Skillz Chief Executive Officer Andrew Paradise
First it was the pandemic. Then it was the SPAC boom. The lockdown led to the best quarter ever for mobile gaming company Skillz Inc., and now it will go public through a merger with blank-check company Flying Eagle Acquisition Corp. (NYSE: FEAC, FEAC-UN, FEAC-WT), giving it a valuation of $3.5 billion. SPACs have represented nothing less than a sea change for investors who are looking beyond traditional shares of publicly-traded companies to reap gains.
Flying Eagle is headed by CEO Harry Sloan, who has teamed up with Jeff Sagansky and Eli Baker, who return to the game after working together to take DraftKings (Nasdaq: DKNG) public in April.
In an interview with IPO Edge, Skillz Chief Executive Officer Andrew Paradise said the company is still sometimes misunderstood: It’s more of a data and financial payments system than a video game system. The full interview is below:
IPO Edge: What is Skillz?
Skillz was founded on one simple belief: everyone loves to compete. We are building the competition layer of the internet by re-inventing competitive mobile gaming. Our proprietary technology platform revolutionizes and democratizes the mobile gaming industry, enabling developers to monetize their games through competition and deliver experiences that players trust and love.
To put this into perspective, Skillz is the only mobile gaming platform that enables over $1.6 billion in gross marketplace volume (GMV) and facilitates more than two billion esports tournaments every year. The interactive and highly social experiences we create result in our player community engaging 62 minutes on average per day seeking out fair, fun, and meaningful competition.
We are highly differentiated in that our platform is built to expand the mobile gaming market by realigning the interests of players and developers. In our model, greater user engagement directly leads to increased developer revenue. More revenue then enables developers to build more content for our platform, which, in turn, increases user engagement and retention. By generating higher player to payor conversion, retention, and engagement, we are able to monetize users at a rate more than five times higher than what developers would generate through advertisements or in-game purchases. This alignment creates a virtuous cycle that delivers powerful network effects.
We expect our revenue to grow from $225 million in 2020 to $555 million in 2022, a 57% CAGR. We have a highly scalable business model with 95% gross margins. As we grow, we expect to achieve EBITDA margins over 30%.
IPO Edge: What’s the market opportunity for mobile gaming, and how do you plan to capitalize on it?
The gaming industry is larger than movies, music, and books, with more than 2.7 billion gamers playing monthly and 10 million developers worldwide. What’s more, gaming is also expected to surpass television in the next five years.
Within the broader gaming universe, mobile is the fastest-growing segment, expected to increase from $68 billion last year to $150 billion in 2025. In the U.S., there are 203 million gamers and our platform attracts 2.6 million monthly active users (MAU), so we’re just scratching the surface with less than 1.5% of the market. Also, only 10% of our players compete in prized tournaments, so the other 90% represents an opportunity for additional monetization.
The opportunity to expand internationally is compelling as well. In 2019, we generated more than 90% of our revenue from users in North America, even though the international market is approximately four times larger than the North American market. We believe we have the potential to reach these users through our existing channels and developer partners creating localized content.
We see a significant opportunity for our developers to expand beyond casual content into other genres by powering competitive experiences in every type of game, including first-person shooters, real-time strategy, and racing games. We are making strategic investments to foster diversified content production across our developer partnerships.
We also believe brand advertisers sponsoring prizes represent a material business opportunity for us to both broaden our reach and increase profitability. Brand advertisers are seeking new ways to engage with existing and potential customers online, and are increasingly looking to us for sponsorship opportunities. These types of competitions allow us to reduce the amount of paid prizes and competitions we have to fund, which helps to lower operating costs. Our recent partnership with Bowlero Corp, the worldwide leader in bowling entertainment, is a great example of the type of brand-sponsored competitions we’re capable of executing.
IPO Edge: Please explain how you monetize the platform and the path to profitability.
Skillz currently monetizes through a transaction-based model where the company receives a portion of tournament entry fees. The model is similar to Shopify, which charges a percentage of the merchandise sold by its ecommerce customers. We’ve redesigned the mobile gaming ecosystem so that all the parties are aligned for success. In our model, the more players enjoy their experience, the more money developers make. By providing users with a better experience, Skillz drives higher engagement, retention, and payor conversion, enabling our platform to out-monetize ads and in-game purchases.
Like the Olympics, competition is universally enjoyed – it cuts across age, gender, and socio-economic status. Being competitive is human nature. Competition is an evergreen experience, driving higher retention.
We could be profitable today, but we are strategically reinvesting in our growth given the rapidly expanding market and ROI we’re seeing. Our three-year lifetime value to customer acquisition cost ratio has averaged 4.7x over the past several years. We’ve proven our ability to generate high returns, and plan to continue investing to fuel growth.
IPO Edge: How has your business been impacted by the pandemic?
We’re fortunate that everyone needs more digital entertainment while at home, but the reality is we’ve been growing rapidly for years. When you look at our broader historical performance, we’ve already been doubling or tripling revenue annually over the past several years. Our business has also been resilient during COVID-19, enabling us to thrive.
IPO Edge: Why go public now?
When I decided to join Skillz full-time about seven years ago, the company included my co-founder Casey Chafkin (who today is our Chief Revenue Officer), and five engineers. From the outset, our focus was on building a long-term independent company that we’d eventually take public. I told the team that if everything went well, it would take us 8 to 12 years to do that. After seven years – a period during which we managed to double or triple the business every year – we are on track to achieve that goal.
We look at going public as a milestone, but it’s not the end of the race. Going public gives us greater access to capital, enabling us to grow faster than we could as a private company. We’re building a 100-year vision for an independent company, and we look forward to working with our developer partners to bring Skillz-powered competitions to every kind of game for billions of players worldwide. We believe the future of gaming is something everyone should share in.
IPO Edge: Please explain why you believe you have a deep technology moat.
Data science is really our secret sauce and the deepest competitive moat around our business. We’ve spent eight years building data science technologies and developing our proprietary platform, resulting in a robust portfolio of 58 issued and pending patents.
We currently analyze 1.5 billion data points per day, which we use to enhance our data-driven algorithms, continuously fortifying our position as the world’s leading competitive mobile gaming platform. To put this into perspective, we ingest 300 data points for every five minutes of gameplay, and we’re running five million tournaments every day. Given that, you can imagine the intensity and level of our data warehousing and processing.
Our algorithms and machine learning technologies augment all sides of our platform. Key features of our proprietary data science technologies include anti-cheat, anti-fraud, player rating/matching, and segmentation engine. Strong anti-cheat and anti-fraud protections are among the most critical elements to foster a healthy competitive ecosystem, because they maintain the trust and fairness of the user experience.
Above all, the Skillz brand is rooted in trust and fairness – and our deep technology and data moats provide us with a strong competitive advantage.
IPO Edge: How are you different from other gaming platforms?
We’ve built a business that’s really hard to replicate. Amazon and Sony have tried to compete with us but failed, along with approximately 30 venture-backed startups. Winning in this market is all about protecting the consumer from cheating and fraud, and that is what we prioritize. Just like PayPal enabled the growth of ecommerce, we’re enabling the growth of competitive mobile gaming by providing players with the confidence to compete online.
Importantly, our data science – which includes proprietary algorithms and machine learning technologies to ensure fair, fun, and meaningful competitive gameplay – also differentiates us. We’re providing players with the confidence to transact on our platform and developers with the necessary tools to compete with the largest and most sophisticated mobile game developers in the world. We have 58 granted and pending patents.
We’ve built a technology platform that is a go to market solution for thousands of developers. What a lot of people don’t understand about our business is that Skillz is not so much a video game system as much as it is a data and financial payments system, and that video games are sitting on top of it.