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Ilya Eremeev and Maria Kochmola, two of the cofounders of The Games Fund, had to make some fast decisions in February when Russia invaded Ukraine. They were based in Moscow, and they decided to move out of the country.
They made it out of Russia with some difficulty and bounced from country to country. They made their way to the United States and settled in Miami, where they have set up a new base for their game-focused venture capital fund. The Games Fund is still making investments in Eastern Europe, which has thousands of game studios. But they have also pivoted to making investments in Western game companies. In fact, 70% of their deal flow now comes from the West.
And fortunately for The Games Fund, the fund’s money isn’t subject to sanctions because the vast majority of the money for the fund came from the West and Asia, said Eremeev and Kochmola, in an interview with GamesBeat. They are both managing partners of the fund, which is registered in the U.S.
“There are a lot of changes before us, but at least for now, it’s clear how to navigate the storm,” Eremeev said.
At the moment, U.S. companies (and those in many other countries) are not allowed to invest in any company in Russia. Any people who live in Russia are not allowed to get investments from U.S. entities now or receive money transfers.
The Games Fund invested in 11 portfolio companies. Of those, nine had core teams that were based in Russia. Now those companies have all moved their staffers out of Russia, due in no small part to urging from The Games Fund. Most of those teams had no choice due to the sanctions. The Games Fund itself could not transfer any money to its invested startups, so long as they stayed in Russia.
“They have to relocate to build international companies,” Kochmola said.
A big pivot
It isn’t easy to pull off this kind of pivot. In April 2021, in the midst of the pandemic, Kochmola and Eremeev announced they had raised the new fund, first with $50 million and later adding an additional $17 million. They both previously worked at Russia’s Mail.ru’s My.Games division, which started a game fund called MGVC.
Kochmola was the investment director at MGVC since its inception in 2017, and she led more than 35 investments. Of those, six companies were acquired.
Eremeev said the company is not allowed to disclose its limited partners. But he said the investors came from the West and some of them have agreed to disclosure. The investors include American companies including Scopely and South Korea’s Com2Us. Other founders of The Games Fund include Sergey Titov, a general partner, and GEM Capital.
The Games Fund’s limited partners include gaming companies in the U.S., China, the United Kingdom, Israel, UAE, and Europe. Kochmola and Eremeev said the investors know each other and recognize they don’t have any “toxic money” in the fund. The fund gets a lot of questions about ties to Russia, so Kochmola and Eremeev have to assure everyone that the fund’s capital is safe.
“The good part is that we have been really picky in choosing our investors, and we don’t have any toxic money,” Eremeev said. “Our bank accounts are in the U.S. Of course, we didn’t expect that things would end up this way. We just wanted to operate with like-minded people.”
The fund had to pass strict “know your customer” regulations, meaning the source of funds couldn’t come from any unknown or banned sources, Eremeev said. The Games Fund did not raise any money from the Russian government, Kochmola said.
“If we took government money, we had this concern that sooner or later this could cause some troubles,” Eremeev said. “That was why we decided not to take it.”
Eremeev and Kochmola are relieved they had the foresight to set themselves up as an independent and international fund.
“We had some intuition or just a gut feeling,” Eremeev said.
And while they feel they made the right decision to leave Russia, it was emotionally difficult to leave a place where they had spent their lives, they said.
The vast majority of the funds came from investors who are familiar with the game industry. Sergey Titov, one of the founders, also lives in Los Angeles, and the company has some partners in Cyprus.
The fund has also managed to keep an ongoing relationship with its Ukrainian partners because it has articulated its position clearly, Kochmola said. The company has some Ukrainian companies in its portfolio. One portfolio company was in the war zone and had to move to Western Ukraine.
The Ukrainian game companies are still working on their games, though they are keeping a low profile. These companies face complications, as male employees cannot leave Ukraine even if a company decides to move.
“We still have many, many people in our portfolio companies based in Ukraine,” Kochmola. “Many companies have their headquarters in Cyprus, but they had teams in both Ukraine and Russia and they try to communicate with each other.”
Because of the war, Eremeev said they decided to leave Russia and move to Miami. They felt welcome there, and they were able to stay in communication more easily with their companies in Europe, given Miami’s Eastern time zone. They also have some connections with local founders in Florida. The Games Fund partners are now in the process of getting access to long-term work visas.
The collapse of Russian game development
While the crypto community is entrenched in Miami, the Games Fund doesn’t have a particular emphasis on investing in blockchain companies.
When it comes to changing operations and getting out of Russia, other companies have not been so lucky and have been hit by sanctions. Nexters was delisted from Nasdaq and it laid off hundreds.
A variety of Russian and Ukrainian game companies have gone out of business or relocated out of their home countries. But we’re not necessarily seeing a wave of acquisitions. Russian game companies have been torn apart by the war, as many had employees in both countries.
Game Insight moved its headquarters in 2014 (when the first fighting began between Russia and Ukraine in Eastern Ukraine) to Lithuania. But most of its team was still in Russia. With the outbreak of the new war in February, Game Insight laid off 600 employees and ceased operations.
“The Russian market is experiencing a massive downfall,” Eremeev said. “A lot of companies have closed.”
Plarium, which had hundreds of employees in Ukraine and Russia, shut down its Russian operations. G5 Entertainment had staff in both Russia and Ukraine, and it opened a new office in Poland. Playrix moved its headquarters from Vologda, Russia, to Dublin, Ireland, in 2014. But the company’s staff saw strife over the war in Ukraine. Wargaming closed its studio in Minsk, Belarus, years ago and moved to Cyprus. But many of its studios remained in Russia, and it has now transferred those employees to Russia-based Lesta Studio and cut all ties with Russia. The maker of World of Tanks has now moved its teams to the West.
Most of the Russian game companies are relocating to Cyprus, Armenia, Georgia, Hungary, and Serbia, Kochmola said. Cyprus made it easy for Russian citizens to incorporate businesses, and it has low taxes as well as access to the European Union. But now it is becoming overcrowded, Kochmola said, because a huge wave of Russians have relocated there.
The Games Fund has made one new investment in Hypemasters, a U.S.-based game studio that raised $3.25 million to make World War Armies. The Games Fund co-led that deal with GEM Capital.
Relatively speaking, Eremeev said it was easier than expected to relocate, but it wasn’t easy. Eremeev and Kochmola feel lucky. A lot of other Russian game developers haven’t made it out of the country and an estimated 3,000 game developers have lost their jobs, Kochmola believes.
“I think most of the people who lost their jobs are still looking for opportunities,” said Kochmola. “I think they’re not employed right now.”
Many of the developers cannot leave Russia, either for financial or family reasons.
This is not to say that the fund is sympathizing only with the Russians who have been impacted. Eremeev and Kochmola recognize that game developers in Ukraine have also suffered much more with the invasion of their country, and Eremeev and Kochmola are gravely concerned about the state of game development in Ukraine as well.
It is not easy for game companies to hold together even after relocating, as the war has divided many communities. For anyone that asks, Kochmola said that The Games Fund is advising Russian developers and their companies to move out of Russia if they are to expect to receive any funding at all.
“All of our founders are currently outside of Russia, together with their core teams,” Kochmola said. “There used to be a shortage of talent, and now the situation is reversed. There is a lot of talent available on the market, and they are willing to locate, as there are no jobs in gaming in some places. We will invest in Russian-based teams only if they relocate.”
Why the recession is a double-edged sword for investing
As with any investment cycle, the slowdown has pluses and minuses. More talent is available now, and it’s a good time to invest in startups, in contrast to investing during a boom.
But Eremeev said the investment market is slowing down, not just in cryptocurrency which has seen a market crash, but in the larger economy because of fears of recession. The public markets have stalled, and nobody expects any initial public offerings.
“The whole market is like a chain, and it goes from the public companies down to the strategic investors down to early stage investors,” Eremeev said.
“But in terms of early-stage investments, we are quite positive because we expect to exit our companies like three to five years from now,” Eremeev said. “And we expect that the economy will not be a concern at that time.”
Still, like all investors, The Games Fund is investing more slowly than it has in the past. Many funds are keeping their “dry powder” to support their existing portfolio companies, which will need a longer runway in order to survive the effects of the recession. But the fund still believes that the fundamental growth of gaming will still be promising in the future.
“We’re still looking for for new investments, but maybe not that aggressively as before,” said Eremeev.
Eremeev said that the blockchain gaming companies are likely to see a slowdown due to the crypto winter.
“We believe a lot of those companies will fail to deliver real results, and the hype is slowing down,” said Eremeev. “And so we expect to see a lot of gaming companies going out of business in the following year or so. But this actually makes it a great time to invest because the strongest companies with solid foundations will survive. And the valuations will get back to normal and companies will become investable.”
The Games Fund does not plan to raise more money now, as it still has capital to deploy for years to come. And it will continue to invest in Ukrainian game developers. Outside of Russia, Belarus, and Ukraine, strong game industries are in Poland, Estonia, and the Czech Republic. And The Games Fund will look for investments in the growing diaspora in Eastern Europe.
“If you want to survive, you have to adapt your strategy,” Eremeev said.