Roblox IPO Preview (with Mario Gabriele from The Generalist)
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Hello, Acquired LPs and readers of The Generalist. For anyone from The Generalist audience, I am Ben Gilbert, and I'm the co-founder of Pioneer Square Labs, a startup studio and early stage venture firm in Seattle. And I'm David Rosenthal, and I'm an angel investor based in San Francisco. And we are the hosts of Acquired, the podcast about great technology companies and the stories and playbooks behind them.

This is a first for Acquired on a number of fronts. It is the first time that we've covered a company just before its IPO. It is the first time that we've done a show like this, where we cover a full company just for folks who are members of the Acquired Limited Partner Program. It is the first time that we are partnering up with Mario Gabrielli, the person behind The Generalist and a frequent source of acquired research, the S1 Club. But before we introduce Mario...

Here's a little bit about the company we are discussing today, Roblox. Roblox might be the most important company of the next generation, those 16 and under.

A full 50% of kids under 16 have used the service in the last 30 days, which is a crazy, insane stat that just blew my mind in the research here. It was supposed to go public just over a month ago at a $3 billion market cap, but instead they decided to not do that, take some private investment at just shy of a $30 billion valuation, that's 10x, and

There are now rumors that is going to go public in a direct listing very soon here at double the share price of that December round, meaning it could be a 20x compared to their valuation from December. The company's fascinating that we'll talk about today, but just like a nutty moment in our financial system where this is possible for this to happen. Totally. I think it was $4 billion. And I think that was the last private round, which was less than a year ago. But I apologize. We dramatize for effect here on Acquired, but...

By any measure, this is nuts. Totally. The question kind of becomes about this company. Is it a platform for games? Is it the next generation of what social networks look like? Is it a remnant of kind of an esoteric game designery thing from 15 years ago based on a physics engine? The answer is probably all three of these things. So we're going to dive in.

here today on this kind of odd and different LP episode and crossover with Mario. David, tell everyone who Mario is. Yeah, we are so excited to have Mario here with us. We were introduced by a friend of the show and former LP show guest himself, Jake Saper over at Emergence Capital. We've just been super impressed with Mario's writing over at The Generalist, which is less than a year you've been doing this now, right? Yeah.

Yeah, that's right. Well, depends, I guess, how you calculate it. I was probably writing it a little bit on the side for longer than a year, but full time on it since August of last year. So still feels very early innings.

Yeah, well, you've built a great audience. We've done some fun collaborations. We did a clubhouse together with Paki McCormick the other day. And we were jamming with Mario a couple weeks ago about stuff we could do together. And Roblox just seemed like such a natural topic because of all the buzz around this IPO. And of course, you've got the

spearheaded the S1 Club and published the S1 Club analysis of their S1 just came out last week and I think is basically the Bible on the topic. So we thought, you know, we certainly I am thinking about

is this a stock that I want to own, make part of my portfolio? You know, who better to talk about this than you? And we thought, let's just hit record and share it with everybody. So we'll link to the S1 Club piece on Roblox in the show notes for people who want to follow along. But go over to readthegeneralist.com. No longer on Substack. Got your own platform, owning your own audience. Love it. Going even indie-er than going indie.

So indie these days. So indie. Love it. It's great. We're members. We're premium members. So worth it. Everybody go check it out. Well, David, before we dive in, I do want to say this is not investment advice. We are not professional stock pickers. We may have interests in the companies we discuss on the show in this episode. Just wanted to tell everybody that.

With that out of the way, and this being a hugely important IPO or actually direct listing, we did want to discuss all the different lenses to look at this company, including the bear and bull case. So David, with all that out of the way, take us in.

Woo. Okay. Well, unlike a regular required episode, we're not going to do the full history and facts, but we have to start with a few and Mario can jump in and help us here. And then we'll go through all the great analysis that he did. But this company, I mean, is crazy as Ben alluded to in the intro. So November 19th, 2020, just a few short months ago, filed their S1. And then less than a month later, after the Airbnb and DoorDash IPOs went bankrupt,

crazy, as we discussed on this show. They pulled the listing, said that the market conditions... It's not that the window had closed. The window was too open. It was too open to go out. And instead, did this private financing at just a hair under $30 billion valuation, raised over half a billion dollars.

led by Altimeter and Dragoneer, announced that they would go public in a direct listing in early 2021. Rumors are that could be as soon as a couple weeks from now, sitting here at the beginning of February. It's quite the story. So we're going to step through kind of each section of the S1 Club piece and start with the history, as always.

Mario, if you want to jump in and take us from here, who is Dave Bazzucchi, the CEO? What is his background? How did we end up with this crazy Lego slash Second Life thing? Well, someone who I think knows David fairly well described him as sort of the first true James Halliday character from Ready Player One, sort of this massive maker and dreamer of fantasy worlds.

And you can sort of see the early signs of that in Interactive Physics, which is the company that he and his brother founded in 1989. And Interactive Physics basically, for those that were in high school around that time, they might remember it, was sort of this little wonkish game where you could set up a ramp or a pulley system or just these different objects that simulate movement and momentum and so forth.

And the idea was that you could get a sense for the actual forces of physics. And so it was supposed to be educational, but ended up getting used quite a lot as essentially a game. And so Bazooki even, he said, users of interactive physics software used it for fun rather than school. Kids would build all kinds of funny contraptions with the product. And so that really ended up setting the tone, I think, for this sort of builder game world that became Roblox later. Yeah.

Yeah, it's funny how with some of these things, you know, you need to put software out in the world and then just watch what people do with it. They had no intention to build a game system, but you got to follow the use case when people are using it for that. Yeah, exactly. It's like the old like TI calculators, which I'm sure kids don't use anymore, but... Oh, I'm sure they do. There was like some kind of weird regulatory capture monopoly type thing there. Well, I know they have an app now that emulates...

the like 82 and 89 or i guess whatever it is the ti whatever's point being the ti 84 or the ti 83 which were exactly the same thing in slightly different plastic packaging was a hundred dollars in like 1991 and was a hundred dollars in 2010 and like was mandated by all the textbooks there's something weird going on there yeah definitely something weird but like i don't know about you guys but my main use case for that was like playing you know mafia wars and drug wars 100%

I don't think I had Mafia Wars, but I remember some more innocent games on there. So if this is foreshadowing, David would be playing very different Roblox games than you, Mario. Yeah, exactly. Well, I guess if you go into the real long tail, there's probably some dark stuff. The top end of the distribution is pretty light. Anyway, at Interactive Physics, the brothers Bazooki hire this

extremely talented engineer called Eric Cassel. And you guys can correct me if I'm pronouncing incorrectly. It could be Castle or Cassel for all I know. You know, he was working at Cornell's physics department doing some really interesting work and read about interactive physics in the Mac user magazine, flew out to take an interview. And, you know, the three of them ended up

building interactive physics and the parent company knowledge revolution into a significant business that eventually sells for 20 million bucks to MSC software. And so that's sort of the end of that chapter one of the Bazooki-Cassell collaboration. But

The two of them keep chatting. And this all happened in Silicon Valley, right? Like, Bazooki had gone to Stanford and then, I don't know where he's from originally, but kept working on the company there. And so this was during, like, the software boom, you know, post-Silicon, but the software era, the PC era of Silicon Valley. Exactly. And...

as is the case with so many of these stories, they build Roblox out of a small office together in 2004 with a pretty vague remit of what they want to do. But knowing just that they wanted to sort of take that kernel that was the unexpected outcome of interactive physics, this desire to play and build something around that. And so they build this first iteration called Dynablox,

which, you know, early on they have to explicitly on the website call out that there is no affiliation with Lego because the worry is that Dynablocks and later Roblox sounds too similar. The iconography, the avatars, the imagery they use is too similar. And so they have to be explicit that, yes, these are digital Legos, but by a different company altogether. Yeah.

And Lego is sort of famously very protective of their intellectual property. Despite the fact that you could go get some plastic and injection molded into something in the shape of a Lego, you'll notice that there's really not any of those on the market. And that is because they are hardcore about making sure that you don't build a system that rips them off or integrates with them in any way.

That's super interesting. Yeah, that makes sense. They certainly did not want to fall foul of them early on. But definitely at the same time, you know, the fact that these were sort of block like cartoony characters in a digital world, they knew that this was going to hold some appeal for kids. Absolutely. Yeah, there's definitely a familiarity there.

Okay, so in 2004, they start Dynablox. That becomes Roblox. And then I think it's at the end of 2006, right, that they launch into the world. They work on it for two years and then launch this project.

product. It's actually a suite of products. It's kind of crazy to think this happened in 2006. People think of Roblox, think Lil Nas X, all this, but it's not just that. What is this system? Yeah. I mean, it started out with a sort of more simplified version of what today is the Roblox client. And so you basically had a hangout spot and your friends had hangout spots and you could sort of jump over to each other's little virtual homes and

mess around, have fun, socialize. Over time, that evolved into the sort of more complex gameplay you have now that sort of compromises the Roblox client. But when you look at the product suite today, it's really these three different lines. You have the Roblox client, you have the Roblox studio, and then you have the Roblox cloud. And each of those sort of fit into this ecosystem. I don't know the full history of Second Life. We're going to have to like pull all this together on a future episode.

Basically, it's kind of like second life for kids is what this quickly evolves into, right? Yeah, or just like...

totally open world infinite iteration sims. You know, the client is the place that people are probably most familiar with. It's where you log in as a player of games and navigate to one of the 18 million titles they have on there. That's so insane. It's nuts. The funny part is that 6 million have never been played, which... Oh, so it's like podcasts. Yeah, exactly. Yeah.

You guys are like the Shinobi life of tech podcast right up there.

So there's 18 million games. We're cheating hardcore and flashing all the way forward to today. Mario, do people go into Roblox and do stuff just in Roblox? Or is it like the Epic Game Store where like there's really nothing to do in the outer layer? You have to go into a game to do something. I'm very likely to utter a shibboleth in saying this because I have not played as much Roblox as I'm sure many, but I believe you really don't get into the meat of it beyond like

decorating your avatar and you can sort of make some cosmetic changes to your very local little house space before you jump into a game. But again, this is based on my minimal experiences playing Adopt Me and preparing for this.

I guess where I'm going with that is like Roblox, despite being open world because there are so many games to go play, there's 18 million of them. Most of the activity actually happens inside those games. And when you say open world, it's because there's a, you know, a ton of games you could play and it's not terribly hard to build a game yourself. And when you're comparing that with like a, you know, Second Life or The Sims where it truly is like an open world, like there's no guidance, no game mechanics. It's just like, okay, like now you get to walk around digitally. Yeah.

Yeah, I mean, I think each of the games themselves in some respect, like take on that quality. So if you go into Welcome to Bloxburg, a lot of the activities are you working at a pizza place or you hanging out in your house and going to high school or whatever those things you want to do are. And that's sort of like, I think a big part of the power is that people now use it just...

as the watering hole for nine to 13 year olds and is also where a lot of the challenges I think come in because since socialization is at the heart of it, moderation is not far behind.

Yeah. Well, so there's an important point up there that is very different than Second Life and the like, which is that Roblox isn't making the content or the games. It's people on the platform who are making the games. And we're going to dive a lot more into this as we go. But there is the separate Roblox studio product.

Which really these days, you know, is basically pretty close to Unity in terms of like what you're both able to do with it and the complexity and knowledge required to build high quality games and experiences. And it's a full on programming environment, game development environment.

editing platform and it's separate from the client, right? It's like Unity, but it only works on Roblox. Like you can't release your game anywhere. You can release it everywhere where Roblox has a client app.

Exactly. Yeah. The sort of innovation, I suppose, there is the use of this programming language, Lua. I think that's the pronunciation, but that simplifies the process of creating a game greatly. And that has allowed younger folks, you know, children to create games of their own. And over time, you know, as they grow up, the games mature as well. But it's sort of, you know, this

on ramp to game development. And it's pretty clever from a business strategy perspective in the sense that if you can give someone the tools to earn money early on as a young game developer and sort of attach them to that asset, then there's obviously an ongoing incentive for them to keep building it, even if they themselves might age out of using the platform.

It's just like interactive physics and the TI calculators. Like you can consume, and you know, most kids, mostly myself included, I did a little bit of tinkering, but mostly I was just playing games that like I downloaded from my friends that they had downloaded from other people on my calculator. But like, if you want, you can open up basic right there on the calculator and like make your own games. Totally.

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So Mario, take us forward from 2006. How's it go when they launch it? And do they launch with all three of these components, the cloud, the studio, and the client all at once? You know, I actually don't know if all three of them launch at once. I'm pretty confident in saying that both studio and client launch at once. But I would imagine that

cloud must have been at least greatly changed over time as they've gone so cross-platform. You can access Roblox on every mobile device, VR headsets, PC, Mac, et cetera. And that's been pretty key is that if you're a kid, you can just jump into it wherever you want. But to return to your question, it's a pretty slow go for Roblox after 2006. They

They don't raise a ton of money. Altos Ventures was the first outside investor. Their Series C was $2.9 million.

It's really only... That's the letter C, not seed. Yes. That's C. Yes. The third round of funding. Yeah, exactly. I assume it must have just been friends and family before that, and they just called it A and B. That was the first institutional, and that was in 2008, I believe, I think. That sounds right. I think it was, yeah. I think they're operating for a couple years. This is such a case study of like,

exponential growth and economics and an economy itself like for years we've

There was nothing going on here, you know, by venture community standards, you know, they were operating for two years with no institutional funding. And then the first round came in, and then the next round, and then, you know, several years after that, the company was making money operating profitably or break even ish. But this didn't attract a lot of attention until people started to realize like, wow, this is a whole economy going on here. So let's get into the

business model of how this works. And just to color what David is saying there with a stat that Mario pointed out in the S1 Club, over the first 12 years of operation, they only raised $11 million. Saying it was not a darling of the venture community for its first dozen years is a wild understatement.

Compare that to companies growing today and raising venture dollars in today's environment. It also speaks to, I think, how much venture's view of gaming writ large has changed over that period with companies like Twitch and Epic and everything else that have also risen in prominence similarly. But it's really only in 2017 when Bazooki mentions that

Roblox is starting to get some network effects. And maybe we'll talk about this when we talk about the seven powers later that the money starts really pouring in. David, back to your earlier question. Let's talk about the economy. So how does the business model work, Mario?

So this is one of the parts of Roblox that I think is most interesting is that there is this thriving economic system and it's quite an idiosyncratic one in many respects. So basically Roblox makes money by selling users Robux. And so that's their in-game currency. You as a user are buying Robux to...

buy in-game experiences, to buy cosmetic items for your avatar. And all of those items, or the vast majority, are created by developers on the platform. And so essentially, Roblox is engaging in a revenue split with the creator of those objects and experiences, and a pretty steep one, in fact.

Yeah, so there's an exchange rate, right, that Roblox sets. They're like the central planners of the economy between USD, or I assume lots of other currencies too, and Robux. Users buy in, they buy Robux, you know, at a certain rate, but then developers or anybody can cash out back to USD, right?

I assume at a much lower rate. Exactly. Yeah. And it's a clever default, but if you're a developer and you earn money from one of your games, for example, you are first paid in Robux. And so, you know, not only is the rate of exchange lower, but also there's the sort of implicit temptation that you might just use your Robux back on the platform and, you know, spend it on someone else's game and so forth.

And if I'm a 15-year-old game developer who's like, hey, look, I made my first game. This is super fun. And I get some Robux, like...

I'm not going to cash with that. It's brilliant by Roblox to... You're going to binge that on Garland's for your avatar's hair. So what is that exchange rate? I know there's some complexity and they are clever with subscription models, but if I just put a dollar in or if I just put whatever it is in, how many Robux do I get just for a one-time purchase? So on the developer side, the exchange rate is set by Roblox at 0.5%.

Exactly.

Exactly. And so you can buy, you know, the packages that we highlight here are sort of 80 Robux for 99 cents or 450 Robux for $4.99 a month. And that's another way they sort of play with the value is pushing you towards subscription rather than a one-off bulk purchase.

So it sounds like on that one-off purchase, they're kind of taking effectively a 20% cut just on the purchase, right? Because you're getting 80 Robux. So I'm trying to think through an entire transaction where someone puts money into the system and

and then it flows through and then a developer gets money out of the system. Sort of how much does Roblox get to keep along the way from the time the consumer puts it in until the developer can pull it out? I think it very much depends on how the Robux was purchased and time in the system, right? Like there's a time element to this too, and how many times it recirculates in the system. There's two super brilliant, really novel things about this that exist in other virtual economies too, but...

One is that there's no transaction costs that Roblox has to bear. So like if they were operating a marketplace for games like Steam or whatnot, like users would buy stuff in USD, they would have to process all that payment. Those dollars would have to get shipped off to the developers. So like Striper, somebody is making money here and it's hard to do all that. With Roblox, once the dollars come into the system, right?

It's all native, right? So there's a payment processor required upon buying your Robux. But after that, you can have tons of transactions at effectively zero cost instead of incurring credit card fees every time. Which then they do. Then it recirculates in the system. So if you're making Robux as a developer, yeah, you can binge on it. But also you can like, well, I don't know. Mario, you might know. But I'm assuming you can build into your game or your experience distributing Robux

back out to your users of your game as part of like the economy of the game. And then they can just recycle on and on and on and on and on within the system. However long they remain in the system, it's like an interest-free loan to...

I actually don't know about that specific case, but I think the principle regardless is definitely true. That working capital thing is so interesting. Part of the reason that they're not public yet is because of this sort of question around how they're doing accounting for Robux in the system. But if you just pop up a level from like caring about the minutia of how exactly they're doing the gap there.

they're totally getting an interest-free loan, and they totally have a negative cash conversion cycle where they get all this money before anybody has to do anything with it, and then it could be a lot of time before they need to pay any of that out to developers. If ever. Wild. Definitely. Yeah, it's crazy stuff. The tough part of the problem is really that the developers often end up with a very small proportion of

the total spent on their experience or in their game. So Roblox themselves estimates that it's about 24.5% of the transaction that goes to the developer. A few sort of deeper Reddit community forums in the Roblox world suggest it's below 20% at like 19.7. But that is...

Not just one of those figures that maybe makes you raise an eyebrow, but it also sort of gestures towards one of the fundamental worries that people might have about Roblox, which is whether they'll be able to keep developer talent happy for the long run, especially as this war for good developers heats up. Did I just hear you right that you only get to keep 20 to 25% as the developer, whereas if I'm releasing an app on the App Store, I keep 70%?

Exactly. Why am I developing for Roblox? I think I tweeted about this yesterday. A takeaway that Ben, you pointed out was actually really insightful from our episode with Alfred Lin on Sequoia's playbook. There's two ways you could have high gross margins. You could be a software business that sells software and have high gross margins for that. But that's deceptive because like there are transactions that people are accomplishing with your software. You're not taking a percentage of that. You're like low gross margin on the net and transactions. Yeah.

Or you can be a sort of full stack company or a marketplace where you're running the whole system. And those tend to be lower margin businesses. Some of those businesses are high margin, like Facebook or Google. They run the whole system and they are high gross margin businesses. Facebook doesn't pay a dime out to creators. Yeah, exactly. Exactly. Or Instagram. In cases where it's possible to sustain that...

The only way that's possible is if you have an immense amount of power in the Hamilton Helmer sense, because otherwise all your users would just leave you. We'll get to this as we go along. But like clearly Roblox has an immense amount of power. It's all within the ecosystem, like the users that are using the client, they're playing the games, the games are made for the client. Like you could not like that as a developer, but if you want to access these 150 million users, you

Well, you got to do Roblox. So you're saying that like it's not actually apples to apples. There's there's like very few developers who are out there saying, should I make an app store game or should I make a Roblox game? They're going to Roblox users and saying, make Roblox better. We'll even pay you for doing some of it in the same way that Snap has sort of experimented with. Like you snap more and like we'll pay you for being on the social network and enriching it with great content.

Exactly. And also, I think just the sheer fact that it is a less mature audience in many respects that, you know, come in probably first as a player of this game, the attention is captured. And then, you know, there's this opportunity to build worlds sort of on top of that. And it's maybe less of a financial calculation at that stage of the user's life. Right. It's like you could build stuff in Minecraft, you know, great, lots of people.

people and kids do. You could build stuff in Roblox and then make some money from it. And it's like, oh, great. I learned how to develop and I learned how to run a business. Exactly. And then all that IP gets locked into the Roblox universe. Mario, did you do any research on like who these top game developers are? Like are some of these stories of like a 15 year old who got crazy rich who has a hit game on Roblox? They're definitely on the young side. So

I can't remember which game it is at this point. I want to say it's Meep City, but it could be a different one. I think it was essentially modified from a different game, sort of heavily inspired by previous games, started without a huge amount of fanfare and then metamorphosized into a hit game. More broadly, looking at the S1, Roblox highlights a few of their developers, their

And they're probably slightly trying to spin the narrative in a certain direction, but they're all on the very, very young side. There's no photos of a 48-year-old dude running a Roblox game that's crushing it. It's like a 21-year-old who was playing it for 10 years. I'm sure they exist out there. I know there are definitely older folks in studios that are making Roblox games.

But Ben, to your point, that's less attractive. You have to really believe you're going to get a lot of users in Roblox to do that versus, oh, I'll build in Unity or I'll build in Unreal and I'll ship to every platform and keep 70% of what I make. Okay, so let's talk about the market because I think you did a really good job, Mario, breaking down like all this sounds great, lots of power, but like we're talking about kids games here. Like what, how big is this? What's the TAM? What's the opportunity? Yeah.

One thing to say about the S1 Club that I think we haven't necessarily hit on yet is that it is a very collaborative effort. And so I want to say that Alice Lloyd George, who's a great VC, did, I think, a lot of amazing research on the market section in particular. And, you know, that's true throughout is that it really is a collaborative effort. But digging into the market, we've seen over the past few years, and we touched on this, just how much...

ventures interest in gaming has grown. And that's really because it's become a massive market. I mean, it's $159.3 billion market as of 2020, growing almost 10% a year, expected to reach $200 billion by 2023. And there are some specific characteristics of gaming that

that make it particularly attractive. It's so funny you say growing at 10% year over year, because I do remember a few years ago when we interviewed, I can't remember if it was Nolan Bushnell or Trip Hawkins, David, but whichever one it was commented, it's crazy. I invented video games for the consumer market and now it's over $100 billion market. And it like, it's literally compounded two to three years since then at 10% per year. Yeah, and it's exceeded most expectations. I remember looking back at some of the previous offerings

estimations. And I think, you know, it's outperforming certainly the statistic that we actually didn't use in here, but I think it's something like three X, the growth rate of gaming versus other forms of media, whether that's, you know, film or TV, et cetera. So it's capturing more and more of that attention, particularly amongst younger audiences. The

whole Fortnite phenomenon over the last few years, which is probably a slightly older age demographic than Roblox, you know, I think just shows like the, for younger generations, these aren't just games. These are, you know, what they're doing instead of watching Netflix. Or instead of social networks. Yeah, exactly. Or instead of Instagram. It's entertainment and social networks.

both of those markets were growing on their own anyway, but gaming is just for a certain audience combining them together. So if you think about like Roblox has the youngest users, if there's a big if that we will get into as we get farther along in the episode,

If they can keep these young users with this is like Netflix plus Instagram for them or Netflix plus WhatsApp, think about the value that that's going to generate. You know, when 50%, right? Is that what you said, Ben, in the intro? 50% of sub 15 year olds, I think in the US, use this product in the last 30 days. Yeah. Unreal. Yeah.

So there's also a really interesting piece of the market here in China, right, Mario? Yeah, exactly. So Roblox has done an amazingly good job capturing the US. Asia Pacific is a colossal market. I think the number on that is 72.2 billion market size as of 2019. So you can really see that it's essentially 50% of the market. And so Roblox has been, I think,

very pragmatic about entering China. They have entered into an agreement with Tencent through sort of a JV where they own 51% of this China entity and Tencent owns 49%. And Tencent's role is really to walk Roblox past the

governmental licensing roadblocks and allow them to operate there. And they've successfully done that, it looks like, from the two licenses that they got in December. Tencent is such a freaking juggernaut. I feel like they show up in every episode somewhere, David. I mean, they're amazing. But yeah, so in China, you need a license to operate a game. This has been true for a long time.

And didn't they like pause licenses for games like a couple of years ago? They did. Well, so Tencent, you know, as we covered way back on our episode with them, Tencent really originated, well, not in the very, very beginning, but it was galloping messages in the beginning. It was QQ, an ICQ knockoff, but then got into gaming. And so Tencent was an operator of many games in China before.

and got the licenses, built those relationships with the government there, and has an established track record of bringing Western games into China, League of Legends, et cetera. And so what you're referring to, Ben, is Honor of Kings, which is the mobile version of League of Legends that Tencent then developed in...

in-house after they'd acquired League of Legends. People started playing it so much in China that the CCP revoked their license temporarily. So there's no way to operate in China without the strength of somebody like Tencent that has those relationships that can get Honor of Kings back reinstated. No Western company is going to be able to do that. Right. Yeah.

looking at power dynamics, if what Tencent is doing is saying, yeah, we'll make sure that you can get to market here, we will take half of the company for that. And people are willing to say, yep, yeah, we'll totally do that. That is an unbelievably strong power dynamic to be able to provide that value. Yeah. And it's an interesting defensive maneuver also. I mean,

We'll get to competition, I'm sure, a little bit later, but ReWorld is sort of the Chinese version of Roblox, much less mature, much earlier in its life. But if Roblox paid homage to Lego in its initial incarnation, ReWorld is very much worshipping at the shrine of Roblox. It's a good move, I think, for plenty of reasons, but you can't discount the fact that it's certainly going to make the path significantly more difficult for ReWorld.

All right, let's talk about management and investors in Roblox. This is a fascinating one. We talked about Dave, and Dave has been there, you know, was a founder and CEO. Basically, the whole rest of the management team is like new, right? Yeah.

It's an interesting one. I mean, sort of looking into it, you don't see a lot of gaming experience as it happens. You see a lot more retail experience and, you know, even a little bit of sort of social network experience. But even that is not particularly pronounced. It's only really when you get to Roblox's...

China czar who you know had some deep experience at Sega that you sort of see that expressed in any meaningful way but yeah, the rest of team is fairly new and from some spaces that you might not necessarily associate with roblox's core business and

So you have the CTO, Daniel Sturman, coming from Cloudera. That makes total sense in the sense that this is a huge infrastructural project to keep up and running and has been historically an area of weakness, but not necessarily gaming related. Chief Business Officer, Craig Donato, coming from Nextdoor. Before that, he was at QVC. That's a sort of interesting twist because Roblox is...

quite aggressive in upselling in-game. And so perhaps that sort of like interactive sale experience is valuable. CMO experience from Walmart. You have a true car experience, some more e-commerce experience. It really comes from the gamut of

They're not trying to be EA. They're trying to be something that covers a variety of sectors. They don't think of themselves necessarily as a game company. I think that's right. They describe it in the filing as trying to win over human co-experience. And that is fittingly vague, but also capacious enough to account for social networking, purchasing, e-commerce, etc.,

It's so funny. Just like a meta point on this. Like, I can't believe we both just said meta at the same time. It's like a meta point on this. These incredibly vague market definitions are so, on the one hand, like highfalutinly ludicrous. On the other hand, like they're trying to paint that we literally, anytime where two people are connecting over something, like we could foreseeably address that in the future. So when you're trying to estimate our total addressable market, like you should be in the high trillions. Yeah.

And like, it's, it's like sort of BS. But on the other hand, you're like, they're definitely not a gaming company. So how else do you want to describe it? For almost anything else? I think you sort of are tempted to laugh it out of the room. But with something like Roblox, you're kind of like, yeah, I mean, human co experience sounds, you know, a little bombastic, but it doesn't feel far off. It's like by a matter of degree rather than by a matter of order.

You do this cool thing in the S1 club where you have word counts of things that appear in the S1, how many times different words appear. And Metaverse is one of the ones that appear on there. It is very Tim Sweeney, epic-like, the ambitions of this company. To me, it makes a lot of sense, regardless of whatever marketing jargon they want to use to describe it. It makes a lot of sense that no executives from...

EA from, you know, Activision Blizzard, like, well, maybe Activision Blizzard with, you know, and Blizzard particularly with World of Warcraft is pretty similar here. But like, if you're used to making like packaged software, that's not what's happening here. They're doing a couple things. They're operating...

cloud technology on the scale of like, you know, AWS, you know, Google, like, you know, the same scale as as Epic with Unreal. And then they're operating an economy, just like Google or Facebook, you know, the like, you know, they're not making content. They're operating an economy. 100%.

Before we move on from this point of talking about other metaverse type companies, if you would have asked me like five, six, seven years ago who was going to own this space, and obviously that was well before Fortnite came out or even really was in development, it's like I wouldn't have told you it's going to be epic. 100% chance I would have told you it was Minecraft.

Is it just getting bought by Microsoft? Or how is Minecraft not the company that we're talking about right now? That's a great question. Is it like they had a strategic misstep? Because I assume their user base is also extremely large and has continued to grow since being acquired by Microsoft. I think that's right. I mean, there's a statistic in here that 50% of 9 to 12 year olds in the US, Canada, New Zealand, and Australia play either Roblox or Minecraft.

If Roblox has sort of overtaken them a little bit, it's no mean feat. Minecraft is still incredibly popular. And interestingly, Roblox purchased this company called Code Kingdoms, used to be called CBER, that basically teaches young game developers how to build games. And it offers classes both for Roblox and for Minecraft.

I still suspect there's a huge amount of overlap there. But to your point, it does feel like selling to Microsoft sort of fundamentally changed the trajectory and ambitions of that business. Yeah, let's see. I'm on businessofapps.com. So, you know, we're doing this live. So caveats about how reputable the source is. But it's from, I think, Sensor Tower, PCMag. So 2020, there were 131 million Minecraft users online.

Mario, how many users were there on Roblox? I think we have 150, something like that. 150 MAU. So right in the same league. And then on revenue, Minecraft did in 2020 about 415 million. What was top line revenue for Roblox? Wow. Bookings was about 1.3. There we go. Yeah. We'll get into this in a minute, but bookings is the number to look at.

But I wonder if it's the same for Minecraft, you know? Like, I wonder if we should be looking at bookings there too. I'm going way out on a limb here. But, you know, there's the Microsoft acquisition that may have derailed Minecraft's economy building a little bit. My understanding, sorry, I'm way out on a limb. My understanding is that Minecraft...

experiences in Minecraft that are not centralized operate on servers. And so you have to run your own server if you're going to host a Minecraft experience.

Whereas this is where we were talking about Roblox being a cloud company. That's not the case in Roblox. It's all centralized in the Roblox cloud. I would imagine that significantly hampers their developer creator, Tam, in Minecraft. In Roblox, it's like, oh, I want to start building a game and creating. Great. Roblox takes care of everything for me there. Whereas Minecraft, I got to set up a server. I got to run a server. Yeah.

Presumably, it's also considerably less flexible, right? Like I think Minecraft games all share more aesthetic DNA. And it also feels like Minecraft themselves push their own games or sort of like game themes, so to speak, more expressly than Roblox does. So in that respect, you know, Roblox probably benefits from the UGC element a bit more directly. Yeah.

Yeah, I think that and Roblox Studio is a very powerful application. Like it really is basically Unity. Like you can build anything. You're not just using like templates and building blocks in there. At risk of over summarizing, very similar user counts between Minecraft and Roblox, but Roblox has managed to monetize at probably over 3x, at least in the last year where Minecraft was. Well, before we get into talking about...

Accounting, which is going to be the most dramatic part of this episode. Yeah. For real. Some accountants out there are like, finally, our moment. Yeah. We pulled the e-brake heading off the cliff and then, you know, change revenue to bookings. Investors got to give shout outs to huge friends of all of ours. And, you know, at Altos, who we've we've mentioned. Love Altos. As the first institutional investors in Roblox. Wonderful investors.

wonderful investors, not well known and they like it that way, but a very, very different DNA and mentality than the rest of Silicon Valley. And then my former firm where I worked as an intern when I was at GSB, Meritech came in as the first growth investors in the company when things, gosh, I can't remember which round Meritech came in, but they came in. I think it was the same round that Meritech and Index co-led once growth really started to pick up, but that was

I think that was where the company had only raised $11 million before then. And then I've invested in every round since, you know, you know, now, uh, there's index, there's entries in Horowitz and of course, altimeter and dragon here. Now it's called.

It's quite the list. It is quite the list, but that's all in the last recent few years. Just the mindset of this company is not the traditional Silicon Valley for a long time. Well, it's like this is the playbook you should run. Like you want to raise as little capital as possible and be profitable until you know for damn sure you have...

runaway success on your hands and then go raise a ton of capital all at once on your terms. And this barbell way that they sort of ran the company, very similar to how Epic Games was run, very similar to how I think we had, we talked with Vlad about this. It was because he couldn't get funding for Webflow for all those years. And then boom, Excel's 80 something million dollar round. I'm sure they had plenty of dilution happen in those early years. In fact,

by looking at the percentages that these early investors still own, we know they took a lot of dilution in the early years with Roblox. But if you can raise little capital until you're a runaway success and then raise a lot, that just seems like the way to do it. Yeah, 100%. All right, let's talk about accounting. Here we go. Okay, so we were talking about the business model, right? And this recycling of capital and the economy.

As you can imagine, this makes for a nightmare for Gap Accounting. So the company reports bookings, which is dollars flowing into the system in any given period. But then some portion of those dollars flowing into the system will ultimately get paid back out to developers. And so there's a very complicated revenue recognition formula here that essentially makes no sense, but...

you got to have something, I guess. What did they try to do? And then what did they have to change to? I actually don't know what the change is going to be. And that'll be very interesting. But the sort of trickiness here is that there's this

accounting standard called the Accounting Standards Codification 606, ASC 606. Should be 666. Yeah, no kidding. That was imposed upon public companies starting in 2019. And for the most part, that's sort of fine. But gaming companies in particular are not very well served by it because of sort of the strange economies and the strange purchases that you might make on a gaming platform. So

In Roblox's case, they have to recognize their revenue, not when someone purchases the Robux on the platform or when that person spends Robux, but over this sort of

indeterminate or amorphously defined LTV period, this lifetime. So that was the craziest thing reading the S1 Club, Mario, was like when the second shoe dropped, like when you're like, it's not when people buy the Robux. I'm like, oh, that's tricky because they're going to have to figure out how to account for the amount of time between when someone buys the Robux and when they spend the Robux. But no, it's what is your...

Like, or what is your customer lifetime? Is it amortize across the customer lifetime? Yes, yes, exactly. And growth, who is an anonymous Twitter account, who's very brilliant about this space, really spearheaded this and also did some hilarious writing here. So I'd

I think you managed to make accounting seem very, very funny. But yes, exactly. Roblox's obligation to you as a user doesn't cease once you spend your Robux because presumably, you know, in some instances, at least, you spent it on a digital item, whether that's a crown or a piece of armor or whatever that is. And so that in and of itself becomes sort of a...

a manifestation of that value that Roblox needs to keep servicing. Yeah, exactly. It's a bit convoluted and makes it not the most legible service.

We'll talk about narratives in a second around this company. Mostly, I mean, the narrative is to the moon on this company. To the extent there is a bear narrative, one of them is this company is losing massive amounts of money and is unprofitable. That's just wholesale false and is a consequence of this accounting. So if you look at the revenue and their net income, yes, they are net income negative.

But what you should really do is essentially take their top line bookings number, which is dollars flowing into the system, which for the first three quarters of 2020, we don't yet have fourth quarter 2020 was 1.25 billion. If you want to be really conservative, you could haircut 20% out of that. That's eventually going to go back to developers. Okay, fine. You know, do that. You're still sitting on a billion in top line. The company is

printing lots of money is very free cashflow positive. Dude, their EBITDA margins are 25 to 28%. Like that's not like quite Facebook territory, but that's like on its way. And for a high growth company too. So being hyper conservative would be stripping out the 20%. Being less conservative would say these bucks, Robux are going to circulate in the system a few times before they pop out. So like, yeah, 20% will get popped out eventually, right?

over like three or four years or maybe longer. So, you know, you could time discount that back to like, maybe you haircut this by 5%. Dude, this is the Warren Buffett playbook. This is float. This is like the brilliance of owning an insurance company. Roblox doesn't seem to be doing this, but they have so much

effectively a gigantic crowdsource interest-free loan that's just sitting there that they could do other things with. And anybody who's describing this company as an unprofitable company right now, I think doesn't realize that in some ways that huge liability is actually an underutilized asset. That's a good framing. Yeah, totally agree.

And then on the growth side, so the bookings for the first nine months of 2020 tripled versus bookings for the first nine months of 2019. Which is a pandemic related. Right. Of course, it's driven by the pandemic, but still nuts. Still a little nuts. From 18 to 19, they grew, what, about 50% top line bookings, I think? Yeah.

Yeah, that sounds right. I think a little over 50%, maybe like 60%. They went from 500 million to just under 700 million. So no, no, that would be more like 40%. Anyway, lots of high growth tailwinds at their back here too. And what we're painting here in both that stat that I threw out on

the EBITDA margin napkin math and on what you're talking about and how they're able to scale. This is just a tech company. This is like a pure play tech company. I should give credit to Scott Galloway on Pivot. He pointed out 79% of their- Professor Goldtakes.

79% of their full-time staff are engineers. If what you want to do is invest in technology businesses on the internet because they have zero marginal costs and zero distribution costs, not only is that true, they also don't have salespeople. You would have it like a snowflake or something. They have a bunch of engineers who are building a system that makes games that have digital goods that uses a digital currency. This is as technology internet native a business as you could possibly have.

100% agreed. Yep. That and moderators. Those are sort of the two key functions. Yeah. Okay. So let's talk about that because that is a piece of this. There's a piece of so many people, Airbnb, Rover, Amazon.

customer support, moderation, you know, Facebook, Google, like this is an expense that scales. Yes. Although compared to some of those other companies you mentioned, this is, you know, obviously more acute in some respects because of the demographics of the user base, over 50% are under 13 years old. It's a place where a lot of socialization happens. And so, you know, there are

pretty robust moderation systems in place. I think Roblox service something like 9 million tickets or, you know, sort of issues that cropped up last year and their average response time to it was 10 minutes. So they've clearly invested a lot in it. And, you know, we touch on this in the piece, but they've managed to improve their efficiency there. That's one of the places where it seems like they've gained some margin, but it still is a massive vulnerability.

Well, the vulnerability, a risk, a cost that scales with usage of the system. But also, I mean, I think something that we got to like commend them for too. I mean, of course, there've been issues. I think you guys talk about it in the piece. Roblox dating is like this shadow thing that happens that they're constantly trying to crack down on. But like operating essentially a social environment for underage children around

around the world and keeping it safe is like an immense task. Yeah, it is a gargantuan effort. And I think they've done some really interesting stuff around tech screening to make it more difficult to, you know, say anything explicit. They seem to have built a very good moderation system, you know, that is human powered behind the scenes as well. The tricky thing is I wonder how much more difficult that may or may not get as the user base grows

over time, like maybe as a larger portion of users are older,

They sort of can take a more hands-off approach there. The corollary would be that maybe as more older users are on the platform, the younger users are potentially more vulnerable to more mature commentary. This is good. I want to get deep into this in competition in a second. So David, I feel like you're going to ask the question, well, are all these people going to stick around after they turn 16 and after they start looking at other platforms? Just because you're capturing the next generation, it's only a good business in the long term if you can keep them.

Are they keeping them? That, I think, is the... I was going to say billion-dollar question now, but like billion here, billion there. This company is already a $29 billion company. That's the like hundred billion dollar, couple hundred billion dollar question, I think, right? And this, I think, deserves a pretty deep double click here. And honestly, for me, is the biggest reason to give me pause about the stock and the DPO. So structurally...

we just said makes Roblox a fantastic place beating Minecraft, a fantastic economy, but a fantastic place for kids 13 and under. It was a long time ago when I turned 14, but I remember when I turned 14, uh,

I didn't want to have anything to do with media I was consuming, things I was doing, memes that I was, you know, we called that then part of when I was, you know, 10, 11, 12 years old. Right, it's kid stuff. That's a huge question for Roblox, I think. 100% agree. I mean, I think once you sort of turn 13 or 14, you start to become a little edgelord and want to, you know, take in the most...

mature media that you're sort of allowed to. Oh, yeah. I remember I got my hands on our family VHS copy of Pulp Fiction when I was like 13 and I watched. I probably burned the tape out of that thing. You're exactly right in identifying that as a key question as to whether a retail investor could expect to make a

3 plus X on something like this? Let's talk about what a 3 plus X on something like this would be, because what we're talking about right now, even at this $30 billion valuation, if we're being generous and talking about bookings at 1.2, I mean, we're in the category of 25X bookings.

bookings on the price and it'll likely be closer to 40 50x by the time the public actually has access to this thing you're buying a stock here that's trading at call it 40x revenue and avibita it's probably and it's not revenue it's bookings but avibita then that's probably 100 to 120x ebitda

So like already, I mean, tech margins right now are in an insane place. But like, you know, what do you have to believe about the underlying business's growth in the near future in order to get a 3x on those already very, very, very high multiples? Well, I think you're right to point out that the retail investor is probably not going to get anywhere near at $30 billion.

Anyway, so a 3X from wherever it sits at the end of IPO day suddenly, I think, looks quite tough. I wouldn't be surprised if we get, you know, reasonably close to a 3X from the last round by the end of, you know. Yeah. The first day of trading. Yeah.

Yeah.

And because of a collective buy-in and they feel a lot more like currencies than they do something that's strictly tied to the sort of utility value of the underlying asset, which is I am entitled to future cash flows from this thing. You just have to like believe so many insane theories.

Like every number on every dimension has to be like at the very maximum of what you could possibly believe. Growth rate, revenue, number of years you want to factor into your DCF to make any of these things fit. So like let's just throw it out there right now that if you're going to get a 3x on this thing, it's probably more likely because of hype that

than it is because the business kicks ass. Oh, I think on any sort of short-term time scale. Yeah, yeah, yeah. Very much depends on time horizon. We style ourselves, you know, investors and I think all of us, Mario included, although feel free to speak for yourself, but fans of, you know, compounding, the compounding mindset on this. Please be careful with that word. Immediately, immediately triggered.

For those that haven't heard that tale, check out the $6 billion stare piece for more context. But yes, that sends a chill down my spine. Wait, wait, wait. We're going to go on this rabbit hole. What are you talking about? You don't know this? Uh-uh. Oh, man. Okay. So last, I want to say November...

I, with a collaborator, wrote a piece on public compounders, like companies that regularly grow 20% or so a year. It caused a massive kerfuffle because a hedge fund called Durable Capital read the piece and decided that phrases like good to great and compounder were their IP.

Oh my gosh, I'm sorry. I forgot about this. Oh, what a kerfuffle. I didn't mean to trigger you. You must have been like, what is he talking about? No, now the word compounder brings, you know, sirens to mind and, you know, all sorts of other terrible things. But yes, they threatened to sue me for writing this piece if I didn't take it down. When I asked them why or what words or what claims they were making, they sort of

shuffle their feet and threatened to call GCN. And I asked again and still and still. And it basically just became a question of whether I was going to take this piece down or not and whether people are allowed to use the word compounders or good to great. Thankfully, I had some pro bono representation from a media law firm that was able to sort of back me on this. I shared the story on Twitter and

It went a bit nuts because FinTwit was like, this is absurd. People have been talking about these concepts for decades. Ever. Yeah. What nonsense. Can Warren Buffett not use these words? Yes. It was a very strange one. Anyway, that's the rabbit hole.

Wow. And thank you for sharing that with us. So David, let's talk about time horizon a little bit because I think I made a snotty little joke there about near-term pop being because of hype. I don't know what near-term and long-term is these days anymore. But if you're thinking long-term and you believe in the markets and the power of this business and the attractiveness and the growth and everything we've just laid out here, then

The biggest question to think about is, you know, how defensible it's going to be in the long run and competition. And is there anybody else credibly that could come and take this momentum from Roblox? So friend of the show, Nick fight, the co-founder and CEO of rec room in Seattle, who we had on way back in the early days to talk about raising his seed round from Sequoia rec room. And we'll talk about this. I talked to Nick last night.

is in many ways Roblox built on modern technology and Roblox for, you know, 14 to 18 plus year olds. So designed for older kids, you're able to do much more, much less restrictions on your communication. And they have also seen incredibly explosive growth through the pandemic and over the past couple of years. They're at about 5 million MAU. So that's

much less than the 150 that Roblox is at, but...

Rec Room is much younger and growing much faster. They grew over 500% in the past year. They're monetizing at as well or better than Roblox rate. And they were just VR when we had Nikon. They're like every platform now, right? Yeah. So there are a couple of really important points here. You know, one is this user base difference between Roblox, which is really 13 and under, and Rec Room, which picks people up as they age out of Roblox.

Roblox. That's an issue for Roblox because of course they could compete, but they can't structurally change a lot of Roblox because it's designed to be a safe environment for younger kids.

They would probably have to do, and they've talked about this, maybe having a separate instantiation like Roblox 13 plus or something. Mature. Yeah, Roblox mature. And then the other aspect, Rec Room started in VR and is now on mobile, console, every platform out there, now on screens. Nick makes a really, really great point that

If you believe that all of this, you know, metaversity type stuff and economies and gaming experiences are going to be going into virtual and augmented reality in the future, it's really hard, if not impossible, to take a platform designed for flat screen gaming

and turn it into VR. You can go down. You can go the other way. You can go from VR to flat screens. But the way he explains it is so simple. He uses the analogy of Quidditch and basketball. If you have a Quidditch team, they could probably play basketball because in Quidditch, it's sort of like basketball, but you're flying around in the air.

basketball team would be really hard to go play Quidditch because they're just used to two dimensions. I love that. So what that means is like when you build a platform for VR, you can do anything with your hands and your body and you can move and have any experience. When you build a play game on a screen, it's usually like hit this button on this controller to jump.

or hit this button on this controller to use the tool in your hand and then like your avatar performs that action. In VR, you actually do that with your hands. Has anyone ever successfully moved from 2D to 3D? Like I'm trying to think of any of these successful VR things and figure out if they come from a 2D predecessor.

So there are, I mean, like Roblox you can play in VR, but it's the same thing. You can look around in VR and you hit a button on the controller to use the item in your hand. Whereas in Rec Room, like you hold the paintball gun and you wave it around and you shoot it. Interesting. If I can offer a brief...

of Roblox's ability to capture that segment. 50% is under 13, but obviously 50% is over 13. It's something like 54, 46. And 17 to 24-year-olds have been growing at a faster pace than those sort of under 13. And if you look over time at the percentage under 13, it has been declining, albeit by not a huge amount. And I think we've seen at least...

some ability to capture an older market in the way that they're offering different aesthetics and the way that they're bringing in people like Lil Nas X. And I think, you know, the fact that they are VR available, at least, suggests they're aware of that. And then my only final defense would be that if you...

Victor Crum and LeBron James a chance to go head-to-head in each sport. I'm taking LeBron every time. Every day.

I love it. I love it. Should we just stop the episode there? I mean, it's not going to go anywhere but down. Well, I mean, honestly, I think the reality is like this is a rising tide that, you know, all boats are going to lift. But I do think this is really interesting. The other difference between Rec Room and Roblox is in Rec Room, it's just one platform. There's no separate studio. All the creation happens separately.

in rec room so that means that they have a much higher percentage of users who become creators and you can do stuff like remix rooms and experiences like you're in a room great grab it you want to change something about it you want to remix you want to publish it yourself super easy to do you can collaborate with other people on creating inside the app like you don't exit to a separate environment so it'll be fascinating to watch over the coming years how

how this plays out. All right. So David, you just gave two bear cases. One was if you believe VR is the future, then you kind of have to believe that at least in this category, that these things should be native VR. And then you painted the other one, which is that they're not going to necessarily be successful in retaining all these users that they get in order to

continue compounding them. Mario, great counterpoint that so far it seems like they actually are doing a pretty good job retaining them and even acquiring older teens. What other bear and bull cases, like before we move on to bull, I guess, are there any other bear cases that either of you have?

I think the big one for me is really retaining developers. And that seems particularly worrisome just because of the distribution on Roblox already. It's an incredibly top-heavy distribution. So Adopt Me is the top game on the platform. And that has, I think, 3x the number of concurrent players regularly than the number two game, Shinobi Life. It's really...

The vast, vast majority of the platform is concentrated in the sort of top three, four games. And then, you know, even beyond that on sort of the top 20 games. And so it makes it incredibly hard for any new developer to sort of come in, make a living from it and try and gain share. And that ends up being a fairly unhealthy dynamic, I think, when you look towards the future of game development and game creation. Yeah.

Do they need more developers? One argument is like it's working pretty well. What if they at any given time do just have 10 games and figure out how to make sure that they're getting 10 and they're getting 10 quality ones? I think if you want to extend the LTV and, you know, especially appeal to a broader audience, you're going to need a lot of different experiences. So

So I would expect definitely some degree of concentration, but it feels particularly pronounced here. And it feels like the current version of the platform is not necessarily where they want it to be in terms of demographic appeal. Well, I think it's like the lesson from our TikTok episode.

Gosh, no, like two years ago. That's crazy about like you want to have dynamism in among the creator economy of people rising and falling and not get locked in. And TikTok's done this amazingly well, right? Like, why are so many people flocking to TikTok other than like, you know, it's cool. That was a big part of it. But like, why have they done so well where Snap has stagnated?

It's because you can break through like you can you can be anybody and post something. And if it's cool, you'll get distribution. If that's not the case, you're not going to keep attracting dynamism. Right. Not to mention, it's always interesting as a consumer because the content is always completely different and always very timely and a clever remix of everything else that's ever come before on the platform and what's going on in life right now.

I think those are spot on, the bear cases. We painted lots of bull cases. What's the biggest one? If someone had to walk away and be like, this is why this company is insanely valuable. What's the this? I feel like it comes back to

What I think you said at the beginning, Ben, which is like, you know, established that entertainment is a massive industry, established that social networks are a massive industry. Right in between them and across both of them is Roblox. It's, you know, this...

insane mix of the way you want to spend your time instead of watching television and also the way you want to spend your time instead of going to socialize with someone somewhere. So that feels like an incredibly powerful combination that they have effectively found a way to really monetize well. And so that's incredibly powerful in my view. I would add to just the economy aspect of this, which really is a new thing that we haven't

seen before like that they operate their own economy where they are the fed and they set the exchange rates and they get to not only pay no transaction fees from moving things around but recycle money in the system imagine if facebook or google operated that way that'd be a whole nother order of magnitude of value well facebook tried with libra yeah yeah right shows how hard it is to bolt on right yeah

Okay, great. Should we discuss powers? Let's do it. Mario, for folks from The Generalist listening, are they familiar with the power framework at all? I would imagine so, but I think a brief synopsis is never amiss.

All right. We have this section because previously on the LP program, we had a friend of the show, Hamilton Helmer, on who wrote this incredible book called Seven Powers. I decided for here not to put in front of me how he actually describes what power is and just try and articulate it as plain of English as I can, which is here's why you deserve to have profits. And here's why you deserve to have lots of profits. And if you really want to dig in, it's sort of differential profits above your nearest competitor.

And the seven powers are the different types of reasons why you are sort of entitled not only today, but in the future to have sort of enduring sort of sustainable differential profits over your competitors. And those are counter-positioning, scale economies, switching costs, network economies, process power, branding, and cornered resource. And rather than explaining each one, let's just

pick one or two or three that we think Roblox has, and then we can sort of define them as we go in describing how it applies to Roblox. I think they have a bunch of them. This will be fun. Mario, you want to go first? Pick your favorite poison here. Yeah, I mean, it's tempting to sort of just run the gamut. But I think one of the low key ones is counter positioning. Games have traditionally been seen as a waste of time by parents by sort of coupling it

with education and particularly development, like coding-based education. There's sort of few more marketable skills that a parent would be happy for their kid to learn. And so by sort of framing it in that sense, it has a little bit of counter-positioning power.

Let's just go down the list. I think it has scale economies on the Roblox cloud, part of the business. And as we talked about, without knowing enough about Minecraft, I think is a major advantage that they have over Minecraft, that they're able to centralize all the compute and compute storage, networking, etc. resources needed.

Switching costs. Switching costs is like the biggest on the developer side. If you're a teenager who wrote something in Lua and deployed it on Roblox, like not only is that user base not easy to acquire on other platforms, but also the dev tool system is completely different. So you need to go pick up a whole new set of skills and hire a whole bunch of new people in order to move to somewhere that's not Roblox. So it feels like there's just a tremendous amount of lock-in on the developer side.

I think on the user side too. Mario, go ahead. No, no. I was only, I was going to echo that, which is, you know, you sort of accumulate all of this wealth and social capital that has no transfer system. So, you know, it's like,

owning old money of some ancient empire that now you can't use in the present day unless you know you are in that milieu it's not just the robux it's also the stuff you buy with the robux like your avatar your skins your outfits your all your history all the stuff you have in the game like that allows you to yeah yeah um

Okay, network economies, duh. Like Roblox with no friends is not very interesting. It's like me being on Roblox. Process power is so elusive. Like the canonical definition Hamilton uses for process power is the Toyota production system. I don't think something like that exists here. And it's a rare one to have as is cornered resource. The only argument I would make is by using Lua and having that system built around it, have they made it

uniquely easier to create games. Would that fit the bill or is that too far? It's interesting. I mean, it's definitely easier than Unity and Unreal. It's not as easy as Rec Room though. So probably not. Feels like it has to be a little more unique.

I'm trying to remember the formal definition of process power. The thing that I do remember uniquely about it is that it can't really be fully duplicated because it's so complex that you can't pick it up and bring it to another organization because there's so many components that you can't write it all down in a book and be like, go execute this book.

Yeah. That's why, um, Hamilton used the Toyota production system of like, they open sourced it. They were like all other car companies, every, you know, other industries come to Japan, learn, study from us, learn combat. And like, nobody can do it like Toyota. And they're like, we're not trying to, it's just like, it's so embedded in the organization. Yeah.

Branding is interesting. I'm always tempted to use branding, but I think often it's something else masquerading underneath. So the way I always think about this is if you have two commodities that you're holding in each hand and one is branded with Tiffany's and one is branded with, you know, Ben's ABC item that you can't charge nearly as much or generate nearly as much profit on Ben's ABC item. Um,

I don't really know that that exists here. I think every reason why Roblox can make more money than anybody else is sort of attributed to all the other powers that have sort of built up the success of the business, not because they have this brand that people are willing to pay more for. I think that's probably right. I think, you know, they're...

Maybe it's some argument that they've taken some of the brand magic from Lego and reapplied it in a slightly different way and can piggyback off that to some extent. But I think you're right. I don't think it feels like that's one of their core strengths. Well, they have, shoot, I'm blanking on the name, but the Chinese competitor. Reworld. Yeah, Reworld is doing the same thing to them. So yeah, that doesn't feel that.

powerful to me i think they do have cornered resources though i think the corner resources are the existing games and experiences on the system like you can't port those out they're not going to work on you know outside of roblox wait but the definition of a cornered resource is something that you can port out that can be identically valuable for a competitor but i think it's that that the competitors can't access hmm

I was just thinking about this from the way that Paki defined this in the Super Sapiens idea, that that contract would be equally valuable to another competitor, but Super Sapiens was the one who locked it down. But then didn't we get the lithium mining guy who was like, hell no, that's not a cornered resource.

Oh, yeah, that's right. I think Hamilton uses patents. Yeah. Preferential access to a valuable resource such as a blockbuster drug. But those games aren't equally valuable to another competitor. That's what I'm saying. Like, because another competitor doesn't have all the shit that makes it valuable. The user base, the Robux, the... It feels like all of these definitions are almost a little bit on a spectrum. Maybe that, you know, Helmer would be like, absolutely not. But, um...

I know what you mean, David. I mean, it feels like a very valuable thing that they have sole proprietary ownership over. Yeah. So we may be butchering the definition of quartered resources. If we are, we apologize. But I don't think that like these these games, even if the developers were to leave the games that exist in Roblox cannot exist elsewhere. Why? Why not? I totally think they can.

Well, they were written in Lua for Roblox. Like you can't... You could go recreate them, but you can't like move the games and their user bases over. And their user bases. That's the thing that you're throwing out because that's why I don't think it's a cornered... Because the user base isn't a cornered resource. You literally could go write a thing that takes Lua and spits out something that looks like, you know, that Lua-based game in the Roblox runtime. And like maybe the Roblox runtime is sort of a cornered resource, but...

Isn't the IP potentially a cornered resource from the game? Probably. That seems fair that like you couldn't ship an iOS game with the same IP as a Roblox game without getting sued. That feels reasonable. But is that the reason why Roblox is able to be super profitable? I don't think so. Yeah, agreed.

Yeah. Okay. Maybe no corner resource. I only try and be strict on these because like, I feel like I could apply all of them to every business. And then like I go and I reread the book and I'm like, Hamilton was actually like way more narrow and how he defined this than I've always thought about it. Semantics. It's a fun section to do. We end up sort of debating what did Hamilton really mean half the time. Yeah.

Well, the answer is we just need Hamilton to join us for a part two on every section. Yeah, we should just dial him up. Here's the power section. We're calling Hamilton in just for this moment. Let's play judge. We can each plead our cases. Yeah, that's right. As we wind down here, we should say again, not investment advice, but how are you guys thinking about if this thing goes public? How interested are you in adding it to your portfolio?

I'm interested. Let me say that. It feels so hard. Very interesting. Yeah, exactly. Feels very hard to say these days because of the...

pricing that you might get but long term i will definitely be looking for opportunities to buy and you know may do some amount on ipo day but like i'm gonna keep a close tab on it if i ever feel like it gets to an exciting place so that i can you know double up and triple up because i think it's an insanely powerful and impressive business i'm a similar boat

It's interesting. I've got a lot of... I don't know what I'm going to do yet. Some of it will certainly depend on the price. I say some because of what I'm about to say. It's not often that you see a business with this kind of power and this kind of potential. It's very, very rare. And I very much believe that the management team, that Dave, that the current shareholder base behind the company is thinking extremely long-term here makes it...

very attractive, like an ordinary circumstances, all else being equal. This is one of very few things that I think about as a candidate for like, I'm going to put in my, I think of this as my, like, I call it my compounding portfolio where I have like, I think I have only five equities in there right now. Amazon, Spotify, Tencent, Zoom, and Berkshire that I think of as like long-term, I can hold this for a decade plus two decades and be happy. I think this is a candidate for that.

I am thinking a lot about the rec room, you know, age dynamic. Like if rec room were going public and we were able to invest in that, which would I rather, I probably would want to own both and just play the theme as a whole. The price is interesting. Like this is probably going to go out at a nutso price. You know, I was thinking similar things with DoorDash, with Snowflake and the like.

And even Zoom at the original IPO. And it's like, well, this price is too expensive. I'm going to, just like you, Mario, I'm going to wait and wait for an opportunity. There was no opportunity. So I don't know what to do in this environment about this, but that's how I'm thinking about it. Well, I don't know what to do in this environment about this is I think the bow that we can put on many episodes and is a great place to leave this one. Mario, really awesome to do this. Wait, Ben, you can't get out of it. You can't get out of the answer here. I feel like I'm the least educated on this one.

And I just don't do as much of this, I think, as you do, David. I will be very interested in this company, but I'm not going to go out and individually buy this stock. I'm going to watch it. I'm going to be very curious. I'll follow it. I hope to do a future acquired episode on it. If it was a SPAC, you'd be all over this.

The SPAC strategy is a little different. I can, I can articulate that another time. I love it. Which as it should be, like if you're not willing to, for whatever reason, be willing to follow this thing for a decade, like at least my view is like you shouldn't invest in something if it's not something you're willing to follow for a decade. Yeah.

That's one strategy. That's the time-tested strategy where you can't time the market. But imagine you could. Imagine you could. Oh boy, the world we live in. Indeed. Well, Mario, one more time, where can folks from the acquired LP community...

find you, find The Generalist and read more. You can check out readthegeneralist.com and would love you to check it out and see if you're interested in learning about more S1s and companies in the private markets. You can follow me on Twitter. I'm at Mario D. Gabrielli. Thank you guys so much for having me on. This was a real treat. I really appreciate it.

Super fun. And you should do more audio. I think like for any new folks who are listening to this from the generalists, like you should email Mario and tell him he should do more podcast stuff because this is great. Please tell me that because I'm very nervous. I texted these guys right before this being like, I am absolutely shaking to do this.

Oh, man. Well, for anyone who's an LP or for anyone who's from The Generalist, we do have a Slack, acquired.fm slash Slack. That is a great community to talk about all things of current tech news going on, current investing going on. And it's a really fun place to...

hop in there and hang out and discuss all this stuff with everyone. So go check it out. If you're new, check out the main show. Most of our content is free and is these three-hour epic deep dives into most recently Bitcoin, but usually companies. This is sort of a much shorter, more abbreviated, more sort of conversational, casual version. Mario, much like this was much more casual and conversational than I think you're writing, which every sentence has so much gravitas when I read it. I love it.

What a charmer. I love it. Only the three of us, right? Could be like, yeah, an hour and 40 minute episode. This is brief. We're going to keep it real tight. Yeah, exactly. Awesome. All right. Listeners, see you next time. We'll see you next time. Thanks so much.