Inside the Deal: Twitch's First VC Investors
Earlier this week, we covered The Twitch Mafia, and so for this week's Inside the Deal series, we're taking a look at the company's first venture investors who took a leap of faith and invested early in the company.
Twitch was initially known as Justin.tv, a platform founded in 2006 by Emmett Shear, Justin Kan, Michael Seibel, and Kyle Vogt. Justin.tv allowed users to live-stream video content from their webcams, but its initial focus on a broad range of user-generated content made it challenging to monetize effectively.
The Birth of Twitch: Early Struggles and Strategic Pivot
In January 2011, the team at Justin.tv initiated two "skunkworks" projects in an attempt to pivot the platform towards a more lucrative business model. CEO Michael Seibel launched Justin.tv Mobile, while CTO Emmett Shear spearheaded Justin.tv Gaming. These projects, seemingly experimental at first, showed early signs of success.
Justin.tv Mobile later evolved into a separate entity called Socialcam, a competitor to BVP's seed investment Viddy. On the other hand, Justin.tv Gaming underwent a profound transformation, rebranding itself as Twitch.tv and becoming the sole focus of the company.
Justin Kan, one of the original founders, departed to launch a new startup called Exec, while Kyle Vogt continued to oversee Justin.tv as a division of Twitch.
Emmett Shear's visionary leadership drove the transformation of Twitch into a dedicated live-streaming platform for gamers, capitalizing on the immense potential within the gaming community. This strategic pivot marked the beginning of Twitch's journey toward becoming the gaming giant we know today.
Investors in Twitch include:
Bessemer Venture Partners: Invested $13 million in Twitch after it pivoted from Justin.tv.
Draper Associates: Invested $15 million in Twitch in September 2013.
Thrive Capital: Thrive Capital led a $20 million Series C investment in Twitch.
Some Stats:
Twitch is worth $45 billion.
Since the acquisition, Twitch's valuation has increased and is currently around $3.79 billion.
In 2020, Twitch had 30 million average daily visitors and over seven million unique streamers going live every month.
Why Investors Thought It Was a Great Deal
Unique Value Proposition: Twitch was seen as a marketplace where gamers could utilize the intellectual property (IP) of game publishers as "raw materials" to create content that viewers wanted to consume. Twitch allowed gamers to share their gameplay experiences with others, charging viewers through advertising, subscriptions, pay-per-view (PPV), and paid HD.
Low-Friction Monetization: Investors recognized that Twitch created value for all parties involved by providing a low-friction environment for transactions and handling monetization on behalf of content creators. This approach enabled Twitch to capture the majority of the transaction value, making it a compelling platform for gamers and viewers alike.
Strong Partnership with CBS Interactive: CBS Interactive's involvement in selling advertising on Twitch's behalf was a significant factor. Twitch was able to sell premium "e-sports content" generating high CPMs (Cost Per Mille, or cost per thousand impressions) in partnership with CBS Interactive. This partnership provided Twitch with a stable revenue stream and high-quality inventory.
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Why Bessemer Invested Early in Twitch
Among the early investors, Bessemer Venture Partners (BVP) stood out as a firm that recognized Twitch's promise. But why did BVP decide to take the plunge?
BVP's investment in Twitch was driven by several key factors:
Visionary Leadership: BVP saw potential in Twitch's leadership team, particularly in its CEO, Emmett Shear.
Market Potential: The esports and gaming market was rapidly expanding, and BVP believed Twitch was well-positioned to capture a significant share of this growing audience.
Strategic Partnerships: Twitch was making strides by forming strategic partnerships with major players in the gaming industry, including Tencent, EA, Activision, and Take Two. These partnerships showcased Twitch's commitment to growth and collaboration.
Integration with Game Publishers: Twitch was actively working with major game publishers like Activision/Blizzard, EA, Ubisoft, and others to integrate the ability to stream directly into their games. This integration would enable gamers to share their gameplay seamlessly without relying on third-party software or hardware.
Metadata Sharing: Twitch allowed gamers to share additional metadata, such as virtual goods inventory, weapons used, and levels achieved, along with their streams.
Large and Growing Market: While this market was still emerging in the U.S., the success of eSports in Asia and the substantial viewership for gaming-related content on platforms like YouTube indicated a significant latent demand for such content.
Concurrent Viewership: Twitch's model of allowing viewers to watch others play video games was compared to the popularity of watching sports events. Gamers could enjoy both participating in games and watching others play, making Twitch's model appealing to a wide audience.
Revenue Potential: Despite initial concerns about monetization, investors believed in Twitch's ability to monetize its highly engaged and targeted demographic effectively. The platform's demographic was viewed as lucrative, and potential revenue streams from subscriptions and virtual goods sales were seen as promising, though speculative at the time.
Early Mover Advantage: Being an early entrant in the live-streaming space for gaming gave Twitch a competitive edge. BVP believed that this advantage would be difficult for potential competitors to overcome.
In August 2014, Amazon acquired Twitch for $970 million. Amazon's acquisition of Twitch was its largest in history. The deal was approved by Twitch's shareholders. Amazon was largely hands-off with the business but has offered Prime subscribers perks on the live streaming platform, such as free games and in-game loot.
Amazon's CEO Jeff Bezos wanted to transform Amazon into an Internet destination beyond its core retail operations. Twitch's COO Kevin Lin said that Amazon matched Twitch's company values really well.
It was re-branded as Twitch Interactive to represent the shift in focus. Justin.tv was shut down in August 2014.
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