Transcend Fund raises nearly $60M for second seed fund to invest in games and entertainment

The Transcend Fund is announcing the closing of its second seed fund of nearly $60 million to invest in games and digital entertainment.

If the fundraising environment looks bleak, don’t give up hope. There’s still money out there.

Transcend Fund II is focused on early-stage companies, and this time the VC fund will have more money in its chest to put into startups.

All told, Transcend Fund has $150 million in assets under management, including funding from limited partners for its first fund from 2020 as well as payouts from its investments, said Shanti Bergel, founder of the fund, in an interview with GamesBeat.

“We’re still excited to keep going. When we look at market studies that show that every generation plays more games than the previous generation, the growth is inevitable,” Bergel said. “We are very cognizant of the current moment in time and how difficult it is to get anything done when things are so tight. And interest rates are where they are and that has knock-on effects. That said, we speak a lot with investment bankers about the current market for M&A. It has been hot and it has cooled a bit, but that always happens. We still see the road ahead as going up.”

Marking a substantial increase compared to its predecessor, Transcend II received widespread support from existing investors, along with the addition of new limited partners, including several renowned companies, family offices, and notable figures in the gaming and finance industries.

According to data from Pitchbook, the previous fund, Transcend I, stood within the top Investor rate of return (IRR) for all 2020 vintage venture funds. The firm — managed by general partners Andrew Sheppard, Brett Krause, and Bergel — is based in San Francisco, though its people are spread out.

Bergel has three decades of experience in the video game industry, and he said he is amazed at the explosive growth potential within the gaming and digital media space.

“Gaming is advantaged by almost every modern digital growth vector, at scale. As computing has evolved, costs have dropped, and access has broadened, the creative and commercial space for gaming has exploded around the world,” said Bergel. “Demographically, the preferred form of socializing and entertainment for GenZ are video games. The gaming carrier wave is increasingly ubiquitous and its place in popular culture is pivotal. Transcend is positioned at the forefront of this vibrant industry.”

By 2028, the game industry could reach $500 billion in revenue, as indicated by various industry reports from McKinsey and Goldman Sachs.

The recent record-breaking acquisition of Activision Blizzard by Microsoft for $68.7 billion signifies the recognition of gaming’s significance by major tech firms. Entities such as Amazon, Google, Apple, Meta, Netflix, Tencent, Sony, and Microsoft collectively hold $229.4 billion in cash reserves and are exploring further investments within the gaming domain. That’s good for startups that want to eventually be acquired.

Transcend, known for its audience-centric approach, has established itself as a frontrunner among early-stage venture firms, focusing solely on digital entertainment.

“The audience is the one true compass in all of entertainment. As former operators with billions in revenue experience, our approach is rooted in decades of direct experience in the games industry reading that compass and building for those audiences,” said Sheppard, in a statement. “That long track record across defining franchises and entertainment companies informs our first principles approach to early stage investing in such a massive yet bespoke category as gaming.”

This approach resonates strongly with the leading founders in gaming who have chosen to work with Transcend. This includes major industry figures and award-winning developers of beloved franchises such as Fortnite, Candy Crush, World of Warcraft, League of Legends, Call of Duty, Diablo, Farmville, StarCraft, Fallout, Last of Us, Elder Scrolls Spider Man, Borderlands, Guild Wars, and many more.

“In this challenging environment, we are thrilled to continue to grow our investor base and expand the Transcend platform and ecosystem,” said Krause, in a statement. “While staying true to the winning strategy of Fund I, we took the opportunity to increase Fund II slightly to around $60 million. We are
immensely proud and appreciative of the trust and confidence placed in Transcend by both our exceptional investor group and the visionary founders who have selected us to be their partner.”

Bergel said the fund isn’t ready to announce its limited partners. But he dropped hits that it includes a top 10 Japanese strategic game company, a top 10 Korean strategic game company, a top 10 Southeast Asian strategic game company, a multibillion dollar European strategic mobile game company, a leading global gaming and consumer electronics company, multiple founders and C-suite executives from multibillion dollar Chinese game companies, leading executives at several of the largest U.S. game companies, one of the largest family offices in Asia and a top 10 game-industry European family office.

Fund II was tougher to raise

Bergel said it wasn’t easy raising money as the world is economically “melting around us” and startups are having trouble raising money. But Transcend’s first fund performed well and that enabled it to raise the new fund. It took about a year and was completed during the summer. That was longer than expected but good when compared with the rest of the industry, he said.

“It’s been a difficult fundraising environment for any big company,” said Bergel, regarding large startups like Gardens. “In cases where you have momentum, you can get some real tailwinds. There are always going to be a handful of companies that are hot.”

All of the limited partners in the first fund decided to participate again, and then there was the addition of new partners. Among the successes in the first fund were Gardens, Thatgamecompany and Singularity 6. All went on to raise new rounds and Thatgamecompany hit unicorn status, as it raised $160 million in 2022 at a valuation above $1 billion.

The limited partnres are a mix between Asia and Europe. There aren’t a lot of Middle Eastern investors as there are in other funds. It so happened to turn out that way.

Where to put the money?

Bergel said his fund has developed a reputation of working with very seasoned people in the game industry, with well-known people leading teams.

“That’s probably what most people when they think about the Transcend brand,” Bergel said. “Those teams are working on very distinctive, very differentiated products. We have seen that good deals beget good deal flow.”

Bergel said the company focuses on audience first and it isn’t necessary investing in the “flash in the pan tech ideas,” like Web3 or AI.

“Each one of these gets a hard look for us,” he said.

He said such categories are evaluated in terms of the potential to expand the audience. Sheppard spent a lot of time in the free-to-play mobile game space at Kabam, as did Krause. And mobile has changed considerably with Apple’s focus on privacy over targeted ads. That has made the fund more conservative when it comes to mobile game investments.

As a result, the first fund had a stronger PC game investment focus, but the PC market is very competitive and you have to invest at the top of the talent scale to succeed, Bergel said. Transcend hasn’t made investments in emerging areas like Unreal Engine Fortnite yet.

The fund has, however, made an investment in the XR market with Stress Level Zero and will continue to explore that market as a possibility, said Bergel.

I asked what Bergel thought about the metaverse, blockchain and even AI getting a lot of blowback on social media from gamers and game developers.

“We think about whether there is an audience for something, and if there is then we don’t care if there is blowback. We are all going to have to get used to the idea that there is content out there that isn’t made for us specifically,” he said. “If you look at the blockchain blowback, you can see it’s not the same in the Korean gaming community. They are a little more respectful. There is different soil in which to plant different ideas.”

The company has also made a couple of investments in blockchain technology companies, including an investmentin the Polygon Layer 2 scaling solution. And the fund has always been interested in MMO companies, if that’s what people mean when they say “metaverse,” he said.

Still, “Most of the content investments we have made tend to be in traditional video games,” Bergel said. “You could say Singularity 6 is a metaverse company. We don’t say that and they don’t.”

As for the layoffs in the game market, that was one reason the second fund took longer to complete. It’s a tough market and many startups that can’t raise funds have to lay off people to make their current funding last longer.

“We have noticed that at the later stage, a lot of companies are raising money in down rounds as a result of “valuation compression,” Bergel said. But the valuations aren’t cratering as there does seem to be a ceiling or cap on how low the valuations go, he said. In any case, the failure rate is higher when startups seek subsequent rounds.

Transcend will invest anywhere from $200,000 to $4 million in a round, depending on a variety of factors.

There were dozens of VC funds that formed in the last five years or so, and those funds will likely have a harder time raising their next funds, Bergel said. One of the keys to getting that second fund is paying attention to both founders and limited partners.

Originally appeared on: TheSpuzz