeping any of your players still engaged after 90 days would have been deemed outstanding performance. From a local publisher to a local games developer, to a global leader: coming out of nowhere, Peak outflanked Candy Crush in terms of in-game metrics, one of the first and largest in the puzzle category. Today, Toon Blast, the largest game of Peak, has one of the top 3 retention in the world. Kudos to a team with the kind of long term 10-year view and the type of grit which we hardly ever encounter.
2/ Capital Efficient
We were the only pre-seed fund to invest in Peak in 2010 with €500K at €2M pre-money. The company raised <$25M in total in the last 10 years, resulting in amazing economics for the founder, and 200x+ return on Hummingbird’s first ticket.
As the company didn’t try to tap into the usual C/D/E funding rounds trying to get brand names on board, they went largely unnoticed. This got us thinking: collectively we put much importance on the signaling of funding rounds. If a company did not raise for 2 years, they must be doing poorly, because alternatively, doing great, why wouldn’t they raise a star-led round? There must be a lot of amazing companies out there, far away from the spotlight, redefining whole industries while not raising round after round. Peak definitely benefitted from being resourceful, but equally so from not having to go up against multiple well-funded competition: they had the time to build great business fundamentals, and both the founders and a handful of investors ended up with large stakes and outcomes.
3/ More with less
The team generates one of the highest, probably the highest, annual revenue per employee globally, multiple times bigger than some of the best tech companies such as Google, Apple and more
With little resources relative to its peers, Peak had to make some though choices — they had to make sure that fundamentals were well in place before they moved with lightning speed. It meant the management team had to make a few strategic choices with no fallback scenarios as the wrong choices would destroy the company much faster than anywhere else. One such choice was that they kept the hiring standards extremely high, only going for the A+ players, who were ready to take ownership and work relentlessly, instead of increasing the team size in a rushed manner. And it also meant the founder went on a salary for close to 10 years that a junior developer in the Valley would not accept.
4/ Geography
Turkey was off-limits for investors. Nowadays, exceptional startups can come from anywhere. Far away from the epicenter of most tech innovation, away from FOMO, one can truly question golden rules of thumb and take the time to build a radically different culture.
Silicon Valley is where it all started. And now some of the best learnings, approaches and principles flew out all over the world. For so many startups, the Valley is the best breeding ground. But you don’t have to be in the Valley anymore. The war for talent, lack of loyalty and patience, being in the spotlight, trying to shield from the buzz and pressure, with often too much money too soon for you or your competition, makes it harder. There’s a reason a lot of early stage companies are hiding out in stealth mode, hiding for overeager VCs and street gossip. Building stuff instead of having to manage their ecosystem. Turkey was surely cheaper to operate in for Peak, but more importantly, it could not take Valley rules and dynamics for granted, which allowed for a first-principles based building of a true core culture.
5/ Global
Early-stage VC is often a provincial game, leaning on local networks & insider culture. But also great founders at the whim of local Serial Sultans. Let founders benefit from global early stage insights & best practices. We crossed 10 countries to get to Turkey.
It is hard to compete with the strengths of being local. On the ground, one benefits from friendships and intelligence-dense networks. A myriad ways of checking whispers and reputation. Time to build rapport and bond with entrepreneurs long before any fundraising efforts. That’s great, and startups benefit from these qualities, but not always. Too many emerging ecosystems now see the rule of a Serial Sultan. Some great entrepreneur who was a trailblazer, and perhaps because he or she had to fight so hard, they start investing with a sense of entitlement in their local ecosystem. This might translate in depressing valuations, but often in meddling and interfering as king makers. The charisma of local heroes gets them to a point that some rules do not seem to apply anymore. To solve for this, one needs more local funds, but entrepreneurs increasingly benefit from seed investors with a global view too.
6/ Grit
The company went from a local game publisher to local game developer, to global game developer in the first 5 years. They worked with incredible grit in between these pivots with many years of flat revenues.
Agile, sure. Grabbing momentum with little resources and street smarts. Getting things done in 1 month that normal companies tackle in years, if at all. But great companies solve one or more really hairy challenges. It is hard to combine that in one startup: usually it is one of both: you are too profound only in attacking hard problems: end of road for most. Or so opportunistic that you show amazing growth until retention or the whole company implodes after the arbitrage is over. In the case of Peak, for years they were bumping into a glass ceiling. Not accepting this, but always grounded and super realistic. I do not recall the founder selling us grand visions or making us feel good about how next year would be any better. In that period of stalling growth, people got really honest with themselves and us. Perhaps this created the peace of mind needed to keep slugging through the desert. Success was not an epiphany in this case, but millions of small improvements and progress.
7/ Near-death support
Founders seeking VC network & platform support marketing blabla, or a 50step formulaic guide to build a unicorn, or celebrity VC status. Try this instead: “With all other investors gone, do you have proof you will support me in near-death situations?”
When the Peak founder could not raise any external funding, we doubled down and wrote our largest check of $3M back then. Sure, networks are important, but any great entrepreneur we know is not successful because of the network of its investor base. Super useful, but not crucial. The platform support services are brilliant. Marketing for VCs that is. I am sure we will be proven wrong soon, but platform services are not crucial. Recently, we see more formulaic investors arriving at the table, claiming that based on their best 10 companies, if the founders follow this roadmap with these and these timelines in mind, and they’ll get there. The best companies in the world will by definition violate one of those formulas. So useful, but dangerous. Not crucial. We tell our entrepreneurs that one of the most relevant questions they can ask future investors is what happens when a company went through one of its mandatory 2–3 near-death moments. The point is not that they were the one and sole supporter at any point, but to prove at least a few moments that they held strong in difficult times. And the great ones will undoubtedly lack the clarity and courage to do the right thing even with such great references, but it talks about the longevity, strategic view, empathy and understanding of the best out there.
8/ Selectiveness and contrarian truths work well in seed
We invested our first $100M in seed since 2010 in only 25 companies, not following traditional spray and pray rule. And 3 have already become what we call internally zebras, i.e. wildly profitable unicorns (think $100m+ebitda in aggregate for startups who did not exist prior to 2010). We spent countless hours focusing on refining our founder pattern recognition to get here. We’re far from done.
We cannot argue with power law dynamics. Nor with luck. We believe some teams work smarter and harder and will not see such outsized success. With only a handful of unicorns in the world getting to such spectacular EBITDA in their first 10 years of existence, you need to surf an incredibly strong underlying wave. With an amazing vessel in terms of unit economics. But fund returns in seed are not a function of simply adding as much lottery tickets as possible. In our case, compensating for being gullible in an earlier part of our career, we went to saying no 10 times more: that is a bit masochistic as we meet so many great entrepreneurs. We find it amazing that other seed investors have the bandwidth and energy to invest in so many more companies, very successfully so. For us we’re still training to get to that level, but we believe velocity is not the only model which works.
9/ Investing in talent
Instead of hiring ‘experienced’ people, Peak has invested in young talent, mostly fresh out of college, creating their own unique culture and accelerating their learning curve with more responsibilities than they could have hoped for.
Unlike more developed tech ecosystems, Peak couldn’t rely on a large pool of extraordinary senior talent with experience building phenomenal companies from scratch in Turkey so Peak had to hire based on raw potential of young, inexperienced talent and train them intensively in their first years. This required huge courage and time investment: we remember being somewhat confused by this approach in the beginning, waiting for an accident to happen when we first heard about this strategy but have been amazed by how much Peak team was able to grow up in such a short time, delivering exceptional products.
10/ Founder genius
All of the above does not exist without a special founder. We fall every time for an extraordinary entrepreneur, not fitting in and wanting to prove the impossible wrong.. Our investment memo’s with risks and opportunities and market analysis are meaningless in comparison to the importance of extraordinary founders. Thank you Sidar, we learned a million things from you.
Originally published at https://medium.com on June 1, 2020.
