Conversation with Chen Yuetian of Huofeng Capital: Why has no successful blockchain game emerged yet?

Industry experts who truly understand how to integrate game experience and economic systems do not tend to participate in the development of crypto games.

Editor: Wu Shuo Blockchain

Chen Yuetian was once responsible for entertainment investment at Sinovation Ventures, and later participated in investments in projects such as IOST, Mask Network, StepN, and Jay Bear. Huofeng Capital is one of the few VCs focusing on the Crypto Game industry. This podcast interview was conducted on November 20, 2023, and some of the discussions on market conditions and data have changed. Listen to the podcast for the full version.

**How is the investment situation in 2023? **

In 2023, our investment activity was very active, with new investment actions almost every month. Especially in the primary market, although there are relatively few investors due to the downturn in the secondary market, we still insist on investing in the primary market. It is generally believed that bargain hunting at market lows is a wise choice, so we are also actively looking for suitable investment opportunities.

Our main focus is on the field of crypto games (Crypto games) and we have clarified our investment scope. After a series of screening and research, we have invested in some projects worthy of attention in the domestic market. Although there are not very many high-quality projects overall, we still found some opportunities with potential.

For example, a foreign gun game project I mentioned recently, “Shrapnel”, is valued at approximately US$500 million after the introduction of the token economic model (Tokenomics). Another project is “Big Time”, which is currently valued at approximately US$900 million. These projects demonstrate the huge potential and market interest in the crypto gaming space.

In addition, we also paid attention to some projects launched during the last bull market, especially those that have recently begun to focus on Tokenomics. We found that by introducing these specific cases to people in the traditional gaming industry, their understanding and attitudes towards crypto gaming and token economic models began to change.

**Is the investment field mainly focused on games, or will it be diversified into other areas? **

Our investment strategy is firm and focused, mainly investing in the field of crypto games. We do not over-diversify our investment directions because our funders have clear expectations for our investment focus - they invest in us to focus on the crypto gaming market.

Of course, we will also explore some innovative areas such as artificial intelligence to a certain extent, but these investments only represent a small part of our portfolio. Our main mission and goal remains to find and invest in promising projects in the crypto gaming space.

We understand the expectations and requirements of investors, so we will not change our core investment track easily. Even if the crypto gaming market has its ups and downs, we will stick to our area of expertise. Ultimately, the goal is to be successful in our chosen field rather than constantly switching between tracks.

**Currently, do you mainly invest in Chinese teams? **

In 2023, our fund focuses on investment in the crypto game (Crypto game) field. Based on my personal resource background and network advantages, we have certain advantages among the Chinese team. Our investment logic is not only based on our optimism about this field, but more importantly, it must meet the needs of investors and recognize our investment philosophy.

Although we invest in global teams, we are mainly focused on the Chinese gaming industry because this is the market we know best and are familiar with. Our investment strategies take into account investor wishes and market trends. For example, although we have also explored investments in the AI field and funded MyShell.ai, our main focus is still on crypto games.

We believe Crypto can help Chinese gaming companies capitalize through non-traditional stock and equity markets. The capital liquidity and valuation premium in this market give the team better capital reserves and development opportunities. For example, we have observed that certain game projects have been valued at hundreds of millions of dollars after Tokenomics, which far exceeds the possible capitalization valuation of Chinese games in traditional markets.

We see that Crypto, as a capital market, is very suitable for promoting the circulation and return of capital. At the same time, we also realize that the game team’s unfamiliarity with the capital market requires an education process. Through the demonstration of foreign relatively relaxed regulatory environments and successful cases, we will gradually educate and attract more teams to realize this. We believe that the Crypto market provides a valuable capitalization platform for the gaming industry. Although there is a certain risk of bubble, as long as the future business model is feasible, this market will eventually gradually develop and grow from immaturity to maturity.

**Has there been any change in the industry’s current valuation logic for games? **

In the world of crypto funds, investment preferences are closely tied to the funder’s background and positioning in the broader capital markets. Especially those funds that focus on native encryption fields such as public chains and DeFi, they tend to support innovative and cutting-edge projects in the blockchain field, such as Magic.

However, our fund’s investor base is slightly different. Most of them joined through my personal relationships. Many of them are friends for many years. They are interested in the game industry or are bosses in the game industry themselves and want to explore the Crypto Game field. These investors are sources of funds outside the industry. They prefer more mature products and teams that they can understand, have clear business models. This type of team is more likely to attract support from our fund and its funders.

In fact, this reflects two different types of teams and investment orientations. The market that our fund and its investors are willing to participate in has many advantages over traditional finance. Everyone is open to this capitalization market. Whether it is the equity stock form supported by Web2 in the past or the team currently supported by Crypto, their quality in terms of game products and R&D is essentially similar. Modern new game product teams, in addition to innovation in business models, also need to have a deeper understanding and familiarity with the Crypto field.

**Will the invested projects also face difficulties in a bear market? **

For us, 2023 is a year of continued active investment in the crypto gaming space. Although there are not many funds that invest as frequently as ours, one advantage of the crypto market is that people are willing to invest together. Among the projects we support, even in a bear market environment, these teams can still raise US$5 million to US$10 million in funding, which is quite rare in the current market environment, even compared to the Chinese equity market in 2023 , the single investment amount is also very large.

Our funders are mainly personal friends or game industry bosses who are interested in the gaming field and want to explore the crypto gaming space. Since they prefer understandable business models and mature products, our investment tends to be in teams they can understand and recognize.

In terms of capital markets, Crypto’s primary market remains active and the amount of funds is sufficient. It’s just that the financing cycle may be lengthened and investment conditions may be more favorable to investors, which means that conditions for the founding team may be average. But overall, game development costs are relatively predictable, as it mainly depends on team size, labor costs, and outsourcing costs. Once a team secures sufficient funding upfront, they usually don’t suddenly face a situation where their funding dries up.

On the other hand, we also met some teams that ultimately did not choose to invest. These teams often have difficulty securing lead investors, resulting in long-term inability to raise funds, which is also a common phenomenon in the current market. As a primary market fund, we still actively invest in bear markets. We have made some adjustments in investment conditions. For example, in a bull market, we may accept a three-year Token unlocking period, but in a bear market, we may require a shorter unlocking period.

**Will Chinese investors be in a more advantageous position relative to project parties in a bear market? **

Indeed, there are relatively few funds in the current crypto market that are willing to continue investing and still have funds on their books. Since many funds operate a mix of primary and secondary markets, their funds are often reserved for purchasing assets such as Bitcoin (BTC) and Ethereum (ETH) at the right time, in anticipation of bargain hunting opportunities. Different from this, our fund is completely focused on project investment in the primary market, which is relatively rare in the market.

In terms of project valuation, we have seen investment opportunities at different levels, including projects valued at US$10 million, US$20 million, US$40 million or even US$90 million. However, we tend not to invest in projects that are overvalued. For example, there is only one project worth $90 million in our investment portfolio. We prefer to invest in projects with valuations between US$10 million and US$20 million. This valuation range is more suitable for us.

**Is there a phenomenon that some VCs reject Crypto Game? **

One of the capitalization characteristics of the crypto market is the high emphasis on narrative. In this market, if a project has an attractive narrative, it may be successful even if there is no substantial product or outcome. This phenomenon reflects a core feature of crypto capital markets: narrative has a higher weight between fundamental analysis and narrative.

Comparing different types of projects, for example, it takes a team of 40 or even 70 to 80 people two years to develop a decent game. In contrast, a team of about 10 people may only take half a year to a year. You can complete a project and tokenize it. In this case, many venture capital (VC) companies that are more active in the capital market may be more inclined to choose the latter. Because the latter not only has a short development cycle and lower risks, but can also realize capitalization and returns faster.

This tendency reflects a common phenomenon in the crypto market: investors and capital prefer projects that are fast and can quickly bring capital returns, rather than projects with long development cycles and large investment capital.

**Is the development of GameFi also largely restricted by regulation? **

When we talk about regulatory standards, we usually consider whether a matter is appropriate to operate. First of all, I don’t think teams involved in this kind of thing should just think about operating domestically. Once it decides to get into gaming, the company should be viewed as somewhat of a global enterprise. Importantly, these companies need to clearly understand their global positioning and not just be technically based on blockchain. If a team and its main market are concentrated in China, this will undoubtedly increase the risk.

Take large-scale projects with Chinese backgrounds as examples, such as STEPN’s GMT. They do not face significant risks and are still launching new games Gas Hero. If a company is involved in the gaming and blockchain fields, its company structure, team composition, employee status, and products should have a global perspective from the beginning. This includes actions to consider, such as access restrictions for Chinese users and Chinese IPs.

For business, I think the fundamental principle is innovation. Law and regulation often lag behind innovation. This is the basic principle of business innovation. If you use existing laws and regulations to evaluate something, there are usually two results: either it is difficult to understand, or it is illegal. Obviously, breaking the law is easy to judge and the conclusion is easy, just don’t do it; while being difficult to understand means there is a gray space. On the fast edge of innovation, regulation always lags behind.

We need to create compliant solutions without clearly breaking the law. For example, many Chinese teams are still involved in the development of exchanges, but they have been positioned as global companies from the beginning. They may have a development team or personnel in the country, but the contract is not a labor contract in the traditional sense, but is project-based. Their operations are also not oriented to the Chinese market. If anyone raises questions, the teams will ask how these people were able to access these services while blocking Chinese IP addresses.

**How do you view the criticisms against some GameFi projects, such as low playability, imperfect economic models, etc.? **

I think first we need to have an accurate understanding of finance and Ponzi theory. Projects should not be labeled lightly, as an overly abstract understanding can lead to misunderstanding and bias. For example, considering China’s real estate market, many people believe that this is not a Ponzi model, but a normal financial activity; another example is China’s stock market, especially some chip companies on the GEM that have suffered losses for many years but still have high market value. Are the values of these companies a bubble? Their own development, even if they are listed on the market, still belongs to the Pond’s model?

In my opinion, if a company wants to avoid being considered a Ponzi model, it should have positive cash flow and net profit every year, and at the same time have a reasonable market value in the capital market. Otherwise, the price and value of many assets are actually determined through trading. In financial markets, controlling liquidity is a common strategy, which can increase market capitalization. For example, if Shanghai’s real estate market implements purchase restrictions and circulation restrictions, and the circulation market becomes smaller, housing prices will be more likely to rise. Banks will also recognize these properties as assets and lend money, so the total amount of loan funds for properties in the entire market can actually increase.

We’ve previously discussed whether a specific game is a Ponzi model, but if you look at the cryptocurrency market as a whole, its biggest issue may be the lack of positive cash flow from the underlying asset. Therefore, it can be considered that there are certain risks in this market to some extent. Nonetheless, I think gaming is already an area in the field that is close to high-quality assets and may bring positive cash flow.

**Are there any conflicts between the financial attributes and playability of the game? **

Indeed, there may be a certain contradiction between the financial attributes of the game and its playability, which is a core issue that the game development team needs to solve. Games are designed to provide an exciting experience, but if there is too much emphasis on financial attributes within the game, such as buying, selling or speculating, it may harm the experience of the game itself. When players play such games, they often have two different feelings: one is the entertainment experience brought by the game, and the other is the excitement brought by the fluctuation in the value of the game assets. These two feelings are often difficult to clearly distinguish, causing problems in the game feedback loop (Game Loop) experienced by players.

For example, when a game’s asset value continues to increase, it may attract a large number of players to participate. But when these players lose interest because the value of their assets drops, they may forget how much fun the game itself is. This situation places extremely high demands on the design capabilities of the game product team. They must find the right balance between gaming experience and in-game value transactions, or create a system that blends the two.

Take “Fantasy Westward Journey” as an example. This game balances these two aspects very well. It has no extreme asset value fluctuations while maintaining a good gaming experience. The props in the game have a certain value, and a cooperation system between players is built. For example, some players focus on producing props and materials, while others focus on other aspects. Such a design creates a small social system that effectively combines gaming experience and financial attributes.

**Why are there still no viable crypto game projects? **

There are two main reasons why there are no viable crypto game projects yet. First, the market itself does not require complex gaming products to be profitable. In crypto markets, simple financial products and speculation are enough to attract capital, reducing the incentive to develop complex, deep games. This is the first reason.

The second reason is that industry experts who really know how to integrate game experience and economic systems do not tend to participate in the development of crypto games. These experts are typically gaming industry veterans with extensive experience and in-depth understanding. For example, most of the current planners and producers in the game industry grew up in the context of the free to play model. They are very familiar with early MMORPGs (such as “Legend”, “Fantasy Westward Journey”, “Westward Journey”, etc. ) may not be familiar with the economic system. Different business models and game designs, such as the character charging system and economic system design created by miHoYo, are completely different professional knowledge and skills. Therefore, returning to MMORPG-like economic systems such as Tokenomics, the existing mainstream The talent doesn’t match.

To solve this problem, a process is required. Gaming industry professionals first need to realize that the crypto market is an excellent capital opportunity. Without this understanding, the best game makers may not join the field. Without the input of these top minds, all of the issues we discuss may still remain unsolvable. Problems in the development and operation of game products, as well as challenges in business model design, all need to be solved by these experts. But the key question is, why do these top talents choose to join this field?

**What do you think of the major domestic manufacturers’ testing of the Web3 project? **

For domestic large companies to try Web3 projects, this reflects the typical internal innovation process of large companies. In this process, success or failure cannot be judged in general terms. Each project needs to be evaluated individually based on specific circumstances, involving many details.

Internal innovation in large companies requires several key elements: First, the company’s top management, especially the boss, must pay enough attention to this area. Second, the executive team needs to have accurate understanding and support. Finally, the execution layer must work with precision. If these elements are met, innovation attempts are likely to be successful.

However, there are some common problems. For example, if a company spreads resources that should be devoted to one important area into ten different innovation directions, this dispersion of resources may make the final results difficult to predict. In addition, some companies may only pay lip service to innovation, but may not actually agree with it in their hearts. They may be motivated more by financial interests than genuine innovative intentions. This kind of inconsistency often does not lead to substantial results.